Icaew Law WB 2023

The Institute of Chartered Accountants in England and Wales
Law
Workbook
For exams in 2023
icaew.com
Law
The Institute of Chartered Accountants in England and Wales
ISBN: 978-1-0355-0151-9
Previous ISBN: 978-1-5097-4201-1
e-ISBN: 978-1-0355-0210-3
First edition 2007
Sixteenth edition 2022
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, graphic, electronic or
mechanical including photocopying, recording, scanning or otherwise, without the
prior written permission of the publisher.
The content of this publication is intended to prepare students for the ICAEW
examinations, and should not be used as professional advice.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Contains public sector information licensed under the Open Government Licence
v3.0
© ICAEW 2022
Contents
Welcome to ICAEW iv
Law v
Key resources vi
Professional skills required by the ACA qualification vii
1 Legal principles and international law 1

2 Contract formation 21
3 Termination of contract 55
4 Agency 77
5 Negligence 97
6 Types of trade 125
7 Companies: the consequences of incorporation 147
8 Companies: ownership and management 187
9 Companies: finance 225
10 Insolvency law: corporate and personal 261
11 Criminal law 293
12 Employment law 329
13 Data protection and intellectual property law 367
Terminology 385
Glossary of terms 391
Index 395
Questions within the Workbook should be treated as preparation questions, providing you with a
firm foundation before you attempt the exam-standard questions. The exam-standard questions are
found in the Question Bank.
ICAEW 2023 Contents iii

Welcome to ICAEW
I’d like to personally welcome you to ICAEW.
As we continue the global recovery from COVID-19, the role of the accountancy profession has never
been more important.
As an ICAEW Chartered Accountant, you will make decisions that will define the future of global
business in a fast-changing and volatile world.
Whether studying for our internationally recognised Certificate in Finance, Accounting and Business
(ICAEW CFAB) or our world-leading chartered accountancy qualification, the ACA, you will acquire
exceptional knowledge and skills – with technology, sustainability and ethics at the heart of your
learning. A focus on capabilities such as judgement and scepticism will enable you to make the right
decisions in diverse and often complex environments.
You will be equipped to flourish and to lead in areas that are transforming the business landscape.
This includes embracing technological change and harnessing digital disruption, to help our
profession deliver greater value. It also includes putting climate change and sustainability at the heart
of business strategy. We will equip you to be adaptable and agile in your work and all within a set of
values fundamental to trust and transparency, which will set you apart from others.
Joining over 195,000 ICAEW Chartered Accountants and students worldwide, you are now part of a
global community. This unique network of talented and diverse professionals work in the public
interest to build economies that are sustainable, accountable and fair.
You are also joining a community of 1.8m chartered accountants and students as part of Chartered
Accountants Worldwide – a family of leading institutes, of which we are a founder member.
We will support you through your studies and throughout your career: this is the start of a lifetime
relationship, and we will be with you every step of the way to ensure you are ready to face the
challenges of the global economy. Visit the Key resources section to review the resources available as
you study.
With our training, guidance and support, you will join our members in realising your career
ambitions, developing world-leading insights and maintaining a competitive edge.
We will enable a world of sustainable economies, together.
I wish you the best of luck with your studies.
Michael Izza
Chief Executive
ICAEW
iv Law ICAEW 2023

Law
You can access this guide and more exam resources on our website. If you are studying this exam as
part of the ACA qualification go to icaew.com/examresources or if you are studying the ICAEW CFAB
qualification go to icaew.com/cfabstudents.
Module aim
To provide you with an understanding of the principles of English law.
On completion of this module, you will be able to:
• explain the nature of contractual agreements, the agency relationship and the consequences of
negligence;
• understand the legal implications of incorporation, including the roles of shareholders and
directors, and the main implications of insolvency law;
• identify instances of criminal behaviour that may be encountered by professional accountants;
and
• identify other key areas in which the law affects the role and work of the professional accountant.
Method of assessment
The Law exam is 1.5 hours long. The exam consists of 50 questions worth two marks each, covering
the areas of the syllabus in accordance with the weightings set out in the specification grid. The
questions are presented in the form of multiple choice or multi-part multiple choice.
Ethics and professional scepticism

The consideration of ethical decision-making is intrinsic to the study of law. In this module, you will
examine the impact of criminal law on business and professional services, focussing on fraud, bribery
and money laundering. They will also explore the relationships and interaction between legal
principles, legislation, case law, ethics and ethical codes.
Specification grid
This grid shows the relative weightings of subjects within this module and should guide the relative
study time spent on each. Over time the marks available in the assessment will equate to the
weightings below, while slight variations may occur in individual assessments to enable suitably
rigorous questions to be set.
Syllabus area Weighting (%)
1 The impact of civil law on business and professional services 35
2 Company and insolvency law 40
3 The impact of criminal law on business and professional services 10
4 The impact of law in the professional context 15
ICAEW 2023 Introduction v

Key resources
Whether you’re studying the ICAEW CFAB or ACA qualification with an employer, at university,
independently, or as part of an apprenticeship, we provide a wide range of resources and services to
help you in your studies.
ACA students, you can access dedicated exam resources, guidance and information for the ACA
qualification via your dashboard at icaew.com/dashboard.
ICAEW CFAB students, you can also access dedicated exam resources, guidance and information at
icaew.com/cfabstudents.
Syllabus and technical knowledge grids

The syllabus presents the learning outcomes for each exam and should be read in conjunction with
the relevant technical knowledge grids.
Exam support
A variety of exam resources and support have been developed to help you through your studies and
each exam. This includes expert guides, sample exams, hints and tips, webinars from our tutors, and
more.
Tuition
The ICAEW Partner in Learning scheme recognises tuition providers who comply with our core
principles of quality course delivery. If you are not receiving structured tuition and are interested in
doing so, take a look at ICAEW recognised Partner in Learning tuition providers in your area at
icaew.com/tuitionproviders
Errata sheets
These documents will correct any omissions within the learning materials once they have been
published. You should refer to them when studying.
Student support team

Our student support team is here to help and advise you, so do not hesitate to get in touch. Email
[email protected] or call +44 (0)1908 248 250. If you are browsing our website, look out
for the live help boxes. You will be able to speak directly to an adviser. Mia, our ChatBot, is also on
hand to answer your queries.
Student Insights
Access our practical and topical student content on our dedicated online student hub, Student
Insights at icaew.com/studentinsights. You’ll find interviews, guides and features giving you fresh
insights, innovative ideas and an inside look at the lives and careers of our ICAEW students and
members. No matter what stage you’re at in your journey with us, you’ll find content to suit you.
ICAEW Business and Finance Professional (BFP)

ICAEW Business and Finance Professional (BFP) is an internationally recognised designation and
professional status. It demonstrates your business knowledge, your commitment to professionalism
and that you meet the standards of a membership organisation. Once you have completed the
ICAEW CFAB qualification or the ACA Certificate Level, you are eligible to apply towards gaining BFP
status. Start your application at icaew.com/becomeabfp.
vi Law ICAEW 2023

Professional skills required by the ACA qualification
The following professional skills areas are present throughout the ACA qualification.
Skill area Overall objective
Assimilating and using Understand a business or accounting situation, prioritise by

information determining key drivers, issues and requirements and identify any
relevant information.
Structuring problems and Structure information from various sources into suitable formats for
solutions analysis and provide creative and pragmatic solutions in a business
environment.
Applying judgement Apply professional scepticism and critical thinking to identify faults,
gaps, inconsistencies and interactions from a range of relevant
information sources and relate issues to a business environment.
Concluding, Apply technical knowledge, skills and experience to support

recommending and reasoning and conclusion and formulate opinions, advice, plans,
communicating solutions, options and reservations based on valid evidence and
communicate clearly in a manner suitable for the recipient.
The level of skill required to pass each exam increases as ACA trainees progress upwards through
each Level of the ACA qualification. The skills progression embedded throughout the ACA
qualification ensures ACA trainees develop the knowledge and professional skills necessary to
successfully operate in the modern workplace and which are expected by today’s forward-thinking
employers.
At Certificate Level, the ACA Professional Skills which you are expected to demonstrate in the exam
are summarised as follows:
Assimilating and using information
• Understanding the situation and the requirements
• Identifying and using relevant information
• Identifying and prioritising key issues
Structuring problems and solutions
• Structuring data
• Developing solutions
Applying judgement
• Applying professional scepticism and critical thinking
• Relating issues to the broader business environment, including ethical issues
Concluding, recommending and communicating
• Concluding and recommending
• Communicating
To help you develop your ability to demonstrate competency in each professional skills area, each
chapter of this Workbook includes up to four Professional Skills Guidance points.
Each Professional Skills Guidance point focuses on one of the four ACA Professional Skills areas and
explains how to demonstrate a particular aspect of that professional skill relevant to the topic being
studied. It is advised you refer back to the Professional Skills Guidance points while revisiting specific
topics and during question practice.
ICAEW 2023 Introduction vii

viii Law ICAEW 2023
Chapter 1
Legal principles and

international law
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 Types of law
2 International law
3 Islamic finance
4 UK law supporting the principles of sustainability
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Recognise the relationships and interaction between civil and criminal law, legal principles,
legislation, case law, ethics and ethical codes
• Recognise situations when laws and regulations other than English law may be applicable to an
organisation, including:
– international regulation of trade between organisations (International Chamber of Commerce
(ICC) Incoterms, the UN Convention on Contracts for the International Sale of Goods)
– Sharia law relating to Islamic finance
Specific syllabus references for this chapter are: 3a and 4i
1
Syllabus links
This chapter forms the basis of the rest of your law studies. It is important to understand the different
types of law and how case law and legislation will affect how business organisations operate and
form legally binding agreements between them (both nationally and internationally). Whilst most
agreements between organisations are successful, some end in dispute and the law is the main
method of resolving them.
ICAEW places great importance on sustainability. In this chapter we shall consider sustainability
within the legal context.
1
Assessment context
Questions on the topics in this chapter will be set as multiple choice, multi-part multiple choice or
multiple-response questions. Some questions may involve an analysis of a brief scenario and the
identification of an appropriate response, which may be in the form of providing advice, such as
applying ICC Incoterms in a particular context.
You can expect at least one question in your assessment to be set on the content of this chapter.
1

Use this schedule and your study timetable to plan the dates on which you will complete your study
of this chapter.
Topic Practical significance Study approach Exam approach Interactive

questions
1 Types of law Approach Scenario questions IQ1: Civil and

Types of law and its Learn the may test your criminal law
sources is key differences between knowledge of the This question
background criminal and civil difference between tests your
information for the law. Then focus on civil and criminal law. understanding
rest of your studies. legislation and case of differences
Knowledge of law as the main between civil
statutory instruments sources of law. and criminal law.
is also particularly
important when
studying for other Stop and think
exams such as tax. Could you explain
whether a particular
case would fall
under civil or
criminal law? How
2 Law ICAEW 2023

questions
do case law and

legislation interact?
2 International law Approach Scenario questions IQ2: UN

Trade is becoming Learn the scope of may ask you to Convention on
increasingly global. the UNCISG, the identify whether a Contracts for the
As Chartered obligations of buyer or seller has International
Accountants it is likely buyers and sellers breached the Sale of Goods
that our employers or and the rules that obligations under the This question
clients will have govern when risk in UNCISG. Knowledge helps you to
dealings with foreign the goods passes questions could test identify whether
organisations. It is between them. your knowledge of the UNCISG
important to Understand that ICC the scope of the applies to
understand the rules Incoterms are UNCSIG, or at which particular types
which govern such available as sources point risk in the of contract.
contracts. of contractual terms goods passes.
and apply to a
range of methods of
transport.
Stop and think

Can you list the
obligations of
buyers and sellers
under the UNCISG?
Which ICC
Incoterms have the
minimum and
maximum
obligations for the
seller?
3 Islamic finance Approach Knowledge questions

Demand for financial Understand that could test your
arrangements which Islamic finance is understanding of
are compliant with based on Sharia law. usury and riba.
Sharia law is This law is unique Scenario questions
increasing. As a because it is bound might ask you to
Chartered in and linked to a identify whether a
Accountant you need religion – Islam. contract is compliant
to understand how Learn what usury with Sharia law.
dealings can be and riba mean and
structured in a Sharia- how they can be
compliant way. avoided in financial
arrangements.
Stop and think

Could you explain
how to structure a
mortgage in a
Sharia-compliant
way?
4 UK law supporting Approach Knowledge questions

the principles of may test your
ICAEW 2023 1: Legal principles and international law 3

questions
sustainability Understand how UK knowledge of

Sustainability is an law is supporting sustainability and
increasingly and promoting how UK laws are
important issue in sustainability. involved in
business. As a supporting it.
Chartered Stop and think
Accountant you are
expected to know Can you explain
what sustainability is how UK laws are
and how it can be supporting
applied in all aspects principles of
of your studies and sustainability?
work-life.
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
4 Law ICAEW 2023

1 Types of law
Section overview
• Civil law deals with disputes involving private individuals and organisations.
• Criminal law deals with cases where one party is accused of committing a criminal offence.
• Primary legislation is in the form of Acts of Parliament.
• Secondary (or delegated) legislation is created when a specific body or individual creates laws in
accordance with an Act of Parliament.
• Case law (otherwise known as the common law) is law that has evolved over time as disputes
between parties are heard in the courts.
Within the English legal system there are two broad categories of law – civil law and criminal law.
Disputes between parties will fall under one or the other of these types of law and will be dealt with
by the civil court system or criminal court system accordingly.
1.1 Civil law

Civil law deals with disputes involving private individuals and organisations. These disputes are often
brought because one party feels that they have suffered a wrong caused by the other party. The
purpose of the civil law is to provide financial redress or another remedy that meets their needs
(such as preventing the wrong from happening again). Breach of contract and professional
negligence cases (which we shall study later) are examples of cases heard under the civil law. Under
the civil law, the parties always have the option to settle the case out of court – even if the court has
already begun hearing it.
Aspects of civil law Description
Parties involved The party bringing the case is the claimant. The party they are
claiming has caused them a wrong is the defendant.
Burden of proof The burden of proof is with the claimant. This means it is up to the
claimant to prove their case.
Standard of proof The standard of proof is the balance of probability. This means the
claimant must prove that it is more probable than not that what they
are claiming is true.
Remedy or penalty The main remedy under the civil law is the award of damages. Other,
non-financial, remedies (such as injunctions) are also available.
There is no concept of punishment. Damages are designed to
compensate the claimant for losses or damage caused to them.
1.2 Criminal law

Criminal law deals with cases where one party is accused of committing a criminal offence. Crimes
are any conduct that is prohibited by law (for example, it is against the law to kill or injure someone).
Because it is society that is affected by crime, it is the state which brings the case against the party
accused of committing the crime. Generally speaking, once a criminal case has begun it will continue
until a verdict is reached. However, sometimes cases that go to court are stopped if it becomes clear
that the case should not have been brought in the first place.
Aspects of criminal law Description
Parties involved The party bringing the case is the state (known as the prosecution).
The party they are claiming has committed the crime is called the
accused.
Burden of proof

Aspects of criminal law Description
The burden of proof is with the prosecution. This means it is up to the

prosecution to prove their case.
Standard of proof The standard of proof is beyond reasonable doubt. This means the
prosecution must satisfy the jury that the accused is guilty. If the jury
has any doubt that the accused might be innocent of the crime then
they should acquit them.
Remedy or penalty There are no direct remedies available to the injured party if the
accused is found guilty of the crime. The purpose of the criminal law
system is to punish those found guilty of committing crimes, such as
by being put into prison or by paying a fine.
Remedies might be available under the civil law if the crime means the
accused also caused loss or damage that is recoverable under the civil
system.
1.3 Cases where both civil and criminal law apply

It is not the particular event or action by the parties that determines whether a case falls under civil or
criminal law. What is important are the legal consequences of the action. Where an event has legal
consequences that fall under both civil and criminal law, then both types of law will apply and may
lead to separate remedies and punishment from each legal system.
Context example: Criminal and civil law

Brogan was crossing the road on foot at a pedestrian crossing when she was hit and injured by a car.
The driver of the car was prosecuted under the criminal law for dangerous driving, and Brogan
claimed compensation for her injuries from the driver under the civil law.
Interactive question 1: Civil and criminal law

Which two parties are involved in a civil law case?
A Accused and defendant
B Prosecution and defendant
C Claimant and accused
D Defendant and claimant
See Answer at the end of this chapter.
1.4 Legislation
Laws are created by Parliament on a continual basis to address the needs of government and of the
country. Such laws are commonly known as legislation, statute law or statute. Parliament is said to be
sovereign and is free to make laws as it sees fit. There are two types of legislation – primary and
secondary.
1.4.1 Primary legislation

Primary legislation takes the form of Acts of Parliament. Many of the laws we will be studying will be
examples of primary legislation (such as the Companies Act 2006). As well as creating wholly new
laws, legislation can be used to put case law (which we shall look at shortly) on a statutory basis, or to
consolidate existing legislation which has seen a succession of amendments into a single Act of
Parliament. These are known as codifying legislation and consolidating legislation.
Another form of legislation (known as enabling legislation) is created to give an individual or body
the power to create laws in the form of secondary legislation, to which we now turn.
6 Law ICAEW 2023

1.4.2 Secondary legislation
Secondary legislation (or delegated legislation) is created when a specific body or individual creates
laws in accordance with an Act of Parliament. The purpose of this is to allow Parliament to focus its
time on creating the purpose and objectives of a statute, while leaving the detail (which is often
highly technical) to be created by others in order to save time or to utilise their expertise.
A common form of delegated legislation is the statutory instrument. This form of legislation
authorises a government minister or department to create the detail of the law. For example,
Parliament usually creates an annual Finance Act, the purpose and objectives of which are set out in
the Budget. The detail of the Act (for example, how tax schemes will work and technical details on tax
rates and reliefs) is delegated to government ministers and their departments. Statutory instruments
can be identified by the initials SI followed by a reference number.
1.5 Case law

Case law (otherwise known as the common law) is law that has evolved over time as disputes
between parties are heard in the courts. The principle of judicial precedent says that the principles of
English law should be consistent and must not become inoperative through the lapse of time. This
means that the decisions of certain courts in the court hierarchy must be applied consistently if a
similar case comes before other courts in the future.
To enable case law to operate, there is a system of recording and publicising judgements and the
reasons behind the decisions, so that legal professionals can apply them to cases they are involved
in. This helps bring certainty and consistency to how disputes are settled. Cases are referenced by
their title, which is essentially the names of the parties, the year the case was heard and the court that
heard the case. You will see important cases referenced in later chapters. Where it is important for
your studies, a short explanation of the case will be given.
1.5.1 Linking case law and legislation

Although they come from different sources, case law and legislation do interact. For example, a piece
of primary legislation might be created to make it harder for individuals to commit tax evasion. A
statutory instrument concerning how the Act applies in practice might also be formed. If an
individual is suspected of committing tax evasion under the Act and is taken to court, then the court
will apply the Act and the statutory instrument to the facts before it.
Whilst applying the legislation, the court might decide that the law is unclear, and may thus make its
own decision on how it should be applied in future similar cases. If so, then this decision will become
judicial precedent that future courts should follow.

2 International law
Section overview
• International law helps businesses to trade across borders.

• The UN Convention on Contracts for the International Sale of Goods (UNCISG) provides a
framework of rules that can be used when goods are sold internationally.
• The UNCISG only applies to certain sales of goods and places obligations on both the buyer and
the seller of the goods.
• Passage of risk is of great importance in the sale of international goods, because buyers and
sellers want to make sure they have insurance in place to protect them from loss or damage to the
goods while they are responsible for them.
• The International Chamber of Commerce’s Incoterms are sets of contractual terms relating to
transportation and other costs that businesses can use in international contracts.
Whilst the English legal system hears disputes concerning parties in England, where organisations
trade internationally it is not always clear which country’s laws apply.
Parties that enter into international contracts may agree in advance which laws will apply in the event
of a dispute. This is perfectly acceptable and is known as choice of laws. To aid international trade,
the United Nations (UN) and the International Chamber of Commerce have created rules of their
own which parties may choose to adopt as well.
2.1 UN Convention on Contracts for the International Sale of Goods (UNCISG)

The UNCISG is effectively a source of contract law which parties in different countries can choose to
apply to their dealings. Providing the dealings falls within the scope of the convention; the parties
will have different obligations depending on whether they are the buyer or seller of the goods and
there will be rules in place that set out when risk of loss or damage to the goods being sold passes
between them.
2.1.1 Scope of the convention

The UNCISG applies only to the commercial sale of goods where the buyer and seller of the goods
have their places of business in different states.
The convention does not apply to the following types of sale:
• where the supply of labour is a major part of the contract
• where the buyer provides most of the materials for the goods
• where the goods are bought for personal or household use
• where the goods are sold by auction
• where the sale relates to certain specific restricted products such as electricity, aircrafts and
investments
Professional skills focus: Assimilating and using information
Before applying the UNCISG to a particular scenario, you need to make sure that the situation falls
within the scope of the convention. To do this you will need to collect all the relevant facts regarding
the deal and decide whether the convention applies to it.
2.1.2 Obligations of the buyer and seller

The table below sets out the main obligations of the buyer and seller of the goods under the
UNCISG.
8 Law ICAEW 2023

Obligations of the buyer Obligations of the seller
To pay the price for the goods and comply with To deliver the goods to the place and at the
any formalities to enable payments to be made time agreed in the contract
If the contract does not set out the place of

delivery, to follow the rules regarding place set
out in the convention
If the contract does not set out the time of

delivery, to deliver the goods within a
reasonable time of the contract being formed
To deliver goods of the quantity, quality and

description set out in the contract and to
package them in the agreed manner
If the contract does not set out the quantity,

quality and packaging requirements, to follow
the conformity requirements set out in the
convention
If either party fails to meet their obligations, then the other party can recover damages for any losses
suffered.
2.1.3 Passage of risk

The UNCISG sets out rules which determine when risk of loss or damage to the goods being sold
passes from the seller to the buyer. This is important because the parties need to know when risk
passes so that they can cover it with insurance.
The point at which risk passes depends on the type of contract, as can be seen from the table below.
Type of contract Point at which risk passes
Carriage of goods included At the place indicated in the contract, or if not specified,
risk passes when the goods are transferred to the first
carrier for transmission to the buyer
Carriage of goods not included The time and place where the buyer takes over the goods,
or the goods are placed at their disposal
Goods sold in transit The moment when the contract is concluded, even if the
goods are still in transit
Professional skills focus: Applying judgement
International trade involves the risk that the goods can be lost or damaged whilst in transit. To
minimise this risk, judgement is needed to determine the most appropriate point at which risk
should pass to ensure that there is no gap where the party responsible for the goods has no suitable
insurance cover.
Interactive question 2: UN Convention on Contracts for the International Sale of Goods

Which of the following contracts comes under the scope of the UN Convention on Contracts for the
International Sale of Goods?
A The purchase of goods for personal use by a private individual in England and a company in
Spain.
B The sale of commercial goods by auction where the seller is in Germany, the buyer is in France
and the auction is held in England.
C The sale of an aircraft where the seller is in Europe and the buyer is in America.

D The sale of farming equipment on credit terms between a seller in Poland and a buyer in Greece.
2.2 ICC Incoterms

The International Chamber of Commerce (ICC) established standard terms of trade (known as
Incoterms), which parties can incorporate into international contracts. The terms set out the
obligations of the parties in respect of paying for things such as delivery, import and export duties,
insurance and freight costs.
The following Incoterms apply to all forms of transport and run from the minimum obligations of the
seller ‘ex-works’ (which means the seller just makes the goods available for collection by the buyer),
to the maximum obligations of the seller ‘delivered duty paid’ (which is the exact opposite). The
goods are delivered to a place specified by the buyer with all costs paid for by the seller.
The full list of these Incoterms are:
• Ex-works (EXW)
• Free carrier (FCA)
• Carriage paid to (CPT)
• Carriage and insurance paid to (CIP)
• Delivered at place (DAP)
• Delivered at place unloaded (DPU)
• Delivered duty paid (DDP)
The following Incoterms also run from minimum to maximum obligations of the seller, but only apply
to goods transported by sea:
• Free alongside ship (FAS)
• Free onboard (FOB)
• Cost and freight (CFR)
• Cost, insurance and freight (CIF)
3 Islamic finance
Section overview
• Islamic finance is governed by Sharia law, which is explicitly bound to the religion of Islam.
• The rule against usury (also known as riba) is the concept of unlawful gain. This has consequences
for financial arrangements because the charging or receiving of interest is not permitted.
• Usury can be avoided if contracts are based on making profit instead of charging interest.
3.1 Sharia law

Islamic finance is governed by Sharia law. This law is explicitly bound to the religion of Islam. Some
countries, such as Pakistan and Iran, have adopted Sharia law into their legal systems. In recent years,
financial systems in other countries have started to provide finance options which are compliant with
Sharia law for those who wish to use them.
3.1.1 Usury
An important rule in Sharia law which affects Islamic finance is the rule against usury. This is known in
Sharia law as riba.
Definition
Riba: The concept of unlawful gain. This is usually translated as interest.
10 Law ICAEW 2023

The concept of unlawful gain may be translated to mean qualitative inequality and is a highly
technical area. For the purposes of our study, we shall consider it to be a rule against charging or
receiving interest. Because interest plays an important role in lending or borrowing situations, care
must be taken when structuring contracts which would otherwise require the transfer of interest
between the parties.
3.2 Avoiding usury

Although the charging or receiving of interest is forbidden, generating and sharing profits is not and
therefore contracts which are structured along profit sharing lines are compliant with Sharia law.
3.2.1 Savings accounts

Traditional savings accounts are based on a bank customer depositing money with the bank and in
return receiving interest payments. Effectively the customer is lending the bank their money for a
period of time. Under Islamic finance, the customer is actually an investor, and the bank is a fund or
asset manager. The customer’s money is invested to earn a profit. At the end of the investment
period, the customer’s money is returned with the profit earned, less a management fee payable to
the bank.
3.2.2 Loans
Traditional loans work the opposite way to savings accounts. The bank lends money to the customer,
often to purchase an asset, such as property, and the customer repays the bank the capital loaned to
them plus an interest payment.
A similar loan under Islamic finance would see the bank purchase the asset from the seller for an
agreed price. The bank then sells the asset at a profit to the customer. Therefore, the customer pays
the bank a pre-determined price for the asset which consists of the price of the asset plus the bank’s
profit. If the customer pays the bank in instalments, then the bank owns the asset until the final
payment has been made. At this point, ownership of the asset is transferred to the customer.
Professional skills focus: Structuring problems and solutions
When structuring finance in a Sharia-compliant way, it may not be easy to determine how best to
replace the interest element. It may help to think of the arrangement as an investment which is
designed to generate profit that can then be shared between the parties in a pre-arranged way.
4 UK law supporting the principles of sustainability

Section overview
• UK law supports the principles of sustainability.

• Legislation aims to help the country meet its sustainability targets, treat employees and
prospective employees equally, tackle criminal finance and protect the rights of individuals in
respect of data held about them.
UK legislation has increasingly introduced and supported laws that promote the principles of
sustainability. Throughout your study of ACA modules, you will encounter examples of UK laws that
cover the themes of sustainable business practices.
Legislation is now helping to ensure that companies meet sustainability targets and treat all
employees and prospective employees equally. It also aims to ensure that organisations and the
people who work for them apply legislative requirements (such as customer due diligence and
employee training) to prevent bribery, money laundering and the financing of terrorism, and have
procedures in place to report suspicious transaction.
The following are examples of significant UK legislation which is currently in place that supports the
principles of sustainability.

Principle of sustainability Legislation that supports the principle
Environmental sustainability Environment Act 2021

This Act allows the UK to enshrine better environmental protection
into law. It provides the government with powers to set new binding
targets, including for air quality, water, biodiversity, and waste
reduction.
Social sustainability Equality Act 2010

This Act sets out statutory powers that make it unlawful to
discriminate against a person because they have one of the
‘protected characteristics’, which are age, disability, sex (including
sexual orientation and gender reassignment), marriage and civil
partnership, race, religion or belief, pregnancy and maternity.
We shall be studying this Act in more detail in Chapter 12.
Governance Bribery Act 2010

Proceeds of Crime Act (POCA) 2002
Money Laundering Regulations 2017
These Acts provide rules that prevent criminals and terrorists
gaining financially from their illegal actions.
We shall be studying these Acts in more detail in Chapter 11.
Data Protection Act 2018
This Act protects individuals from the holding and sharing of
excessive personal data, and set outs requirements for permission,
types of data and how long personal data can be held.
We shall be studying this Act in more detail in Chapter 13.
Professional skills focus: Concluding, recommending and communicating
As a Chartered Accountant you should be aware of all relevant laws relating to sustainability and to
communicate how they might be applied within a particular organisation.
12 Law ICAEW 2023

Summary
Civil law Criminal law

Claimant and defendant Parties Prosecution and accused
Claimant Burden of proof Prosecution
Balance of probability Standard of proof Beyond reasonable doubt
Damages Remedy/Punishment Imprisonment/fines
Legislation
Primary Secondary (delegated)

• Acts of Parliament • Statutory instruments
• Codifying Acts
• Consolidating Acts
• Enabling Acts
Case law
• Also known as common law
• Built up historically through the courts
• Judicial precedent
• Linked to legislation as cases are heard

UN Convention on Contracts for the International Sale of Goods
Scope
Commercial sales of goods, but not:
• where the supply of labour is a major part of the contract
• where the buyer provides most of the materials for the goods
• where the goods are bought for personal or household use
• where the goods are sold by auction
• where the sale relates to certain specific restricted products such as
electricity, aircraft and investments
Obligation of the buyer

To pay the price for the goods and comply with any formalities to
enable payments to be made.
Obligations of the seller

To deliver the goods to the place and at the time agreed in the contract.
To deliver goods of the quantity, quality and description set out in the
contract and to package them in the agreed manner.
Passage of risk
Contracts including carriage

At the place indicated in the contract, or if not specified, risk passes when
the goods are transferred to the first carrier for transmission to the buyer.
Contracts not including carriage

The time and place where the buyer takes over the goods, or the goods
are placed at their disposal.
Goods sold in transit

The moment when the contract is concluded, even if the goods are still in
transit.
14 Law ICAEW 2023

ICC Incoterms
Incoterms for all modes of transport: Incoterms for transport by sea only:
• Ex-works (EXW) • Free alongside ship (FAS)
• Free carrier (FCA) • Free onboard (FOB)
• Carriage paid to (CPT) • Cost and freight (CFR)
• Carriage and insurance paid to (CIP) • Cost, insurance and freight (CIF)
• Delivered at place (DAP)
• Delivered at place unloaded (DPU)
• Delivered duty paid (DDP)
Islamic finance
Based on Concept of riba prevents the Profit sharing

Sharia law charging or receiving of interest is permitted
Sustainability
Environmental sustainability Social sustainability Governance

• Environment Act 2021 • Equality Act 2010 • Bribery Act 2010
• Proceeds of Crime Act 2002
• Money Laundering
Regulations 2017
• Data Protection Act 2018

1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
Confirm your learning
1. Do you know the different parties involved in civil and criminal law cases? (Topic 1)
2. Do you know the obligations of buyers and sellers under the UNCISG? (Topic 2)
3. Do you know the name given under Sharia law for the charging or receiving of interest?
(Topic 3)
4. Do you know the powers that the Environment Act 2021 gives to the government? (Topic
4)
2 Chapter Self-test question practice

Aim to complete all the self-test questions at the end of this chapter. Once completed, attempt all the
questions in Chapter 1 of the Law Question Bank. Refer back to the learning in this chapter for any
questions which you did not answer correctly or where the suggested solution has not provided
sufficient explanation to answer all your queries. Once you have attempted these questions, you can
move on to the next chapter.
16 Law ICAEW 2023

• © International Chamber of Commerce (ICC) (2020) The Incoterms® rules. [Online]. Available
from: https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/ [Accessed 11
May 2022].
• United Nations Convention on Contracts for the International Sale of Goods. (2010). New York, UN.

Self-test questions
Answer the following questions.

1 What is the main remedy available under the civil law?
2 The standard of proof in criminal law cases is the balance of probability.
A True
B False
3 Under the UNCISG the sole obligation of the seller is to deliver the goods to the buyer at the place
and time they agreed.
A Yes
B No
4 Which of the following ICC Incoterms only applies to maritime transport?
A CIF
B EXW
C DDP
D CPT
5 In Sharia law the concept of riba prevents the sharing of profit between parties in a financial
transaction.
A True
B False
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
18 Law ICAEW 2023

Answer to Interactive question 1

The correct answer is:
D Defendant and claimant
In a civil law case, the claimant brings the case to court against a defendant. In a criminal law
case, the prosecution brings the case to court against the accused.

D The sale of farming equipment on credit terms between a seller in Poland and a buyer in Greece.
The UNCISG does not apply to goods sold for personal use, where the goods are sold by
auction or where the type of good is specifically restricted, which includes aircrafts. The sale of
commercial goods on credit terms falls within the scope of the convention.

1 Damages to compensate for loss or damage suffered is the main remedy under the civil law.
2 Correct answer(s):
B False
The standard of proof in civil cases is the balance of probability. In criminal cases it is beyond
reasonable doubt.
B No
As well as delivering the goods to the right place at the right time, the seller also has an obligation to
ensure the goods conform to the quantity, quality and description of the goods agreed in the
contract or as required by the convention, and to ensure they are packaged appropriately too.
A CIF
CIF applies to maritime transport only. The other options apply to all forms of transport.
B False
Riba is the concept of unlawful gain which translates into the charging or receiving of interest.
Earning and sharing profit is lawful under Sharia law.
20 Law ICAEW 2023

Chapter 2
Contract formation
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 The validity of a contract
2 Offer and acceptance
3 Intention to create legal relations
4 Consideration
5 The terms of the contract
6 Privity of contract
Summary
Self-test questions
Introduction
Learning outcomes
• Recognise when a legally binding contract exists between two parties and how a contract may be
enforced
The specific syllabus reference for this chapter is 1a.
2
Syllabus links
As seen above, the issue of contract formation could be relevant in many different areas of the
syllabus, for example accounting and auditing, employment, business and financial management.
Contracts are also important in assurance; for instance, a key contract is the engagement letter
between the client and the assurance provider.
2
Assessment context
Contract is an important part of the syllabus. Typically 7 out of 50 questions relate to contract law.
Understanding the basic precepts relating to contract is vital.
You are likely to be presented with scenarios and may have to conclude whether a valid contract has
been formed. Many cases are referred to in this and later chapters. They will not be assessed directly,
but illustrate points of law that could be.
2

of this chapter.

questions
1 The validity of a Approach Knowledge questions IQ1: Essentials

contract Focus on the rules may require you to of a valid
Businesses use on void and identify correct contract
contracts to formalise voidable contracts. statements about This question
agreements that they Make sure you know void, voidable and tests your
make. It is important for what it means for a unenforceable knowledge of
contracts to meet contract to be contracts. the factors that
certain criteria in order unenforceable. make contracts
for them to be valid void, voidable
and enforceable. and
Stop and think unenforceable.
What makes a
contract void,
voidable and
unenforceable?
2 Offer and acceptance Approach Scenario questions IQ2: Offer or

All contracts begin with It is important that may require you to invitation to
negotiation between you understand determine whether a treat
the parties. This what offers and valid offer has been This question
negotiation ultimately acceptance are and made and whether it tests your
ends with an offer the rules on has been accepted. understanding
being made which is termination of offer of how an
accepted. and communication advert in a
22 Law ICAEW 2023

questions
of acceptance. newspaper is
treated in
contract law.
Stop and think
Could you identify
an offer and
acceptance from a
given scenario?
3 Intention to create Approach Knowledge questions IQ5: Intention

legal relations The key points to could test the rules to create legal
For any contract to be note are the on intention. relations
valid, both parties must presumptions on This question
have intended to be intention. tests your
legally bound by it. The understanding
rules on intention differ of when there
depending on whether Stop and think is no intention
the contract is Could you decide to create legal
commercial or social in whether the parties relations.
nature. to an agreement
intended to be
legally bound by it?
4 Consideration Approach Scenario questions IQ6:

For a contract to be Make sure you might require you to Consideration
enforceable, both understand what identify whether both This question
parties must bring consideration is and parties to a contract tests your
something to the what constitutes have provided valid knowledge of
agreement. This is valid consideration. consideration. consideration
known as It is also important through some
consideration. to learn what short
adequacy and scenarios.
sufficiency mean
and the rules on
waiving debt.
Stop and think

Could you define
consideration?
Could you decide
whether
consideration is
valid?
5 The terms of the Approach Knowledge questions IQ7: Implied

contract Make sure you might test your terms
The express terms of a understand the knowledge of sources This question
contract are the ‘nuts rules on express of implied terms. tests your
and bolts’ of the terms and the understanding
agreement that the circumstances of situations
parties have where terms may be where courts
negotiated. However, implied into will imply
terms can also be contracts. terms into a
implied into contracts. contract.
ICAEW 2023 2: Contract formation 23

questions
Stop and think

Could you explain
how terms are
incorporated into
contracts?
6 Privity of contract Approach A scenario question IQ8: Essentials

The rules on privity Learn the basic rule could test your of a valid
determine which on privity and the understanding of contract
parties are bound by provisions of the which parties have This question
and have rights under a Contracts (Rights of rights under a pulls together
contract. Third Parties) Act contract. some of the
1999. points you
have studied in
this chapter.
Stop and think
Could you explain
which parties are
bound by a
contract?
24 Law ICAEW 2023

1 The validity of a contract
Section overview
• A valid contract is a legally binding agreement, between two parties, which agreement may be
evidenced by writing, words or action.
• Three essential elements must be present, namely:
– agreement
– an intention to create legal relations
– consideration
It is almost invariably the case that the two parties to a contract bring with them differing levels of
bargaining power. A contract may be made between a large retail company and an individual, for
example. In such cases, the agreement is likely to be in the form of a standard form contract,
prepared by the dominant party and which the other party has no choice but to take or leave.
Generally speaking, the law will not wish to restrict or interfere with the ability of contractual parties
to decide whether or not to enter into a contract and, if so, upon what terms (‘freedom of contract‘).
However, it will often intervene where one party seeks an unfair advantage as a result of their
superior bargaining position.
Such intervention will be made by the courts or by legislation. Thus, for example, the Sale of Goods
Act implies terms into a contract which impose obligations on the business seller as to the quality
and fitness for purpose of the goods they sell. Likewise the Consumer Credit Act affords the
consumer protection where they enter into credit agreements. In respect of exclusion clauses, in
which typically the stronger party seeks to avoid liability, the Unfair Contract Terms Act may result in
such a clause being void outright or void if the court considers it to be unreasonable.
In order to be valid, three essential elements of a contract must be shown to be present. These are
dealt with in detail in sections 2–4. Suffice it to say here that those elements are:
• agreement between the parties
• an intention to create legal relations
• consideration
1.1 Void and voidable contracts

Even if these essential elements can be shown, a contract may nonetheless be rendered void or
voidable by one or more of the following vitiating factors:
Rule (in broad terms) Effect of rule not being

followed
Lack of capacity An individual must be of sound mind Voidable at the option of

and aged 18 or over. the person without capacity
Absence of free will A party should not be made to enter Voidable

into a contract other than by their own
free will, ie, not by duress or undue
influence.
Illegality A contract should not be illegal or Void

offend public policy.
Mistake You should be aware that if one or both

parties alleges that they were mistaken
in some way, this may affect the validity
of the contract. However, the law is as
complex as the facts of each case are
varied and you do not need to know
the law for the purposes of your

Rule (in broad terms) Effect of rule not being
followed
studies.
Misrepresentation If A makes a pre-contractual statement Voidable

of fact that is intended to and does
cause B to enter into the contract but
turns out to be untrue
(misrepresentation) the other party may
choose to avoid the contract.
The consequences of a contract being rendered void or voidable are as follows:
Void A void contract is not a contract at all. The parties are not bound by it and if
they transfer property under it they can generally recover their goods even
from a third party.
Voidable A voidable contract is a contract which one party may set aside. Property
transferred before avoidance is usually irrecoverable from a third party.
1.2 Unenforceable contracts

Even if a contract satisfies the above requirements and is valid, it may still be unenforceable. This
means that if either party fails to perform their part of the contract, the other party cannot compel
them to do so.
A contract will be unenforceable where it is not in the correct form. Generally speaking, a contract
may be made orally or in writing and an oral agreement will be just as binding as a written contract.
However, in certain cases the law provides that an oral contract will not be sufficient, for example
agreements for the transfer of land and consumer credit agreements (that are regulated by the
Consumer Credit Act 1974 (HMSO, 1974) (as amended by the Consumer Credit Act 2006 (TSO,
2006))) must be in writing. Note that, increasingly, contracts are made electronically and an electronic
signature can be used as evidence of the validity of a contract in the same way as a written signature
(s.7 Electronic Communications Act 2000 (TSO, 2000)).
Another example with which you should be familiar is a guarantee. This is where a guarantor
promises to pay a creditor the sum of the debtor’s debts, in the event that the debtor fails to pay
them. The agreement itself need not be in writing but the terms must be evidenced in writing before
any action is brought. The written evidence should be signed (or acknowledged in some way) by the
guarantor.
Golden Ocean Group Ltd v Salgaocar Mining Industries PVT 2011
The facts: Brokers for Golden Ocean and SMI exchanged a number of emails in which the terms of a
charterparty by SMI’s Singaporean chartering arm, Trustworth, were negotiated, but they were never
formalised into a written agreement. Emails early in the exchange had stated that the charter would
be ‘fully guaranteed’ by SMI. When Trustworth refused to take delivery, Golden Ocean sued SMI on
the guarantee.
Decision: The Court of Appeal recognised that contracts are often negotiated informally by email
(particularly in the shipping industry) and held that a single document was not necessary. Nor was it
material that no documents had been signed in the traditional way. The typed name of the broker for
SMI in the final email had clearly signified their agreement to all negotiated terms and constituted a
valid signature.
Deciding that a business contract is unenforceable is risky and may leave a business open to a claim
for breach of contract. Before making such a judgement it is important to identify and consider all
information that might be relevant.
26 Law ICAEW 2023

Interactive question 1: Essentials of a valid contract
What will be the consequences of the following in relation to a purported contract between two
parties?
Void/Voidable/Unenforceable
There is clear agreement between the parties on all terms

and they intend to create a legally binding agreement but
there is no consideration.
One of the parties is aged 17.
The contract is an agreement to defraud HMRC.
The contract is made orally and provides for Graham to pay

Harry the debt owed to Harry by Imran.
2 Offer and acceptance

Section overview
• As noted above, the first essential element in the formation of a valid and binding contract is
agreement. This is usually analysed and understood in terms of ‘offer’ and ‘acceptance’.
• It is a matter of interpretation whether something amounts to an offer.
• There are a number of rules which determine whether an offer has been validly accepted.
2.1 What constitutes an offer?

An offer is a definite promise to be bound on specific terms. It is made by an offeror.
It is a matter of interpretation as to whether something is sufficiently definite to comprise an offer
capable of acceptance. A statement that is vague and that cannot be rendered certain by reference
to previous dealings or custom cannot be an offer. Only an offer in the proper sense may be
accepted so as to form a binding contract. A statement which sets out possible terms of a contract is
not an offer unless this is clearly indicated, although if, in the course of negotiations for a sale, the
vendor states the price at which they will sell, that statement may be an offer which can be accepted.
An offer must be something more than a supply of information or a statement of intention. For
example, advertising that an auction will take place is a statement of intention, not an offer to sell.
Potential buyers may not sue the auctioneer if the auction does not take place. Likewise, saying that
you might be interested in buying your neighbour’s car is a statement of intention not an offer to buy.
It is also important to distinguish between an offer and a mere invitation to treat. Where a party is
initiating negotiations, they are said to make an invitation to treat. An invitation to treat cannot be
accepted to form a binding contract, it is simply an indication that a person is prepared to receive
offers with a view to entering into a binding contract.
That indication is evidenced in the following situations.
• Advertisements (in a newspaper, for example)
• Goods displayed for sale in a shop window or on self-service shelves (if it were the case that a
customer accepted an offer to sell by removing goods from the shelf, they could not then change
their mind and put them back as this would constitute breach of contract)
• Circulation of a price list

Context example: Offer or invitation to treat
Karen offered to sell Leah a flick knife for £20. She also advertised flick knives in the local newspaper
and put one on display in her shop window with a price tag on it. Will she be liable to prosecution for
‘offering for sale’ an offensive weapon?
She will be guilty of the offence with regard to her offer to Leah. However, the advertisement and
shop window display are not offers but invitations to treat and do not render her guilty of this
offence.
An offer does not have to be made to a particular person. It may be made to a class of persons or to
the world at large.
Carlill v Carbolic Smoke Ball Co 1893
The facts: The manufacturers of a medicinal carbolic smoke ball published an advertisement by
which they undertook to pay “£100 reward ... to any person who contracts ... influenza ... after having
used the smoke ball three times daily for two weeks”. The advertisement added that £1,000 had been
deposited at a bank “showing our sincerity in this matter”. Carlill read the advertisement, purchased
the smoke ball and used it as directed. She contracted influenza and claimed her £100 reward.
In their defence the manufacturers argued against this.
• The offer was so vague that it could not form the basis of a contract, as no time limit was specified.
• It was not an offer which could be accepted since it was offered to the whole world.
Decision: It was a valid offer capable of acceptance. It was not vague but clear that the smoke ball
must protect the user during the period of use. Further, it was accepted that an offer could be made
to the world at large (by analogy with reward cases where it was accepted that a notice offering a
reward could be accepted by anybody).
You should note that Carlill is an unusual case in that advertisements are not usually regarded as
offers. However, it established the principle that an offer can be made to the world at large and is
generally seen as a landmark case. You should be familiar with it.
Context example: Negotiations in respect of a contract

It is often unclear at what point, if at all, actions or statements during negotiations constitute an offer
capable of acceptance. This was the case in Gibson v Manchester City Council 1979.
Gibson lived in a council house in Manchester and received a brochure from the council seeking to
determine whether council tenants would be interested in buying their council houses. Interested
parties were advised to return the form attached to the brochure, which Gibson did. As a result, the
council sent him a letter saying that the council may be prepared to sell him the house for £2,180.
The letter enclosed an application form to purchase the house which Gibson filled out and returned.
After Gibson had sent his application, the council changed hands and the new council reversed the
policy on selling council houses. Only in cases where there had been an exchange of contracts were
the sales completed. Gibson sued the council, claiming that the letter he had been sent by the
former council was an offer which he had accepted at the time when he made his formal application.
The House of Lords concluded that no binding contract had been formed because the council’s
letter was not a formal offer but was still part of the negotiations taking place surrounding the
potential sale. The letter was not unequivocal and it was still at a level of negotiation about a
potential sale at a potential price.
Note that, in contrast, Gibson’s formal application could have been seen to be an offer capable of
acceptance. However, there would still not have been a contract, as the council had not accepted this
offer by the time that the council’s policy on selling houses had changed.
Interactive question 2: Offer or invitation to treat

Bianca sees the following notice in a newspaper:
“20 orthopaedic beds, £100 each”
28 Law ICAEW 2023

Requirement
How would you describe this notice in terms of contract law?
A Offer
B Invitation to treat
C Supply of information
D Advertisement
2.2 Termination of offer

In the absence of an acceptance, an offer may be terminated in any of the following ways:
Method of termination Consequence
Rejection Rejection by the offeree terminates the offer.
Counter-offer A counter-offer is when the offeree proposes new or amended terms,

thereby terminating the original offer (since acceptance must amount to
an unqualified agreement to all the terms of the offer). The counter-offer
is then open to the offeror to accept or reject.
Hyde v Wrench 1840

The facts: Wrench offered to sell property to Hyde for £1,000. Two days
later, Hyde made a counter-offer of £950 which Wrench rejected. Hyde
then informed Wrench that he accepted the original offer of £1,000.
Decision: The original offer of £1,000 had been terminated by the
counter-offer of £950.
If the offeree’s response is actually a request for information, the offer is
not affected.
Stevenson v McLean 1880

The facts: McLean offered to sell iron at “40s net cash per ton, open till
Monday”. Stevenson enquired whether he would agree to delivery
spread over two months. McLean did not reply and (within the stated
time limit) Stevenson accepted the original offer. Meanwhile McLean
had sold the iron to a third party.
Decision: There was a contract since Stevenson had merely enquired as
to a variation of terms and had not rejected the offer or made a counter-
offer.
Lapse of time An offer may be expressed to last for a specified time. If, however, there
is no express time limit set, it expires after a reasonable time.
Ramsgate Victoria Hotel Co v Montefiore 1866

The facts: Montefiore applied to the company in June for shares and
paid a deposit. At the end of November, the company sent him an
acceptance by issue of a letter of allotment and requested payment of
the balance due. Montefiore contended that his offer had expired and
could no longer be accepted.
Decision: The offer was for a reasonable time only and five months was
much more than that. The offer had lapsed.
Revocation by the The offeror may revoke their offer at any time before acceptance either
offeror expressly or by implication. Even if they undertake that their offer shall
remain open for acceptance for a specified time they may nonetheless
revoke it within that time, unless they have bound themselves to keep it

Method of termination Consequence
open by a separate contract.

Revocation initially takes effect when it is communicated to or received
by the offeree. (Note that the postal rule discussed below applies only to
acceptance and not to revocation of an offer.)
Failure of a pre- An offer may be ‘conditional’ in that it is dependent on some event

condition occurring or there being a change of circumstances. If that event or
change of circumstances does not occur, the offer is not capable of
acceptance.
Context example: Request for information about an offer

Oscar has horses to sell and offers two each to Abby and Beth for £4,000, stating that the offer will be
open until Monday. Abby asks Oscar whether she could have one now and the other in a month’s
time. Oscar does not reply, so on Sunday, Abby accepts his original offer. Beth replies on Saturday
saying that she will take them for £3,500. Oscar does not reply, so on Saturday Beth accepts his
original offer.
If Abby’s enquiry whether she could have the horse now and the other later had been a counter-offer,
then she could not have accepted the original offer, as a counter-offer would have terminated it.
However, in this case, Abby has simply requested more details of the terms of the offer and can still
accept the original offer to form a contract.
Beth’s reply amounts to a counter-offer which has the effect of terminating Oscar’s original offer.
Beth’s purported acceptance of the purchase at £4,000 is therefore not effective and there is no
contract.
2.3 Acceptance
The offeree’s response must amount to an unqualified agreement to all the terms of the offer in
order to constitute a valid acceptance. Acceptance may be made by express words to that effect by
the offeree or their authorised agent, or it can be inferred from conduct.
Brogden v Metropolitan Railway Co 1877
The facts: For many years C supplied coal to D. D’s agent sent a draft agreement to C for
consideration and the parties applied the terms of the draft agreement to their dealings, but they
never signed a final version. C later denied that there was any agreement between them.
Decision: The conduct of the parties was only explicable on the assumption that they both agreed to
the terms of the draft.
There must be some act on the part of the offeree to indicate their acceptance. An offeror cannot
dictate that their offer shall be deemed to have been accepted unless the offeree actually rejects or
accepts it.
Felthouse v Bindley 1862
The facts: C wrote to his nephew offering to buy the nephew’s horse, adding, “If I hear no more
about him, I consider the horse mine”. The nephew intended to accept his uncle’s offer but did not
reply.
Decision: C had no title to the horse as the nephew’s silence could not constitute acceptance.
Similarly, in Carlill’s case (above), once Carlill began using the influenza product, this was a positive
act that constituted acceptance of the offer.
Context example: Offer and acceptance

In January Elle offered to buy Jane’s boat for £3,000.
Elle’s offer of £3,000 is an offer. Many offers are in fact made by prospective buyers rather than by
sellers.
30 Law ICAEW 2023

Jane immediately wrote a letter to Elle saying, “For a quick sale I would accept £3,500. If not
interested please let me know as soon as possible.”
Jane’s letter forms a counter-offer, which has the effect of terminating Elle’s offer. Elle may now
accept or reject this counter-offer.
Elle did not see the letter until March when she returned from a business trip.
There is nothing to indicate that Jane’s (counter-) offer is not still open in March. An offer may be
expressed to last for a specified time. It then expires at the end of that time. If, however, there is no
express time limit set, it expires after a reasonable time. It would not appear that the offer would
have lapsed by March.
She then replied. “I accept your offer. I trust that if I pay £3,000 now, you can wait until June for the
remaining £500.”
Elle’s reply, using the words “I accept your offer” appears conclusive. However, it is not. The enquiry
as to variation of terms does not constitute acceptance and is more than a request for information.
Elle’s reply is probably best analysed as being a new counter-offer including terms as to deferred
payment.
On receiving the letter, Jane attached a ‘sold’ sign on the boat but forgot to reply to Elle.
By affixing a ‘sold’ sign, it appears that Jane accepts the revised terms as to dates for payment of the
£3,500. However, the court would need to decide whether, in all the circumstances, acceptance can
be deemed to have been communicated (we will look at communication in the next section).
Applying technical knowledge, such as established case law, to a scenario will help you come to a
conclusion when deciding which answer is correct in exam questions.
Interactive question 3: Offer and acceptance

On 1 October, Adam posts a letter to Belinda offering to sell his fridge. On 2 October, Belinda
receives Adam’s letter. On 3 October, Adam changes his mind and posts a letter to Belinda saying
that the fridge is no longer for sale. Later that day, Belinda telephones Adam and accepts his offer.
Requirement
Which one of the following best describes the state of the contract between Adam and Belinda for
the sale of Adam’s fridge?
A It is valid because acceptance took place before Belinda received Adam’s revocation.
B It is invalid because Adam posted his revocation before Belinda accepted.
C It is valid because Adam cannot revoke the offer once Belinda has received it.
2.4 Communication of acceptance

The general rule is that acceptance must be communicated to the offeror and the acceptance is not
effective (and hence there is no agreement) until this has been done. However, it is always open to
the offeror to waive this requirement either expressly or by implication. Thus, in Carlill’s case it was
held that it was sufficient for the claimant to act on the offer without notifying her acceptance of it.
The need for acceptance to be communicated was impliedly waived.
The offeror may require that communication of acceptance is made by some prescribed method, in
which case the offeree should communicate by that method or (unless the wording is very specific)
by some other method which is no less expeditious or effective.
Where no mode of communication is prescribed by the offeror, the offeree can choose any
reasonable method (a reply by letter to an offer by email, for example, might not be acceptable).

Note that where acceptance is made by post, communication will be effective the moment the
acceptance is posted even if it is delayed or lost altogether in the post, subject to the following:
• If the delay is attributable to the offeree’s negligence, for example by stating the address
incorrectly, it will not be the case that posting amounts to acceptance.
• Use of the post must have been within the contemplation of the parties, which intention can be
deduced from the circumstances and need not be express.
This is often referred to as ‘the postal rule‘ (and applies only to acceptance, not revocation). The
postal rule will not operate where the offeror requires acceptance ‘by notice in writing‘ as the words
‘notice in writing’ must mean notice actually received by the offeror. Nor does the rule apply to
instantaneous methods of communication.
The law is unclear as to when an acceptance sent by email becomes effective. It is not possible to say
that the communication of acceptance is instantaneous, rather it is likely to be linked to when the
offeror actually saw the email or when they should have read it or might have been expected to read
it. Given the legal uncertainty as to the time of acceptance by email, it is advisable for the terms of an
offer which is made online to make express provision as to the means and timing of acceptance.
Interactive question 4: Formation of contract

Frankie writes to Xiao-Xiao on 1 July offering to sell him her sailing dinghy for £1,200. On 10 July,
having received no reply, she decides to withdraw this offer and sends a second letter. On 10 July,
Xiao-Xiao receives the original letter and posts a reply to Frankie accepting the offer. Frankie never
receives Xiao-Xiao’s letter and sells the boat to Mel on 13 July.
Requirement
Indicate whether or not each of the following statements is true or false.
True/False
Frankie’s original letter constitutes an offer, which Xiao-Xiao is

entitled to accept or reject.
Xiao-Xiao’s reply constitutes a valid acceptance.
Frankie is legally entitled to sell the boat to Mel on 13 July since she
revoked Xiao-Xiao’s offer.
Acceptance will only be effective to create agreement where the offeree is aware of the offer. Thus, if
A offers a reward to anyone who finds and returns their property and B, unaware of A’s offer, returns
the property, B cannot have ‘accepted’ A’s offer since they were unaware of it and there is no
agreement.
2.5 Agreement without offer and acceptance

As mentioned above, agreement is normally understood in terms of an offer made by one party
being accepted by the other party. However, in some cases this may not be appropriate but an
agreement might still be said to exist between the parties. The courts may consider the words and
actions of the parties and construct a contract. The following case illustrates this principle:
Clarke v Dunraven 1897
The facts: Both parties entered a regatta. Each undertook to obey the club’s rules, including an
obligation to pay for all damage caused by fouling. Dunraven’s yacht fouled Clarke’s yacht, which
sank. Clarke sued for damages. Dunraven argued that his only liability was under the Merchant
Shipping Act 1862 and was therefore set at £8 per ton.
Decision: A contract had been created between the parties when they entered their yachts for the
regatta and accepted the club’s rules. Clarke was entitled to recover the full cost of the damage.
32 Law ICAEW 2023

3 Intention to create legal relations
Section overview
• The intention to create legal relations is the second essential element of a valid contract. It may be
completely obvious but, if not, one of two rebuttable presumptions may be applied.
The nature of the Presumption

relationship between the
parties
Social, domestic and family It is presumed that social, domestic and family arrangements are
not intended to be legally binding unless there is clear evidence
which points to the contrary. All circumstances will be taken into
account, including whether husband and wife were separated at
the time of contract, the nature of the relationship between the
parties and the type of contract. For example, if the parties are a
husband and wife living apart or if the contract relates to property
matters, the presumption is more likely to be rebutted.
Commercial It is presumed that there is an intention to enter into legal relations

unless this is expressly disclaimed or the circumstances give a clear
contrary indication. It is not easy to rebut this presumption. In
Edwards v Skyways Ltd 1964, Skyways Ltd promised to make an ex
gratia payment to its employee, the argument that the words ‘ex
gratia‘ showed that there was no intention to create legal relations
failed.
Care needs to be taken during the negotiation stage as to whether a contract is intended. Use of the
words ‘subject to contract‘ amounts to a strong presumption that no immediately binding contract is
intended.
RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH 2010
The facts: A letter of intent set out a draft contract which was not to become effective until signed
and executed by the parties. The contract was not signed but the parties proceeded with the project
of installing two production lines in the claimant’s factory.
Decision: The Supreme Court held, first, that it was unrealistic to conclude that major works would
have been carried out in the absence of a contract and, secondly, that there was evidence of an
agreement and an intent to create legal relations in this case. The court made it clear that it would not
always be the case, in circumstances where works commence before a contract is finalised, that the
contract that exists between the parties contains the same terms as those in the negotiated contract.
That would be a question of fact in all the circumstances.
Similarly, calling an agreement “a personal agreement until a fully legalised agreement, drawn up by
a solicitor and embodying all the considerations herewith stated, is signed”, was held to be a binding
agreement, notwithstanding that it was obviously intended to be replaced by a more formal contract
at a later date (Branca v Cobarro 1947).
Interactive question 5: Intention to create legal relations

In which of the following situations is there no intention to create legal relations?
A Where one partner in a marriage or civil partnership agrees to pay the other a monthly amount
towards food bills.
B In divorce situations where one partner agrees to continue to pay the mortgage on the family
house.
C Where an individual signs an employment contract.
D Where one business agrees to purchase goods from another business.

4 Consideration
Section overview
• Consideration is the third essential element of a contract. Put simply, it is what each party gives or
agrees to give to the other, usually payment or a promise to do something in return.
In more legal language, consideration has been defined as follows:

“A valuable consideration in the sense of the law may consist either in some right, interest, profit or
benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered
or undertaken by the other” (Currie v Misa 1875); and
“An act or forbearance of one party, or the promise thereof, is the price for which the promise of the
other is bought, and the promise thus given for value is enforceable” (Dunlop v Selfridge 1915).
There are three types of consideration:
• Executed (valid)
• Executory (valid)
• Past (generally invalid)
4.1 Valid consideration
Type of consideration Meaning
Executed A performed, or executed, act in return for a promise. For example,

payment for goods at the time those goods are delivered.
Executory A promise given for a promise. The consideration in support of

each promise is the other promise, not a performed act. For
example, a promise to pay for goods which are to be delivered and
paid for at a later date.
4.2 Invalid consideration

Past consideration is something which has already been done at the time the promise is made, for
example where works are carried out and then a promise is made to pay for them:
Re McArdle 1951
The facts: Under a will, the testator’s children were entitled to a house after their mother’s death.
During the mother’s lifetime, one of the children and his wife lived in the house with the mother. The
wife made improvements to the house. The children later agreed in writing to repay the wife “in
consideration of your carrying out certain alterations and improvements”, but they refused to do so
when the mother died.
Decision: The work on the house had all been completed before the promise was made. The
improvements were therefore past consideration and so the promise was not binding.
However, if it could be said that there was an implied promise before the works were carried out that
they would be paid for at a later date, then they will constitute valid consideration. Whether there
was such an implied promise will be a question of fact but it will need to be shown that the works
were requested by the promisor and that the parties must have understood and assumed that they
would be paid for. If such a promise is implied, then the amount to be paid will be determined by
reference to the actual promise made after the works are completed.
34 Law ICAEW 2023

Context example: Essentials of a contract
A and B are negotiating to enter into a contract with the intention to enter into legal relations with
each other.
They have been negotiating for some time. When A says, “I will sell you 20 barrels of oil for £20 each,
take it or leave it”, B says, “Done”. Here they have achieved a second essential as A has made an offer
and B has accepted it, creating an agreement.
The third essential element is consideration, which both parties giving (or promising to give)
something of value to the contract. In this case, A has promised 20 barrels of oil and B has promised
£400, so this essential element is also present.
4.3 Exception: where consideration is not required

Where a contract is in the form of a deed then consideration is not required. A deed is simply a
formal promise between parties which must be in writing and signed. Certain types of contract must
be in the form of a deed.
Contracts which must be in the form of a deed Examples
Conveyances Where property, such as land or a house, is

transferred between the parties.
Leases which last over three years Where a leasehold property (such as a flat) is
purchased, or retail units are leased.
Promises that are unsupported by consideration A promise to pay a regular amount to another
party (such as a charity) with nothing expected
in return.
4.4 Adequacy and sufficiency of consideration

The court will also seek to ensure that a particular act or promise can actually amount to valid
consideration. Learn these rules:
• Consideration need not be adequate (that is, equal in value to the consideration received in
return). There is no remedy at law for someone who simply makes a poor bargain.
• Consideration must be sufficient. It must have some identifiable value in order to be capable in
law of being regarded as valid consideration.
It is presumed that each party is capable of serving their own interests, and the courts will not seek to
weigh up the comparative value (or adequacy) of the promises or acts exchanged.
Thomas v Thomas 1842
The facts: By his will, C’s husband expressed the wish that his widow should have the use of his house
during her life. After death, his executors (the defendants), allowed her to do so (a) in accordance
with her husband’s wishes and (b) in return for her undertaking to pay a rent of £1 per annum. They
later said that their promise to let her occupy the house was not supported by consideration.
Decision: Compliance with the husband’s wishes did not constitute valid consideration (since no
economic value attached to it), but the nominal rent was sufficient consideration (even though it
could hardly be said to be adequate).
In order to be sufficient (however inadequate or tenuous), the consideration must contain some
element that can be seen as the price of the other party’s promise. If all that is offered is something
that the promisee was bound to do anyway, then there is unlikely to be sufficient consideration. This
can be the case where the promisee is obliged to do something by law or under an existing contract,
either with the promisor or a third party. You should familiarise yourself with the following:
Performance of existing Not consideration unless it can be shown that some extra service
statutory duty over and above the scope of the statutory duty is also being offered.
For example, if someone agrees to pay another a sum of money for
appearing in a court, when that other person has been subpoenaed

to attend in any event, there is no consideration to support the
promise to pay.
Performance of existing Not consideration unless it can be shown that the promisee is
contractual duty owed to actually giving or doing something over and above the scope of the
the promisor contractual obligation. The facts need to be examined closely in each
case to see whether what is being done or offered is actually over
and above the existing contractual (or statutory) duty and also to
ensure that the case is not actually one of duress. It may be enough
where the promisor obtains some extra practical benefit.
Williams v Roffey Bros & Nicholls (Contractors) Ltd 1990

The facts: The defendant subcontracted part of its work refurbishing
a block of flats to Williams for £20,000. During the works, Williams
found himself in financial difficulties and the defendant promised to
pay an extra £10,300 to ensure that the work was completed on time,
but later refused to pay all of the extra amount.
Decision: The defendant’s argument that there was no consideration
for the promise to pay £10,300 failed. It was significant that their
promise was not made as a result of William’s duress or fraud. It was
considered important that the defendant derived the added practical
benefit of not having to engage somebody else to complete the
work and also of avoiding a penalty clause for late performance in its
own contract.
Where the question concerns the waiver of all or part of a debt, the
waiver needs to be supported by consideration and the decision in
Williams v Roffey Bros is not likely to be applied (see section 4.4).
Performance of existing This can amount to valid consideration. Thus in Scotson v Pegg 1861,
contractual duty owed to Scotson contracted with a third party (X) to deliver cargo as X
a third party directed. X directed Scotson to deliver it to Pegg. Pegg contracted
with Scotson to unload the cargo himself if Scotson delivered it to
Pegg (which he was already bound to do under his contract with X). It
was held that Scotson’s obligation owed to X to deliver the cargo to
Pegg was sufficient consideration for Pegg’s promise to Scotson.
Forbearance or waiver of Forbearance or the promise of it may be sufficient consideration if it

existing rights has some value, or amounts to giving up something of value. For
example, A might agree to forego their right to take action against B
in return for B’s promise to A.
Worked example: Consideration

A crew of 30 people contract to sail a ship from Land’s End to John O’Groats for £2,000 each. During
the voyage, two crew members desert and the captain promises an additional £500 to the remaining
28 people if they will complete the voyage short-handed.
Requirement
Can this promise be enforced?
Solution
No. The 28 crew members are already contractually bound to complete the voyage and they would
be expected to deal with normal emergencies arising en route. The fact that they have to cover two
missing crew members does not amount to something over and above what they are bound to do
anyway.
If, on the other hand, many more had deserted, so as to make the continuation of the voyage
exceptionally hazardous, then their agreement to complete for an extra £500 each would amount to
36 Law ICAEW 2023

valid consideration. (Note that the position might be different in each case if it were a case of the
remaining crew members refusing to go further without extra payment.)
4.5 Waiver of existing debt

If X owes Y £100 but Y agrees to accept a lesser sum, say £80, in full settlement of Y’s claim, that is a
promise by Y to waive their entitlement to the balance of £20. The promise, like any other, should be
supported by consideration. The case below is important:
Foakes v Beer 1884
The facts: Beer had obtained judgement against Foakes. Judgement debts bear interest from the
date of the judgement. By a written agreement Beer agreed to accept payment by instalments, no
mention being made of the interest. Once Foakes had paid the amount of the debt in full, Beer
claimed interest, claiming that the agreement was not supported by consideration.
Decision: Beer was entitled to the debt with interest. No consideration had been given by Foakes for
waiver of any part of her rights against him.
However, in the following cases the waiver will be binding:
• Alternative consideration. If X offers and Y accepts anything to which Y is not already entitled, the
extra thing is sufficient consideration for the waiver, for example goods instead of cash, or
payment in advance of the due date.
• Bargain between the creditors. If X arranges with creditors that they will each accept part
payment in full entitlement, that is a bargain between the creditors. Even though X has given no
consideration, the creditors are bound individually to the agreed terms.
• Third party part payment. If a third party (Z) offers part payment and Y agrees to release X from Y’s
claim to the balance, Y has received consideration, in the form of the offer from Z, against whom
they had no previous claim and that is sufficient.
Worked example: Waiver of entitlement to debt

A owes B, C and D £100 each. Each of the creditors agrees to accept £90 in full satisfaction of the
debt. A also owes X £200. T offers to pay X £150 on the condition that X discharges A from the £200
debt.
Requirement
Can creditors B, C and D take action against A for the remaining £30? Can X take action against A for
the debt of £200 or any part of it?
Solution
The answer is no in each case. The arrangement between the creditors will bind each of them as the
law effectively imports a consideration to support the creditors’ agreement (although the exact legal
reasoning for this is far from clear). X cannot sue A for the original debt as they have now received
consideration from T, against whom they had no previous claim. Like the creditors’ agreement, this
instance is another exception to the rule in Foakes v Beer.
Determining whether a valid contract has been created requires you to understand the whole
situation from a number of different perspectives. You will need to identify the issues within each
scenario that are relevant to the decision regarding whether a contract exists.
Interactive question 6: Consideration

Alice owns a classic car. Alice and Bev are negotiating a deal for Bev to clean the outside of Alice’s
car for her before Saturday, when she is lending her car to Claudia for her wedding. Alice will pay
£10 and allow her to borrow the car on Sunday when Claudia is finished with it.

On Thursday Alice gets mud in the car and therefore when Bev comes on Thursday to clean the car,
Alice asks her to clean the inside as well.
Bev cleans the car and asks for £15 to cover the fact that she cleaned the inside as well as the
outside. Alice refuses to pay Bev extra. She also discovers that she does not have £10 to pay her, only
£5. She offers her £5 and a week’s loan of the car in full settlement.
Requirement
Indicate whether or not each of the following statements is true or false.
True/False
Alice’s consideration of £10 and a loan of her car is valid consideration

for Bev’s promise to clean her car.
By the time she raises the issue with Alice, the fact that Bev has cleaned
the inside of the car is past consideration and therefore she cannot
demand additional payment for it.
Alice has offered Bev additional consideration (extended loan of the car)
for his waiver of the other £5 and therefore, on acceptance by Bev, the
waiver will be binding.
5 The terms of the contract

Section overview
• As a general rule, the parties to a contract may expressly include in the agreement whatever terms
they choose. This is part of the principle of freedom of contract.
• Terms may also be implied into the contract by the courts, by statute or by custom.
5.1 Express terms

In a wholly oral contract, the court must ascertain, as a question of fact, what was expressly agreed by
the parties.
In a written contract, as a general rule, the terms expressed therein will be treated as the contract.
However, the following should be taken into account:
• Terms must be substantially complete on the face of it or capable of being clarified. The parties
are entitled to leave a term to be determined at a later date (for example a price can be left to be
determined by an agreed arbitrator). However, if a term is left outstanding and there is no
provision for its clarification, there will be no contract.
Scammell v Ouston 1941
D ordered a motor-van from C “on the understanding that the balance of the purchase price can
be had on hire-purchase terms over a period of two years”. The hire-purchase terms were never
supplied and so no agreement could be identified.
However, if a term is vague but also meaningless and unnecessary (such as ‘the usual conditions
of acceptance apply’), it can be disregarded.
• A statement of fact made before the contract that induces a party to enter into the contract may
become a term of the contract. The court will consider all the circumstances to determine whether
it became a term or was simply a representation.
Thus if the person making the statement had special knowledge of the subject, it is more likely
the statement will be treated as a term of the contract. Likewise, the courts will assess the
38 Law ICAEW 2023

significance of how much time passed between the representation and the making of the
contract and why the contract omitted to incorporate the statement. (If the statement is not
treated as a term of the contract, remedies might lie in misrepresentation but not for breach of
contract.)
• Oral evidence will not usually be admitted to add to, vary or contradict written terms, unless it can
be shown that the document was not intended to comprise all the agreed terms.
SS Ardennes (Cargo Owners) v SS Ardennes (Owners) 1951
D contracted to take C’s cargo of oranges to London “by any route, directly or indirectly”. D’s
agent gave a verbal undertaking that the vessel would sail direct from Spain to London. In fact, the
ship went via Antwerp so that the oranges arrived late and a favourable market was missed. It was
held that the verbal undertaking amounted to a warranty and was admissible as oral evidence to
override the written term in the bill of lading.
In a contract entered into online, the general terms and conditions are normally in a standard form
and the other party is required to scroll through them and click ‘accept’ before making the contract.
Parties to an international contract are well advised to include an express clause that specifies which
country’s law will apply to any dispute arising under its terms (usually called a ‘choice of law’ or
‘governing law’ clause). In the absence of such a provision, the relevant law will be determined in
accordance with the Contracts (Applicable Law) Act 1990 (as amended, in particular, to take account
of European regulation ‘Rome I’ in 2008). (A governing clause may also provide for non-contractual
disputes, although this is less straightforward.)
5.2 Implied terms

Additional terms of a contract may be implied by law. Such implied terms will be deemed to form
part of the contract even though they are not expressly mentioned. In some cases, they will add to
the express terms; in others, they may override express terms. Terms can be implied in the following
ways:
By reference to custom But not if that would produce an inconsistency with the express
terms.
By statute For example, by the Supply of Goods and Services Act 1982 (HMSO,
1982), which implies terms that work and materials should be of
satisfactory quality. Such implied terms often override any express
terms that do not offer as much protection to the weaker party.
Under Rome II (a piece of EU legislation which has been adopted by
the UK post-Brexit), if parties that are based in different European
countries have a commercial or civil dispute, and they had not
previously agreed which country’s law applies to their circumstances,
then the applicable law is the law of the country where the damage
occurs.
By the courts (1) Necessary to give business efficacy

Terms may be implied if the court concludes that the parties must
have intended those terms to apply to the contract in order to give
business efficacy to the contract.
The Moorcock 1889
The facts: The owners of a wharf agreed that a ship should be
moored alongside to unload its cargo. It was well known that at low
water the ship would ground on the mud at the bottom. At ebb tide
the ship settled on a ridge concealed beneath the mud and suffered
damage.
Decision: It was an implied term that the ground alongside the wharf
was safe at low tide, since both parties knew that the ship must rest
on it.
(2) Implicit in the nature of the contract itself

The court may also imply a term, not based on the presumed
intention of the parties, but because it is considered to be implicitly
required by the nature of the contract used. Such an implied term
may form a precedent for future contracts of the same type and
parties will be advised to express clear wording if such an implied
term is not required.
Liverpool City Council v Irwin 1977
The facts: A tenant in a tower block with no formal tenancy
agreement withheld rent, alleging that the owner of the block had
breached implied terms because (among other things) the lifts did
not work and the stairs were unlit.
Decision: It was held that since tenants could only occupy the
building with access to stairs and/or lifts, the agreement between the
parties implicitly required implied obligations on the owner’s part to
maintain the common parts of the building.
5.3 Battle of the forms

Disputes sometimes arise because each party is accustomed to doing business on its own standard
terms and argues that they apply to the contract, rather than the other party’s terms. Great care
should be taken during the negotiation stage to clarify which standard (or other) terms will apply.
Where it is not clear, the contract must be considered objectively, but taking into account what has
actually happened (the ‘factual matrix’).
GHSP Inc v A B Electronic Ltd 2010
The facts: The claimant, a manufacturer of control systems for motor vehicles, purchased pedal
sensors from the defendant which were defective and caused substantial losses. Both parties argued
that their standard terms applied to the contract. The defendant’s standard terms excluded liability
for consequential loss or damage and limited liability to carrying out works of repair.
Decision: The contract was not governed by either set of standard terms, as it was clear that neither
party had accepted the other party’s terms. The court held that the contract was governed by the
terms implied by the Sale of Goods Act 1979.
When considering a contractual issue, it may be helpful to identify any gaps in the express terms,
which may then be filled by implied terms.
Interactive question 7: Implied terms

Which two of the following are reasons for a court implying terms into a contract?
A The term is implicitly required due to the nature of the contract.
B To make the contract fair on both parties.
C The term is required to ensure every possible eventuality is covered.
D To give business efficacy to the contract.
40 Law ICAEW 2023

6 Privity of contract
Section overview
• As a general rule, only a person who is a party to a contract has enforceable rights or obligations
under it. This is the doctrine of privity of contract.
• The Contracts (Rights of Third Parties) Act 1999 has had a fundamental effect on the doctrine.
The law requires that consideration must move from the promisee and only a party to a contract can
enforce it. No one may be entitled to or bound by the terms of a contract to which they are not a
party.
Where A promises B that (for a consideration provided by B) A will confer a benefit on C, then C
cannot as a general rule enforce A’s promise since C has given no consideration for it.
There are a number of equitable and statutory exceptions to the privity of contract rule, for example
a person injured in a road accident may claim against the motorist’s insurers under the Road Traffic
Act 1972 (HMSO, 1972). However, the two principal exceptions of which you should be aware are as
follows:
• Where an agent enters into a contract with a third party on behalf of their principal, the resulting
contract is actually enforceable by and between the principal and the third party. The agent
cannot enforce it.
• The Contracts (Rights of Third Parties) Act 1999 (TSO, 1999) provides that a third party may
enforce a term of the contract provided:
– the contract expressly provides that they may; or
– the term confers a benefit on them, unless it appears that the contracting parties did not intend
them to have the right to enforce it.
The third party must be expressly identified in the contract by name, class or description, but need
not be in existence when the contract is made (for example, an unborn child or a future spouse). The
Act enables a third party to take advantage of exclusion clauses as well as to enforce ‘positive’ rights.
The Act does not apply to employment contracts, so, for example, a customer of an employer cannot
use this Act to enforce a term of a contract of employment against an employee.
Interactive question 8: Essentials of a valid contract

You have been asked to act as legal adviser to Catherine, advising her whether or not a contract
exists between her and David after the following course of events.
On Monday, David advertised a table and chairs for sale for £100 in the local newspaper. Catherine
saw the advertisement and telephoned David offering him £75. David offered to sell the table and
chairs to Catherine for £80. She accepted. Two days later, Catherine rang David and said that she
would give him £85 if he delivered the table and chairs as well. David refused. Catherine said that if
she had to collect the table and chairs herself she would only give David £75. During the course of
their negotiations, Catherine and David have discovered that they know each other through the local
gardening club.
Requirement
Indicate whether each of the following statements is true or false.
True/False
As Catherine and David are acquaintances, they cannot form a

binding contract.
Catherine and David have not formed a valid contract as they have
been unable to come to an agreement about price.

True/False
Delivery is capable of constituting sufficient consideration for an

increase in contract price.
If David accepts Catherine’s final suggestion, there will be a binding

contract between them at a price of £75.
42 Law ICAEW 2023

Summary
A valid contract is a legally

binding agreement, formed by
the mutual consent of two parties
The three essential There are a number A contract contains Generally speaking it
elements of a of factors which may express terms and can only be enforced
contract are offer affect the validity of a additional terms by the parties to it.
and acceptance, contract. For a may be implied by Exceptions:
consideration and contract to be custom, statute or • Agency
intention to enter binding it must also the courts • Contracts (Rights
into legal relations satisfy various tests • Business efficacy of Third Parties)
relating to certainty, • Necessarily Act 1999
legality, form and incidental
the genuineness of
consent of the parties
A contract which is
not valid may be:
• void (neither party
is bound)
• voidable (the
contract is binding
unless and until
one party chooses
to avoid it)
• unenforceable (the
contract is valid
but its terms
cannot be enforced
in a legal sense
(although it may
be ratified)

Essential Components Definition Rules Exemptions
element
Cannot be vague
Does not have to be made to
particular person
Must be distinguished from
“A definite promise to be invitation to treat
bound on specific terms” May be express words, action
Offer of inferred from action, but not
silence
Must be unconditional
acceptance of terms (ie, not
counter-offer or request for
information)
Agreement + Must be communicated to the Unless:
offeror (1) offeror waives the
need
“A positive act by a (2) under postal rule, if a
person to whom an offer posted letter does
has been made which, not arrive acceptance
if unconditional, brings remains valid
Acceptance
a binding contract into Offer can be only accepted when
effect” it remains open – it may lapse in
the following situations:
(1) Rejection or counter-offer
(2) Lapse of time
(3) Revocation
(4) Failure of condition
In the absence of express No exceptions –
intention, the courts apply but remember the
“An agreement will only
“rebuttable presumptions”: presumptions are
become legally binding
Intention (1) Family or social agreements rebuttable – if you can
if the parties intend that
not intended to be binding prove otherwise, the
this will be so”
(2) Commercial agreements courts will apply what you
intended to be binding can prove
Must not be past Implied promise to pay
for a service
“A valuable consideration Need not be adequate

in the sense of the law Must be sufficient
may consist either in Waiver of rights under a (1) Alternative
some right, interest, contract must be matched by consideration
Executed or profit or benefit accruing consideration from the other given (goods, early
Consideration
Executory to one party, or some party settlement)
forbearance detriment, (2) Third party pays part –
loss or responsibility rest is cancelled
given, suffered or
undertaken by the other” Consideration must move from (1) Contracts (Rights of
the promisee (privity of contract), Third Parties) Act
only then have the rights in the (2) Agency
contract
44 Law ICAEW 2023

indicated.
1. Do you know the three essential elements of a contract? (Topic 1)
2. Can you define an offer? (Topic 2)
3. Do you know what is presumed about the intention of commercial organisations when
entering into a contract? (Topic 3)
4. Do you know the two types of valid consideration? (Topic 4)
5. Do you know the ways in which terms can be implied into contracts? (Topic 5)
6. Can you explain who may enforce a contract under the rules of privity? (Topic 6)

questions that you did not answer correctly or where the suggested solution has not provided

• Consumer Credit Act 1974. (1974). London, HMSO.

• Consumer Credit Act 2006. (2006). London, TSO.
• Contracts (Rights of Third Parties) Act 1999. (1999). London, TSO.
• Electronic Communications Act 2000. (2000). London. TSO.
• Road Traffic Act 1972. (1972). London, HMSO.
• Supply of Goods and Services Act 1982. (1982). London, HMSO.
46 Law ICAEW 2023

Self-test questions

1 Which one of the contracts below is a standard form contract?
A A document put forward for the customer’s signature by a supplier of goods in which pre-
printed contractual terms are set out.
B A document signed by both parties to a contract in which contractual terms as negotiated
between them are set down.
C An oral agreement to enter into relations on the basis of terms as agreed following negotiations
between the parties.
D An oral agreement between two parties who have negotiated terms regarding the standards of
performance to be met by each party in the main contract.
2 Complete the following sentence.
A valid contract is a legally binding agreement. The three essential elements of a contract are
, , and .
3 Indicate if the following statement is true or false.
True/False
A voidable contract is not a contract at all.
4 Match the definition to its term.
The contract is valid but the parties cannot be

held to its terms.
Neither party is bound.
The contract is binding unless and until one

party chooses to avoid it.
5 How is the circulation of a price list categorised in the law of contract?

A Offer
B Tender
C Invitation to treat
D Auction
6 Fill in the blanks in the statements below, using the words provided.
• information
• rejection
• offer
• communicated
• invitation to treat
• offeror

As a general rule, acceptance must be to the and is not
effective until this has been done.
An is a definite promise to be bound on specific terms and must be distinguished

from a supply of and from an .
A counter-offer counts as a of the original offer.
True/False
Advertising an auction is an offer to sell.
8 Give three examples of situations likely to be invitations to treat.

True/False
As a general rule, silence cannot constitute acceptance.
10 Define the postal rule.

11 Distinguish between executed and executory consideration.
True/False
Past consideration, as a general rule, is not sufficient to make a promise

binding.
13 Fill in the blanks in the statement below.
Consideration need not be but it must be .
True/False
A promise of additional reward for existing duties is not generally

binding.
True/False
In the context of contractual considerations, payment of a lesser sum

cannot be satisfaction for the whole sum unless something is added to
it, such as earlier payment, or payment by a different method.
16 What is the name of the EU law, which has been adopted by the UK, that deals with the situation
where parties that are based in European countries have not agreed which country’s law applies?
48 Law ICAEW 2023

this chapter.

There is clear agreement between the parties on all terms Void

and they intend to create a legally binding agreement but
there is no consideration.
One of the parties is aged 17. Voidable
The contract is an agreement to defraud HMRC. Void
The contract is made orally and provides for Graham to pay Unenforceable
Harry the debt owed to Harry by Imran.

B Invitation to treat
An advertisement is an invitation to treat, ie, an invitation to a reader to make an offer which the
advertiser can either accept or reject.

A It is valid because acceptance took place before Belinda received Adam’s revocation.
Revocation must be received to be effective. It is not effective on posting (unlike an acceptance).
True/False
Frankie’s original letter constitutes an offer, which Xiao-Xiao is True

entitled to accept or reject.
Xiao-Xiao’s reply constitutes a valid acceptance. True
Frankie is legally entitled to sell the boat to Mel on 13 July since she False
revoked Xiao-Xiao’s offer.
(1) Frankie’s letter constitutes an offer.

(2) The acceptance by Xiao-Xiao takes effect when posted on 10 July. The revocation letter posted
10 July will arrive too late to prevent acceptance on 10 July. Therefore a contract is formed on 10
July.
(3) Frankie’s sale of the dinghy to Mel is in breach of her contract with Xiao-Xiao.

A Where one partner in a marriage or civil partnership agrees to pay the other a monthly amount
towards food bills.
50 Law ICAEW 2023

In social, domestic and family situations, there is a presumption of no intention unless partners
are separating or the agreement involves property. In commercial situations, including
employment contracts, the presumption is that there is intention to create legal relations.
True/False
Alice’s consideration of £10 and a loan of her car is valid consideration True
for Bev’s promise to clean her car.
By the time she raises the issue with Alice, the fact that Bev has cleaned True
the inside of the car is past consideration and therefore she cannot
demand additional payment for it.
Alice has offered Bev additional consideration (extended loan of the car) True
for his waiver of the other £5 and therefore, on acceptance by Bev, the
waiver will be binding.
(1) Consideration does not have to be adequate but must be sufficient. In other words, it must have
identifiable value. In this case, Alice is offering both £10 and the loan of her car, both of which
have identifiable value and thus constitute valid consideration.
(2) True on the face of it, since anything that has been done before a promise in return is given is
past consideration. However, if it can be argued that the parties must have assumed that there
would be payment for this extra work, then it may be valid consideration.
(3) Alice cannot afford to pay Bev the £10 she agreed and asks her to waive her right to it. This
request is accompanied by additional and alternative valuable consideration (the extension of
the loan period to a week) and if she accepts those terms, the waiver is binding.

The correct answers are:
A The term is implicitly required due to the nature of the contract.
D To give business efficacy to the contract.
Courts will imply contractual terms if the term is implicitly required due to the nature of the
contract, or if the court believes the parties intended the term to apply to give the contract
business efficacy. Fairness and covering every eventuality are not reasons for a court to imply
terms.
True/False
As Catherine and David are acquaintances, they cannot form a False

binding contract.
Catherine and David have not formed a valid contract as they have False
been unable to come to an agreement about price.
Delivery is capable of constituting sufficient consideration for an True

increase in contract price.
If David accepts Catherine’s final suggestion, there will be a binding False

contract between them at a price of £75.

(1) The presumption that friends do not intend to form contractual agreements is rebuttable and is
rebutted in this case – their acquaintance was not recognised or relevant at the time of making
the contract.
(2) David’s original advert is an invitation to treat so cannot be accepted as an offer. Catherine’s offer
of £75 is rejected by David so no contract is formed at this point. However, David then makes an
offer of £80 which is accepted by Catherine, at which point a contract is made. The further offer
of £85 is rejected but this does not affect the agreement already reached.
(3) Delivery is clearly valuable to Catherine, as she implies by her offer of an extra £5 for delivery.
(4) Catherine is asking David to waive his rights under the contract but there is no consideration to
support this waiver and it would not be binding on David.
52 Law ICAEW 2023

A A document put forward for the customer’s signature by a supplier of goods in which pre-
printed contractual terms are set out.
2 A valid contract is a legally binding agreement. The three essential elements of a contract are
offer and acceptance , consideration , and intention to create legal relations .
True/False
A voidable contract is not a contract at all. False
The contract is valid but the parties cannot be Unenforceable

held to its terms.
Neither party is bound. Void
The contract is binding unless and until one Voidable

party chooses to avoid it.
C Invitation to treat
6 As a general rule, acceptance must be communicated to the offeror and is not effective until
this has been done.
An offer is a definite promise to be bound on specific terms and must be distinguished from a
supply of information and from an invitation to treat .
A counter-offer counts as a rejection of the original offer.
True/False
Advertising an auction is an offer to sell. False
It is merely a statement of intention.

8 Situations likely to be invitations to treat:
• Advertisement
• Exhibition of goods for sale
• Circulation of a price list
9
True/False
As a general rule, silence cannot constitute acceptance. True

10 The postal rule states that, where the use of the post is within the contemplation of both the parties,
the acceptance is complete and effective as soon as a letter is posted, even though it may be
delayed or even lost altogether in the post.
11 Executed consideration is an act in return for a promise, such as paying for goods when the
shopkeeper hands them over. Executory consideration is a promise given for a promise, such as
promising to pay for goods that the shopkeeper puts on order for you.
12
True/False
Past consideration, as a general rule, is not sufficient to make a promise True

binding.
13 Consideration need not be adequate but it must be sufficient .
14
True/False
A promise of additional reward for existing duties is not generally True

binding.
15
True/False
In the context of contractual considerations, payment of a lesser sum True

cannot be satisfaction for the whole sum unless something is added to
it, such as earlier payment, or payment by a different method.
16 Rome II
54 Law ICAEW 2023

Chapter 3
Termination of contract
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 Discharge of the contract
2 Remedies
3 Exclusion clauses in contracts
Summary
Self-test questions
Introduction
Learning outcomes
• Recognise when a legally binding contract exists between two parties and how a contract may be
enforced
• Identify the circumstances under which a contract can be terminated and possible remedies for
breach of contract
Specific syllabus references for this chapter are: 1a, b.
3
Syllabus links
You will have learnt about liabilities and provisions in your Accounting paper. It is helpful to see how,
in practice, such liabilities of companies might arise.
3
Assessment context
You should expect several questions on contract termination. They are likely to be a mixture of
application ‘scenario’ questions and definition questions.
3

of this chapter.

questions
1 Discharge of contract Approach Scenario questions IQ2:

Most contracts are Learn the rules on might test your Frustration of
concluded through how contracts are understanding of contract
performance. However, performed before whether a party is in This question
there are other ways in considering what breach of contract. helps you to
which a contract might frustration is and understand
end. what constitutes a the rules on
breach of contract. frustration,
which can
seem
Stop and think complicated
Could you explain at first.
what the
consequences of a
contract being
frustrated are?
2 Remedies Approach Scenario questions IQ3:

If a party is in breach of It is important to may test your Remoteness
contract it is highly learn all the rules on understanding of the of damage
likely that the other the different rule in Hadley v This scenario
party will seek a remedies Baxendale – an question
remedy. Payment of presented. Focus on important case that is tests your
damages is a common the purpose of each used to determine ability to
remedy, but other remedy and why a whether damages apply the
possibilities exist as party might want to should be awarded. rules on
well. seek them. remoteness
of damage.
56 Law ICAEW 2023

questions
Stop and think

Could you explain
the purpose of a
liquidated damages
clause in a contract?
3 Exclusion clauses in Approach Scenario questions IQ6:

contracts After learning what may test your ability to Exclusion
Exclusion clauses are an exclusion clause apply the UCTA 1977 clause
used by parties to is and how they can or CRA 2015 rules. This is a
avoid liability for be incorporated scenario
breaches of contract. into a contract you question that
They are fairly should focus on the tests your
commonplace in rules relating to ability to
commercial contracts, commercial apply the
but there are strict rules contracts (in the rules on
in place to help protect Unfair Contract incorporating
consumers in Terms Act 1977) exclusion
consumer contracts. and consumer clauses.
contracts (in the
Consumer Rights
Act 2015).
Stop and think

Could you explain
whether an
exclusion clause
would be valid
under UCTA 1977
and CRA 2015?
ICAEW 2023 3: Termination of contract 57

1 Discharge of the contract
Section overview
• A contract is usually discharged by performance of the parties’ obligations contained in the

contract.
• Events may take place that make performance of the contract impossible or meaningless, thereby
discharging the contract by frustration.
• In the absence of frustration (or other lawful excuse), non-performance will constitute breach of
the contract.
1.1 Performance
Performance is the normal method of discharge of a contract: each party fulfils or performs their
contractual obligations and the agreement is then ended. Although it is commonly said that
complete and exact performance of all the contract terms is required to discharge the contract, in
fact the courts will apply an important qualification to this rule. This is that so long as there is
substantial performance of a party’s contractual obligations, that will be a sufficient discharge,
although the other party will be entitled to seek redress for that part of the performance that did not
completely and exactly match the contract terms.
While partial performance cannot discharge the contract as a whole, most contracts are treated as
‘severable’ which means that they consist of a number of obligations and can be ‘severed’ or
discharged through performance of only part of those obligations, leaving the remaining obligations
to be performed. For example, employment contracts usually provide for payment each week or
month and building contracts usually provide for payment at various stages of the contractor’s
progress. Each of these payment dates or stages represents a point at which the contract can be
severed or, effectively, divided into smaller contracts.
If one party prevents performance, the offer of performance by the other party is sufficient discharge
of their obligations and they will be entitled to sue for damages for breach of contract, or
alternatively bring a quantum meruit (literally ‘as much as they deserve’) action to claim for the
amount of work already completed.
Planché v Colburn 1831
The facts: Planché had agreed to write a book on costumes and armour for Colburn’s ‘Juvenile
Library’ series. He was to receive £100 on completion. He did some research and wrote part of the
book. Colburn then abandoned the series.
Decision: Planché was entitled to 50 guineas (a little over £50) as reasonable remuneration on a
quantum meruit basis.
Interactive question 1: Discharge by performance

Carol employs Luz as an interior designer and decorator to do some work on her apartment. The
contract price is £15,000. Luz completes the work within the allotted time. When inspecting the work,
Carol notices that a lampshade she specified has not been supplied, that the door handles are of the
wrong design and that two of the new bathroom tiles are cracked. She tells Luz the job is incomplete
and refuses to pay.
Requirement
Advise Luz.
A Luz is not entitled to payment since she has not performed her obligations completely and
exactly.
B Luz is entitled to receive the full contract price since she has substantially performed her part of
the contract.
C Luz is entitled to receive the contract price less a reasonable deduction for the defects and
omissions.
58 Law ICAEW 2023

1.2 Discharge by frustration

If it is impossible to perform the contract when it is made, there is usually no contract at all. In respect
of impossibility arising after the contract has been made, the parties are free to negotiate escape
clauses or force majeure clauses (for example in respect of adverse weather or strike action in a
building contract), which will prevail if the anticipated impossibility arises.
However, if, after the contract is made, performance or further performance of the contract is
rendered impossible or totally futile by some extraneous cause, for which neither party is responsible
(and for which the contract makes no provision), then the contract will be treated as discharged by
frustration. A contract will not be discharged where another mode of performance is still possible,
even if that way is more expensive and/or more difficult.
The following are examples of events or changes in circumstances where contracts have been
frustrated:
Example
Destruction of the A hall was let to a musician for a series of concerts but before the date
subject matter of the first concert, the hall was accidentally destroyed by fire (Taylor v
Caldwell 1863).
Personal incapacity to A drummer was contracted to perform seven nights a week in a pop
perform a contract of group. Due to ill health the drummer was only able to perform four
personal service nights a week (Condor v Barron Knights 1966).
Government Where an outbreak of war or new legislation rendered further

intervention performance of the contract illegal.
Non-occurrence of an A room was let for the sole purpose of overlooking the coronation
event which is the sole procession of a king, whose illness caused the procession to be
purpose of the contract postponed (Krell v Henry 1903).
(Note that the contract would not have been frustrated if the room had
been let for several days or for some other purpose also.)
The Law Reform (Frustrated Contracts) Act 1943

In most cases, the rights and liabilities of parties to a contract discharged by frustration are regulated
by the Law Reform (Frustrated Contracts) Act 1943 (HMSO, 1943), although any express provision to
the contrary will prevail. The consequences of frustration under the Act are as follows:
• Any money paid under the contract before the frustrating event is to be repaid.
• Any sums due for payment under the contract cease to be payable.
• If a person has to repay money, or if they must forego a payment that should have been made
before the frustrating event, then if the court considers it just in all the circumstances of the case,
they may be able to retain or recover (as the case may be) expenses incurred, provided they were
incurred in the performance of the contract and before the contract was frustrated.
• If either party has obtained a valuable benefit (other than payment of money) under the contract
before it is discharged, the court may in its discretion order them to pay to the other party all or
such part of that value as it considers just, having regard to all the circumstances of the case.
BP Exploration Co (Libya) Ltd v Hunt (No. 2) 1982
The facts: Hunt owned an oil concession in Libya. BP was contracted to explore and exploit the
potential oil fields in return for a share of the concession if successful. BP’s investigation revealed
a large oil field and pipelines were laid. The Libyan government then cancelled the concession,
thus frustrating the contract.
Decision: The court held that Hunt had received a valuable benefit of around $85 million in terms
of the increased value of his concession as a result of discovering oil. The court awarded a ‘just
sum’ of around $35 million to represent this valuable benefit. It took into account all the

circumstances, namely the value of the oil already removed, the potential claim for compensation
against the Libyan government and the allocation of risk expressed in the contract.
Whether a contract has been frustrated is often a matter for professional judgement. It can be a
cause of significant uncertainty that a working professional will actively need to appreciate when
deciding how to proceed.
Interactive question 2: Frustration of contract

Which of the following is not a correct statement of the law relating to frustration of contract?
A Parties are discharged from their contract if altered circumstances render the contract
fundamentally different in nature from what was originally agreed.
B Parties are discharged if an event, for which neither party is responsible, occurs which renders
performance impossible or futile.
C Parties who contract that something should be done are discharged if performance becomes
substantially more expensive or onerous.
D Parties who contract that something should be done are discharged if their assumption that
certain conditions (which are fundamental to the contract), would continue, proves to be totally
false.
1.3 Breach of contract

Where a party does not perform their contractual obligation sufficiently, they are said to be in breach
of contract, unless the contract has been discharged by frustration or they have some other lawful
excuse. A lawful excuse may apply in the following circumstances:
• Where they have tendered performance but this has been rejected
• Where the other party has made it impossible for them to perform
• Where the parties have by agreement permitted non-performance
All breaches of contract entitle the injured party to seek damages. If the breach is very serious, the
injured party is entitled to treat the contract as at an end (thus discharging their own obligations) in
addition to seeking damages. Alternatively, they may elect to affirm the contract. This kind of serious
breach (sometimes called ‘repudiatory breach‘) arises in the following circumstances:
• Where the breach is of a term that the parties regard as a fundamentally important term or where
the breach has the effect of depriving the injured party of substantially the whole benefit of the
contract. Sometimes the test applied is whether the breach can be said to ‘go to the root of the
contract’.
Poussard v Spiers 1876
The facts: Mme Poussard agreed to sing in an opera throughout a series of performances. Owing
to illness she was unable to appear on the opening night and the next few days. The producer
engaged a substitute who insisted that she should be engaged for the whole run. When Mme
Poussard recovered, the producer declined to accept her services for the remaining
performances.
Decision: Failure to sing on the opening night was a breach of condition, which entitled the
producer to treat the contract for the remaining performances as discharged.
• Where one party renounces their contractual obligations explicitly or implicitly in advance by
showing that they have no intention of performing them. This kind of breach before performance
is due is also known as ‘anticipatory breach‘.
Hochster v De La Tour 1853
The facts: De La Tour engaged Hochester as a courier to accompany him on a European tour
commencing on 1 June. On 11 May De La Tour wrote to Hochester to say that he no longer
60 Law ICAEW 2023

required his services. On 22 May Hochester commenced legal proceedings for anticipatory
breach of contract. De La Tour objected that there was no actionable breach until 1 June.
Decision: Hochester was entitled to sue as soon as the anticipatory breach occurred on 11 May.
Where the breach is sufficiently serious, the injured party may choose (at the time of the breach)
either to:
• treat the contract as discharged immediately and sue for damages; or
• allow the contract to continue until there is an actual breach and take action at that time.
If the innocent party elects to treat the contract as still in force, they may continue with their
preparations for performance and recover the agreed price for their services. The duty to mitigate
their losses (see the section on ‘Damages’ below) does not arise until they accept the breach, but
they will need to show that the losses have been caused by the actual breach.
If the innocent party elects to treat the contract as discharged, they must notify the other party of
their decision. This may be by way of refusal to accept further performance or refusal to perform their
own obligations. In this situation, the following applies:
• They are not discharged from the contractual obligations that were due at the time of termination,
but they are discharged from their future or continuing contractual obligations and cannot be
sued on them.
• They need not accept nor pay for further performance.
• They may be able to refuse to pay for partial or defective performance already received, unless
the contract is severable.
• They can reclaim money already paid in respect of defective performance.
• They can still claim damages from the defaulter.
2 Remedies
Section overview
• Contractual disputes may be resolved by civil litigation in the courts or by other means.
• Damages are the main remedy awarded by the courts for breach of contract and are designed to
compensate the claimant by putting them in the position they would have been in, if the contract
had been performed.
• In some cases, a more appropriate remedy might be awarded, such as specific performance or an
injunction.
In this section, you will learn about the remedies available in the courts in an action for breach of
contract. However, you should be aware that the majority of contractual disputes will not reach the
courts and may be resolved by negotiation, arbitration or some other means such as mediation,
adjudication or expert determination. These alternatives to litigation are usually referred to as
‘alternative dispute resolution’ (or ‘ADR’) and are actively encouraged by the courts, even once court
proceedings have been commenced.
2.1 Damages
In a claim for damages the first issue is remoteness of damage. Here the courts consider how far
down the sequence of cause and effect the consequences of breach should be traced before they
should be ignored.
Under the rule in Hadley v Baxendale (see below) damages may only be awarded in respect of those
losses that may fairly and reasonably be considered as, either:
• arising naturally (ie, according to the usual course of things) from such breach of contract; or
• such as may reasonably be supposed to have been in the contemplation of both parties, at the
time of making the contract, as the probable result of the breach.
Hadley v Baxendale 1854

The facts: C owned a mill at Gloucester. When the main crank shaft had broken, C made a contract
with D for the transport of the broken shaft to Greenwich to serve as a pattern for making a new shaft.
Owing to D’s neglect, delivery was delayed and the mill was out of action for a longer period. D did
not know that the mill would be idle during this interval, simply that he had to transport a broken mill
shaft. C claimed for loss of profits of the mill during the period of delay.
Decision: Although D’s failure to perform the contract promptly was the direct cause of the stoppage
of the mill for an unnecessarily long time, the claim must fail since it was not a natural consequence
of delay in transport of a broken shaft, that the mill would be out of action (the miller might have a
spare for example) and D did not know that that would be the result.
If the defendant can show that the ‘chain of causation’ was broken and that the claimant had, in fact,
caused the loss, the defendant will not be liable. This is a question of fact, but if the claimant is
unaware of the breach, it is likely that only recklessness on their part would break the chain of
causation (Borealis AB v Geogas Trading SA 2010).
If the losses are exceptional or abnormal and not reasonably foreseeable, the defendant will be
liable only if they knew (at the time of the contract) of the special circumstances from which the
abnormal consequence of breach could arise.
Victoria Laundry (Windsor) v Newman Industries 1949
The facts: D contracted to sell a large boiler to C ‘for immediate use’ in their business of launderers
and dyers but were late delivering it. D was aware of the nature of C’s business and had been
informed that C was most anxious to put the boiler into use in the shortest possible space of time. C
claimed damages for normal loss of profits for the period of delay and for loss of abnormal profits
from losing ‘highly lucrative’ dyeing contracts that would have been undertaken, if the boiler had
been delivered on time.
Decision: Damages for loss of normal profits were recoverable since, in the circumstances, failure to
deliver major industrial equipment ordered for immediate use would be expected to prevent
operation of the plant. The claim for loss of special profits failed because D had no knowledge of the
dyeing contracts.
In real life, deciding whether losses are too remote is often a judgement call based on technical
knowledge and experience. When facing a scenario question on losses, it is important to focus on
just the facts that you are given and to apply only case law that is relevant to the situation.
Interactive question 3: Remoteness of damage

Louise runs a homemade cake business. Cook & Co contract to sell her a large industrial oven to
enable her to expand her business by enabling her to increase cake production. Louise tells Cook &
Co that she has also been awarded a contract to bake 100 jacket potatoes daily during November
and December for a local street fair in the run up to Christmas and so needs the oven by 31 October.
Cook & Co agree to deliver the oven by 28 October. Unknown to Cook & Co, Louise has also agreed
to allow Bobbie the baker to use the oven on Fridays (her day off) so that she can meet her extra
customer demands over the weekends.
Owing to a dispute between the manufacturer and Cook & Co, the oven is not delivered to Louise
until 12 November. Louise is therefore unable to fulfil the jacket potatoes contract and also is unable
to increase cake production as planned. She has also lost the hire payment agreed by Bobbie in
respect of two Fridays.
Requirement
Which one of the following statements best describes the legal position of Cook & Co?
A Cook & Co could not be expected to know that Louise would not have access to a replacement
oven and will not have to pay damages as a consequence.
B Cook & Co were aware of the jacket potatoes contract and so are liable for that loss but not for
Louise’s other losses as they were not known.
C Cook & Co is liable for all Louise’s losses since they were all in the course of her business.
62 Law ICAEW 2023

D Cook & Co are not liable for the loss due to the agreement with Bobbie but will be liable in
respect of the other losses.
The second issue to be considered is how much money (what ‘measure of damages‘) is needed to
put the claimant in the position they would have achieved if the contract had been performed. This is
sometimes referred to as protecting the expectation interest of the claimant. A claimant may
alternatively seek to have their reliance interest protected; this refers to the position they would have
been in had they not relied on the contract. In such cases, they are claiming for wasted expenditure
and the onus is on the defendant to show that the expenditure would not have been recovered if the
contract had been performed.
Anglia Television Ltd v Reed 1972
The facts: The claimant engaged an actor (the defendant) to appear in a film they were making for
television. The actor pulled out at the last moment and the project was abandoned. The claimant
sought compensation for the preparatory expenditure, such as hiring other actors and researching
suitable locations.
Decision: Damages were awarded as claimed. It is impossible to tell whether an unmade film will be
a success or a failure and, had the claimant sought compensation for loss of profits, they would not
have succeeded.
In a recent case, the court confirmed that a claim for wasted expenditure was also subject to the
general principle that an award of damages should not put a claimant in a better position than they
would have been in if the contract had been performed. Reliance damages will not be awarded
regardless of the anticipated profit to be made by the claimant, but would only be awarded where
their gross profits were likely to exceed their expenditure (Omak Maritime Ltd v Mamola Challenger
Shipping Co 2010).
Generally speaking, damages will only be awarded for actual financial loss. In very rare cases,
damages have been recovered for mental distress where that is the main result of the breach. It is
uncertain how far the courts will develop this concept.
Jarvis v Swan Tours 1973
The facts: The claimant entered into a contract for holiday accommodation at a winter sports centre.
What was provided was significantly inferior to the description given in the defendant’s travel
brochure. Damages on the basis of financial loss only were assessed at £32.
Decision: The damages should be increased to £125 to compensate for disappointment and distress
because the principal purpose of the contract was the giving of pleasure.
Mitigation of loss
In assessing the amount of damages, it is assumed that the claimant will take all reasonable steps to
reduce or mitigate their loss. They are not required, however, to take discreditable or risky measures
as these are not ‘reasonable’. The burden of proof is on the defendant to show that the claimant
failed to take a reasonable opportunity of mitigation.
Payzu Ltd v Saunders 1919
The facts: The parties had entered into a contract for the supply of goods to be delivered and paid
for by instalments. When the claimant failed to pay for the first instalment on the due date, the
defendant declined to make further deliveries unless the claimant paid cash in advance with their
orders. The claimant refused to accept delivery on those terms. The price of the goods rose, and they
sued for breach of contract.
Decision: The defendant had no right to repudiate the original contract and was therefore liable in
damages. However, the claimant should have mitigated their loss by accepting the defendant’s offer
of delivery against cash payment. Damages were limited to the amount of their assumed loss, had
the claimant paid in advance, ie, interest over the period of pre-payment. The judge commented that
“in commercial contracts, it is generally reasonable to accept an offer from the party in default”.
Interactive question 4: Measure of damages

Chana agrees to buy a car from Mel’s Motors for £6,000. Mel had paid £5,500 for the car. On the
agreed day, Chana arrives at the dealers but refuses to accept or pay for the car. In the meantime, the

car’s market value has risen to £7,000. The following week Mel sells the car for £7,500. Mel claims
against Chana for damages.
Requirement
What sum is Mel likely to be awarded?
A Nothing
B £6,000
C £5,500
D £7,000
2.2 Liquidated damages and penalty clauses

To avoid later complicated calculations of loss, or disputes over damages payable, the parties may
include up-front in their contract a fixed sum or a formula for determining the damages payable for
breach (liquidated damages).
Such a clause will be effective provided it is not considered to be penal in nature. If the sum does not
protect the legitimate interest of the innocent party and is excessive, it may be construed as a
penalty clause and will not be enforceable.
However, recent judgements have provided examples of situations where a penalty clause may be
enforceable.
In Cavendish Square Holding BV v Talal El Makdessi 2015 a test of whether a clause is a penalty or not
was developed.
Lord Neuberger stated that a penalty clause is “a secondary obligation which imposes a detriment on
the contract-breaker out of all proportion to any legitimate interest of the innocent party in the
enforcement of the primary obligation”.
In other words, a clause that introduces an obligation to pay the innocent party more in damages
than their actual losses will be enforceable providing it is in proportion to the primary obligation
under the contract. This will be a question of fact for the court to decide.
ParkingEye Limited v Beavis 2015
The facts: The claimant managed a car park at a retail park. There were notices around the car park
stating that visitors are entitled to two hours of free parking but an £85 charge would be levied if
visitors stay in excess of that time. Mr Beavis stayed in the car park for almost three hours but refused
to pay the charge stating that it was a penalty.
Decision: The Supreme Court held that a charge like this acts as a deterrent and as such should not
be deemed a penalty. In this case the claimant has a legitimate secondary interest that is not satisfied
by recovering damages for breach of contract. The purpose of the charge is to prevent visitors
overstaying, which is important for managing the car park in the interest of all visitors (ie, to stop the
car park being clogged up with people staying for extended periods). There were notices displayed
all around the car park and the charge was not excessive when compared to the level of parking
fines generally.
2.3 Specific performance

The court may, in its discretion, make an order for specific performance. This is an equitable remedy
which orders the defendant to perform their part of the contract instead of letting them ‘buy
themselves out of it’ by paying damages for breach.
It will only be awarded where damages are not an adequate remedy. For example, an order is likely
to be made for specific performance of a contract for the sale of land, since the claimant may need
the land for a particular purpose and would not be adequately compensated by damages for the
loss of their bargain. Specific performance will not be granted if it would require supervision of the
performance or if it is a contract for personal service (such as an employment contract).
64 Law ICAEW 2023

2.4 Injunction
There are three types of injunction that can be granted in the court’s discretion:
• A mandatory injunction, which is restorative in its effect. It directs the defendant to take positive
steps to undo something they have already done in breach of contract; for example, to demolish
a building that they have erected in breach of contract. This is a relatively rare remedy and will
only be granted where it will produce a fair result in all the circumstances.
• A prohibitory injunction, which requires the defendant to observe a negative promise in a
contract.
Note that where a person enters into a contract to perform personal services for A and not to
perform them for B, an injunction may be given to enforce the negative promise, even though an
order of specific performance for the positive promise would be refused.
• An asset-freezing injunction prevents the defendant from dealing with assets where the claimant
can convince the court that they have a good case and that there is a danger of the defendant’s
assets being exported or dissipated.
Context example: Injunctions

Sophia agreed to sing at Anita’s theatre for six months and not to sing at Tim’s theatre during that
period. After a few weeks, Sophia began to give three matinee performances each week at Tim’s
theatre. Anita wants to sue her for breach of contract.
Anita would be entitled to damages. In addition, she should consider seeking a prohibitory
injunction, restricting Sophia from performing at Tim’s theatre, ie, enforcing her promise not to do so.
(Note that had the contract stipulated that Sophia should only work for Anita and not for anybody
else in any capacity whatsoever, an injunction would not be granted, even of the negative promise,
because that would result in her being compelled to work for her or otherwise abandon her
livelihood and starve.)
Interactive question 5: Other remedies

Anna has breached her contract with Charlotte by failing to complete the sale of some farmland she
owns. She now wants to keep the land for herself, but Charlotte needs it to graze her cattle on.
Requirement
Which of the following remedies is most appropriate?
A Mandatory injunction
B Liquidated damages
C Specific performance
D Asset-freezing injunction
3 Exclusion clauses in contracts

Section overview
• An exclusion clause in a contract is one that purports to restrict or exclude liability for breach of
contract or negligence.
• An exclusion clause must have been properly incorporated in the contract if it is to be effective.
• It will be interpreted strictly against the party seeking to rely on it.
• An exclusion clause in a business-to-business contract may be rendered void or subject to the test
of reasonableness by the Unfair Contract Terms Act 1977.

It is often the case that when a party sues the other for breach of contract, the defaulting party will
claim that their liability for breach has been restricted or excluded altogether by an exclusion clause
contained in the contract. Such clauses are very common in standard form contracts. (A standard
form contract is a contract that has been prepared by one of the parties on its written standard terms
of business, rather than one where the terms have been individually negotiated and agreed by the
parties.)
3.1 Incorporation and interpretation

In order to be a properly incorporated term of the contract, the clause or document containing the
exclusion of liability must be an integral part of the contract. If it is actually in the nature of an
unsigned receipt for payment or otherwise given after the contract is made, then it is not regarded as
part of the contract and will not be effective.
Olley v Marlborough Court 1949

The facts: A husband and wife arrived at a hotel and paid for a room in advance. On reaching their
bedroom they saw a notice on the wall by which the hotel disclaimed liability for loss of valuables
unless handed to the management for safe keeping. A thief obtained the key and stole the wife’s furs
from the bedroom.
Decision: The hotel could not rely on the notice disclaiming liability since the contract had been
made when they checked in and the disclaimer was too late.
Provided the document is an integral part of the contract, then, generally speaking, the following
rules will apply:
• If the document is signed, it will be regarded as binding, even if the person has not read the term
and even if the term is in ‘small print’ (provided no misleading explanation has been given of the
term’s effect).
• If the document is not signed, then it must be shown that the person whose rights it restricts was
made sufficiently aware of it at the time of making the contract. In particular, onerous terms must
be sufficiently highlighted.
When deciding whether an exclusion clause has been validly incorporated into a contract, it is
important to consider only the information that is relevant to the decision. For example, where a
document that has been signed is relevant but the precise wording of the clause is not.
Interactive question 6: Exclusion clause

Natasha hires a car from a car rental company. On arrival at their office she is given a form, which
includes terms and conditions in small print on the back, and asked to sign it. She does so and pays
the hire charge. When she gets into the car, she happens to look in the glove compartment and sees
a document headed ‘Limitation of Liability’. This states that the hire company will not be liable for any
injury caused by a defect in the car unless this is as a result of the company’s negligence. While
Natasha is driving on the motorway, the airbag inflates and causes her to crash. She is badly injured.
Requirement
Which of the following is correct?
A Natasha’s claim will be valid as she signed the form containing terms and conditions.
B The claim will be invalid because the liability notice was in the car.
C It is unclear whether the claim will be valid because the notice in the car may have been
reinforcing the terms and conditions Natasha signed.
Once an exclusion clause can be shown to be an incorporated term, the courts will interpret any
ambiguity in the clause against the person who relies on the exclusion.
66 Law ICAEW 2023

Basically, the clause must cover the breach complained of. For example, a clause excluding liability
for ‘damage caused by fire’ might be interpreted to mean only accidental fire and not fire caused by
the person’s negligence.
The following case illustrates the point:
Photo Productions v Securicor Transport 1980
The facts: D agreed to guard C’s factory under a contract by which D was excluded from liability for
damage caused by any of their employees. One of the guards deliberately started a small fire that
destroyed the factory and contents. It was contended that D had entirely failed to perform their
contract and so they could not rely on any exclusion clause in the contract.
Decision: There is no principle that total failure to perform a contract deprives the party at fault of any
exclusion from liability provided by the contract. In this case the exclusion clause was drawn widely
enough to cover the damage which had happened.
3.2 The Unfair Contract Terms Act 1977 (UCTA)

The Unfair Contract Terms Act 1977 (HMSO, 1977) makes legislative provision for exclusion clauses
in certain contracts, sometimes rendering them void altogether and sometimes rendering them void
if they fail to satisfy a test of reasonableness.
Some types of contract (for example insurance and land transfer contracts) are excluded and UCTA is
concerned with business liability only. It applies to clauses inserted into agreements between
commercial concerns or businesses. Contracts between businesses and consumers are covered by
the Consumer Rights Act 2015.
Neither the 1977 nor 2015 Acts apply to contracts between private persons, who may restrict liability
as much as they wish.
The main provisions of UCTA can be summarised as follows:
• Any clause or notice that attempts to exclude or restrict liability for death or personal injury
arising from negligence is void.
• Any clause that attempts to restrict liability for other loss or damage arising from negligence is
void unless it can be shown to be reasonable.
• In contracts of sale or hire purchase, a clause that excludes or limits liability for breach of
obligations regarding title of the seller or owner, implied by the Sale of Goods Act 1979 (HMSO,
1979), is void.
Where the statutory test of reasonableness applies, the term must be fair and reasonable having
regard to all the circumstances which were, or which ought to have been, known to the parties when
the contract was made.
The burden of proving reasonableness lies on the person seeking to rely on the clause. Statutory
guidelines have been included in the Act to help in the determination of reasonableness. By way of
example, reasonableness will depend on factors such as the relative strength of the parties’
bargaining positions, whether any inducement was offered and whether the innocent party knew or
should have known of the term. In addition, the courts have considered other matters to be
significant, such as whether insurance was in place or available to the party relying on the clause and
whether any misrepresentations were made. Where the parties are of equal bargaining strength, the
courts will be reluctant to hold the exclusion clause to be unfair or unreasonable and invalid.
3.3 The Consumer Rights Act 2015 (CRA)

As mentioned above, the Consumer Rights Act 2015 (TSO, 2015) provides statutory control in
respect of consumer contracts and consumer notices (such as signs in car parks). It provides that
terms in contracts between a business and a consumer will only be binding on the consumer if they
are ‘fair’.
To determine whether a term is fair, the Act firstly considers whether it can be deemed automatically
unenforceable. For example, a consumer contract or notice, cannot limit liability for death or
personal injury resulting from negligence. Nor can it restrict any of the consumer’s legal rights under
the Act. If it does then the clause is automatically unenforceable and void, so the question of fairness
is not considered any further.
If the clause is not deemed automatically unenforceable then the Act provides guidance as to
whether or not it is fair. The Act states:

“A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the
parties’ rights and obligations under the contract to the detriment of the consumer.”
When considering whether a term is ‘fair’, a number of factors should be considered, such as whether
it puts the consumer at a disadvantage, if there were any relevant circumstances when the contract
was signed, as well as the nature of the contract itself. In addition, the Act requires that terms are set
out in plain, intelligible language and any relevant terms must be prominent. The test is whether an
average consumer who is reasonably well-informed, observant and circumspect would be aware of
the term.
A consumer may rely on a term (and therefore enforce a contract) that is deemed ‘unfair’. Unfair
terms do not invalidate the whole contract which will continue as far as possible.
Where a contractual term is open to different meanings, the meaning given to it will be the one
which is most favourable to the consumer.
Where a business engages in an activity which is merely incidental to the business, the activity will
not be in the course of the business unless it is an integral part and carried on with a degree of
regularity. It will therefore be acting as a consumer and the Consumer Rights Act may apply to it.
However, the business must prove that it was acting as a consumer. The following case indicates how
the law is likely to be applied in this area.
R & B Customs Brokers Ltd v United Dominions Trust Ltd 1988
The facts: The claimants, a company owned by Mr and Mrs Bell and operating as a shipping broker,
bought a second-hand Mitsubishi Shogun. The car was to be used partly for business and partly for
private use.
Decision: This was a consumer sale, since the company was not in the business of buying cars.
Many legal issues are not clear-cut or easy to decide. Very often a professional’s experience will be
needed, in addition to evidence, if a conclusion is to be reached.
68 Law ICAEW 2023

Summary
Contract in operation
Performance Frustration Breach without

discharges discharges lawful excuse
contract contract
Consider:
• what will give rise
Non-serious Serious
to frustration
• consequences
under LR (FC) Act
1943 Treat contract as Affirm
discharged
Remedies
Damages Specific performance Injunction

Consider: Only if damages
• remoteness of inadequate
damages Not if contract requires:
• measure of • ongoing Mandatory Prohibitory Asset-freezing
damages supervision
Put in position as if • personal services
contract peformed

indicated.
1. Do you know the normal method of discharging a contract? (Topic 1)
2. Do you know the consequences of frustration under the Law Reform (Frustrated
Contracts) Act 1943? (Topic 1)
3. Can you explain the rule on remoteness of damages from the Hadley v Baxendale case?
(Topic 2)
4. Can you explain the difference between liquidated damages and a penalty clause?
(Topic 2)
5. Can you explain the rules on whether exclusion clauses are enforceable in commercial
and consumer contracts? (Topic 3)

70 Law ICAEW 2023

• Consumer Rights Act 2015. (2015). London, TSO.

• Law Reform (Frustrated Contracts) Act 1943. (1943). London, HMSO.
• Sale of Goods Act 1979. (1979). London, HMSO.
• Unfair Contract Terms Act 1977. (1977). London, HMSO.

Self-test questions

1 Which of the following is not a lawful excuse not to perform contractual obligations?
A The contract has been discharged though frustration.
B The parties have by agreement permitted non-performance.
C One party has made it impossible for the other party to perform.
D Performance has become substantially more expensive than was originally anticipated.
2 Fill in the blanks in the statements below, using these words:
• mitigate
• performed
• claimant
• penalty clause
• exceptional
• damages
• common laws
• unenforceable
• defendant
are a remedy designed to restore the injured party to the

position they would have been in had the contract been .
A loss outside the natural course of events will only be compensated if the
circumstances are within the ‘s knowledge at the time of making the contract.
In assessing the extent of recoverable losses, the is expected to

their loss.
A contractual term designed as a is .
3 Complete the following sentence.

If a party is prevented from completing performance of their obligation by the other party, they may
bring a action to claim for the amount of work already done.
4 Name three types of event or change in current circumstances that will give rise to a contract being
frustrated.
5 Indicate whether the following statement is true or false.
True/False
When a contract is frustrated, under the Law Reform (Frustrated Contracts)

Act 1943, any monies paid to the other party before frustration can be
recovered but expenses incurred by that other party cannot be recovered
or offset.
72 Law ICAEW 2023

True/False
A claimant must do all that they can to reduce the amount of the loss they
suffer.
7 When an anticipatory breach occurs, the injured party has two options. List these two options.
8 Name two types of Alternative Dispute Resolution (other than negotiation).
9 What is the rule set out in Hadley v Baxendale concerning remoteness of damage?
10 The amount awarded as damages is what is needed to put the claimant in the position they would
have achieved if the contract had been performed.
Requirement
What interest is being protected here?
A Expectation
B Reliance
True/False
A court will never enforce a liquidated damages clause, as any attempt to

prevent the injured party from pursuing a remedy through the courts is
void.
12 Will a clause in a standard form contract that excludes or restricts liability for the following be
rendered void or subject to the reasonableness test under UCTA?
Void/Test
For death or personal injury
For other loss or damage arising from breach of contract or

negligence
For breach of the implied condition relating to title
this chapter.


C Luz is entitled to receive the contract price less a reasonable deduction for the defects and
omissions.

C Parties who contract that something should be done are discharged if performance becomes
substantially more expensive or onerous.
Greater expense or difficulty than anticipated does not result in frustration.

D Cook & Co are not liable for the loss due to the agreement with Bobbie but will be liable in
respect of the other losses.
Cook & Co were aware of the nature of her business and therefore will be liable to pay damages
for her loss of normal profits arising from her inability to increase cake production between 28
October and 12 November. The losses on the baked potatoes contract are also recoverable from
1–12 November since, although they cannot be said to arise from the ordinary course of her
business, Louise made Cook & Co aware of the contract. The agreement to let Bobbie hire the
oven was not in the ordinary course of her business and the special circumstances were not
known to Cook & Co, so they would not be liable for the loss of special profits on this contract.

A Nothing
Mel has completely mitigated her loss by the subsequent sale.

C Specific performance
The most appropriate remedy is specific performance because this will give Charlotte what she
needs and what she entered into the contract for (the farmland). Damages are not appropriate. A
mandatory injunction is also not appropriate because Anna has not done anything that needs to
be undone. An asset-freezing injunction might have been needed in the short-term if Anna had
wanted to sell the farmland to someone else, but this is not the case here.

C It is unclear whether the claim will be valid because the notice in the car may have been
reinforcing the terms and conditions Natasha signed.
There must be prior notice of the presence of an exclusion clause. Whether the claim is valid or
not will depend on whether this exclusion was included in the original terms and conditions that
Natasha signed (and therefore merely reinforced by the later document).
74 Law ICAEW 2023

D Performance has become substantially more expensive than was originally anticipated.
An increase in cost does not lawfully excuse non-performance of a contract.
2 Damages are a common law remedy designed to restore the injured party to the position they
would have been in had the contract been performed .
A loss outside the natural course of events will only be compensated if the exceptional
circumstances are within the defendant ‘s knowledge at the time of making the contract.
In assessing the extent of recoverable losses, the claimant is expected to mitigate their loss.
A contractual term designed as a penalty clause is unenforceable .
3 If a party is prevented from completing performance of their obligation by the other party, they may
bring a Quantum meruit action to claim for the amount of work already done.
4 Any three of the following:

• Destruction of the subject matter
• Personal incapacity to perform a contract of personal service
• Government intervention
• Non-occurrence of an event that is the sole purpose of the contract
5
True/False
When a contract is frustrated, under the Law Reform (Frustrated Contracts) False
Act 1943, any monies paid to the other party before frustration can be
recovered but expenses incurred by that other party cannot be recovered
or offset.
Expenses incurred in the performance of the contract before frustration may be recovered or offset
in the court’s discretion.
6
True/False
A claimant must do all that they can to reduce the amount of the loss they False
suffer.
They are only required to take all reasonable steps to mitigate their loss.
7 Two options when an anticipatory breach occurs:
• Treat the contract as discharged forthwith
• Allow the contract to continue unless and until there is an actual breach
8 Any two of the following:

• Mediation
• Arbitration

• Adjudication
• Expert determination
9 Recoverable damages should be:
(1) such as arise naturally from the breach; or
(2) which the parties may reasonably be supposed to have contemplated, in making the contract, as
the probable result of the breach of it.
A Expectation
11
True/False
A court will never enforce a liquidated damages clause, as any attempt to False
prevent the injured party from pursuing a remedy through the courts is
void.
Provided the amount is a not a penalty, it will be enforceable.

12
Void/Test
For death or personal injury Void
For other loss or damage arising from breach of contract or Subject to the
negligence reasonableness test
For breach of the implied condition relating to title Void
76 Law ICAEW 2023

Chapter 4
Agency
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 Agency and agents
2 Creation of agency
3 Duties and rights of an agent
4 Authority of the agent
5 Liability of the parties
Summary
Self-test questions
Introduction
Learning outcomes
• Identify the role of agents, their duties and rights, and their authority to enter contracts on behalf
of a principal
Specific syllabus references for this chapter are: 1c.
4
Syllabus links
As outlined above, agency is the basis of partnership, which we will go on to look at later in this
syllabus.
4
Assessment context
This is an important area for your assessment. The sample paper contained five questions on agency
law. It is likely to be assessed in the context of partnerships.
identification of an appropriate response, which may be in the form of providing advice.
4

of this chapter.

questions
1 Agency and agents Approach Knowledge questions

Agents play an Read this short may test your
important role in section as understanding of the
commercial life, so it background role of an agent.
is crucial that you information.
understand what they
do.
Stop and think
Can you think of
some practical
examples of agents
that you have come
across?
2 Creation of agency Approach A knowledge IQ1: Creation of

Although many Note the various question could test agency
agency agreements ways in which an your understanding This simple
are made through agency relationship of the various ways in question tests the
contracts, an agency can be created. It is which an agency ways in which a
relationship might be also important to relationship might be valid agency
created through learn what created. relationship
other means. ratification is and might be created.
the rules
surrounding it.
78 Law ICAEW 2023

questions
Stop and think

Can you think of
some practical
situations where
agency by
necessity might
arise in the modern
day?
3 Duties and rights of Approach Knowledge questions IQ2: Duties of a

an agent It is important to may be quite principal
Agents that are learn all of the straightforward and This question
validly appointed rights and duties require you to asks you to think
have certain rights contained within correctly identify the about the rights
that they can enforce. the two tables in rights of an agent. and duties you
However, they also this section. have studied in a
owe a number of different way, this
duties to their time from the
principal. Stop and think point of view of a
Could you explain principal.
the duties that an
agent owes to their
principal?
4 Authority of the Approach Scenario questions IQ4: Authority

agent Learn the various might require you to This is a lengthy
Because company types of agent determine whether scenario question
directors and authority. an agent had that tests your
partners in a authority to act for knowledge on
partnership act as their principal. whether an agent
agents, this section is Stop and think has various types
very important as you Could you explain of authority.
will come back to this what an agent’s
later on in your ostensible authority
studies. is?
5 Liability of the Approach Knowledge questions IQ5: Liability

parties Note the might test the This question
In most cases, once a circumstances circumstances where tests your
contract has been where an agent will an agent becomes understanding of
formed, the agent be liable on a liable on a contract. who is liable on a
will drop out of the contract. contract when an
picture, leaving the agent is involved.
principal and third
party liable on the Stop and think
contract. However, an Could you explain
agent may become what happens if an
liable themselves in agent has authority
certain but is not known by
circumstances. the third party to
be an agent?
ICAEW 2023 4: Agency 79

1 Agency and agents
Section overview
• Agency is a very important feature of modern commercial life and describes the relationship that
exists where one party, the agent, acts on behalf of another, the principal.
• We are concerned with the law of agency insofar as it relates to the agent purporting to enter into
a contract with a third party, on behalf of the principal.
• The basic principles of agency are relevant to the actions and liabilities of (among others) partners
and company directors.
Where an agency relationship exists, the agent, by entering into a contract, establishes privity of
contract between the principal and the third party. The contract is thus enforceable both by and
against the principal and third party. Generally speaking, the agent effectively drops out of the
picture and has no rights or liabilities in respect of it, provided they have acted within their authority.
It is as if the principal had made the contract themselves in the first place. The questions of authority
and liability are addressed in sections 4 and 5.
Section 2 describes the various ways in which an agency relationship may come into existence. The
question sometimes arises whether someone has acted as an agent or as an independent contractor
in their own right. For example, there are conflicting views (and much will depend on the
circumstances) in the case of a dealer who sells goods to a finance company, which then lets them on
hire-purchase: to what extent is the dealer the agent of the finance company? The test of whether
someone is an employee or independent contractor in relation to employment law is considered in a
later chapter. Similarly, there may be ambiguity over which party is the principal, for example in the
case of someone employed by an insurance company to solicit business: are they always the agent
of the insurance company or can they sometimes be said to be the agent of the insured?
In practice, there are many examples of agency relationships to which you are probably accustomed,
such as estate agents and travel agents. For the purposes of this course, you should appreciate, in
particular, how a director may be held to be an agent of the company and bind the company by their
acts and also how a partner is an agent of the partnership and may bind the firm by their acts.
Directors’ and partners’ authority is discussed in more detail in later chapters.
2 Creation of agency
Section overview
• The agency relationship is created either by mutual consent or by operation of law or by

ratification.
• Express agency is created when the principal expressly appoints someone as their agent, but an
agency relationship can also be implied by the conduct of the parties.
• The law may deem that an ‘agency of necessity’ is created in particular circumstances.
• The law may provide that an ostensible or apparent agency relationship is created if the principal
holds out to a third party that the agent’s authority is greater than it actually is.
• Agency can be created retrospectively, through ratification of the contract.
The agent does not form contracts with third parties on their own behalf and so it is not necessary
that they have full contractual capacity. The principal, however, must have full contractual capacity.
2.1 Agency by consent

Consent may be express or implied. An agency can be expressly created either orally or in writing.
There is only one exception to this, which is that if the agent is to execute a deed on the principal’s
behalf (for example a conveyance of land or a lease exceeding three years) then the agency must be
created by deed. Essentially this means that the agent is given a power of attorney. In commercial
80 Law ICAEW 2023

transactions it is usual (but not essential) to appoint an agent in writing so that the terms and extent
of the relationship are set down to avoid misunderstanding.
Context example: Express agency by consent

Petra asks Alina to take Petra’s car to be repaired. Petra and Alina thereby expressly agree that Alina is
to be Petra’s agent in making a contract between Petra and Tilly, the car mechanic.
2.2 Agency by estoppel (or ‘holding out’)

Agency by estoppel arises by operation of law and is no less effective than an agency expressly
created. It arises in the following situation:
• when the words or conduct of the principal give to a third party the impression that the person
who purports to contract with the third party is the agent of the principal; and
• the third party, as a result, acts upon this.
The principal is ‘estopped’, or prevented, from denying the existence of the agency.
Agency by estoppel can only arise where the conduct of the apparent principal creates it. Agency
does not arise by estoppel if it is the ‘agent’ who holds themselves out as agent, not the ‘principal’.
Context example: Apparent authority

Paul leads Tina to believe that Amy is Paul’s agent. Tina deals with Amy on that basis. In this case, Paul
is bound by the contract with Tina that Amy has made on his behalf. This situation may have arisen in
the following circumstances:
• when Amy, who dealt with Tina as Paul’s authorised agent, continues to do so after her authority
as agent of Paul has been terminated, but Tina is unaware of it; or
• when Amy, to Paul’s knowledge, enters into transactions with Tina as if Amy were Paul’s agent and
Paul fails to inform Tina that Amy is not Paul’s agent.
2.3 Agency of necessity

An agency of necessity is another way in which an agency can arise by operation of law. Its origins
can be found in mercantile law, and in shipping law in particular. It may arise where a person is faced
with an emergency in which the property or interests of another person are in imminent jeopardy
and, in order to preserve that property or those interests, it becomes necessary to act for that person
without their authority. An agency of necessity probably only applies where there is already some
existing contractual relationship between the parties, as the law is highly unlikely to allow a person
to be bound by the act of a complete stranger.
An agent who seeks to bind a principal on the grounds of an agency of necessity will need to show
that:
• the agent had no practical way of contacting the principal in order to obtain the principal’s
instructions;
• their actions arose from some pressing need for action (usually an emergency of some kind,
involving perishable goods or starving animals, for example);
• they acted in good faith in the interests of the principal rather than in their own interests; and
• their action was reasonable and prudent in the circumstances.
An illustrative case is Sachs v Miklos 1948:
The facts: Miklos agreed to store Sach’s furniture. After a considerable time had elapsed, Miklos
needed the storage space for his own use. Unable to trace Sachs, he sold the furniture and Sachs
sued him for conversion. Miklos pleaded agency of necessity in making the sale.
Decision: There was no agency of necessity since no emergency had arisen and Miklos had sold the
furniture for his own convenience. If Miklos’s house had been destroyed by fire and the furniture left
in the open, then he would then be justified in selling it.
It is fair to say that modern day telecommunications may prevent an agent of necessity from arising
very often.

The business context is a very important consideration when determining the type of agency being
created. For example, agency by necessity is becoming less and less relevant as modern
communications improve.
2.4 Ratification
In certain circumstances, the relationship of principal and agent can be created or extended with
retrospective effect, that is, once the contract has been entered into by the agent and third party.
Ratification only validates past acts of the purported agent. It gives no authority for the future.
Thus, where A makes a contract on behalf of P at a time when A has no authority from P, P may later
ratify the contract. This will have the retrospective effect of establishing an agency as at the time the
contract was made. All parties are then in the same position as if the principal had been the original
contracting party, ie, the principal may sue or be sued by the third party and the agent no longer has
any liability.
The principal may only ratify if the following conditions are satisfied:
• The principal must have been in existence at the time of the agent’s act.
• The principal must have the legal capacity to make the contract themselves, both at the time the
act was carried out and at the time of the purported ratification.
• The agent must, at the time of making the contract, either name or sufficiently identify the
principal on whose behalf they are making the contract.
The principal must ratify the contract within a reasonable time and a ratification of part of the
contract will operate as a ratification of the entire contract (ie, the principal cannot just select such
parts of the contract as they consider to be to their advantage). In order to ratify the contract, the
principal must communicate a sufficiently clear intention of ratifying, either by express words or by
conduct, such as refusing to return goods purchased for them by an agent who lacked authority.
Mere passive inactivity will not amount to ratification.
Context example: Conditions of ratification

David is Esther’s friend. He is negotiating with Farouk to buy some goods, and, as he knows the
prices and credit terms that Farouk is offering are good, he thinks that Esther would like to buy some
of Farouk’s goods too. Unfortunately, Esther is not answering her phone, so he cannot confirm with
her that she authorises him to go ahead and buy the goods on her behalf.
It may be possible for David to go ahead and make the purchase on behalf of Esther and get her to
ratify the contract with Farouk once he can make contact with her. In order to do this, he must be sure
that the conditions of ratification will be met:
The principal must exist at the time of the Clearly Esther does exist.
contract.
The principal must have legal capacity. There is no indication to the contrary.
The agent must name or sufficiently identify There appears to be no reason why David
the principal. wouldn’t tell Farouk that he is acting on behalf of
Esther.
Therefore, David can go ahead and make the contract with Farouk for Esther to ratify later, if Farouk is
happy to contract with Esther. If Esther does not want the goods, she will not ratify the contract.
Interactive question 1: Creation of agency

A valid agency relationship can be created by:
82 Law ICAEW 2023

Yes/No
Law, if it is a necessity
Ratification
Consent between the parties
The agent holding themselves out as an agent
3 Duties and rights of an agent

Section overview
• The agent owes a number of duties to the principal.

• The agent also has a number of rights.
The courts have always sought to ensure that a person does not abuse the confidence of another for
whom they are acting.
The position of principal and agent gives rise to particular and onerous duties on the part of the
agent, and the high standard of conduct required from him springs from the fiduciary relationship
between his employer and himself. His position is confidential; it readily lends itself to abuse. A strict
and salutary rule is required to meet the special situation (Armstrong v Jackson 1917).
When an agent agrees to perform services for their principal for reward there is a contract between
them. However, even if the agent undertakes their duties without reward (but provided there is some
consideration to make the contract valid), they have obligations to their principal.
The law implies the following duties into any contract of agency:
Duties of an agent Explanation
Accountability An agent must provide full information to their principal of their agency
transactions and account for all monies arising from them.
If they accept from the other party any commission or reward as an
inducement to make the contract with them, it is considered to be a bribe
and the contract is fraudulent. The principal who discovers that their agent
has accepted a bribe may dismiss the agent and recover the amount of the
bribe from them.
Boston Deep Sea Fishing & Ice Co v Ansell 1888
The facts: A, who was managing director of the claimant company, accepted
commissions from suppliers on orders that he placed with them for goods
supplied to the company. He was dismissed and the company sued to
recover from him the commissions.
Decision: The company was justified in dismissing A and he must account to
it for the commissions.
No conflict of The agent owes to their principal a duty not to put themselves in a situation
interest where their own interests conflict with those of the principal.

Duties of an agent Explanation
The agent who agrees to act as agent for reward has a contractual
Performance obligation to perform their agreed task. (An unpaid agent is not bound to
carry out their agreed duties unless there is other consideration.) Any agent
may refuse to perform an illegal act.
Obedience The agent must act strictly in accordance with their principal’s instructions
insofar as these are lawful and reasonable. Even if they believe
disobedience to be in their principal’s best interests, they may not disobey
instructions (unless they were asked to commit an illegal or unreasonable
act).
Skill An agent undertakes to maintain the standard of skill and care to be

expected of a person in their profession.
Personal The agent is usually selected because of their personal qualities and owes a
performance duty to perform their tasks themselves and not to delegate it to another.
(However, they may delegate in certain circumstances, for example a
solicitor acting for a client would be obliged to instruct a stockbroker to buy
or sell listed securities on the Stock Exchange.)
Confidence The agent must keep in confidence what they know of their principal’s affairs
even after the agency relationship has ceased.
Conversely, an agent has the following rights (or duties owed by the principal):
Rights of an agent Explanation
Indemnity The agent is entitled to be repaid their expenses and to be indemnified by

their principal against losses and liabilities, provided their acts are done
properly within the limits of their authority.
They may recover expenses properly paid even if they were not legally
bound to pay; for example, a solicitor who pays counsel’s fees (which the
counsel cannot recover at law) may reclaim this expense from their client.
Remuneration The agent is also entitled to be paid any agreed remuneration for their
services by their principal. The entitlement to remuneration may have been
expressly agreed or may be inferred from the circumstances, for example by
reference to trade or professional practice. If it is agreed that the agent is to
be remunerated but the amount has not been fixed, the agent is entitled to a
reasonable amount.
Lien The agent has the right to exercise a lien over property owned by the
principal, ie, a right to retain and hold goods pending payment of sums
owed to them.
84 Law ICAEW 2023

Interactive question 2: Duties of a principal
There is a degree of overlap between the rights of an agent and the duties of a principal. Are the
following duties of a principal or of an agent?
Agent/Principal
A duty not to retain benefit from the agency relationship
A duty to pay agreed remuneration, even if no benefit has been derived

from their acts
A duty of confidence
Interactive question 3: Lien

Which of the following describes an agent’s right of lien?
A The right to have any out-of-pocket expenses refunded.
B The right to enter into contracts on behalf of a principal.
C The right to retain property owned by the principal until they have been paid.
D The right to avoid liability on contracts entered into on behalf of the principal.
If you are not sure about what the duties of an agent are, think about what they need to do to act
ethically on behalf of their principal.
4 Authority of the agent

Section overview
• An agent’s authority may be:

– expressly given
– impliedly given
– ostensible or apparent on the basis of the principal’s conduct
The contract made by the agent is binding on the principal and the other party only if the agent was
acting within the limits of their authority from their principal. In analysing the limits of an agent’s
authority, three distinct sources of authority can be identified:
• Actual express authority
• Actual implied authority
• Ostensible or apparent authority

4.1 Actual express authority
This is authority explicitly given by the principal to the agent to make a particular contract.
Context example: Express authority

Grace wants Hope to act as her agent to buy some goods from Imran. She sends her the following
note:
“Please act as my agent to buy 12 wheelbarrows from Imran. You are only entitled to buy
wheelbarrows and the most I want to pay is £600 in total.”
Hope therefore has express authority to buy some wheelbarrows for Grace. However, the limits of
this authority are that she must buy them from Imran, she can only buy 12 and she must not pay more
than £600.
The extent of the agent’s express authority will depend on the construction of the words used on
their appointment. If the appointment is in writing, then the document will need to be examined. If it
is oral, then the scope of the agent’s authority will be a matter of evidence.
4.2 Actual implied authority

Authority may also be implied from the nature of the agent’s activities or from what is usual in the
circumstances, save insofar as such implied authority would be contrary to authority expressly given.
Thus an agent also has actual implied authority:
• to do all things that are incidental to the actions expressly authorised
• to do all things that are usual by virtue of the agent’s office
Third parties are entitled to assume that the agent has implied usual authority unless they know to
the contrary. So, for example, an agent appointed to sell a car will also have implied incidental
authority to advertise the car for sale. Partners will have implied usual authority to do the usual
things partners might do, for example, rent office premises, buy office paper or employ secretaries.
Watteau v Fenwick 1893
The facts: The claimant owned a hotel and employed the previous owner to manage it. Against the
claimant’s express instructions, the previous owner bought cigars on credit from a supplier. The
supplier sued the claimant on the contract and the claimant argued that he was not bound by the
contract, since the previous owner had no actual authority to make it.
Decision: It was within the usual authority of a manager of a hotel to buy cigars on credit and the
claimant was bound by the contract (although the supplier did not even know that the previous
owner was the agent of the claimant) since the restriction on his usual authority had not been
communicated.
Note that incidental authority and usual authority are implied because they are not expressly stated
but they are still part of an agent’s actual authority.
An agent’s implied authority is often a matter of judgement. Base your decision on case law and your
practical experience.
Context example: Actual authority

A principal employs a stockbroker to sell 100 shares at £10 each. This is the scope of the actual
express authority conferred. In addition, the broker shall (unless otherwise agreed) have actual
implied authority to do whatever is incidental to that sale and also to do anything that is usual in
practice for a broker selling shares for a client to do. Any person who deals with the broker is entitled
to assume (unless informed to the contrary) that the broker has the usual authority of a broker by
their client. The two forms of authority are coextensive.
86 Law ICAEW 2023

4.3 Ostensible or apparent authority
The ostensible (or apparent) authority of an agent is that which their principal represents to other
persons (with whom the agent deals) that they have given to the agent. As a result, an agent with
limited actual authority can be held in practice to have a more extensive authority. A partner has
considerable but limited implied authority merely by virtue of being a partner. If, however, the other
partners allow them to exercise a greater authority than is implied, they represent that they have that
greater authority and they are bound by the contracts that they make within the limits of this
ostensible authority.
Ostensible authority (unlike implied authority) is not restricted to what is usual and incidental. The
principal may expressly or by inference from their conduct confer on the agent any amount of
ostensible or apparent authority.
Whether an agent has authority is a common problem in agency law. To help resolve the issue, you
will need to identify all the relevant information and base your decision on all the evidence you have.
Context example: Ostensible authority

Janelle is in partnership with Kit and Lemar to provide plumbing services. As outlined above, Janelle
has implied authority to do the usual things that partners in a plumbing service do, by virtue of being
a partner, and she binds Kit and Lemar by her actions. In addition, Janelle has advertised and carried
out electrical work in the name of the partnership and Kit and Lemar have not prevented her from
doing so. This means that Janelle has ostensible authority to carry out electrical work on behalf of the
partnership, even though the partnership is limited to plumbing. Thus, when Janelle wires something
wrongly and causes a personal injury to a client, that client will have a claim against all three partners,
not just Janelle.
It is not necessary that the agency agreement be in the form of a contract.

Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964
The facts: Two individuals carried on business as property developers. One lived abroad and the
business of the company was left entirely under the control of the other who had no actual or
apparent authority to enter into contracts as agent of the company and was never formally
appointed as managing director. However, the individual living overseas and two other directors
allowed him to act as if he were MD, contracting on the company’s behalf. The claimants (a third
party) sued the company for work done on the MD’s instructions.
Decision: Although there had been no actual delegation and authorisation, the company had, by its
directors’ acquiescence, led the claimants to believe that the individual was the MD and, as such, an
authorised agent and the claimants had relied on it. The company was bound by the contract made
under the principle of ‘holding out’ (or ‘estoppel’). The company was estopped from denying (that is,
not permitted to deny) that the individual who acted as MD was its agent. Although he had no actual
authority to bind the company, he had ostensible, or apparent, authority to do so.
It can be seen that it is the conduct of the principal which creates ostensible authority; an agent
cannot claim apparent authority or hold themselves out to have it. It does not matter whether there is
a pre-existing agency relationship or not.
The representation must be made to the third party and it must be shown that the third party relied
on the representation. If there is no causal link between the third party’s loss and their reliance upon
the representation, the third party will not be able to hold the principal liable.
Where a principal has represented to a third party that an agent has authority to act but subsequently
revokes the agent’s authority, they will not escape liability. The principal should inform third parties
who have previously dealt with the agent of the change in circumstances. This is particularly relevant
to partnerships and the position when a partner leaves a partnership.

Interactive question 4: Authority
Michelle works in Natalia’s building firm. She is employed in the purchases department. Natalia does
not have approved suppliers, but Michelle is required by internal policy to get Natalia’s approval for
all orders. Natalia has been invited to Oliver’s timber yard as Oliver is keen to get Natalia as a
customer. However, Natalia is busy and does not want to go, so she sends Michelle in her place,
telling Oliver that “she deals with buying anyway”.
While Michelle was at Oliver’s timber yard, she noticed a very good price on some timber. Knowing
that Natalia needed some timber soon for an existing project, she decided to buy it for Natalia.
Oliver was delighted and set up a credit account for the timber in Natalia’s name.
Requirement
Indicate whether the following statements are true or false in respect of Michelle’s authority to make
this contract on behalf of Natalia.
True/False
Michelle has no authority to make this contract on Natalia’s

behalf.
Michelle has express authority to make this contract on Natalia’s

behalf.
Michelle has implied authority to make this contract on Natalia’s

behalf.
Michelle has ostensible authority to make this contract on

Natalia’s behalf.
5 Liability of the parties

Section overview
• As mentioned earlier, generally speaking, a contract entered into by an agent and a third party
binds the principal and the third party but not the agent, who effectively drops out of the picture.
• There are, however, instances where this general rule will not apply and these are noted in this
section.
5.1 Where the agent has authority and is known to be an agent

Where the agent is known to be acting as an agent and they have authority from their principal, the
principal and third party may sue and be sued on the contract and the agent has no rights and
liabilities on the contract, unless it appears that the parties intended otherwise. Such an intention
may be express or inferred from the circumstances (for example how the agent is named in and how
they sign any documentation).
Note that where the agent does not name the principal, it is more likely that they will be considered
to be a contracting party. However, even here, if it is clear that the parties intended that they should
act only as agent, then they will drop out of the picture.
There are particular circumstances where the agent might incur personal liability:
• under rules of trade usage
• where they add their name as party to a negotiable instrument (depending on the facts)
88 Law ICAEW 2023

• where they make a contract under seal, unless they do so as trustee for the principal or unless the
law provides otherwise (for example, in the case of powers of attorney)
5.2 Where the agent has authority, but is not known to be an agent
In these cases, where a principal becomes known at a later date:
• either the agent or the principal may sue on the contract (but the agent’s rights are subordinate to
the principal’s); and
• either the agent or the principal may be sued on the contract (but the third party must choose
which one).
These rules will only apply where the agent’s authority existed at the time of making the contract and
the contract cannot be said to have been intended to operate only between the contracting parties
(on the basis of their express or implied intentions).
5.3 Where the agent has no authority

If the agent has no authority, the principal cannot sue or be sued on the contract unless they choose
to ratify it.
If the agent, knowing that they have no authority, makes a representation to the contrary and causes
loss to the third party, they may be liable for the tort of deceit.
If they genuinely believe that they have authority, but are in fact mistaken, they may nonetheless be
liable for breach of warranty of authority. This applies not just to contracts but to any business
transaction where a party wrongly represents to the other that they have authority from some other
person, thereby inducing the other party to enter into the contract.
Interactive question 5: Liability

Derek entered into a contract with Eugenie. He was acting with authority as Florence’s agent, but
Eugenie was not aware of this at the time. Subsequently, Florence breached the contract with
Eugenie, who is now aware that Florence is the principal.
Requirement
Who may Eugenie sue for the breach?
A Derek only
B Florence only
C Derek and Florence jointly
D Either Derek or Florence but not both

Summary
P P
Privity
(Contract enforceable by P + TP) Unless P ratifies
Authority No authority
A Contracts TP A Contracts TP
privity
Agency by necessity Ratification by P

• P uncontactable • P existed
• Emergency • P had capability (time
• A acts for P in of contract and
Agency by consent good faith ratification)
Agency by estoppel
(usually express, oral or • Reasonable and • P named or identifiable
(or 'holding out' by P)
written) or implied prudent action
Agency created,
giving agent authority
Ostensible/apparent (TP
Actual
acts on representation by P)
(Implied) incidental
Express
(Implied) usual
Implied rights and duties
Rights • Indemnity
• Remuneration (‘reasonable’ if unspecified)
• Lien
Duties • Account for benefits (no bribes)

• Avoid conflict
• Perform task, not delegate
• Obedience
• Skill and care
• Respect confidences
90 Law ICAEW 2023

indicated.
1. Can you give five examples of agents? (Topic 1)
2. Do you know what agency by estoppel is? (Topic 2)
3. Can you explain three duties of an agent? (Topic 3)
4. Can you explain what an agent’s implied authority is? (Topic 4)
5. Do you know the circumstances where an agent will be personally liable on a contract?
(Topic 5)


Self-test questions

1 Fill in the blanks using the words below.
• relationship
• principal
• third party
• contract
• legal
• principal
• agency
is the that exists between two persons, the

and the agent, in which the function of the agent is to form a
between their and a .
2 Identify the four ways in which an agency can arise.

3 Which of the following is not a necessary condition of agency of necessity?
A Agent has no practical way of contacting principal.
B A pressing need for action exists.
C The agent must have the principal’s permission.
D The agent must act in good faith in the interests of the principal.
E The action must be reasonable and prudent in the circumstances.
True/False
A principal may, in certain circumstances, ratify the acts of the agent, which
has retrospective effect.
5 What is the best definition of ostensible authority?

A The authority that the principal represents to other persons they have given to the agent
B The authority implied to other persons by the agent’s actions
True/False
An agent may disobey the instructions of the principal if they believe

disobedience to be in the best interests of the principal.
7 Name the three types of authority that an agent might have.
92 Law ICAEW 2023

True/False
Provided an agent has authority and is known to be an agent, they can

never have any personal liability under the contract and only the
principal can be liable.
this chapter.

Yes/No
Law, if it is a necessity Yes
Ratification Yes
Consent between the parties Yes
The agent holding themselves out as an agent No
Agent/Principal
A duty not to retain benefit from the agency relationship Agent
A duty to pay agreed remuneration, even if no benefit has been derived Principal
from their acts
A duty of confidence Agent

C The right to retain property owned by the principal until they have been paid.
Lien is the right to retain and hold goods pending payment of sums owed.
True/False
Michelle has no authority to make this contract on Natalia’s False

behalf.
Michelle has express authority to make this contract on Natalia’s False

behalf.
Michelle has implied authority to make this contract on Natalia’s True

behalf.
Michelle has ostensible authority to make this contract on True

Natalia’s behalf.
As Michelle is employed in the purchasing department, she has implied authority to enter into
contracts on Natalia’s behalf.
Natalia has told Oliver that Michelle “deals with buying” so he is entitled to assume that she has the
authority to enter into this contract on Natalia’s behalf.
94 Law ICAEW 2023

D Either Derek or Florence but not both
Where a third party is unaware of a contract’s principal when the contract is formed, but finds out
at a later date, they may choose either to sue the agent or the principal if the contract is
subsequently breached.

1 Agency is the relationship that exists between two legal persons, the principal and the
agent, in which the function of the agent is to form a contract between their principal and a
third party .
2 Four ways in which an agency can arise:

• Agency by consent
• Agency by estoppel
• Agency of necessity
• Ratification
C The agent must have the principal’s permission.
4
True/False
A principal may, in certain circumstances, ratify the acts of the agent, which True
has retrospective effect.
A The authority that the principal represents to other persons they have given to the agent
6
True/False
An agent may disobey the instructions of the principal if they believe False
disobedience to be in the best interests of the principal.
7 Three types of authority:

• Actual express authority
• Actual implied authority (incidental and usual)
• Ostensible or apparent authority
8
True/False
Provided an agent has authority and is known to be an agent, they can False
never have any personal liability under the contract and only the
principal can be liable.
Generally speaking, the contract is only enforceable by the principal and the third party but this rule
is subject to a contrary intention being express or implied.
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Chapter 5
Negligence
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 The law of tort
2 The tort of negligence
3 Professional advice and negligent misstatement
4 Defences and damages
5 Vicarious liability
Summary
Self-test questions
Introduction
Learning outcomes
• Identify instances and consequences of negligence (particularly negligent misstatement) in a
given scenario
• Identify instances and consequences of vicarious liability in a given scenario
Specific syllabus references for this chapter are: 1e, f.
5
Syllabus links
Some of the issues relating to employees in this chapter will be looked at in more detail later in this
Workbook when it focuses on employment law.
Negligent misstatement will be a relevant factor when looking at the risks an assurance firm faces
and the quality processes put into place to combat them in your Audit and Assurance studies.
5
Assessment context
Being an important practical issue for accountants, you might expect around five questions relating
to negligence and vicarious liability in your assessment. Questions will be set as multiple choice,
multi-part multiple choice or multiple-response questions. Some questions may involve an analysis of
a brief scenario and the identification of an appropriate response, which may be in the form of
providing advice on liability for negligence.
5

of this chapter.

questions
1 The law of tort Approach You may be tested on IQ1: Tort

Torts are civil wrongs Make sure that you what a tort is through This question
done to an individual. understand what a a basic knowledge tests your basic
It is important to tort is and the fact question. understanding of
remember that that parties may be torts in general.
individuals and unknown to each
businesses owe other.
duties under tort,
even if they have no
contractual Stop and think
relationship with Can you state two
them. torts other than
negligence?
2 The tort of Approach This section is highly IQ2: Duty of care

negligence Learn the main examinable. This question
The tort of principles of Knowledge questions tests the first key
negligence has negligence and the may test basic element of a
considerable factors that need to statements negligence claim,
practical significance be in place for a concerning the rules the rules on
to accountants and party to have a on negligence, and whether a duty of
auditors, who may liability. We shall scenario questions care exists.
become liable for come back to much may test your ability
giving negligent of this section to apply the rules and
98 Law ICAEW 2023

questions
advice. when we study decide whether a

professional party is liable for
misstatement. negligence.
Stop and think

Which elements
need to be in place
for a duty of care to
exist? How is a
breach of duty
determined? What
are the rules on
losses caused by
negligence?
3 Professional advice Approach Scenario questions IQ5: Negligent

and negligent Think about how may test your ability misstatement
misstatement the rules you to apply the rules on This is a simple
The rules on studied in the negligent knowledge
professional advice previous section misstatement to a question that
and negligent apply to practical situation. tests the rules on
misstatement are accountants. Make negligent
highly relevant to sure that you know misstatement
accountants and the situations in from a claimant’s
auditors. It is which professionals point of view.
important to know owe and don’t owe
the practical steps a duty of care for
that can be taken to negligent
avoid liability. misstatement.
Stop and think

Can you explain the
situations where an
auditor will owe
and will not owe a
duty of care?
4 Defences and Approach Knowledge questions IQ7:

damages Focus on the three may test your basic Contributory
The reason claimants defences first. understanding of negligence
bring a claim for Remember that defences and This question
negligence is usually these only come in remoteness of tests your
to seek damages to play if the damage. understanding of
from the defendant defendant is found how contributory
for their losses. This liable. See how negligence is
section explains the volenti is a defence applied.
rules on damages to liability in full,
and how defendants and how a
may seek to reduce defendant can
damages they owe or reduce damages
avoid paying them payable if
altogether. contributory
negligence can be
proved.
ICAEW 2023 5: Negligence 99

questions
The calculation of
damages is fairly
straightforward but
remember that the
losses must not be
‘too remote’.
Stop and think

What is the
meaning of volenti
non fit injuria?
How are
negligence
damages
calculated?
5 Vicarious liability Approach Questions are likely IQ8: Vicarious

The principle of Focus on the to focus on liability
vicarious liability is of elements that must identifying whether This question
high significance to be proved for an employer has a tests what you
employers. vicarious liability to vicarious liability in a have learned
exist. Note the rules particular situation. from this section.
on agents and
partners.
Stop and think

Think of some
different
businesses. How do
you think they
might have a
vicarious liability?
100 Law ICAEW 2023

1 The law of tort
Section overview
• The law of tort includes negligence, which is considered in detail in this chapter.
• In a situation involving a breach of contract or crime, the law of tort may also be relevant.
1.1 Tort
The law of tort is a vast subject dealing with various wrongs done to an individual. The law protects
certain personal interests and where these are infringed, the law might offer redress, typically in the
form of damages or (in exceptional cases) an injunction.
Thus where personal security is infringed, for example, the torts of assault or false imprisonment
might apply and where a person’s property is infringed or damaged, the torts of trespass or nuisance
might apply.
In tort, no previous transaction or contractual relationship need exist. Indeed it is quite likely that the
parties involved will be complete strangers. Where the parties are in a contractual relationship and
there has been both a breach of contract and a tort committed, the claimant may prefer to proceed
in contract rather than tort (or vice versa) for reasons associated with the measure of damages or
limitation periods. The measure of damages in contract will be such amount as would put the
claimant in the position they would have been in had the contract been performed, whereas in tort,
the award will reflect the position they would have been in had the tortious act not taken place.
Broadly speaking, the limitation period (during which an injured party must take proceedings) is six
years from a breach of contract or six years from the damage caused by the tortious act being
suffered (or three years in the case of personal injury).
Robinson v P E Jones (Contractors) Ltd 2011
The facts: Defects in two chimney flues were discovered 12 years after the contractor built a house
for Robinson. Since a contractual claim was statute-barred, Robinson sued the contractor in tort.
Decision (Court of Appeal): Where a contractual duty of care is owed, it does not necessarily follow
that a duty of care is owed in tort also. Whether or not a tortious liability arose in this case depended
on the facts and the relationship between the parties, but was excluded in any event by a clause in
the contract which restricted liability to that set out in the National House-Building Council standard
agreement.
This clause satisfied the reasonableness test in UCTA and excluded any potential tortious liability for
economic loss. The following example illustrates how the same event can easily give rise to more
than one legal liability.
Context example: Tort, crime and contract breach

Davinia is a hired chauffeur working for Estelle. She drives while drunk, crashes the car and runs over
Ewan, seriously injuring him and injuring Estelle slightly.
This road accident may lead to proceedings for both crime (drink driving) and tort (injury to Ewan)
and even in contract (breach of terms with Estelle).
Bad professional advice may give rise to liability both in tort and in contract. We discuss the law of
tort in relation to professional advisers in section 3 of this chapter.
Interactive question 1: Tort

For a party to have a liability in tort, there must already be a contractual relationship between the
parties.
Requirement
True or false?
A True

B False
1.2 Elements of a tort

Generally speaking, a tort consists of an act or omission by the defendant, which is responsible for
causing injury or damage to the claimant. The damage must normally be due to the fault of the
defendant and it must be caused to an interest of the claimant that the law seeks to protect, ie, the
damage must be a type of harm that the courts will recognise as giving rise to a legal liability. The
claimant will only be able to recover for damage or loss that is not considered to be too remote.
2 The tort of negligence

Section overview
• The terms ‘negligence’ and ‘negligent’ may refer to the careless way in which an act is carried out,
or to the tort that arises when a person is in breach of a legal duty of care that they owe to
another, thereby causing that person harm or loss.
• Negligence is the most important modern tort. To succeed in an action for negligence, the
burden of proof is on the claimant to prove, on a balance of probabilities, that:
– the defendant owed a duty of care to the claimant to avoid causing injury, damage or loss;
– there was a breach of that duty by the defendant; and
– in consequence the claimant suffered injury, damage or loss.
2.1 Duty of care

It is not possible to give a clear statement of the law as to when a duty of care exists for the purposes
of negligence, since the law has evolved over many years as it has had to be applied to extremely
varied situations and many factors have influenced the courts’ decisions. However, you should be
aware of the landmark case, in which the House of Lords ruled that a person might owe a duty of
care to another with whom they had no contractual relationship. Up to this point it was felt that to
allow a party to recover for their loss arising out of a breach of contract between two other parties
(and to which they were not a party) would be to undermine the doctrine of privity of contract.
Donoghue v Stevenson 1932
The facts: A friend purchased a bottle of ginger beer for consumption by Miss Donoghue. Miss
Donoghue drank part of the contents, which contained the remains of a decomposed snail, and
became ill. The manufacturer of the ginger beer (Mr Stevenson) argued that because there was no
contract between himself and Miss Donoghue, he owed her no duty of care and so was not liable.
Decision: The House of Lords laid down the general principle that every person owes a duty of care
to their ‘neighbour’, to “persons so closely and directly affected by my act that I ought reasonably to
have them in contemplation as being so affected”.
This so-called ‘neighbour principle’ has been developed further and the law is extremely complex in
this area. However, the principle is still relevant and an awareness of the reasoning of this case and its
application is perhaps fundamental to an understanding of the tort of negligence.
For many years, this was the test applied where physical damage was the loss sustained, but where
economic or financial loss was suffered, no remedy was given unless that loss was directly
consequential on physical loss or unless there was also contractual liability, fraud or deceit. In 1964,
however, the House of Lords refined the neighbourhood principle by requiring that a ‘special
relationship‘ (but not necessarily a contract) was needed to found an action in negligence where the
claimant suffered pure economic loss arising out of negligent misstatement. This area of negligence
is dealt with more fully in section 3.
102 Law ICAEW 2023

At the present time, it is perhaps fair to say that whether or not a duty of care exists will be assessed
on the basis of some or all of the following four tests. These were formulated by the House of Lords
in The Nicholas H (Marc Rich & Co v Bishops Rock Marine) 1995 case.
Test Meaning
1 Reasonably foreseeable Was the damage reasonably foreseeable by the

defendant as damage to the claimant at the time of
the negligent act or omission?
2 Proximity Is there sufficient proximity, or neighbourhood,

between the parties?
3 Fair, just and reasonable Is it fair, just and reasonable that the law should
impose a duty on the defendant on the facts of the
case?
4 Public policy Is there a matter of public policy that requires that

no duty of care should exist? (By way of example,
the Court of Appeal has held (in 2011) that a duty
should not be owed by a surveyor to a buy-to-let
investor, when carrying out a rental valuation for a
lender, on the grounds that such an investor (unlike
a simple residential purchaser) is more likely to
obtain an independent valuation.)
In applying these tests, the court is essentially looking at the relationship between the claimant and
the defendant in the context of the damage suffered. The Nicholas H case was concerned with
economic loss, but the court held that the requirements would be equally applicable in cases of
physical damage to property.
Applying the four tests above is a good way to structure the problem of determining whether a party
owes another a duty of care.
Interactive question 2: Duty of care

Which of the following tests will be considered in assessing whether a duty of care exists?
(1) Whether there is a sufficient relationship of proximity between defendant and claimant
(2) Whether the damage was reasonably foreseeable as a result of the defendant’s carelessness
(3) Whether the claimant acted in good faith and without carelessness
(4) Whether it is just and reasonable for the law to impose liability
A (1) and (2) only
B (3) and (4) only
C (1), (2) and (3) only
D (1), (2) and (4) only
2.2 Breach of duty of care

The second element that must be proven by a claimant in an action for negligence is that there was a
breach of the duty of care by the defendant.
Whether or not there has been a breach of duty is a question of fact. In certain circumstances where
the reason for the damage is not known, but it can fairly be said that it would not have occurred
without the defendant’s lack of care, the claimant can argue res ipsa loquitur (‘the facts speak for

themselves’) and the court will infer that the defendant was in breach of the duty of care. It will be
necessary for the claimant to show that the thing which caused the damage was under the
management and control of the defendant. In such cases, it will then be for the defendant to prove
that the cause of the injury was not their negligence.
The standard of care needed to satisfy the duty of care is a question of law. Broadly speaking, it is the
standard of a reasonable person. The standard was originally described in the following way in the
original nineteenth-century case, “a reasonable man, guided upon those considerations which
ordinarily regulate the conduct of human affairs” (Blyth v Birmingham Waterworks Co 1856).
The following principles have been established by case law:
Principle Explanation
Particular skill If the defendant professes a particular skill, the standard is that of a reasonable
person with that skill, ie, a reasonable accountant or reasonable electrician.
Lack of skill Peculiarities or disabilities of the defendant are not relevant, so the standard for
a learner driver is that of a reasonable driver and for a trainee accountant, that of
a reasonable accountant.
No hindsight The test is one of knowledge and general practice existing at the time, not
hindsight or subsequent change of practice.
Roe v Minister of Health 1954
The facts: A doctor gave a patient an injection taking normal precautions at that
time. The drug became contaminated in a way that was not understood at the
time and the patient was paralysed.
Decision: It was held that the proper test was normal practice based on the state
of medical knowledge at the time. The doctor was not at fault in failing to
anticipate later developments.
Body of In broad terms, a claim against a professional person will fail if they can point to
opinion a body of professional opinion that supports the approach taken and which the
court considers to be reasonable.
Advantage and In deciding what is reasonable care, the balance must be struck between
risk advantage and risk. (For example, a driver of a fire engine may exceed the
normal speed on their way to the fire but not on the way back.)
Emergency If a defendant acts negligently in an emergency situation, this will be taken into
account – the test is that of a reasonable person in the defendant’s situation.
Vulnerability If A owes a duty of care to B and A knows that B is unusually vulnerable, a higher
standard of care is expected.
Paris v Stepney Borough Council 1951
The facts: Paris was blind in one eye and was employed by the defendant on
vehicle maintenance. It was not the normal practice to issue protective goggles
since the risk of eye injury was small. A chip of metal flew into Paris’s eye and
blinded him.
Decision: There was a higher standard of care owed to Paris because an injury to
his remaining good eye would blind him.
Interactive question 3: Breach of duty of care

Sharnie is training to be an ICAEW Chartered Accountant and is concerned about being liable to
clients in tort.
Requirement
What is the standard of care expected of Sharnie?
A That of a reasonable accountant
104 Law ICAEW 2023

B That of a reasonable trainee accountant
C That of a reasonable person
D That of an inexperienced accountant
2.3 Loss caused by the breach

The third element that the claimant must demonstrate is that they suffered injury or loss and that this
was as a result of the breach. A person will only be compensated if they have suffered actual loss,
injury, damage or harm as a consequence of another’s actions. As a general rule, loss is represented
by personal injury or damage to property, or financial loss directly connected to such injury (for
example, loss of earnings) or property damage. Such consequential economic loss, that is related in
this way, is more readily recoverable than pure economic loss.
Spartan Steel Alloys v Martin Co Contractors 1973
The facts: Spartan was halfway through smelting a steel ingot when a cable was damaged by Martin
Co, causing its electricity supply to be cut off.
Decision: Spartan was entitled to claim damages for the damaged ingot, as it had been damaged by
Martin Co’s act and for the loss of profit consequential upon the ingot being in production at the
time. However, they were not entitled to claim for loss of profits generally due to the disruption
caused to the factory, as there was no actual damage to the factory. The court held that the loss
should lie where it fell and it was more appropriate for factories to take out insurance against
interrupted production.
However, in the later case of Junior Books v Veitchi Co Ltd 1982, some doubt was expressed in the
House of Lords as to whether this decision was still good law (although it was not overruled). In that
case, pure economic loss was recoverable on the basis that there was sufficient proximity between a
sub-contractor and an owner of a building to give rise to a duty of care in tort, despite there being no
contract.
Subsequent cases have sought to emphasise the limited application of this case, however, and it
remains a difficult area of law. The courts’ reluctance to permit recovery of pure economic loss is
largely due to the difficulties and cost in insuring against liability that would be likely to arise as a
result and also concern that the floodgates would be opened to large numbers of claims for
potentially enormous sums.
Whether or not the damage was caused by the defendant’s breach is a question of fact. Put simply,
the question is “would the damage have occurred but for the defendant’s act or omission?” If it can
be shown that actually the damage was caused by something or someone else, then there will be no
liability on the defendant’s part. If something happened after the defendant’s breach that caused or
contributed to the damage, then the defendant’s liability will cease at that point.
Even where the claimant is able to show that the loss was suffered as a result of the defendant’s
breach of duty, the court will not allow them to recover for loss that is considered too remote, or too
far down the chain of causation. This is a question of law and is part of the assessment of a damages
award made by a court. It is considered in section 4.
To understand whether a party has breached a duty of care requires you to assimilate information
from a number of sources. You will need to consider the issue from a variety of different perspectives.

3 Professional advice and negligent misstatement
Section overview
• Negligent misstatement is one aspect of the tort of negligence.

• It tends to be considered separately, partly because liability stems from words rather than acts
and partly because the damage suffered is financial rather than physical.
• It is obviously also of particular relevance to you as an accountant, as you will be giving
professional advice in most aspects of your work.
Where an adviser (such as an accountant, banker, solicitor or surveyor) makes a statement in some
professional or expert capacity, and where it is likely that others would rely on what they said, then
they may owe a duty of care in addition to their contractual commitments. This means a potential
liability in tort if their statement or advice turns out to be negligently made.
We shall now take a look at how the situation developed in this area historically, by examining some
important cases that changed things for those giving professional advice, before looking at how the
tort of negligent misstatement has developed in more recent times.
As noted earlier, pure economic or financial loss (in the absence of physical damage) used not to be
recoverable unless there was a liability in contract or evidence of fraud or deceit. The neighbour
principle laid down in Donoghue v Stevenson was restricted to tortious acts or omissions that
resulted in physical damage.
In negligence cases, the question of damage or loss being caused is rarely the decisive issue of the
case. In most cases, the point of law at stake is whether or not the defendant owed the claimant a
duty of care, and we shall see a number of cases that created the principles used to determine
whether professionals owe others a duty of care.
The turning point for negligence came in 1963 when the following landmark case ushered in a new
judicial approach to cases involving negligent misstatement.
Hedley Byrne & Co Ltd v Heller and Partners Ltd 1963
The facts: Hedley was an advertising agent acting for a new client, Easipower Ltd. The company
requested information from Easipower’s bank (Heller), on its financial position. Heller returned
noncommittal replies, which expressly disclaimed legal responsibility, and which were held to be a
negligent misstatement of Easipower’s financial resources.
Decision: While Heller was able to avoid liability by virtue of its disclaimer, the House of Lords went
on to consider whether there ever could be a duty of care to avoid causing financial loss by
negligent misstatement where there was no contractual or fiduciary relationship. It decided that, had
it not been for the disclaimer, Heller would have been liable for negligence, having breached the
duty of care, because a special relationship did exist.
In coming to the decision, one of the Law Lords made the following statement:
If someone possessed of a special skill undertakes … to apply that skill for the assistance of
another person who relies on that skill, a duty of care will arise … If, in a sphere in which a person
is so placed that others could reasonably rely on his skill … a person takes it on himself to give
information or advice to … another person who, as he knows or should know, will place reliance
on it, then a duty of care will arise.
Essentially, the judgment means that if a professional provides a special skill to somebody who then
relies on that skill, or if the professional knows or should know they would rely on it, then this creates
a special relationship between them and therefore a duty of care exists.
It is important to remember that liability can only arise where the defendant is in the business of
giving professional advice (such as practising as an accountant) and the statement is made within
that context. They will not be liable for advice given informally or on a social occasion.
One consequence of courts considering the context in which statements are made is that the
outcome of cases really depends on the specific circumstances involved. For example, if the
circumstances involve the preparation of accounts for shareholders or for a potential takeover
bidder. The Court of Appeal has recently made it clear that it will be very difficult to prove that a duty
106 Law ICAEW 2023

of care is owed to sophisticated investors, who are more likely to be considered responsible for their
own actions (Springwell Navigation Corp v J P Morgan Chase Bank 2010).
Remember that, in addition to establishing that a duty of care exists and has been breached, it will be
necessary to show that the loss was caused by that breach. If, in fact, the loss was attributable to
another cause or would have been suffered in any event, an action for negligence will not succeed.
J E B Fasteners Ltd v Marks, Bloom & Co 1982
The facts: Accountants, in the knowledge that the company was seeking outside finance, prepared
accounts negligently showing overvalued stock and inflated profits. The claimant saw the accounts
and took over the company.
Decision: The claim failed on grounds of causation. It was considered that the claimant should have
known from their own enquiries that the figures were inaccurate and that the company was taken
over in order to secure the directors’ expertise and not purely on the basis of the accounts.
The following cases are described in order to give you a feel for the types of situation that can arise
and the courts’ approach to determining whether the professionals owe a duty of care in tort. An
understanding of the legal considerations is more important than a recall of the facts of any given
case.
3.1 No duty of care owed

Unless the defendant makes a negligent misstatement in the knowledge or reasonable expectation
that an identified bidder would rely on it, then no duty of care is owed to anyone other than the
body of shareholders as a whole.
Caparo Industries plc v Dickman and Others 1990
The facts: Caparo, a shareholder in Fidelity plc, bought more shares and later made a takeover bid,
after seeing accounts prepared by the defendants that showed a profit of £1.3 million. Caparo
claimed against the auditors for the fact that the accounts should have shown a loss of £400,000,
arguing that the auditors owed a duty of care to investors and potential investors in respect of the
audit. They should have been aware, Caparo argued, that a press release stating that profits would
fall significantly had made Fidelity vulnerable to a takeover bid and that bidders might well rely upon
the accounts.
Decision: The auditor’s duty was owed to the body of shareholders as a whole (rather than
shareholders individually) and did not extend to potential investors nor to existing shareholders
increasing their stakes.
In its decision, the House of Lords decided that the reason for annual accounts was to enable the
shareholders as a whole to exercise their rights in respect of the management of the company and
not to give advice on the merits of further investment in the company. Therefore, it would be wrong
to impose a duty of care on the auditors because the accounts were used for a purpose for which
they were not intended, without the auditors’ prior knowledge.
The House also ruled that, since there was no duty owed to an individual shareholder, there could be
none owed to a potential takeover bidder who was not known to the auditors.
Following Caparo, the principle extends to the situation where an individual relies on annual audited
accounts to invest in, or lend to, or bid for a company, unknown to the professional who prepared
them, there is no cause of action because no duty of care exists.
Also, preparing statements for general circulation (ie, to persons not known to the accountant) will
not give rise to a duty of care, even if the accountant could reasonably foresee they would be relied
on. The fact that the user is unknown to the accountant will prevent a duty of care being created.
3.2 Duty of care owed

The key point to note is that professionals are likely to owe a duty of care if they provide information
to a particular person in the knowledge that they will rely on it (such as if they were contemplating a
business transaction and would rely on the information in deciding whether or not to proceed with
the transaction).
This approach is illustrated by James MacNaughton Papers Group Ltd v Hicks Anderson & Co 1991, in
which an accountant prepared draft accounts for a company chair, who then, as claimant, inspected
the accounts and then took over the company. It was held that since the accounts were in draft only

and were drawn up specifically for the chair, the accountant only owed a duty of care to the chair and
not to a potential takeover bidder.
However, in Royal Bank of Scotland v Bannerman Johnstone Maclay 2005 it was held that a third
party can be owed a duty of care where auditors know their identity, the use to which the
information would be put, and that the third party intends to rely on it.
In this case, the major lender to a company was entitled to the monthly management accounts and
audited financial statements as part of its lending agreement. Over a number of years, the lender
acquired a majority shareholding in the business, but the accounts on which they relied were
misstated and the business collapsed with debts of £13 million owed to the lender. The duty of care
was owed as a consequence of the auditors being aware that the accounts would be sent to the
lender as part of the lending agreement and would therefore be relied upon. The auditors could
have disclaimed responsibility to the lender if they had wanted to avoid liability.
The issue of disclaimers from the Bannerman case was upheld in the decision of Barclays Bank plc v
Grant Thornton UK LLP 2015. In this case, the auditors disclaimed liability on the face of their
auditor’s reports, which were relied upon by the lender of a hotel chain that went into administration.
The court struck out the case brought by the bankers who claimed that the disclaimer was not valid in
law. The court decided that it was perfectly reasonable for auditors to avoid liability by including a
disclaimer (for example stating that they do not accept responsibility to anyone other than the
person to whom they are reporting) on the auditor’s report.
Where financial statements are prepared for the purpose of contesting a proposed takeover bid, the
directors and financial advisers will owe a duty of care in respect of them to a known takeover bidder.
These were the facts in Morgan Crucible v Hill Samuel Bank Ltd 1991.
Likewise, in Galoo Ltd v Bright Grahame Murray 1995, the Court of Appeal reiterated that an auditor
owes a duty of care to a takeover bidder when they have been expressly informed that the bidder
will rely on the accounts for the purpose of determining the value of their bid and the bidder does so
rely on them. On the facts of that case, it was considered that the accounts had been prepared not
just for audit purposes, but also for the purpose of fixing the takeover price.
The need for a cautious approach (and possibly to issue disclaimers) when giving financial advice in
such situations is well illustrated by the following case:
ADT Ltd v BDO Binder Hamlyn 1996
The facts: Binder Hamlyn signed off the audit of BSG as showing a true and fair view of the
company’s position. ADT was thinking of buying BSG and, as a potential buyer, sought Binder
Hamlyn’s confirmation of the audited results. At a meeting between the Binder Hamlyn audit partner
and a director of ADT, the audit partner specifically confirmed that he “stood by” his firm’s audit. ADT
proceeded to purchase BSG for £105 million. It was subsequently alleged that BSG’s true value was
only £40 million. ADT therefore sued Binder Hamlyn for the difference, £65 million plus interest.
Decision: Binder Hamlyn assumed a responsibility for the statement that the audited accounts
showed a true and fair view of BSG which ADT relied on to its detriment. Since the underlying audit
work had been carried out negligently, Binder Hamlyn was held liable for £65 million.
The court concerned itself particularly with the purpose of the statement made at the meeting and
attached great importance to the fact that Binder Hamlyn assumed responsibility as a result of the
partner’s comments.
Interactive question 4: Duty of care of accountants

Lemondo LLP is preparing to audit the accounts of Delittle plc.
Requirement
If the accounts are found to have been audited negligently, to whom would Lemondo LLP have owed
a duty of care?
A Delittle’s shareholders as a whole
B Individual shareholders of Delittle who lose money as a consequence of the negligence
C Delittle’s directors who appointed Lemondo LLP as auditor
D Any investors in Delittle plc who lose out financially due to the negligence
108 Law ICAEW 2023

3.3 Non-takeover situations
The following two cases provide further examples of where a duty of care was said to exist, based on
the knowledge of the accountants in preparing a client’s accounts.
Law Society v KPMG 2000
The facts: KPMG were retained by a firm of solicitors to prepare annual reports required by the Law
Society. The Law Society found that the solicitors had been defrauding clients and amounts had to be
made good from a compensation fund of which the Law Society was a trustee. The Law Society sued
KPMG for negligence.
Decision: KPMG owed a duty of care to the Law Society and was liable in negligence. It was just and
equitable to make KPMG liable since it was entirely foreseeable that an adverse accountant’s report
could result in intervention by the Law Society for the protection of the public.
Andrew v Kounnis Freeman 1999
The facts: The defendant, Kounnis, prepared the accounts of a travel company that collapsed.
Decision: The accountant had assumed a duty of care to the CAA and was liable in negligence. A
reasonable accountant should have known that the CAA would assume the audited accounts had
been prepared with due skill and care and would rely on them in deciding whether to renew the
company’s licence.
In both cases it may be said that it was reasonably foreseeable that the claimant (who could be
identified and was not one of a large class of recipients) would rely on the accounts.
The following case provides an example of where no duty of care was found to exist.
De Sena v Notaro 2020
The facts: An accountant was involved in a demerger of a family-owned business. The demerger was
designed to move a number of assets that were owned by the family’s company into a new company,
which would be owned by a family member who wished to move their interests away from the rest of
the family. The claimant claimed that the assets moved to the new company had their values inflated
and therefore they suffered a financial loss as a consequence of the demerger. The claimant argued
that the accountants owed them a fiduciary duty due to a long-standing relationship that they had
with the family company.
Decision: The accountants did not owe the claimant a fiduciary duty. They had only ever acted on
behalf of the company, not the claimant, and had advised the claimant to seek independent advice,
which they did not do. Even if a fiduciary duty was owed to the claimant, the claim would fail because
the accountants had not furthered their own interests to the detriment of the claimant. There is no
liability in negligence because they had assumed no responsibility to the claimant.
3.4 Summary
As the Court of Appeal made clear in the James MacNaughton case, there is no single overriding
principle that can be applied to the complexities of every case. Rather, as you will have seen from the
cases mentioned in this chapter, there are a number of factors that the court will take into account
and some will assume a greater significance than others.
The factors with the greatest significance are:
• the purpose for which the statement is made and communicated
• the relationship between the professional, the recipient and any relevant third party
• the state of knowledge of the professional
• whether the professional could be said to have assumed responsibility to the claimant
• the size of any class to which the recipient belonged
• whether the third party was identified and known to the professional
• the extent of reliance by the claimant and whether that was foreseeable
• whether it is fair and equitable (and not an offence to public policy) to impose a duty of care
It is worth noting that the increasing litigation against professionals, particularly during the takeover
boom period of the late 1980s, led accountants to find ways to limit their potential liability. KPMG, for
example, incorporated its audit practice in 1995. Several large audit firms, for example Ernst & Young
LLP, have incorporated as Limited Liability Partnerships.

Any exclusion clause that attempts to exclude liability for negligent misstatement may be subject to
the reasonableness test in the Unfair Contract Terms Act.
Negligence cases are often very complex and require judgment when applying the factors described
above. Be wary of any inconsistencies and contradictions in the information you are given, because
they may indicate that some information cannot be trusted.
Interactive question 5: Negligent misstatement

In order to show that there exists a duty of care not to cause financial loss by negligent misstatement,
the claimant must show that:
(1) The person making the statement did so in a professional capacity.
(2) The claimant was the only person likely to rely on the statement.
(3) The claimant was introduced to the person making the statement.
(4) The claimant actually relied on the statement and suffered loss as a result.
A (1) and (4) only
B (1), (2) and (4) only
C (1), (3) and (4) only
D (1), (2), (3) and (4)
3.5 Companies Act liability for auditor’s report and audited accounts
In addition to any liability in tort, an auditor also commits an offence under the Companies Act 2006
(TSO, 2006) if they recklessly cause an auditor’s report to contain any matter that is misleading or
false to a material extent (s.507). Such an offence is punishable by fine.
Also relevant to this question of professional liability are the following provisions of that Act:
• Any provision which exempts an auditor of a company (to any extent) from, or indemnifies them
against, liability for negligence (among other things) in relation to providing audited accounts is
void (save for an indemnity for costs against successfully defending proceedings or where a
liability limitation agreement applies) (s.532).
• A company may enter into a liability limitation agreement with an auditor, limiting their liability for
negligence (among other things) in the course of auditing accounts to a fair and reasonable
amount (s.534).
Interactive question 6: Professional advice

Claudia is a trainee accountant employed in an accountancy firm. She meets Daniel at a party and
they date for three months. During that time, Daniel asks for some tax advice. Claudia looks up some
information at work and then goes home and gives him advice, based on the information she has
obtained from the office. She has misinterpreted the tax law and gives incorrect advice to Daniel. A
reasonably competent accountant would not have given the same advice to Daniel.
Requirements
If Daniel decides to sue Claudia, indicate whether or not she could rely on any of the following
factors as a complete or partial defence.
110 Law ICAEW 2023

Yes/No
She was merely a trainee and therefore the objective standard of care
required is lower.
She was in a relationship with Daniel, therefore there is a rebuttable

presumption that she is not intending him to use her advice professionally.
Daniel had intended to do as she advised anyway, so was not affected by

her advice.
Daniel might succeed in a claim for negligence against:
Yes/No
Claudia
Claudia’s firm
Claudia’s firm and Claudia
4 Defences and damages

Section overview
• There are three defences of particular relevance to the tort of negligence.

• The principal remedy in any case involving negligence will be an award of damages.
4.1 Defences
The three defences particularly relevant to a case involving negligence are:
Defence Application
Contributory negligence Where the defendant can show that the damage or loss suffered
was partly due to the claimant’s fault, the claimant’s damages will
be reduced by the court in proportion to their degree of fault. For
example, if a claimant would have received £100,000 but is found
to be 40% contributorily negligent, the damages awarded will be
£60,000. (Where there is concurrent liability in tort and contract,
this defence will also apply to reduce contractual liability.) The
defence is governed by the Law Reform (Contributory Negligence)
Act 1945 (HMSO, 1945).
Volenti non fit injuria This applies where the claimant voluntarily (ie, exercising free
(literally “to a willing person choice) agrees to undertake the legal risk of loss or damage at their
no injury is done”) own expense. Effectively it amounts to an agreement by the
claimant to exempt the defendant from a duty of care which
otherwise would be owed. The fact that a person knows that there
is a risk, or even consents to run that risk, does not mean volenti

Defence Application
necessarily applies. The question is whether the claimant

consented to run the risk of having no legal redress. Where UCTA
applies, volenti cannot be raised to provide a greater exclusion of
liability than the Act would allow (for example, to relieve liability for
death or personal injury).
Exclusion clauses Where there is an agreement between the parties that contains a
provision seeking to exclude or limit liability for negligence, it may
be subject to UCTA. Insofar as it relates to business liability for
death or personal injury caused by negligence, it will be void.
Provisions limiting liability for other types of damage caused by
negligence will be subject to the reasonable test. UCTA specifically
provides that a person’s agreement to, or awareness of, the clause
does not necessarily amount to voluntary acceptance of any risk.
Interactive question 7: Contributory negligence

In cases where contributory negligence is established, which of the following statements is correct?
A The defendant has proved that they did not owe the claimant a duty of care.
B The defendant has proved that they did not breach a duty of care owed to the claimant.
C The defendant has proved that the breach of their duty of care did not cause the harm to the
defendant.
D The defendant has proved that the claimant also acted negligently thereby contributing to the
claimant’s loss or injury.
4.2 Damages
Damages for negligence are compensatory and are intended to put the claimant in the same
position they would have been in had they not suffered any loss. They are normally awarded in a
single lump sum. As in contractual claims, damages will not be recovered to the extent that they are
considered to be too remote. When a person commits a tort with the intention of causing loss or
harm that in fact results from the wrongful act, that loss can never be too remote.
The loss is too remote unless it can be said that the type of damage that actually did occur was
reasonably foreseeable. Provided the kind of damage suffered was reasonably foreseeable, it does
not matter that it came about in an unforeseeable way, nor that it was more extensive than could
have been foreseen.
The Wagon Mound 1961
The facts: A ship was taking on oil in Sydney harbour. Due to negligence, oil was spilled onto the
water and it drifted to a wharf 200 yards away where welding equipment was in use. The owner of
the wharf carried on working because he was advised that the sparks were unlikely to set fire to
furnace oil. Safety precautions were taken. A spark fell onto a piece of cotton waste floating in the oil,
thereby starting a fire that damaged the wharf. The owners of the wharf sued the charterers of the
ship.
Decision: The claim must fail. Pollution was the foreseeable risk, fire was not.
Any conclusion on the amount of potential damages payable must take into account the possibility
of claiming contributory negligence, and may therefore be a ‘worst case’ scenario with damages
subject to a reduction in future.
112 Law ICAEW 2023

5 Vicarious liability
Section overview
• An employer may be liable for the tortious acts of their ‘employee’ provided there is a close
connection between the relevant act and the employee’s employment.
• A principal may be liable for the tortious acts of their agent where they are committed in
furtherance of an agency relationship.
• Partners in an ordinary partnership may be vicariously liable for the tortious acts of their fellow
partners where they are committed in furtherance of the partnership business.
Vicarious liability is a legal doctrine under which one person can be held legally responsible and
liable for the tortious acts of another person. Thus a person may be liable in tort in two ways:
• Primarily, if they commit a tort
• Vicariously, if their employee or agent commits a tort
Vicarious liability is a legal liability that may be imposed on a person even though they are free from
blame and in addition to the personal liability of the other person who committed the tort.
The doctrine has the advantage of providing an innocent tort victim with recourse against a
financially responsible defendant, but at the same time it does impose an additional burden on the
business or person held vicariously liable. In the context of employment, for example, this imposition
of liability in the absence of fault is a pragmatic recognition of the fact that the employer is likely to
have a greater ability to pay damages than the employee, is the best insurer against liability and is
able to pass the costs of such liability, or potential liability, to their customers. It has far less to do with
any argument that the employer should accept losses alongside the benefits of the employee’s work
or that they were careless in selecting the employee.
5.1 Vicarious liability and employment

There are two requirements to establish vicarious liability:
• Generally speaking, the wrongdoer (tortfeasor) must be an employee and not an independent
contractor.
• The employee must have been acting in the course of their employment.
Employee …
Various tests have been used to distinguish between an employee and an independent contractor.
We will study them when we look at employment law, but bear in mind the test may be slightly
different when determining whether the person is an employee for the purposes of a tort. The key
issues are whether the ‘employer’ has control over what that person does and how they do it and
whether the employee is integral to the business.
However, the courts have shown a willingness to extend vicarious liability to cases where the
wrongdoer is not, strictly speaking, an ‘employee’.
Likewise, an ‘employer’ may be found vicariously liable for the acts of an ‘agency worker’ where the
employer temporarily hires the worker from an agency company to act, in effect, as their employee.
In such cases, either the ‘employer’ or the ‘agency company’ or both can be found vicariously liable,
depending on the facts of the case.
… Acting in the course of employment
An employer will only be liable for torts committed by an employee in the course of their
employment. Otherwise you could have the silly situation of an employer being liable for an
employee’s motorcycle accident while driving a private bike on holiday. An employee is also usually
not considered acting in the course of their employment when they are travelling to and from work.
The law relating to whether an employee was acting in the course of their employment has recently
been revised considerably by the following House of Lords case:
Lister and others v Hesley Hall Ltd 2001

The facts: The warden of a boarding school was found guilty of sexually abusing children resident
there.
Decision: The school was vicariously liable. The nature of the warden’s work created a sufficient
connection between the acts of abuse that he had committed and the work that he was employed to
do.
Obviously, in this case, the school did not employ the warden for the purposes of abusing the
children. In that sense, he was not acting in the course of his employment when he carried out the
abuse. However, the House of Lords concluded that the acts that he carried out were so closely
connected with the nature of his work that it was fair and just to hold the employer liable. In other
words, he was employed to look after the children, and the torts committed were in his work time, in
the place where he was employed and while he was carrying out his employed duty to care for the
children.
Whether this ‘close connection’ between the employee’s tort and his employment exists must be
decided by the court on the facts of each case. Two further cases in which the test has been applied
since the Lister case are:
Dubai Aluminium Co Ltd v Salaam and others 2002
The facts: A solicitor, drafted bogus agreements.
Decision: The drafting of agreements of this nature (but for a proper purpose) would be within the
ordinary course of business for a solicitor. Therefore the dishonest acts were sufficiently closely
connected to the course of their business for their employers to be vicariously liable for those acts.
Attorney General v Hartwell 2004
The facts: A police constable in the British Virgin Islands was on duty when he went to a restaurant
where his partner worked as a waitress. He fired several shots at his partner and her male companion.
One shot hit a British tourist, who sustained serious injuries.
Decision: The Privy Council found that the Attorney General (as the representative of the
Government of the British Virgin Isles) was not vicariously liable for the personal injury sustained by
the British tourist. The acts of the policeman were not closely connected to his employment, and in
fact had nothing to do with his police duties. He was pursuing a personal vendetta.
5.2 Vicarious liability and agency

A principal is vicariously liable for a tort committed by an agent acting within the limits of their
authority and carrying out the acts for which they were appointed as agent.
Ormrod v Crossville Motor Services 1953
The facts: A car owner asked a friend to drive his car to Monte Carlo where the owner was going to
take part in a rally and then they were going to holiday together after the rally. The friend’s negligent
driving caused damage to the claimant’s bus.
Decision: The owner was vicariously liable for his friend’s negligence. It was irrelevant that the friend
was driving to Monte Carlo partly for his own purposes.
5.3 Vicarious liability and partnership

A partnership is liable for any wrongful act or omission of any partner acting in the ordinary course of
the business of the firm or with the authority of their co-partners which causes loss or injury to
another person (s.10 Partnership Act 1890 (HMSO, 1890)). We shall look at the question of partners’
authority and liability when we study partnerships.
Interactive question 8: Vicarious liability

Vicki works as a home-delivery driver for a major supermarket. One day while she was driving home
from work in her own car, Vicki crashed into another vehicle. When she stepped out of her car, she
was still wearing her high-vis jacket, which bore the name of her employer on the back. The driver of
the other vehicle saw this and has decided to sue Vicki’s employer, saying it is vicariously liable.
Requirement
Is Vicki’s employer vicariously liable for her actions?
A Yes
114 Law ICAEW 2023

B No

Summary
The law gives various Employers may be held Principals may be held Parners may be held liable
rights to persons. When liable for the tortious liable for the tortious act for the tortious acts of
such a right is infringed acts of employees of their agents their fellow partners
the wrongdoer is liable in
tort
Tortfeasor must be an Tortious act must be

employee not an within the course of
independent contractor employment or agency or
partnership business
The law on negligent professional advice is currently

influenced strongly by the Caparo case, where it was held that
the auditors of a public limited company did not owe a duty of
Negligence is the most
care to the public at large who relied upon the audit report in
important modern tort
making an investment decision. Note especially how it is
different where the professional knows of an identified bidder
who has access to the accounts
Remember the criteria applied:

• Purpose made and communicated
• Relationship between parties
• Knowledge of professional
• Reliance
• Size of recipient class
To succeed in an action for negligence and claim damages the claimant must
prove that: The defendant might be
• the defendant has a duty of care to avoid causing injury, damage or loss able to rely on volenti or
• there was a breach of that duty by the defendant exclusion clause or
• in consequence the claimant suffered injury, damages or loss contributory negligence
In the landmark case of Donoghue v Whether there is a breach Finally the claimant must
Stevenson 1932 the House of Lords of the duty of care is a demonstrate that he
ruled that a person might owe a duty question of fact. The suffered injury or loss as a
of care to another with whom they standard applied is result of the beach
had no contractual relationship at generally the reasonable
all. The doctrine has been refined in person:
subsequent rulings, but the principle is • with D's skill The loss must be of a kind
unchanged • ignoring D's disabilities that was reasonably
forseeable in order not to
• without the benefits of
be too remote
hindsight
• taking into account
any emergency
• taking account of
victim's vulnerability
116 Law ICAEW 2023

indicated.
1. Can you explain what a tort is? (Topic 1)
2. Do you know the three things that a claimant must prove in order to be successful in a
claim for negligence? (Topic 2)
3. Can you explain the circumstances where a professional accountant will be liable for
negligence? (Topic 3)
4. Do you know the defences that a defendant can use against a negligence claim? (Topic
4)
5. Can you explain the circumstances where an employer will be vicariously liable for the
acts of an employee? (Topic 5)


• Companies Act 2006. (2006). London, TSO.

• Law Reform (Contributory Negligence) Act 1945. (1945). London, HMSO.
• Partnership Act 1890. (1890). London, HMSO.
118 Law ICAEW 2023

Self-test questions

1 In tort no previous transaction or contractual relationship need exist.
A True
B False
2 The ‘neighbour’ principle was established by the landmark case:
A Caparo v Dickman 1990
B Hedley Byrne v Heller 1963
C Donoghue v Stevenson 1932
D The Wagon Mound 1961
3 There are three essential elements for a negligence claim to be successful. What are they?
4 Is the following statement true or false?
True/False
When the court applies the maxim res ipsa loquitur, it is held
that the facts speak for themselves and the defendant does not
have to prove anything, since the burden of proof is on the
claimant.
5 What was the leading case on negligent misstatement that allowed recovery of non-physical
damage?
6 Which of the following would prevent a claim for negligence from being successful?
A The claimant followed a course of action regardless of the acts of the defendant.
B The defendant caused the harm to the claimant.
C The defendant was not yet fully qualified.
D The parties were proximate and the harm suffered was reasonably foreseeable.
E An intervening act broke the ‘chain of causation’.
F The duty of care was restricted by public policy.
True/False
“A public company’s auditors owe no duty of care to the public

at large who rely on the audit report in deciding to invest.”
This is the decision from Caparo.
8 Name four of the matters to be taken into account by the court in considering cases of professional
negligence.
9 In order for the employer to be vicariously liable, under which circumstances must the tort have been
committed?

True/False
If an agent is liable in tort, the claimant may enforce the

vicarious liability of the principal only where they are unable to
recover sufficient damages from the agent.
this chapter.
120 Law ICAEW 2023


B False
No contractual (or any other type of relationship) is required. Very often, the parties involved in a
tort case will be complete strangers until the loss or damage was caused.

D (1), (2) and (4) only
Any carelessness on the claimant’s part may amount to contributory negligence but will not
affect the question of whether or not a duty of care exists.

A That of a reasonable accountant
Even though Sharnie is in training, the standard of care expected of her is that of a reasonable
accountant.

A Delittle’s shareholders as a whole
As per the Caparo case, an auditor’s duty is owed to the body of shareholders as a whole (rather
than to shareholders individually). No liability is owed to potential investors or to existing
shareholders increasing their stakes.

A (1) and (4) only
(2) and (3) are factors that would be taken into account and would be likely to lead to a
successful claim, but they are not essential.
Yes/No
She was merely a trainee and therefore the objective standard of care No
required is lower.
She was in a relationship with Daniel, therefore there is a rebuttable No

presumption that she is not intending him to use her advice professionally.
Daniel had intended to do as she advised anyway, so was not affected by Yes
her advice.
(1) The objective standard of care is the same for a trainee as a qualified accountant.

(2) There is no such rebuttable presumption (such as there is in contract law). However, the position
would be different had Claudia given the advice at the party over a drink or two.
(3) If Daniel’s acts and therefore loss were unconnected with her advice then Claudia will not be
liable. Daniel will have to prove that the reverse was true.
Yes/No
Claudia Yes
Claudia’s firm No
Claudia’s firm and Claudia No
(1) If he can prove that the loss was due to her advice.
(2) Claudia’s firm will not be vicariously liable, as although she researched the matter at work, she
gave the advice in her own time and away from work premises and therefore not in the course of
her employment.
(3) Because of the answer to the above point.

D The defendant has proved that the claimant also acted negligently thereby contributing to the
claimant’s loss or injury.
Even though contributory negligence is established, it does not mean that the defendant was
not negligent. All it means is that the claimant’s own actions contributed to their loss or injury, so
that any damages due from the defendant should be reduced accordingly.

B No
Vicki’s employer would only be vicariously liable if Vicki’s accident occurred while she was acting
in the course of employment. Since Vicki was driving home after work in her own private car
when the incident occurred, it is unlikely that this employer would be found to be vicariously
liable, even though Vicki was still wearing her high-vis jacket.
122 Law ICAEW 2023

A True
C Donoghue v Stevenson 1932
3 Three essential elements for a negligence claim:
• Duty of care
• Breach of that duty
• Consequential damage, injury or loss
4
True/False
When the court applies the maxim res ipsa loquitur, it is held False
that the facts speak for themselves and the defendant does not
have to prove anything, since the burden of proof is on the
claimant.
Res ipsa loquitur means “the facts speak for themselves” and will lead to an inference that the
defendant was in breach of the duty of care.
5 Hedley Byrne v Heller 1963
A The claimant followed a course of action regardless of the acts of the defendant.
E An intervening act broke the ‘chain of causation’.
F The duty of care was restricted by public policy.
7
True/False
“A public company’s auditors owe no duty of care to the public True

at large who rely on the audit report in deciding to invest.”
This is the decision from Caparo.
8 Any four:
• The purpose for which the statement was made and communicated
• The relationship between the parties
• The size of any class to which the recipient belonged
• The state of knowledge of the maker
• The reliance by the recipient
• Whether the professional assumed responsibility
9 Tort must have been committed:
• by an employee; and
• the employee must have been acting in the course of their employment (in a way that had a close
connection with the scope of their employment).

10
True/False
If an agent is liable in tort, the claimant may enforce the False

vicarious liability of the principal only where they are unable to
recover sufficient damages from the agent.
The principal’s liability is in addition to the agent’s liability and exists regardless of the agent’s ability
to satisfy the claimant.
124 Law ICAEW 2023

Chapter 6
Types of trade
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 Sole traders
2 Ordinary partnerships
3 Limited liability partnerships
Summary
Self-test questions
Introduction
Learning outcomes
• Identify the nature of a partnership and the authority given to partners
• Identify the differences between unincorporated businesses (sole traderships and partnerships),
limited liability partnerships and companies, show the advantages and disadvantages of
incorporation and recognise the circumstances when the veil of incorporation can be lifted
• Identify the procedures required to form a registered company or a limited liability partnership,
including any practical considerations, and the nature and contractual force of a company’s
memorandum and articles of association and identify the advantages and disadvantages of off-
the-shelf companies
• Identify the administrative consequences of incorporation or the formation of a limited liability
partnership including requirements regarding statutory books, accounts, meetings and the role of
the company secretary
• Identify the rights and duties which a member of a limited liability partnership possesses
Specific syllabus references for this chapter are: 1d, 2a, b, c and j.
6
Syllabus links
The practical effects of partnership will be relevant when looking in detail at audit firms and their
liability in the Audit and Assurance paper.
6
Assessment context
Partners’ authority will be assessed in the context of agency law. The law on partnerships may also be
assessed by requiring a comparison with companies. Questions in this chapter will be set as multiple
choice, multi-part multiple choice or multiple response. Some questions may involve an analysis of a
brief scenario and the identification of an appropriate response, which may be in the form of
providing advice, such as whether a partner or partners have a liability for the debts of the firm.
6

of this chapter.

questions
1 Sole traders Approach Knowledge IQ1: Sole traders

A sole tradership is Note the fact that a questions may test This question tests
the most basic sole trader business the pros and cons your
business form. It is a is not legally distinct of running a understanding of
common way for from the owner. business as a sole the advantages of
people to work on a Learn the trader. running a
self-employed basis. advantages and business as a sole
disadvantages of trader.
this business form.
Stop and think

Can you state three
disadvantages of
running a business
as a sole trader?
126 Law ICAEW 2023

questions
2 Ordinary Approach Partner liability and IQ3: Partnership

partnerships Learn what a author could easily regulation
An ordinary partnership is and be tested in a This question
partnership is how one is formed scenario. reinforces some
essentially the same and dissolved. This Knowledge rules on how
as two or more sole section revisits questions could partnerships are
traders working agency law so you focus on the managed.
together. Many need to appreciate Partnership Act
professions operate the material on 1890 rules.
as partnerships. partner liability and IQ4: Authority of
authority. partners
This scenario
question is a good
Stop and think test of your
What happens to a understanding of
partnership when a the authority of
partner leaves? Can partners to enter
you explain the contracts.
liability of new and
retiring partners?
3 Limited liability Approach Knowledge IQ5: Regulation

partnerships Note the difference questions may test of LLPs
Partnerships can gain between the the difference This question tests
the benefits of limited Limited Partnership between ordinary your
liability by trading as Act 1907 and partnerships and understanding of
an LLP. Firms that Limited Liability LLPs in terms of LLPs through a
offer professional Partnerships Act administration number of
advice, such as 2000. Learn all the requirements. true/false
accountants and rules on formation, statements.
solicitors, often regulation, authority
choose this form due and termination.
to the risk from
negligence claims.
Stop and think

Are LLPs required to
have an audit? Do
they have to deliver
a confirmation
statement to the
Registrar of
Companies?
ICAEW 2023 6: Types of trade 127

1 Sole traders
Section overview
• In a sole tradership, there is no legal distinction between the individual and the business.
1.1 Introduction
In this chapter we shall study two types of unincorporated entity before we look at incorporated
entities and company law in the chapters that follow. There are two types of unincorporated entity
which we will consider – sole traders and partnerships. We shall begin by looking at sole traders.
A sole trader owns and runs a business. They contribute capital to start the enterprise, run it with or
without employees, and earn the profits or stand the losses of the venture. Sole traders are found
mainly in the retail trades (local newsagents), small scale service industries (plumbers), and small
manufacturing and craft industries.
1.2 Legal status of the sole trader

Whilst the business is a separate accounting entity the business is not legally distinct from the
person who owns it. In law, the person and the business are viewed as the same entity.
The advantages of being a sole trader are as follows.
• No formal procedures are required to set up in business. However, for certain classes of business
a licence may be required (eg, retailing wines and spirits), and VAT registration is often necessary.
• Independence and self-accountability. A sole trader need consult nobody about business
decisions and is not required to reveal the state of the business to anyone (other than the tax
authorities each year).
• Personal supervision of the business by the sole trader should ensure its effective operation.
Personal contact with customers may enhance commercial flexibility.
• All the profits of the business accrue to the sole trader. This can be a powerful motivator and
satisfying to the individual whose ability/energy results in reward.
The disadvantages of being a sole trader include the following.
• If the business gets into debt, a sole trader’s personal wealth (for example, private house) might
be lost if the debts are called in, as they are the same legal entity.
• Expansion of the business is usually only possible by ploughing back the profits of the business
as further capital, although loans or overdraft finance may be available.
• The business has a high dependence on the individual which can mean long working hours and
difficulties during sickness or holidays.
• The death of the proprietor may make it necessary to sell the business in order to pay the
resulting tax liabilities, or family members may not wish to continue the business anyway.
• The individual may only have one skill. A sole trader may be, say, a good technical engineer or
craftsman but may lack the skills to promote the business effectively or to maintain accounting
records to control the business effectively.
• Other disadvantages associated with small size, lack of diversification, absence of economies of
scale and problems of raising finance.
Interactive question 1: Sole traders

One advantage of running a business as a sole trader is that there is no requirement to file accounts
or otherwise to reveal the state of the business to the public or to the authorities.
A True
B False
128 Law ICAEW 2023

Sometimes a sole trader is the best form of business for a client in terms of the business context and
their personal needs. Don’t assume that the best form of business is always going to be a partnership
or company.
2 Ordinary partnerships
Section overview
• A partnership is “the relation which subsists between persons carrying on a business in common
with a view of profit”.
• A partnership can be an informal arrangement or it can be formalised and regulated by a written
partnership agreement.
• A partnership can be termed an ‘ordinary’ (or traditional) partnership in order to distinguish it
from a limited liability partnership (see section 3).
• The Partnership Act 1890 governs ordinary partnerships.
Partnership is a common form of business association. It is flexible, because it can be either a formal
or informal arrangement, thus suiting both large organisations and small operations.
Some professions prohibit their members from carrying on practice through limited companies and
therefore operate as partnerships. However, some permit their members to trade as ‘limited liability
partnerships’ that share many characteristics with companies (and which are described in section 3 of
this chapter). Businesspersons are not so restricted and generally prefer to trade through a limited
company for the advantages this can bring.
2.1 Definition
A partnership is “the relation which subsists between persons carrying on a business in common with
a view of profit” (s.1 Partnership Act 1890 (HMSO, 1890)). This definition can be further explained as
follows:
Relation which subsists A partnership does not have a separate legal personality, it is merely a
relationship between persons.
Between persons ‘Person’ includes companies. There must be at least two partners.
Carrying on a business • Business includes ‘every trade, occupation or profession’.

• It can be a single transaction (often referred to as a ‘joint venture’).
• The business must involve some activity, so if two or more persons
are merely the passive joint owners of revenue-producing property,
such as investments or rented houses, that fact of itself does not
make them partners.
• A partnership begins when the partners agree to conduct their
business activity together, which may well be before the business
actually begins to trade. Thus in Khan v Miah 2001 the parties to a
proposed venture (running a restaurant) were partners even before
the restaurant opened because, on the facts, they were clearly
carrying on the business (by leasing premises, hiring equipment and
opening a bank account).
In common Ie, as joint proprietors (normally evidenced by the sharing of profits). For
example, where a shop owner employs a shop assistant, they are both
concerned with running a business at a profit but they cannot be said to

be partners.
With a view of profit The test is one of intention, so if partners plan to make a profit but
actually make a loss, that does not stop the arrangement being a
partnership. However, if the purpose of the common endeavour is
actually to gain business experience, for example, there is no
partnership (Davies v Newman 2000).
The word ‘firm‘ is correctly used to denote a partnership. It is not correct to apply it to a registered
company (though newspapers often do so). The word ‘company’ may form part of the name of a
partnership (for example, ‘Smith and Company’) but the words ‘limited company’ and ‘registered
company’ can only be applied to a registered company.
Interactive question 2: Partnerships

Identify whether the following statements are true or false in relation to an ordinary partnership.
True/False
In England and Wales, an unlimited partnership has no existence distinct from the
partners.
Partners share equally in the venture’s profits.
2.2 Formation and regulation of a partnership

A partnership can be a very informal arrangement with no written formality at all; people simply
agree to run a business together and then do so.
On the other hand, it may be appropriate to formalise the arrangement with a written partnership
agreement, particularly where the partnership is a vast organisation with substantial revenue and
expenditure, such as many accountancy firms. The advantages of an agreement are that it sets out
details which are not otherwise implied by law (such as the nature of its business) and that it can
expressly override provisions which might otherwise be implied by law and which are not
appropriate (for example the proportions in which profits are to be shared).
In addition, partnerships are governed by the Partnership Act 1890, which sets out basic rights and
duties of partners, such as the rights to share profits, to take part in business decisions and to veto
new partners and the duty to share losses and indemnify other partners. These rights and duties in
most cases can be expressly overruled in a partnership agreement but will be assumed in the
absence of any express provision. The key provisions of the Act are set out below:
Provisions of the Description

Partnership Act
Profits and losses These are shared equally in the absence of contrary agreement. If the
partnership agreement states that profits are to be shared in certain
proportions but is silent as to losses, then losses are to be shared in the
same proportions.
Management Every partner is entitled to take part in managing the firm’s business;
ordinary management decisions can be made by a majority of partners.
Change in business Any decision on changing the nature of the partnership’s business must
be unanimous.
130 Law ICAEW 2023

Provisions of the Description
Partnership Act
Indemnity The firm must indemnify any partner against liabilities incurred in the
ordinary and proper conduct of the partnership business or in doing
anything necessarily done for the preservation of the partnership
property or business.
Remuneration No partner is entitled to remuneration for acting in the partnership

business.
Variation The partnership agreement may be varied with the consent of all the
partners.
Records and accounts These must be kept at the main place of business and must be open to
inspection by all partners.
Interest on capital None is paid on capital except by agreement. However, a partner is

entitled to 5% interest on advances beyond their original capital.
New partners New partners must only be introduced with the unanimous consent of
existing partners.
Expulsion A partner may only be expelled by a majority of votes when the

partnership agreement allows; even then, the power must only be used
in good faith and for good reason.
Dissolution The authority of the partners after dissolution continues so far as is

necessary to wind up the partnership affairs and complete transactions
already begun. On dissolution, any partner can insist on realisation of the
firm’s assets, payment of the firm’s debts and distribution of the surplus.
Capital deficiency The remaining partners share a capital deficiency (what a partner owes
but cannot pay back) not as a loss but in ratio to the amounts of capital
which they originally contributed to the firm.
In addition to the rights and duties set out in the Partnership Act, partners also owe fiduciary duties to
the partnership by reason of being fiduciaries (in the same way that some directors’ duties are
fiduciary in nature). These duties arise out of general principles of equity. For example, it is a breach
of the duty to act in good faith, to exercise a legal right (eg, to expel a partner) for an improper
motive. The fiduciary nature of their relationship also prohibits partners from keeping profits derived
from the partnership without the consent of the other partners and requires them to avoid conflicts
of interest without full disclosure. Breach of these fiduciary duties may render the partner responsible
liable to account to the partnership for any monies received or to make good any other loss suffered.
Interactive question 3: Partnership regulation

Dolittle Solicitors has four partners, Ahmed, Bridget, Charlotte and Don. Ahmed, Bridget and Don
want to invite Edith to be a partner. Charlotte does not want to invite Edith to be a partner because
she does not feel that she has sufficient experience in a senior position in the firm yet. Ahmed,
Bridget and Don decide to expel Charlotte from the partnership and invite Edith to take her place.
Ahmed also wants to be paid a salary as he carries out many of the administrative functions of the
partnership. There is no provision for new partners in the partnership agreement, but the agreement
does allow partners to remove partners by majority decision.
Are the following statements true or false?
Requirements
Ahmed, Bridget and Don may invite Edith to be a partner without Charlotte’s consent.
A True
B False

Ahmed, Bridget and Don may not expel Charlotte from the partnership on these grounds.
C True
D False
Ahmed is not entitled to a salary for acting in the partnership business.
E True
F False
2.3 Partners’ liability and authority

Partners are jointly and severally liable for the acts of their fellow partners in so far as they bind the
firm. Thus it is necessary to consider the authority of partners to bind the firm. This is based on the
principles of agency law. The Partnership Act 1890 provides that each partner is the agent of the
partnership and their fellow partners for the purpose of the business of the partnership. A partner’s
authority may be actual (express or implied) or apparent.
The Act also provides that the firm and the partners will be bound by all partners’ acts for carrying on
in the usual way business of the kind carried on by the firm unless:
• they have no authority to act for the firm in the particular matter; and
• the person with whom they are dealing either knows that they have no authority or does not know
or believe them to be a partner.
The courts have interpreted this provision to mean that the binding act should be done in the firm’s
name for the purpose of the firm’s business, and by a person who purports to act as a partner.
Context example: Partners’ authority

Faith, Georgina, Harbajan and Ingrid are partners in an animal hospital. They are all authorised to
carry out the business of being a vet on behalf of the practice. The partners have assigned Faith the
position of hospital manager with authority to purchase medicines and other supplies that the
hospital needs. The hospital has approved suppliers who have been informed that the only person
with authority to buy goods on behalf of the practice is Faith.
One day Faith was reading the catalogue from a supplier and saw an advert for a new drug. One of
the hospital’s approved suppliers was advertising for hospitals to participate in a drugs trial in
respect of this drug in return for a number of free drugs. Faith rang the supplier and volunteered the
hospital for the drugs trial. Georgina, Harbajan and Ingrid are very unhappy that Faith made this
commitment without consulting them and are wondering if they can avoid the commitment on the
grounds that Faith was not authorised to bind them in a contract involving drugs which have not yet
been subject to clinical trials.
In addition, Ingrid has recently placed a large order on behalf of the partnership with a non-
approved supplier because it was offering a good deal on a drug which the hospital uses regularly.
The supplier was aware that she was a partner in the hospital and therefore entered into the contract.
Faith is very annoyed and wishes to cancel the contract because she is concerned that the hospital
will not have sufficient need of the drug and that too many will go to waste.
• Faith’s commitment to the drugs trial. Participating in a drugs trial, while not the direct business of
the partnership, is sufficiently connected with the business of the partnership to be considered
the business of the partnership. In addition, Faith was acting in the normal course of her duties,
dealing with drug companies to obtain drugs for the partnership. This being the case, Faith has
authority to bind the partners in this way, in the absence of any express agreement that partners
will not commit the partnership to participation in drugs trials. Even if there were such a restriction
on her authority, the supplier would have had to have been aware of it in order for her contract
not to bind the firm.
• Ingrid’s purchase of the drug. Although approved suppliers of the hospital are aware that only
Faith is authorised to buy drugs, a non-approved supplier, who has not been told this, is entitled
to assume that a partner has the power to bind the other partners when buying drugs connected
with the partnership business. Therefore the partnership will be bound by this contract.
132 Law ICAEW 2023

The Act specifically provides that where a partner pledges the credit of the firm for a purpose which
has no apparent connection with the firm’s ordinary business, the firm will not be bound unless they
have actual express authority to do so.
If any restriction is placed on a partner’s authority to bind the firm, no act done in contravention of
that restriction is binding on the firm where the third party has notice of the restriction.
Note that (except where a partner has actual authority) their authority often depends on the
perception of the third party. Generally speaking, if the third party genuinely believes that the
partner has authority, it is highly likely that the acts of the partner will bind the firm.
Note that a new partner admitted to an existing firm is liable for debts incurred only after they
become a partner. They are not liable for debts incurred before they were a partner unless they
agree otherwise.
Where a partner retires, they remain liable for any outstanding debts incurred while they were a
partner, unless the creditor has agreed to release them from liability. They are also liable for debts of
the firm incurred after their retirement if the creditor knew them to be a partner (before retirement)
and has not had notice of their retirement. Therefore, it is vital on retirement that a partner gives
notice to all the creditors of the firm. They may also consider entering into an agreement with the
continuing partners that they will indemnify them against any liability for post-retirement debts.
The liability of the partnership for a partner’s acts before they retired is not affected by that partner’s
retirement.
Following the basic laws of agency is a good basis for any decision on whether a partner is liable for
the debts of their firm.
Interactive question 4: Authority of partners

Smith & Co has two partners, Alice and Beth, following Colway’s retirement last month. Alice and
Beth decide to allocate £10,000 for the purposes of upgrading their IT system and Beth agrees that
Alice should go ahead and purchase the necessary hardware and software that they need. Alice gets
carried away and orders supplies worth £18,500 from the firm’s usual office supplier Solution Ltd.
The new letterhead without Colway’s name has not arrived from the printers and so she uses a piece
from the old supply for making the order.
Requirement
Which of the following best describes the legal position?
A The contract is not binding because Alice acted beyond her authority.
B The contract is enforceable against Alice only because she acted beyond her authority and
cannot therefore bind her fellow partners.
C The contract is binding on Alice and Beth because her acts bind existing partners only and she
had implied authority as a partner of a firm.
D The contract is binding on Alice, Beth and Colway because the letterhead led Solutions Ltd to
believe that Colway was still a partner and it did not know about the £10,000 limit.
2.4 Dissolution and insolvency of a partnership

In the absence of any express provision to the contrary contained in the partnership agreement, the
Partnership Act 1890 provides that a partnership is dissolved in the following instances:
• The death or bankruptcy of a partner
• Expiry of a fixed term partnership
• Completion or termination of a single joint venture, if applicable
• Subsequent illegality

• Notice given by a partner if it is a partnership of indefinite duration
• Order of the court, for example where it is deemed just and equitable to do so
A partnership agreement may include other circumstances in which a partnership will be dissolved.
More commonly, it will provide that the partnership business shall continue on the death, retirement
or bankruptcy of any partner so that dissolution is merely a technicality. It may also provide that the
partnership shall only be dissolved by mutual consent of all the partners.
Where a partnership is in default on any secured loan, its creditors may take action against the
partners individually or sue them in the name of the partnership. If the partnership is insolvent,
bankruptcy proceedings may be brought in respect of individual partners and/or the partnership
may be wound up in the same way as an unregistered company (under Part V Insolvency Act 1986
(HMSO, 1986)).
3 Limited liability partnerships

Section overview
• A limited liability partnership (LLP) is a corporate body, which combines the features of an
ordinary partnership with limited liability.
• It is governed by the Limited Liability Partnerships Act 2000.
• Its members are agents of the LLP.
• An LLP is wound up like a company, rather than being dissolved on a change of membership.
• Particular documents must be sent to the Registrar of Companies on and subsequent to
incorporation.
Despite being a relatively new type of business organisation, most professional partnerships are
formed as a Limited Liability Partnership (LLP). As a Chartered Accountant, it is highly likely that you
will be employed by an LLP and will deal with other LLPs throughout your career.
The concept of the Limited Liability Partnership was introduced by the Limited Liability Partnerships
Act 2000. This Act allowed partnerships to incorporate themselves and gain a number of advantages
that previously only companies enjoyed.
One of these advantages is the limited liability of partners in an LLP for the debts of the organisation
and from being personally liable to pay damages for any professional negligence claims made
against the firm. This limited liability comes from the fact that the LLP has its own identity in law (a
separate legal personality) that we shall study further when we look at companies. However, there are
also a number of other benefits from operating a partnership as a limited liability partnership instead
of an ordinary partnership that we shall consider as well.
Therefore, essentially an LLP is an incorporated partnership that has a legal personality separate
from that of its partners. This means that the LLP has unlimited liability for its debts, but the liability of
members for the debts of the partnership is limited to the amount of capital they have contributed to
the firm.
LLPs are regulated and have similar rules on governance and accountability as limited companies.
They are generally set up by firms of professionals – such as accountants and lawyers – who are
required by the rules of their professions to operate as partnerships, but nevertheless wish to have
the protection of limited liability.
An LLP should not be confused with a limited partnership registered under the Limited Partnership
Act 1907 (HMSO, 1907). A limited partnership requires at least one general partner who has control
of the management of the business and whose liability must be unlimited. The other partners are not
entitled to participate in management and cannot bind the partnership and their liability is limited to
the amount of capital they invested in the business.
3.1 Formation of an LLP

An LLP is created by the registration with the Registrar of Companies of a lawful business carried on
by two or more persons with a view to profit. The incorporation document must be signed by at least
two subscribers and must state the following:
134 Law ICAEW 2023

• The name of the LLP (which must end with the words Limited Liability Partnership or the
abbreviation LLP)
• The location of its registered office (England and Wales or Wales)
• The address of its registered office
• The names and addresses of all the members of the LLP
• The names of the two designated members who have certain responsibilities (see below)
There is also a registration fee.
3.1.1 Role of designated members

The designated members of an LLP have certain responsibilities regarding the publicity
requirements of the firm. These include:
• filing notices with the Registrar (for example when members join or leave) and the Register of
People With Significant Interest
• signing and filing partnership accounts
• appointing auditors (if required)
As with companies, the Registrar will maintain a file containing the LLP’s publicised documents at
Companies House.
3.2 Regulation and administration

An LLP is not required to have (but normally will have) a formal partnership agreement dealing with
matters of internal regulation and duties owed by the partners to each other. Any such agreement
does not have to be filed with the Registrar. In the absence of any express agreement to the contrary,
the provisions of the Act and the Limited Liability Partnerships Regulations 2001 (TSO, 2001) will
apply. Broadly speaking, these regulations apply the provisions of companies legislation to LLPs (with
necessary modifications) and also default provisions in line with the Partnership Act 1890, dealing
with profit share, remuneration, inspection of books and expulsion.
There is no maximum limit on the number of members in an LLP. New members (apart from the
original subscribers) are admitted by agreement of the existing members. A person ceases to be a
member by giving reasonable notice to the other members or by following any other agreed
procedure. Changes in membership do not affect the existence of the LLP but must be notified to the
Registrar within 14 days.
Subject to any partnership agreement, every member may take part in the management of the LLP,
essentially taking on the duties and responsibilities of directors. The obligations to keep and retain
accounting records, to prepare and publish annual accounts (and to have them audited) apply to an
LLP as they do to a company. Similarly, special rules for small- and medium-sized LLPs and audit
exemption rules apply as they do to companies. There is no requirement to provide the equivalent of
a directors’ report.
Note that an LLP is required to comply with the following:
• To maintain a register of charges and to register charges with the Registrar
• To notify the Registrar of any change to membership, designated members or registered office
• To provide the name of the LLP on correspondence and outside its place of business
• To deliver a confirmation statement to the Registrar
As in the case of companies, the members of an LLP may apply to the court in cases of unfair
prejudice, although this right can be excluded with unanimous consent for an agreed period.
Interactive question 5: Regulation of LLPs

Are the following statements true or false in relation to LLPs?
Requirements
There is a maximum limit on the number of members in an LLP of 50.
A True
B False

There must be at least one general partner who has unlimited liability and control of the
management of the LLP.
C True
D False
An LLP is normally subject to a requirement to have its accounts audited annually just like a company.
E True
F False
The members of an LLP are required to prepare a report along the same lines as a directors’ report.
G True
H False
3.3 Authority and liability of LLP members

The LLP, as a separate legal entity, is primarily liable for the debts and obligations of the firm’s
business. Generally speaking, the members of the LLP will not face personal liability. There is an
exception which may apply to an LLP of professionals, where each member owes a duty of care. If a
member in this case is in breach of that duty (for example an accountant who negligently prepares
incorrect accounts), they may be personally liable in respect of an award of damages against the
firm. However, it is likely that the claimant will be unable to show that the negligent member
accepted personal liability. If it is considered that they were acting only for the LLP, then it will be for
the LLP to meet the liability for damages.
A member may be found guilty of fraudulent or wrongful trading or liable to disqualification in the
same way as a director of a company.
The Act provides that each member is an agent of the LLP and therefore has the power to bind the
LLP by their acts. However, the LLP will not be bound where:
• the member does not have authority; and
• the third party is aware that they do not have authority or does not know or believe them to be a
member of the LLP.
You should apply professional scepticism to situations where an LLP says that they told a third party
that an individual was no longer a member. You should obtain relevant information (such as a letter
to the third party) that confirms what they say.
3.4 Termination and insolvency of an LLP

An LLP, unlike an ordinary partnership, is not dissolved by one of its members leaving. It can be
dissolved, or terminated, by agreement of the members unanimously (or otherwise in accordance
with any agreement).
Where the LLP becomes insolvent, members of the LLP may propose a voluntary arrangement, apply
to put the business into administration or resolve to go into voluntary or compulsory liquidation.
Basically the law relating to companies’ insolvency applies to LLPs, with two notable modifications:
• Withdrawals made by members within two years before winding-up may be clawed back if it can
be shown that the member (at the time of the withdrawal) knew or had reasonable grounds to
believe that the LLP was or would become insolvent.
• On a winding up, past and present members may be required to contribute to the assets of the
LLP to the extent that they have agreed to do so in any LLP agreement. Note that in the absence
of any relevant provision in an LLP agreement (which is not obligatory) the legal liability of
members on liquidation is not clear.
136 Law ICAEW 2023

Recommending that an LLP is wound up is a serious decision because it affects all of the members.
Any such recommendation should be supported by evidence and reasoning.
Interactive question 6: Formation of LLP

Under the Limited Liability Partnerships Act 2000, certain requirements must be met in order for an
LLP to be legitimately formed.
Requirement
Indicate whether each of the following is a necessity of incorporation.
Yes/No
A An incorporation document signed by at least two subscribers

must be sent to the Registrar of Companies
B The name and address of at least one designated member must

be given
C Details of the assets of the LLP must be given on registration
D A statement detailing the level of contribution that will be

required from past and present members in the event of a
winding-up must be included

Summary
Owner liable for all business debts

Sole Owner entitled to all business profits
trader Very little regulation or reporting requirements
All partners agents Formal partnership agreement

of partnership and
Ordinary Fiduciary
Partnership Act 1890
co-partners
partnership Informal partnership agreement duties
Acts binding unless Relation which

• No authority and subsists between Indemnity Share in profit 5% interest on advances
• Third person persons carrying Share in losses Right to participate beyond original capital
knows no authority on a business in Right to see account All partners to agree to
or does not common with a No right to renumeration new partners
know/believe them view of profit Majority of partners to
to be a partner expel existing partners
138 Law ICAEW 2023

indicated.
1. Do you know the advantages of being a sole trader? (Topic 1)
2. Do you know the disadvantages of being a sole trader? (Topic 1)
3. Do you know how an ordinary partnership is formed? (Topic 2)
4. Do you know the one rule on the admission of new partners? (Topic 2)
5. Can you explain what happens to a limited liability partnership when a member leaves?
(Topic 3)


• Insolvency Act 1986. (1986). London, HMSO.

• Limited Liability Partnerships Act 2000. (2000). London, TSO.
• Limited Liability Partnerships Regulations 2001. (2001) SI 2013/1090. London, TSO.
• Limited Partnership Act 1907. (1907). London, HMSO.
• Partnership Act 1890. (1890). London, HMSO.
140 Law ICAEW 2023

Self-test questions

1 What is the statutory definition of ‘partnership’?
2 A partnership can exist when parties enter into a single transaction rather than a series of
transactions.
A True
B False
3 Name five rights of partners.
4 Complete the following definition.
Partnership is assets beneficially by the partners (the firm). It

does not have to be in shares.
5 Which of the following completes the sentence correctly?

A partner is an agent of the firm and therefore binds the partnership by their acts in the partnership
business…
A provided they have actual authority
B provided the third party knows they are a partner
C provided the third party doesn’t know that they have no actual authority
D provided the third party doesn’t know that they lack actual authority and knows or believes them
to be a partner
6 An LLP has a separate legal personality.
A True
B False
7 Which of the following must be included on the LLP incorporation form?
A Name of LLP
B Location of registered office
C Addresses of all branches
D Names of all members of the LLP
E Tax status of each member of the LLP
F Names of designated members
8 Members of LLPs are agents of the LLP and of each other.
A True
B False
9 Which of the following must an LLP deliver to the Registrar annually?
A Incorporation documents
B Audited accounts
C Confirmation statement
D Tax returns
10 Can the members of an insolvent LLP propose a voluntary arrangement?
A Yes
B No

this chapter.
142 Law ICAEW 2023


B False
Although sole traders do not have to file accounts, which would be publicly available, they do
have to file a tax return with the tax authorities. Such returns reveal information such as turnover,
costs and profit.
True/False
In England and Wales, an unlimited partnership has no existence distinct from the True
partners.
Partners share equally in the venture’s profits. True
Ordinary partnerships are not incorporated and therefore have no separate existence from the
partners. The partners share equally in the venture’s profits subject to any contrary agreement.

Correct answer(s):
B False
All existing partners must consent to new partners being admitted.
Correct answer(s):
C True
Even where the partnership agreement allows for the expulsion of a partner, it must be in good
faith and for a good reason, not just because they don’t agree with a policy of the other partners,
apparently on reasonable grounds.
Correct answer(s):
E True
The partners could agree to pay Ahmed a salary, but he has no right to one.

D The contract is binding on Alice, Beth and Colway because the letterhead led Solutions Ltd to
believe that Colway was still a partner and it did not know about the £10,000 limit.

Correct answer(s):
B False
There is no maximum limit.
Correct answer(s):
D False
This is the case with a limited partnership under the 1907 Act.
Correct answer(s):

E True
But note that exemptions may apply.
Correct answer(s):
H False
There is no such requirement, notwithstanding that in most respects the administrative
consequences of incorporation are the same for an LLP as for a company.
Yes/No
A An incorporation document signed by at least two subscribers Yes

must be sent to the Registrar of Companies
B The name and address of at least one designated member must No

be given
C Details of the assets of the LLP must be given on registration No
D A statement detailing the level of contribution that will be No

required from past and present members in the event of a
winding-up must be included
B Two designated members are required.
144 Law ICAEW 2023

1 Partnership is the relation which subsists between persons carrying on a business in common with a
view of profit.
A True
3 Any five:
• To be involved in decision making
• To share in profits
• To examine accounts
• To insist on openness and honesty
• To veto new partners
• To be indemnified by fellow partners
4 Partnership property is assets beneficially owned by the partners (the firm). It does not have to
be in equal shares.
D provided the third party doesn’t know that they lack actual authority and knows or believes them
to be a partner
A True
A Name of LLP
B Location of registered office
D Names of all members of the LLP
F Names of designated members
B False
Members of an LLP are agents of the LLP but not of each other.
B Audited accounts
C Confirmation statement
A Yes

146 Law ICAEW 2023
Chapter 7
Companies: the consequences
of incorporation
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 Characteristics of a company
2 Types of company
3 Formation of a company
4 A company’s name
5 Articles of association
6 Administrative consequences of incorporation
7 Accounts and audit requirements
8 Comparison between ordinary partnerships and companies
Summary
Self-test questions
Introduction
Learning outcomes
• Identify the differences between unincorporated businesses (sole traderships and partnerships),
limited liability partnerships and companies, show the advantages and disadvantages of
incorporation and recognise the circumstances when the veil of incorporation can be lifted
• Identify the procedures required to form a registered company or a limited liability partnership,
including any practical considerations, and the nature and contractual force of a company’s
memorandum and articles of association and identify the advantages and disadvantages of off-
the-shelf companies
• Identify the requirements of the Companies Act 2006 in respect of companies’ statutory accounts
and audit, including the exemptions for small and medium-sized companies and micro-entities
Specific syllabus references for this chapter are: 2a, b, c, e.
7
Syllabus links
As companies are fundamental in the business world, this chapter is relevant to most papers in your
syllabus. Elsewhere, you will study the audit of companies, corporation tax, financial companies,
managing companies and preparing company accounts, for example.
7
Assessment context
You might expect around 6 or 7 questions to address the areas covered by this chapter. Questions
on the topics in this chapter will be set as multiple choice, multi-part multiple choice or multiple-
response questions. Some questions may involve an analysis of a brief scenario and the identification
of an appropriate response, which may be in the form of providing advice.
7

of this chapter.

questions
1 Characteristics of a Approach You might be IQ2: Lifting the

company Focus on legal required to identify corporate veil
This chapter sees the personality and situations in a This question
start of your study of how it feeds into scenario where the helps you to
company law, and the the limited liability veil of incorporation identify whether
rules that govern how of members. You will be lifted. the veil of
businesses are run. also need to incorporation will
The key characteristic understand the be lifted in a
of a company, that of circumstances given situation.
separate legal where the veil of
personality, underlies incorporation can
the principle of be lifted.
limited liability to Stop and think
members of a
company. What is the
principle of legal
personality? When
148 Law ICAEW 2023

questions
will the veil of

incorporation be
lifted?
2 Types of company Approach The differences IQ4: Types of

The choice of Focus on the between private and company
corporate form is a different types of public companies This question
key practical company and in could easily be tested tests your ability
consideration for all particular, the in a knowledge to recommend a
businesses. differences question. Scenario particular type of
between public questions may ask company in a
and private you to recommend a scenario.
companies. particular type of
company in a given
Stop and think situation.
What are the
differences
between public
and private
companies in terms
of number of
directors and
deadlines for filing
accounts?
3 Formation of a Approach Knowledge questions IQ6: Pre-

company Learn the different may test your incorporation
To form a company documents that are knowledge of the contracts
requires a needed to form a registration This question
registration company. You also documents. Scenario helps you to
procedure to be need to questions may test understand the
followed or an off- understand the role the liability of liability of
the-shelf company to of promoters and promoters. promoters for
be purchased. pre-incorporation pre-incorporation
contracts. Make contracts.
sure that you can
explain the benefits
of buying an off-
the-shelf company.
Stop and think
When is a promoter
liable on a pre-
incorporation
contract?
4 A company’s name Approach Knowledge questions IQ7: Company

Companies cannot Learn the could test your name
choose any name restrictions on understanding of This question
they wish. There are a company names which company tests your
number of rules that and how a names are and are understanding of
control what a company name can not permitted. the rules on
company can be be changed. company names.
called. Stop and think?
How can a
company change
its name?
ICAEW 2023 7: Companies: the consequences of incorporation 149

questions
5 Articles of Approach Knowledge questions IQ9: Articles of

association Focus on how the may test the type of association
Every company articles form a resolution required to This question
needs to have rules contract between amend a company’s tests your
that govern how it is the company and articles. A scenario knowledge on
run. These are known its members, but question could altering articles
as articles of not third parties. It require you to of association.
association. is also important to identify whether
know what model certain parties are
articles are and bound by them.
how a set of articles
can be amended.
Stop and think
Name the parties
that are bound by
articles of
association. How
does a company
alter its articles?
6 Administrative Approach A scenario question IQ10: Company

consequences of You need to learn may examine records
incorporation the names of all the whether contracts This question
Part of the price paid records a company entered into by a tests your
for limited liability is is required to keep company secretary knowledge of
the requirement for and what records had the required one of the key
companies to keep are maintained by authority. There is a company records
and return to the the Registrar. You link here to the rules that must be
Registrar of also need to of agency. kept.
Companies certain appreciate the
records. This role is importance of a
often performed by a confirmation
company secretary, statement and the
but not all companies rules on
are required to have appointment and
one. authority of a
company secretary.
Stop and think
Can you name five
records a company
is required to
keep? What details
does a
confirmation
statement contain?
Who may act as a
company
secretary?
7 Accounts and audit Approach All of the detailed IQ11: Audit

requirements Learn the details of rules in this section requirements
This section on the the documents that could easily be tested This question
legal rules relating to make up an in a knowledge tests your
accounts and audit is organisation’s question. For knowledge of
of great significance accounting records. example, you may be when companies
150 Law ICAEW 2023

questions
to an accountant. You should ensure required to identify a are/are not

that you know the company as being exempt from
relevant micro, small or audit.
publication dates medium.
for private and
public companies
as well as the
criteria for
companies to be
classified as micro,
small and medium.
You also need to
understand which
companies are
exempt from an
audit.
Stop and think
What information is
contained in a
Director’s report?
What criteria must
be met for a
company to be
classified as small?
What percentage
of members of an
exempt company
can require an
audit be
conducted?
8 Comparison Approach Scenario questions IQ12: Company

between ordinary Learn the could require you to vs partnership
partnerships and differences apply your This question
companies between knowledge of the tests the
There are many partnerships and differences between differences
practical differences companies. partnerships and between
between companies to companies and
Stop and think recommend a
partnerships and partnerships.
companies. Explain the particular business
Accountants often difference between form to a client.
have to advise clients a company and a
of the most partnership when
appropriate business there is a change of
form for them. membership.

1 Characteristics of a company
Section overview
• A company has a separate legal identity from its members and is, in law, a person in its own right.
This is one of the fundamental cornerstones of company law.
• The liability of the members of a company for the debts of the company may be limited. The
liability of the company itself is always unlimited.
• The ‘veil of incorporation’ said to be drawn between the company and its members may be lifted
in certain circumstances.
For the purposes of this Workbook, a company is an entity registered under the Companies Act
2006 (TSO, 2006) (‘CA’06’) or any earlier Companies Act. References to ‘the Act’ are to the
Companies Act 2006 unless otherwise stated.
The single largest piece of legislation ever made, the CA’06 is intended to be a comprehensive code
of company law, restating and replacing most of the relevant companies legislation that went before
it (principally the Companies Acts 1985 and 1989) and also introducing new law. Many of the
changes in law were designed to lighten the regulatory and bureaucratic burden on companies
(simplifying decision-making processes and capital maintenance provisions, for example), although it
remains to be seen whether the burden may actually be increased in some areas, such as
communication with nominated holders and the new duty on directors to promote the success of the
company (which could lead to differences in the way they conduct their business).
References to ‘the Act’ are to this statute and section numbers are given for ease of reference only
(the assessment will not require you to know section numbers).
1.1 Legal personality

A person possesses legal rights and is subject to legal obligations. In law, the term ‘person’ is used to
denote either a natural person (ie, an individual human being) or an artificial person (including
companies).
It is a fundamental legal principle that a company is a legal entity, separate and distinct from its
members. One of the consequences of applying this principle is that the liability of the company’s
members (not the company itself) for the debts and other liabilities of the company can be limited. It
also follows that the property of a company belongs to that company, debts of the company must be
satisfied from the assets of that company and the company continues in existence (despite any
change in its membership) until such time as it is wound up or otherwise removed from the register.
The first case that clearly demonstrated the separate legal personality of companies is of great
significance to any study of company law and is therefore set out in some detail below.
Salomon v Salomon & Co Ltd 1897
The facts: The claimant, Salomon, had carried on business as a leather merchant and boot
manufacturer for 30 years. He decided to form a limited company to purchase the business with, he
and six members of his family each subscribing for one share. The company then purchased the
business from Salomon for £38,782, the purchase price being by way of the issue of 20,000 £1
shares, the issue of debentures for £10,000 (effectively making Salomon a secured creditor) and the
balance in cash. The company did not prosper and was wound up a year later, at which point its
liabilities exceeded its assets. The liquidator, representing unsecured trade creditors of the company,
claimed that the company’s business was in effect still the claimant’s (since he owned all but six of the
issued shares), that he should bear liability for its debts and that payment of the debenture debt to
him should be postponed until the company’s trade creditors had been paid.
Decision: The Court of Appeal held that since the other shareholders were ‘mere puppets’ and that
the company had been irregularly incorporated, Salomon should indemnify the company against its
liabilities. The House of Lords however held that the business was owned by, and its debts were
liabilities of, the company. The claimant was under no liability to the company or its creditors, his
debentures were validly issued and the security created by them over the company’s assets was
effective. This was because once the company had been found to have been formed in compliance
152 Law ICAEW 2023

with the formal procedures set out in the Companies Act, the company was regarded as a legal entity
in its own right, notwithstanding the dominant position of Salomon within the company.
1.2 Liability
As mentioned above, one of the key consequences of the fact that the company is distinct from its
members is that its members may enjoy limited liability. This means that, in the event of business
failure, the members will only be asked to contribute identifiable amounts to the assets of the
business, even though they are, essentially, the ones who own the business. Not surprisingly, most
companies are registered with limited liability. The amount members will be asked to contribute will
be any amount that is unpaid on their shares (including any premium). This means that their total
liability is the value of the share capital that they own.
However, some lenders may require directors and/or members to agree to repay a loan out of their
personal wealth should the company default on the debt. This is known as requesting a personal
guarantee, which is a promise by a person (the directors or shareholders) to assume a debt
obligation in the event of non-payment by the borrower (the company). Personal guarantees are a
means of protecting the lender by preventing the shareholders/members from hiding behind the
protection of limited liability. It is commonly used where the lender is very powerful (such as a bank)
and the borrower has no other source of funds available to it (such as a new or small company).
It is important that you understand that the company itself, on the other hand, is liable without limit
for its own debts. In an unlimited company, there is no limit on the company’s or the members’
liability. Thus, the question of limited liability is important when a limited company is unable to satisfy
all its debts. The amounts that members may be required to pay, in the event of a winding up,
depend upon the type of limited company, as follows:
Type of company Amount owed by member at winding up
Company limited by Any outstanding amount of the nominal value of any share that has not
shares been paid either by the original or a subsequent holder of the shares. If
the member’s shares are fully paid, there is no further liability to
contribute. Any premium (over the nominal value) that was agreed to
be paid for the share will also be owed to the extent that it has not
been paid, unless the shareholder at the time is not the original
shareholder (since the amount of premium is a debt that does not pass
with the shares).
Company limited by The amount they guaranteed to pay in the event of a winding up.
guarantee
A company, as a separate legal entity, may also have liabilities in tort and crime. However, it is
currently extremely difficult to prosecute a company successfully for a criminal offence.
Interactive question 1: Legal personality

Gerome set up as a sole trader six years ago and the business grew quickly. A year ago the business
was incorporated, and Gerome transferred all of his sole trader assets to the company. Gerome also
sought investment for the business from a bank that issued an unsecured loan, and from five other
shareholders. However, Gerome has fallen on hard times and now wishes to sell some of the
company’s assets to raise funds to help him.
Requirement
Who owns the assets of the business?
A Gerome
B The company
C The bank
D The shareholders

1.3 Veil of incorporation
As a result of the law stated in Salomon’s case, a ‘veil of incorporation’ is said to be drawn between
the members and the company, separating them for the purposes of liability and identification. This
often results in protecting the members from the consequences of the company’s actions, as you will
see below. Occasionally the separate legal personality symbolised by the veil can be problematic as
where, for example, an individual incorporated their business but insured the company’s property in
their own name rather than that of the company. When the property was destroyed by fire, it was
held that they had no insurable interest (either as creditor or member) and that the company, as a
separate legal entity, should have insured its own assets (Macaura v Northern Assurance Co Ltd
1925).
A rigid application of the principle of separate legal personality can sometimes produce harsh or
inequitable results and so the law sometimes ‘lifts the veil‘ in order to expose the commercial reality
of the situation.
Generally speaking, this may be done by the courts in order to defeat fraud, sharp practices or
illegality, although it is difficult to define a set of consistent principles underlying the cases. Examples
of where the veil has been lifted by the courts are given below in order to give you a general
understanding of the courts’ approach. You will not be assessed on your recollection of each case.
COURTS
Situation where the veil might be Examples

lifted
Groups of companies – where the

subsidiary can be regarded as the
agent of the holding company
• To reduce tax liability Firestone Tyre & Rubber Co Ltd v Lewellin 1957: English
subsidiary (S) deemed to be agent of American holding
company (H) (thus rendering H liable to UK tax) where H
entered into agreement with distributors under which the
distributors should place orders with H, to be carried out by
S. In fact, S received orders direct, handled business
completely (free from control of H) and forwarded money
(less a percentage) to it.
• To give entitlement to Smith, Stone & Knight Ltd v Birmingham Corporation 1939:
compensation Compensation for compulsorily acquired premises was
payable to an owner-occupier (H in this case) but not a
tenant-occupier (S). Held that S occupied the premises as an
agent of H since it was wholly owned and the directors of H
and S were the same.
• To prevent evasion of excise ReH and others 1996: Where evasions were alleged to have
duty been committed by H, the court also allowed restraint of S’s
assets, refusing to recognise the companies as separate.
It is important to note, however, that cases such as these do not mean that groups of companies
will generally be regarded as a single entity. There are numerous examples of where the courts
have refused to lift the veil between companies within a group, including cases where creditors of
an insolvent subsidiary are not paid in full even though the holding company remains solvent or
where a claimant proceeds against a subsidiary company that is not as asset-rich as its holding
company.
To reveal true national identity and Daimler Co Ltd v Continental Tyre & Rubber Co (GB) Ltd
expose illegality 1916: A company was registered and had its registered
office in England. However, since all of its members with
control of the company (except one) were German, the veil
could be lifted to expose the company as an enemy alien.
Therefore trading with this company was against the law (in
wartime).
154 Law ICAEW 2023

COURTS
Situation where the veil might be Examples

lifted
(See too Re F G Films below.)
Quasi-partnership Ebrahimi v Westbourne Galleries 1972: In this case, the

courts lifted the veil to reveal a company so completely in
the nature of a partnership, that a winding-up of the
company could be ordered on the grounds of it being just
and equitable, because one of the directors being excluded
from the management of the company represented a
complete breakdown in the management of the company
just, as it would be unlawful in a partnership.
Where a company is a sham
• To prevent an evasion of Gilford Motor Co Ltd v Horne 1933: An employee was

obligations contractually bound not to solicit customers from his ex-
employer after leaving its service. In order to get around this,
he formed a company and carried on his work, soliciting his
ex-employer’s customers in the process. The veil was lifted to
reveal his company as a ‘mere cloak or sham’ and an
injunction was granted against it and the employee.
• To reveal national identity Re F G Films Ltd 1953: An English company was formed to
make an English film. In fact, the staff and finance were
American, the film was produced in India and there were
neither premises nor employees in England. The veil was
lifted to expose a ‘sham’ company with the result that the
marketing and other advantages available to British films
were not available in this case.
In addition to the courts sometimes exercising their discretion to lift the veil, legislation can also
provide for the veil to be lifted, usually in order to confer a personal liability on those who run a
company for breach of obligations imposed on the company. You should note that the following
examples are only legitimate illustrations of the veil being lifted if the directors or others (upon whom
liability is imposed) are also members of the company:
STATUTE
Situation where veil might be lifted Explanation
Where director is disqualified Directors who participate in the management of a

(Company Directors Disqualification company in contravention of an order under the
Act 1986 (HMSO, 1986)) Company Directors Disqualification Act 1986 will be
jointly or severally liable along with the company for the
company’s debts.
Fraudulent and wrongful trading Where a company is being wound up:

(Insolvency Act 1986 (HMSO, 1986)) • all persons who are knowingly parties to carrying on
business with the intent of defrauding creditors or for
some other fraudulent purpose (fraudulent trading);
and
• directors who carry on business when they knew or
should have known that the company would not avoid
insolvent liquidation (wrongful trading)
can be held personally liable to make such contribution
to the company’s assets as the court thinks fit.

STATUTE
Situation where veil might be lifted Explanation
Trading without a trading certificate A public company must obtain a certificate from the
(s.767) Registrar before it commences to trade. Failure to do so
leads to personal liability for the directors for any loss or
damage suffered by a third party to a transaction entered
into by the company in contravention of this section.
Interactive question 2: Lifting the corporate veil

Following the collapse of Forest Ferns Ltd, Sandy is disqualified from being a director for five years.
However, after three years, he sets up a company, Beach Holidays Ltd, of which he is a director and
95% shareholder. As a result of a terrorist attack on a passenger jet from Heathrow, the overseas
holiday market collapses and Beach Holidays Ltd goes into insolvent liquidation.
Requirement
A Beach Holidays Ltd is a separate legal personality and is therefore solely responsible for its
debts.
B Sandy is liable for Beach Holidays Ltd’s debts as a 95% shareholder and the veil will be lifted to
reveal the company as a sham, designed to conceal a sole proprietor’s business.
C The veil will be lifted on a statutory basis because Sandy is disqualified and he will be solely
liable for the debts of Beach Holidays Ltd.
D The veil will be lifted because Sandy was acting while disqualified and both he and Beach
Holidays Ltd will be liable for the debts on a joint and several basis.
Applying the rules of lifting the veil of incorporation in an assessment question requires you to use
your judgement to decide whether any of the situations in which the veil may be lifted can be
applied.
2 Types of company
Section overview
• Public companies are companies limited by shares and registered as public companies.
• Private companies may be unlimited, or limited by shares or guarantee.
• Public companies may re-register as private and vice versa.
• Limited companies may re-register as unlimited and vice versa.
2.1 Limited and unlimited companies

The liability of the members of a company may be limited or unlimited (s.3) as follows:
156 Law ICAEW 2023

Liability Description
Limited by shares Liability is limited to the amount of the nominal value, if any, unpaid on
(public or private) members’ shares held by them (including any premium payable by the
current owner in respect of them).
Limited by Liability is limited to such amount as the members undertake to contribute

guarantee (private to the company’s assets in the event of it being wound up.
only) A company limited by guarantee cannot be registered with a share capital.
A company limited by guarantee is often a charity or trade association, ie, a
non-commercial organisation that aims to keep income and expenditure in
balance but has the members’ guarantee as a form of reserve capital in case
of insolvency.
Unlimited (private There is no limit on the members’ liability. They can be compelled to
only) contribute as much as may be necessary to pay the company’s debts in full.
An unlimited company does not need to file annual accounts, subject to
certain conditions (for example, that it is not a subsidiary or a parent of a
limited company (s.448)).
A company may alter its status once, as follows (ss.102–111):

• Limited to unlimited: with the consent of all members of the company
• Unlimited to limited: by passing a special resolution to that effect and specifying whether the
company is to be limited by shares or guarantee
In each case, the company must make any necessary changes to its name and articles and apply, with
appropriate documentation, to the Registrar of Companies.
A company limited by shares may not re-register as a company limited by guarantee, and vice versa.
2.2 Public and private companies

A public company is a limited company expressly registered as a public company under the Act.
Only a small proportion of companies are public companies.
A private company is any registered company (limited or unlimited) that is not stated to be a public
limited company. Most private companies are small to medium enterprises in which some, if not all,
shareholders are the directors.
The principal differences are that a public company is subject to more stringent rules and regulation
than private companies and that only a public company can offer its securities to the public. The
principal features of public and private companies can be summarised in the following table (at the
same time illustrating the differences between them).
Feature Public Private
Liability Must be limited. May be limited or unlimited.
Share capital Subject to authorised minimum No minimum.

(currently £50,000).
Ability to commence Must have trading certificate May commence trading once
trading before it can commence trading incorporated.
(s.761).
Public offers Can offer its securities to the Prohibited from offering its
public (and may obtain a listing securities to the public (s.755).
from the stock exchange or other
investment exchange).
Name Must end with ‘public limited Must end with ‘limited’ or ‘Ltd’ (or
company’ or ‘plc’ (or Welsh Welsh equivalent) although
equivalent) (s.58). certain companies (including

charities) may be exempt from this

requirement (ss.59–62).
Loans etc Loans to persons connected with These rules do not apply (unless
directors and quasi-loans and the company is associated with a
credit transactions to directors or public company). Only loans
connected persons need made directly to directors need
members’ approval (ss.198–202). members’ approval.
Directors Must have at least two directors Must have at least one.
(s.154).
Company Secretary Must have one (s.271). Need not have one (s.270).
Written resolutions Not applicable. May pass written resolutions

instead of calling meetings
(s.288).
AGMs Must hold AGM (s.336). Need not hold AGM.
Accounts and reports Must lay these before general Need not do so.
meeting.
Must file within six months Must file within nine months
(s.442). (s.442).
Small- and medium-sized Not applicable. May qualify as small- or medium-

companies sized, and take advantage of audit
exemptions (small companies)
and less stringent regime for
filing.
Appointment of auditors Must appoint auditors each year Existing auditors may be deemed
if necessary (s.489). to be re-appointed, subject to
conditions (s.487).
Pre-emption rights May not be excluded. May be excluded.
Payment for shares Additional rules apply to public Not applicable.

companies, including that shares
must be at least ¼ paid up
(s.586) and concerning
valuations for non-cash
consideration (s.593).
Reduction of capital Needs special resolution Needs only special resolution and
confirmed by the court (s.641). directors’ solvency statement
(s.642).
Power to redeem or Not applicable. May do so, subject to conditions

purchase shares out of (s.709).
capital
In addition, special rules apply to quoted companies with regard to publication of details on the
company website and directors’ remuneration reports. Quoted companies are also known as listed
companies. This is because their shares are listed (or quoted) on public stock exchanges.
A private company may apply to the Registrar of Companies to be re-registered as a public company
(or a public company as a private company) provided certain conditions and procedures are satisfied
(ss.90–101).
158 Law ICAEW 2023

Interactive question 3: Private and public companies
A private company may not pass written resolutions; this type of resolution may only be passed by
public companies.
A True
B False
Interactive question 4: Types of company

Alexa, Beth and Carol have operated as a partnership for five years trading in domestic carpets. The
business has been successful and they are now considering expanding the business operations by
opening three new shops and an additional wholesale unit. The partners are aware that the
expansion will require new business capital. They are considering the formation of a company rather
than continuing as a partnership.
Requirement
What types of company may be formed under the Companies Act 2006? Which type of company is
suitable for this business?
Choosing an appropriate corporate form for a given situation requires you to appreciate the context
in which the business operates, not just the desires of the client. For example, a client may desire the
status that owning a plc brings, but that choice might not be appropriate given their circumstances.
3 Formation of a company
Section overview
• There are a variety of documents required to form a company.

• Companies can be bought ‘off the shelf’.
• Promoters make business preparations for a new company.
A company may not be formed for an unlawful purpose.
3.1 Registration documents

In order to form a company, the following documents must be sent to the Registrar of Companies:
Document Description
Memorandum of A memorandum in the prescribed form stating that the subscribers (a) wish
association to form a company and (b) agree to become members of the company
and, in the case of a company with a share capital, agree to take at least
one share each. It must be authenticated by each subscriber.
Application This must state:

Document Description
• the company’s proposed name (which is subject to certain rules

designed to prevent the company misleading the public regarding its
identity and/or activities);
• whether the liability of the members is to be limited and, if so, whether
by shares or guarantee;
• whether the company is to be private or public;
• whether the registered office is to be in England and Wales or Wales or
Scotland or Northern Ireland; and
• the intended address of the registered office (the registered office is
the address for delivery of legal documents which may need to be
served on a company and also where company registers must or may
be kept (see section 6)).
Statement of capital It must state:

and initial • the total number of shares;
shareholdings
(applicable to a • their aggregate nominal value;
company with a • details of individual classes of shares; and
share capital) • the amount to be paid and unpaid on each share.
This is essentially a snapshot of the company’s share capital at the time of
registration.
Statement of It must state the maximum amount which each member undertakes to
guarantee contribute to the net assets of the company if the company is wound up
(applicable to a while they are a member or within one year thereafter.
company limited by
guarantee)
Statement of This must give particulars of and the consent of:

proposed officers • the first director(s) of the company; and
• the first company secretary (optional in the case of a private company).
Statement of This is a statement that the requirements of the Act have been complied
compliance with.
Articles of association may also be submitted, but if none is supplied, the default articles will apply
(see section 5).
If the Registrar is satisfied that the registration requirements of the Act have been complied with, they
will register the documents and issue a certificate of incorporation, naming and describing the
company and giving its date of incorporation and registered number.
This certificate is conclusive evidence that the company is registered in accordance with the Act and
is a body corporate. If irregularities in formation procedure or an error on the certificate are later
discovered, it is nonetheless valid and conclusive (Jubilee Cotton Mills Ltd v Lewis 1924).
Note that a public company also needs to obtain a trading certificate before it can commence
trading. It must submit:
• an application stating (amongst other things) that the nominal value of the company’s allotted
share capital is not less than the ‘authorised minimum’; and
• a statement of compliance (s.762).
Any transaction in contravention of this provision will render any company officer in default liable to
a fine but the transaction will remain valid. Failure to obtain a trading certificate within a year of
incorporation may result in a compulsory winding up (s.122 Insolvency Act 1986).
160 Law ICAEW 2023

3.2 Companies ‘off-the-shelf’
Because the registration of a new company can be a lengthy business, it is often easiest for people
wishing to operate as a company to purchase an off-the-shelf company.
This is possible by contacting enterprises specialising in registering a stock of companies, ready for
sale when a person comes along who needs the advantages of incorporation.
Normally the persons associated with the company formation enterprise are registered as the
company’s subscribers, and its first secretary and director. When the company is purchased, the
shares are transferred to the buyer, and the Registrar is notified of the director’s and the secretary’s
resignation.
There are two principal advantages to such ‘off-the-shelf’ companies:
• It is obviously a quicker way of achieving the result of having a company ‘ready to go’.
• It avoids any potential liability arising from pre-incorporation contracts (see section 3.3) as the
company already exists.
There are disadvantages, however, since the following changes may need to be made:
• change of name
• transfer of subscribers’ shares
• change of directors and possibly company secretary
• alteration of articles
Interactive question 5: Off-the-shelf companies

Off-the-shelf companies are founded by the Registrar of Companies and available to purchase from
the Companies House website.
A True
B False
3.3 Promoters and pre-incorporation contracts

A promoter is a person who takes the procedural steps to get a company incorporated; the term
‘promoter’ includes anyone who makes business preparations for the company. However, a person
who acts merely in a professional capacity in company formation, such as a solicitor or an accountant,
is not on that account a promoter.
A promoter owes certain duties to the company:
• A general duty to exercise reasonable care and skill
• A fiduciary duty to disclose any personal interest in a transaction and, sometimes, to account for
monies received. Generally speaking, any profits that they make from promoting the company
and fails to disclose must be surrendered to the company. However, if they disclose them and the
company gives consent, they may retain any legitimate profits.
It was held in Erlanger v New Sombrero Phosphate Co 1878 that if the promoter does not make a
proper disclosure of legitimate profits, or if they make wrongful profits, the primary remedy of the
company is to rescind the contract and recover its money.
A legitimate profit is made by a promoter who acquires interest in property before promoting a
company and then makes a profit when they sell the property to the promoted company,
provided they disclose it.
A wrongful profit is made by a promoter who enters into and makes a profit personally in a
contract as a promoter in breach of their fiduciary duty.
In the case of a public company, disclosure is made through the listing particulars or prospectus.
Disclosure in a private company should be to existing and prospective members or to the board
of directors, provided it is independent of the promoter.

Since a company has no capacity to enter into contracts before its coming into existence, if a
promoter makes a contract on the company’s behalf before incorporating (a ‘pre-incorporation
contract’), the following will apply:
• The company cannot ratify the contract since it did not exist when the contract was made (Kelner
v Baxter 1866). In this case, promoters agreed on behalf of a company, that had not been formed,
to purchase stock for resale. Subsequently, the company was formed, it took delivery and sold the
stock, but failed to pay for it. The court held that the company was not liable because it cannot
ratify a pre-incorporation contract that was created before the company existed. The promoters
were liable.
• The company is not bound by it even after incorporation and even if it has derived some benefit
from it (ReNational Motor Mail Coach Ltd, Clinton’s Claim 1908).
• The company cannot enforce the contract against the third party unless the promoter and third
party have given rights of action to the company under the Contracts (Rights of Third Parties) Act
1999 (TSO, 1999).
• The contract takes effect (subject to any agreement to the contrary) in the same way as one made
with the promoter and they are personally liable on it (s.51).
A promoter can avoid potential liability, most usually by:
• not making contracts until the company has been incorporated;
• using an off-the-shelf company; or
• agreeing a draft only with the third party on the basis that the company, once formed, will enter
into the agreed form with the third party.
Where a promoter is already liable on a pre-incorporation contract, they may be able to arrange for
the company to novate the contract (ie, enter into a new contract on identical terms), in which case
they should also secure the third party’s consent to the promoter thereupon being released from
personal liability.
Note that giving rights to the company under the Contracts (Rights of Third Parties) Act 1999 does
not also remove a promoter’s liability since the Act provides that the original parties remain liable on
the contract.
A promoter usually incurs expenses in preparations, such as drafting legal documents, made before
the company is formed. They cannot legally claim any remuneration or indemnity for their services or
expenses but, in practice, will generally arrange that the first directors, of whom they may be one,
agree that the company shall make such payment to them.
Interactive question 6: Pre-incorporation contracts

Imran is in the process of setting up a new company, Silver Stumps Ltd. Before submitting the
application for registration, he enters into a contract on behalf of the company with Greenfields plc
for the purchase of a cricket ground on the banks of the River Avon. Shortly after the company is
registered and a certificate of incorporation issued, Silver Stumps Ltd finds that it is unable to raise
sufficient funds and so fails to complete on the purchase on the due date.
Requirement
A Greenfields plc may enforce the contact against Silver Stumps Ltd because Silver Stumps Ltd
automatically assumes responsibility for contracts entered into on its behalf upon incorporation.
B Provided Silver Stumps Ltd ratifies the contract with Greenfields plc, Greenfields plc may enforce
the contract against Silver Stumps Ltd.
C Greenfields plc may enforce the contract against Imran personally because Silver Stumps Ltd
cannot ratify the contract.
D Imran’s liability on the contract ceased because he has transferred all rights to Silver Stumps Ltd
in accordance with the Contracts (Rights of Third Parties) Act 1999.
162 Law ICAEW 2023

4 A company’s name
Section overview
• There are rules that restrict a company’s freedom to choose any name.
• A company’s name may be changed either through the company’s choice or as directed by the
Registrar.
• A company’s name must be disclosed in accordance with the Act.
The Act sets out rules that provide for certain company names to be prohibited, for a name to be
changed and requiring disclosure of a company’s name and business name (exceptions are set out in
ss.60–62).
4.1 Prohibited names

You have already learned that the name of a public company should end with ‘public limited
company’ (or ‘plc’) and that a private limited company should end with ‘limited’ or ‘ltd’.
In addition, the name of a company should be chosen with care, having regard to the following rules
(contained in Part 5 of the Act):
• The company will not be registered if the Registrar considers the name to be offensive, or if its
use could constitute a criminal offence.
• The approval of the Secretary of State is required if the name is sensitive in some way or likely to
suggest some connection with central or local government, or any public authority. Words such as
‘British’ or ‘International’, for example, are only likely to be sanctioned if the size of the company
matches its pretensions.
• Words which indicate that the company is of another type or legal form are not permitted.
• A company cannot be registered if its name is the same as or virtually the same as the name of an
existing company.
Using the rules covering which company names are prohibited will help narrow down the possible
names that can be chosen for a new company.
Interactive question 7: Company name

Luce wishes to incorporate her sole trader business. The business currently operates in the UK, but its
business plans forecast an expansion overseas in five years’ time. Luce wishes to name the company
British Traders International Ltd, as she knows that no company with the same or a similar name
exists.
Requirement
Will the Registrar of Companies permit her choice of name?
A Yes
B No
4.2 Change of company name

A company may choose to alter its name at any time by passing a special resolution to that effect or
otherwise as provided for in its articles (s.77). The company must notify the Registrar accordingly and
obtain a new certificate of incorporation. The new certificate merely reflects the change of name – a

new company is not formed. The change does not affect any rights, obligations or proceedings of
the company.
The Secretary of State may order a company to change its name for a number of reasons, including
where it is considered to be the same as or virtually the same as an existing company name or that it
might otherwise mislead the public.
Interactive question 8: Formation of company

What are the documents that must be delivered to the Registrar on formation of a private company
limited by shares?
4.3 Disclosure of company name

The name of the company must be displayed in certain locations and on certain documents in
accordance with regulations made by the Secretary of State (s.82). The name must also be engraved
legibly on the company seal if the company has chosen to have one (s.45). Breach of either provision
may result in a fine.
4.4 Business names

Most companies carry on business under their registered names. However, a company, just like an
individual or partnership, may adopt a ‘business name’.
Business names are subject to similar rules as to words or names that are misleading or otherwise
prohibited or that require the approval of the Secretary of State in the case of company names.
5 Articles of association
Section overview
• Every company is required to have articles of association (‘articles’) and model articles apply
where a company does not register its own.
• Articles prescribe regulations governing the management of the company’s affairs, the rights of
the shareholders and the powers and duties of the directors.
• Articles form part of the constitution of a company and bind the company and its members.
• Articles may be altered by the company in general meeting.
A company’s articles form part of its constitution, along with all special resolutions and other relevant
resolutions and agreements (s.17). Sometimes a power conferred on a company by the Act is
expressed to be subject to any restriction or prohibition contained in the company’s articles (for
example, the power of a private limited company to reduce its capital). Where the Act prohibits
something permitted by the articles, the Act will prevail.
5.1 Model articles

‘Model articles‘ prescribed by the Secretary of State in respect of different types of companies, will
apply wherever a company is formed without registering articles or insofar as it registers articles that
do not exclude or modify the model articles. The prescribed articles thus operate as default articles
and are commonly adopted by companies limited by shares, either in their entirety or with small
amendments. Listed companies must have their own full-length articles containing a number of
special provisions as required by stock exchange rules.
5.2 The contractual effect of a company’s constitution

Under s.33 CA’06, the provisions of a company’s constitution (ie, articles and relevant resolutions and
agreement) bind the company and its members as if each had covenanted to the other to observe
those provisions. They do not bind the company to third parties.
164 Law ICAEW 2023

This principle applies only to rights and obligations that affect members in their capacity as
members. Thus it applies to defeat an action when an outsider, who is also a member, seeks to rely
on the articles in support of a claim made as an outsider.
This point can be illustrated by the following case:
Eley v Positive Government Security Life Assurance Co 1876
The facts: Eley, a solicitor, drafted the original articles and included a provision that the company
must always employ him as its solicitor. Eley became a member of the company some months after
its incorporation. He later sued the company for breach of contract in not employing him as a
solicitor.
Decision: Eley could not rely on the article since it was a contract between the company and its
members and he was not asserting any claim as a member.
S.33 gives to the constitution the effect of a contract made between (a) the company and (b) its
members individually. It also acts as a contract on the members in their dealings with each other.
In certain cases, if a contract contains no specific term on a particular point but the articles do, then
the contract may be deemed to incorporate the articles to that extent. In one case, for example, a
director’s contract with the company was silent as to remuneration but the articles provided that
directors would be paid £1,000 per annum. The court held that although the articles did not
constitute a contract between the company and the director (in his capacity as director) they could
be used to imply the term as to remuneration into his contract (Re New British Iron Co, ex parte
Beckwith 1898).
Generally speaking, if a contract incorporates terms of the articles, it is subject to the company’s right
to alter its articles. However, where rights have already accrued under a contract, say for services
rendered before the alteration, those rights will be unaffected by any alteration of the articles.
5.3 Alteration of articles

A company may normally alter its articles by passing a special resolution to that effect (s.21).
However, where the articles contain ‘provision for entrenchment‘ such provisions can only be altered
with the agreement of all company members or by court order (s.22). Such a provision for
entrenchment might, for example, require that certain articles can only be changed if particular
conditions are met or procedures followed that are more restrictive than the usual requirement for a
special resolution. A company cannot provide that a provision for entrenchment can never be
replaced or amended and must give notice to the Registrar whenever one is included or removed.
A copy of any amended article must be sent to the Registrar within 15 days.
A member will not be bound by any alteration made after they became a member insofar as the
alteration requires them to take more shares or increase their liability in any way to pay money to or
contribute to the company (s.25).
Interactive question 9: Articles of association

A company’s articles contain ‘provisions for entrenchment’. Which of the following is true regarding
the alterability of these provisions?
A They cannot be altered.
B They can be altered with the approval of all company members.
C They can be altered by a special resolution of the company.
D They can be altered by an ordinary resolution of the company.

6 Administrative consequences of incorporation
Section overview
• Incorporation necessitates compliance in a number of areas including the ownership,

management and financing of companies dealt with in subsequent chapters. There are also
administrative consequences, including:
– the need to maintain registers and records
– the need to file a confirmation statement
– the need for public companies to have a company secretary
6.1 Company records

The term ‘company records’ refers to any register, agreement, minutes, accounting records or other
documents required to be kept by the Act. They may be kept in hard copy or electronic form. In each
case, the company record is to be kept at the company’s registered office or at any other place
specified in regulations made by the Secretary of State. The Act sets out rules relating to rights of
inspection (and sometimes rights to receive copies) for members and others. Generally speaking,
any contravention of any of these provisions renders the company and every company officer in
default guilty of an offence and liable to a fine.
In particular, a company is required to keep the following company records:
• A register of members
• A register of directors and (if applicable) company secretaries
• A register of people with significant control (containing information on individuals or companies
who own or control over 25% of a company’s shares or voting rights, or who exercise control over
the company and its management in other ways). This register must be updated whenever there
is a change.
• A register of directors’ residential addresses (this information is ‘protected information’ and must
not be made available for public inspection)
• Copies of directors’ service contracts and indemnity provisions restricting directors’ liabilities
• Records of resolutions and minutes of members’ and directors’ meetings (for a period of 10 years)
• Directors’ statement and auditor’s report
• A register of charges and copies of charges
In addition, a company is required to give copies of the company’s articles, and certain other
documents of constitutional importance, free of charge upon request (s.32). A company is not
required to keep a register of debenture holders but, if it does, it must comply with the provisions
concerned with its availability for inspection (s.743).
6.2 The register

The Registrar of Companies maintains a ‘register’ in respect of each company at Companies House.
This register contains:
• the certificate of incorporation
• the trading certificate (if it is a public company)
• certificates of registration of charges
• the information contained in documents delivered to the Registrar in accordance with any
statutory provision, including annual accounts and return, special and some ordinary resolutions
and changes of directors
The Registrar is required to keep certain information in electronic form (including the articles, annual
accounts and reports, confirmation statements, statements of capital and statement of directors), but
otherwise may keep the register in such form as they think fit.
166 Law ICAEW 2023

Subject to exceptions listed in the Act (s.1087), any person has the right to inspect the register and,
with payment of a fee, to require a copy of any material on the register. The exceptions to this right to
inspect include the following:
• protected information on directors’ residential addresses
• the contents of any charges
Any person also has the right to a copy of any certificate of incorporation and the right to inspect the
Registrar’s index of company names.
6.3 Confirmation statement

Every company must send a confirmation statement to the Registrar. The statement can be sent at
any time, but no more than 12 months may elapse between statement submissions. The purpose of
the confirmation statement is to keep the Registrar informed about certain changes to the company.
Much of this information would have been submitted when the company is formed.
Confirmation statements are used to confirm that there have been no changes to the information
held by the Registrar during the previous 12 months, if none have been made. If changes have been
made, it records just the changes that have occurred.
Examples of information requiring confirmation are as follows:
• The address of the registered office of the company
• The address (if different) at which the register of members or debenture holders is kept
• The type of company and its principal business activities
• The total number of issued shares, their aggregate nominal value and the amounts paid and
unpaid on each share
• For each class of share, the rights of those shares, the total number of shares in that class and their
total nominal value
• Particulars of members of the company
• Particulars of those who have ceased to be members since the last confirmation statement
• The number of shares of each class held by members at the return date, and transferred by
members since incorporation or the last confirmation statement date
• The particulars of directors, and secretary (if applicable)
Interactive question 10: Company records

What is the minimum percentage holding of a company’s shares or voting rights that is required for
an individual to be included on the register of people with significant control?
A 10%
B 20%
C 25%
D 30%
6.4 Company secretary

Every public company must appoint a company secretary who satisfies at least one of the following
qualification requirements:
• employment as a plc’s secretary for three out of the five years preceding appointment
• membership of one of a list of qualifying bodies: the ACCA, CIMA, ICAEW, ICAS, ICAI or CIPFA
• qualification as a solicitor, barrister or advocate within the UK
• employment in a position or membership of a professional body that, in the opinion of the
directors, appears to qualify that person to act as company secretary
They should also have the ‘necessary knowledge and experience’ as deemed by the directors.

Private companies may choose to have a company secretary but are not obliged to do so. The
company secretary is usually appointed by the directors. A sole director of a private company is
permitted to act as company secretary if the company chooses to have one.
A company secretary is an employee of the company. They are also an ‘officer’ of the company and
therefore faces potential civil and criminal liability where the Act so provides in the event of
contravention by the company of legislative requirements.
The Act does not define the role of the company secretary and it will vary according to the size and
nature of each company. However, typically, a company secretary will convene the meetings of the
board of directors, issue the agenda and draft the minutes. They will also be responsible for the
various statutory registers and for filing documents with the Registrar. In a smaller company, they are
also likely to act as general administrator and compliance manager and might even be responsible
for the accounts and taxation aspects of the company’s business.
The company secretary is recognised as having the power to contract on behalf of the company in
respect of its administrative operations, including the employment of office staff and management of
the office generally. Thus they may bind the company by their actions on the basis of implied actual
authority as well as any express or ostensible authority. However, a company secretary’s implied
authority is limited and does not extend to buying land, for example, nor to borrowing money, nor to
doing other acts usually undertaken by the directors.
7 Accounts and audit requirements

Section overview
• Incorporation also requires a company to file statutory accounts that may be subject to audit. The
requirements for accounts and audit are dependent on the type and size of the company
concerned.
Every company must comply with Companies Act 2006 rules requiring the keeping of accounting
records and to file accounts that may or may not be subject to audit. The rest of this chapter focuses
on what these requirements are and how the rules differ depending on the type and size of the
company concerned.
7.1 Accounts and reports requirements

Generally speaking, every company must keep accounting records and must produce annual
accounts. These accounts must be prepared in accordance with UK or international accounting
standards and should be in the prescribed form. In addition, the directors are responsible for
producing a report. These accounts and reports need then to be published and circulated to
members and filed at the registry.
The following framework of rules generally applies to all companies. However, certain variations
apply to companies that are classified as micro, small or medium. You should also bear in mind that
there are other exceptions and points of detail which may be relevant in practice to individual
companies.
Document Notes
Accounting records ‘Adequate accounting records’ must be kept that are sufficient to show
the company’s financial position at any time with reasonable accuracy,
including:
• daily entries of income and expenditure
• record of assets and liabilities
• (if applicable) statements of stock and stock takings
A company’s underlying accounting records must be kept for three years
in the case of a private company, and six years in that of a public one.
168 Law ICAEW 2023

Document Notes
Annual accounts Under the Companies Act 2006, these are a balance sheet and profit and
(including group loss account. However, accounts produced under international
accounts) accounting standards are also permitted.
Consolidated group accounts are also required where the company is a
parent company.
The accounts must give a ‘true and fair view’ of the company’s financial
position in respect of its financial year. Notes to the accounts must deal
with employee numbers and costs and directors’ benefits.
The accounts must be approved by and signed on behalf of the board of
directors.
Directors’ report This must contain, in respect of the financial year, the:
(including • names of directors
consolidated report)
• principal activities of the company
• statement that the auditor is not unaware of any relevant audit
information
A recommended dividend and business review, (including principal risks
and uncertainties facing the company) are usually included although not
always (for example small companies).
(A consolidated report should be produced where group accounts are
prepared.) The directors’ report must be approved by and signed on
behalf of the board of directors.
Directors’ This applies to quoted companies only and is subject to the members’
remuneration report approval.
Auditor’s report Where accounts are audited the report must:

• identify the accounts audited and the financial reporting framework
applied in their preparation
• describe the scope of the audit
• state whether, in the auditor’s opinion, the accounts give a true and
fair view of the company’s financial affairs
• state whether the directors’ report is consistent with the accounts
Strategic report Under the Companies Act 2006 (Strategic Report and Directors’ Report)
Regulations 2013 (TSO, 2013), large and medium-sized companies must
prepare a strategic report as part of their financial statements.
The purpose of the strategic report is to inform members of the
company and help them assess how the directors have performed their
duty to promote the success of the company.
The strategic report must contain a fair review of the company’s business,
and a description of the principal risks and uncertainties facing the
company.
The review required is a balanced and comprehensive analysis of the
development and performance of the company’s business during the
financial year, and the position of the company’s business at the end of
that year, consistent with the size and complexity of the business.
Companies These regulations introduced a number of new reporting requirements.

(Miscellaneous These include:
Reporting) Regulations • Disclosures on the extent of engagement with employees, suppliers,
2018 (TSO, 2018) customers and relevant others. These disclosures are centred around
how the business builds and fosters relationships with these
stakeholders. This applies to companies with over 250 employees as

Document Notes
regards employee engagement.

For other stakeholder engagement, this applies to a company that
exceeds any two of the following thresholds: Turnover > £36 million,
Balance Sheet Assets > £18 million and Employees > 250.
• A statement in the strategic report describing that the directors have
had regard to the matters set out in s.172 of the Companies Act
2006 when performing their s.172 duties (see later chapter). This
applies to large companies only.
• A statement of corporate governance arrangements. This sets out the
details of which particular corporate governance code the
organisation applied during the year, how the code was applied and
whether it departed from it in any way. If no code was followed, then
an explanation should be provided and what arrangements for
corporate governance had been applied instead.
This applies to companies that either have over 2,000 employees
globally, or Global Turnover > £200 million and Global Balance Sheet
> £2 billion.
• Disclosures on remuneration. The regulations require additional
information to be provided about director remuneration. Such
additional information includes the amount of director remuneration
that is attributable to share price growth and pay ratios (comparing
the CEO’s remuneration with various levels of employee
remuneration). This applies to quoted companies with more than 250
employees.
Companies (Directors’ This Act introduced additional directors’ report disclosure requirements
Report) and Limited concerning company emissions, energy consumption and energy
Liability Partnerships efficiency. It only applies to quoted companies, large unquoted
(Energy and Carbon companies and to large LLPs.
Report) Regulations
2018 (TSO, 2018)
Non-compliance with these provisions may render the company and any relevant officer liable to a
fine and, in some cases, imprisonment.
7.2 Publication of accounts and reports

A company’s accounts and reports must be publicised in compliance with the Companies Act,
including filing them at the Registry within nine months (private company) or six months (public
company) after the end of the relevant accounting reference period.
You should be aware that a less stringent regime applies to small- and medium-sized companies (for
example, they may file ‘abbreviated accounts’ and small companies have a simpler directors’ report).
Micro-entities also have an option to take advantage of certain accounting exemptions. These
include filing a simple profit and loss account or no profit and loss account at all. However, a balance
sheet must be filed, but this is only required to provide a minimum of accounting information
(referred to in the regulations as minimum accounting items). There are only two compulsory notes to
the accounts (advances to directors and financial commitments), the directors’ report is as required
for small companies and there is no requirement to comply with parts of accounting standards that
require information in addition to that required by law of micro-entities (unless the company chooses
to disclose this voluntarily).
Broadly, micro-entities and small- and medium-sized companies are private companies that comply
with two or more of the following requirements:
Micro Small Medium
Turnover ≤ £632k ≤ £10.2m ≤ £36m
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Micro Small Medium
Balance sheet ≤ £316k ≤ £5.1m ≤ £18m

Employees ≤ 10 ≤ 50 ≤ 250
7.3 Audit requirements

Generally speaking, a company is required to appoint auditors to carry out an audit of its annual
accounts. Some companies are exempt, namely:
• micro and small companies (that satisfy the small company criteria above)
• dormant companies
• non-profit-making companies subject to public sector audit
• subsidiary companies whose parent company guarantees their liabilities outstanding at the
balance sheet date
Note that certain types of business (such as in banking and insurance) are excluded from being
micro, small or dormant companies.
Even where an exemption applies, an audit can be required by 10% or more of the members or by
members representing at least 10% of the nominal value of the company’s issued share capital.
An auditor or auditors must be appointed for each financial year and can be appointed by the
directors or by the members passing an ordinary resolution or, in the event of default, by the
Secretary of State. The auditor’s remuneration should be fixed by those appointing them. An auditor
of a private company is deemed to be re-appointed unless the company decides otherwise (s.487).
Auditors have a right of access at all times to the company’s books and accounts. They have a duty to
carry out a proper investigation in preparing their report. They may be removed by ordinary
resolution, subject to special notice being given and the auditor having the right to make
representations.
Any person who knowingly or recklessly causes an auditor’s report to include any matter that is
misleading, false or deceptive commits an offence punishable by a fine.
Interactive question 11: Audit requirements

Qintin Ltd’s draft financial statements for this year show turnover of £10 million, balance sheet total of
£5 million, and a total of 60 employed staff.
Requirement
Which of the following statements is correct?
A The company is required by law to be audited.
B The company is exempt from audit and the members may not request an audit.
C The company is exempt from audit, but an audit can be requested by at least 10% of the
members.
D The company is exempt from audit, but an audit can be requested by at least 20% of the
members.
When answering a scenario question that requires you to apply the thresholds for company types
and exemptions from reporting and audit, you should focus on just applying the rules you have been
given to the facts in the scenario. Avoid basing your conclusion on non-relevant information.

8 Comparison between ordinary partnerships and
companies
Section overview
• The key difference between a company and an ordinary partnership is that a company has a
separate legal personality, distinct from its members, whereas an ordinary partnership does not.
• There are many other differences, some incidental to this key difference and some arising from
specific statutory provisions.
The principal differences between a registered company and an ordinary partnership are given in the
tables below; the first noting the differences which are commonly seen as advantages of
incorporating a business, the second noting those commonly seen as disadvantages, or conversely,
advantages of running a business as a partnership.
8.1 Advantages of incorporation
Factor Company Ordinary partnership
Legal entity Separate legal entity distinct from its Has no independent existence
members
Liability Company liable on its contracts Partners (personally) are jointly and
severally liable on partnership
contracts
Limit on liability Members’ liability can be limited by Partners’ liability unlimited

shares or guarantee
Ownership Company owns assets and ownership Partners own assets jointly
not affected by change of members
Finance In addition to fixed charges, a An ordinary partnership cannot do so

company can raise finance by creating
a floating charge over its undertaking
or assets, allowing it to deal with them
without the lender’s consent before
any crystallisation
Change of Company has perpetual succession The death, retirement or bankruptcy of

membership (ie, it is unaffected by a change in its a partner dissolves the partnership
members) (subject to the terms of any
partnership agreement)
Transferability Members’ shares freely transferable A partner may assign their interest but
of ownership (subject to articles) the assignee does not become a
partner as a result
Limit on No maximum, minimum one No maximum, minimum two

membership
8.2 Disadvantages of incorporation
Formation A company must be registered under No particular formality is required for a

the Companies Act partnership to exist
172 Law ICAEW 2023

Administrative A company must file accounts and A partnership does not have to
consequences documents with the Registrar of comply with such formalities
Companies
Cost A company faces the cost of A partnership has no such cost

compliance with administrative
requirements and an annual audit
Privacy A number of the company accounts Only partners have a right of access to
and documents must be open to the partnership accounts
public inspection
Management A company member cannot be Every partner has a right to participate

directly involved in the management in the management of the partnership
of the company unless they are also a (subject to the terms of any
director partnership agreement)
Withdrawal of A company is subject to strict rules It is more straightforward for a partner

capital concerning repayment of capital to withdraw capital
Interactive question 12: Company vs partnership

Indicate whether each of the following statements is true or false.
Requirements
A benefit for the participants of a partnership over a company is that because it has separate legal
personality, they have limited liability.
A True
B False
A benefit for the members of a company over a partnership is that it continues in existence even if its
participants change.
C True
D False
A benefit of a limited company over a partnership is that a company’s liability is limited.
E True
F False
A benefit of a partnership over a company is that a partnership is not subject to any legislative
regulation.
G True
H False

Summary
Formation
Promoters Mem & arts Off-the-shelf Name?
Application: name, But changes Not offensive
• Owe fiduciary
address, public? to name, directors, Approval if sensitive
duties
Limited? share capital & Not mislead as to form
• Liable on transfer of shares?
Statement of Not same/virtually same
pre-incorporation
capital or guarantee Change –
contracts
Statement of Compulsory
proposed officers NAME Voluntary
Business name?
£50,000 minimum X Veil

Public Trading certificate X Private LIFT VEIL
company Offer to public X company Group (but not
'plc' Co Secretary X 'ltd' for debts)
AGM X Identity
File 6 months 9 months Sham
X Small/medium Evasion
X Exclude pre-emption Statutory – to
X Written resolutions render
X Unlimited director/officer
Extra rules on loans, paid up X liable for
shares, mergers etc company debts
Limited by Limited by Limited by Members

Unlimited
shares shares guarantee • Articles
• Contract
CA '06 • Alteration
Company separate person (Salomon)
Records/ Registers Accounts Reports Co registry

copies Members Accounting records Directors' Certificates of
Service contracts Directors/ Annual accounts Auditor's incorporation
Indemnity secetaries audited? Directors' Certificates of
provisions Directors' Confirmation remuneration charges
Resolutions residential statement Documents
Debenture- requiring to be
Contracts for
holders (opt) filled
own shares
Charges
Register of
people with
significant
control
174 Law ICAEW 2023

Company Partnership
Yes Separate legal entity No
Company unlimited Partners: joint and several liability

Liability
Members: limited Unlimited
Company owns Partners own

Asset ownership
Floating charge and finance No floating charges
Minimum 1 Minimum 2
Minimum members and
Perpetual succession Change = dissolution
change of membership
Freedom to transfer Assignee not partner
Registration Formality unecessary
Administrative burden Little administrative burden

Formation and
Cost consequences Little cost
Publicity Privacy
Directors Management Partners

indicated.
1. Do you know the principle of law that was decided by the Salomon v Salomon case?
(Topic 1)
2. Can you list five differences between a private and public company? (Topic 2)
3. Do you know what a memorandum of association is? (Topic 3)
4. Do you know how a company may change its name? (Topic 4)
5. Do you know what model articles are? (Topic 5)
6. Can you list five records that companies must keep? (Topic 6)
7. Do you know the criteria that companies must meet in order to be classified as micro,
small and medium? (Topic 7)
8. Can you explain the main advantages and disadvantages of ordinary partnerships versus
limited companies? (Topic 8)

176 Law ICAEW 2023

• Contract (Rights of Third Parties) Act 1999. (1999). London, TSO.

• Companies Act 2006 (Strategic report and Directors’ Report) Regulations 2013. (2013) SI
2013/1970. London, TSO.
• Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report)
Regulations 2018. (2018) SI 2018/1155. London, TSO.
• Companies (Miscellaneous Reporting) Regulations 2018. (2018) SI 2018/860. London, TSO.
• Company Directors Disqualification Act 1986. (1986). London, HMSO.

Self-test questions

1 Define a company.
2 What was the name of the case that is generally cited as establishing the principle of corporate
personality?
True/False
An unlimited company has unlimited liability. A limited company has limited

liability.
4 Give three examples of where the courts might lift the veil of incorporation.
5 Give three examples of where statute provides for the veil of incorporation to be lifted.
6 True or false?
True/False
A company is not required by law to have a company secretary.
7 What is the minimum share capital for:
Response
a private company?
a public company?
8 List 10 examples of how public companies differ from private companies.

9 If a public company does business or borrows before obtaining a trading certificate from the
Registrar, the transaction is:
A invalid and the third party cannot recover any loss
B invalid but the third party can recover any loss from the directors
C valid and the directors are punishable by a fine
D valid but the third party can sue the directors for liquidated damages
10 The memorandum of association for a company limited by shares records the subscribers’
agreement and intention in respect of three matters. Name them.
11 What is an off-the-shelf company and what is its significance in company formation?
12 Indicate if the following statements are true or false.
True/False
A company can ratify a pre-incorporation contract thus releasing the

promoter from any personal liability.
178 Law ICAEW 2023

True/False
A promoter should avoid personal liability by utilising the Contracts

(Rights of Third Parties) Act 1999 and giving rights of enforcement to
the company as third party.
13 True or false?
True/False
A company cannot be registered unless it submits a copy of its articles of

association when applying for registration.
14 How can a company change its articles of association?

15 In the event of conflict which prevails: the articles or the Act?
16 Which one of the following is not compulsory?
A Register of members
B Register of directors
C Register of secretaries
D Register of debentureholders
E Register of charges
17 What are the ‘accounting records’ that a company is required to maintain?
18 True or false?
True/False
Small companies and dormant companies are not required to have their
accounts audited.
19 Name four differences between companies and ordinary partnerships that make incorporation
advantageous.
20 Name five differences between companies and ordinary partnerships that make partnership
advantageous.
this chapter.


B The company
One aspect of legal personality is that a company owns its assets. Gerome transferred the assets
to the company in return for shares when the business was incorporated, so he does not own
them himself.

D The veil will be lifted because Sandy was acting while disqualified and both he and Beach
Holidays Ltd will be liable for the debts on a joint and several basis.
Directors who participate in the management of a company while disqualified will be liable for
the company’s debts on a joint and several basis. Where the director is also a member, as here,
this is an example of the corporate veil being lifted.

B False
The reverse is true. Only private companies may pass written resolutions. This is because this
type of company does not have to hold an AGM, so this is the only way to pass resolutions.

The main categories of companies which may be formed under the CA’06 are a public company
limited by shares, and a private company, which may be limited by shares or by guarantee or be an
unlimited company.
A private company limited by shares is the most suitable type for a small business venture of this
kind. It offers the advantages of being a corporate entity separate from its members, giving them the
protection of limited liability. This means that on a winding-up of the company, each shareholder
would only have to contribute any amount that was not already paid up on their shares.
The main restriction on a private company is that it may not offer its shares or debentures to the
public. However, it is subject to fewer restrictions than a public company including not needing a
company secretary or an AGM. It may use capital to finance the purchase of its own shares and it may
give financial assistance for the purchase of its shares. If the company ranks as a small or a medium
sized company for the purposes of its annual accounts, the accounts delivered to the registrar need
not contain all the material required in the accounts of a public company and need not be audited.

B False
Off-the-shelf companies are available to purchase from enterprises specialising in registering a
stock of companies, ready for sale. The Registrar is not involved, other than in processing the
incorporation documents supplied by the enterprises.

C Greenfields plc may enforce the contract against Imran personally because Silver Stumps Ltd
cannot ratify the contract.
180 Law ICAEW 2023

There is no automatic assumption of responsibility for promoters’ contracts on incorporation. A
company cannot ratify a contract entered into by a promoter before the company is formed
because a principal must have been in existence at the time the contract was made in order to
be capable of ratifying it. The reference to Imran’s rights being transferred by the Act in D is
inappropriate.

B No
Such words as ‘British’ or ‘International’, for example, are only likely to be sanctioned if the size of
the company matches its pretensions. Given that the business is not trading overseas at the
moment, nor is it expected to for five years, it is unlikely that this choice of name will be
approved.

Documents required for the formation of a private company limited by shares:
• Memorandum of association
• Application stating name, domicile and intended address of registered office, and a statement
describing the liability of the members as limited by shares and whether the company is to be
public or private
• Copy articles of association (although if none is submitted, prescribed default articles will apply)
• Statement of capital and initial shareholdings
• Statement of proposed directors (and company secretary if applicable)
• Statement of compliance

B They can be altered with the approval of all company members.
Provisions for entrenchment can only be altered with the approval of all company members, or
by a court order.

C 25%
Those who own or control more than 25% of a company’s shares or voting rights, together with
others who exercise control over the company or its management in other ways, have to be
included on the register of people with significant control.

C The company is exempt from audit, but an audit can be requested by at least 10% of the
members.
The company’s turnover and balance sheet total are just within the limit of a small company and
therefore the company is exempt from audit. However, if at least 10% of the members agree, an
audit can be requested.

Correct answer(s):
B False

Partnerships do not have separate legal personality but companies do, so it is a benefit of
companies that members may have limited liability.
Correct answer(s):
C True
Correct answer(s):
F False
The company’s liability is unlimited (it is the members’ liability that may be limited).
Correct answer(s):
H False
Although nothing like as extensive as the companies’ legislation, the Partnership Act 1890 does
lay down some rules for partnerships, although most may be varied or overridden by a
partnership agreement.
182 Law ICAEW 2023

1 A company is an entity registered under the Companies Act 2006 or any earlier Act.
2 Salomon v Salomon & Co Ltd 1897
3
True/False
An unlimited company has unlimited liability. A limited company has limited False
liability.
Any company has unlimited liability for its debts. In a limited company, the liability of the members
(not the company) is limited to the amount outstanding on their shares or the amount of any
guarantee.
• Where a subsidiary company can be regarded as an agent of the holding company
• To reveal the true national identity of a company
• Where the company is a quasi-partnership
• Where a company is a sham
• Where a public company trades without a trading certificate
• In cases of fraudulent or wrongful trading
• Where a director carries on business when they are disqualified
• Where directors form a new company with a name identical or similar to that of an insolvent
company
6
True/False
A company is not required by law to have a company secretary. False
This is true in the case of private companies but a public company must have a company secretary.
7
Response
a private company? No minimum
a public company? £50,000
8 Any 10 from the following:
Liability Must be limited May be limited or unlimited
Share capital Subject to authorised minimum No minimum

(currently £50,000)
Ability to commence Must have trading certificate May commence trading once
trading before it can commence trading incorporated
(s.761)

Public offers Can offer its securities to the Prohibited from offering its
public (and may obtain a listing securities to the public (s.755)
from the stock exchange or other
investment exchange)
Name Must end with ‘public limited Must end with ‘limited’ or ‘Ltd’ (or
company’ or ‘plc’ (or Welsh Welsh equivalent) although
equivalent) (s.58) certain companies (including
charities) may be exempt from this
requirement (ss.59–62)
Loans etc Loans to persons connected with These rules do not apply (unless
directors and quasi-loans and the company is associated with a
credit transactions to directors or public company). Only loans
connected persons need made directly to directors need
members’ approval (ss.198–202) members’ approval
Directors Must have at least two directors Must have at least one
(s.154)
Company Secretary Must have one (s.271) Need not have one (s.270)
Written resolutions Not applicable May pass written resolutions

instead of calling meetings (s.288)
AGMs Must hold AGM (s.336) Need not hold AGM
Accounts and reports Must lay these before general Need not do so
meeting Must file within nine months
Must file within six months (s.442)
(s.442)
Small- and medium-sized Not applicable May qualify as small- or medium-

companies sized, and take advantage of audit
exemptions (small companies)
and less stringent regime for filing
Appointment of auditors Must appoint auditors each year Existing auditors may be deemed
if necessary (s.489) to be re-appointed, subject to
conditions (s.487)
Pre-emption rights May not be excluded May be excluded
Payment for shares Additional rules apply to public Not applicable

companies, including that shares
must be at least ¼ paid up
(s.586) and concerning
valuations for non-cash
consideration (s.593)
Reduction of capital Needs special resolution Needs only special resolution and
confirmed by the court (s.641) directors’ solvency statement
(s.642)
Power to redeem or Not applicable May do so, subject to conditions

purchase shares out of (s.709)
capital
C valid and the directors are punishable by a fine
184 Law ICAEW 2023

10 Three matters:
• Their wish to form a company
• Their agreement to becoming members of the company
• Their agreement to subscribe for at least one share each
11 It is a dormant company available for purchase by those wishing to set up a company. It avoids the
usual formation formalities and the problems associated with pre-incorporation contracts do not
arise.
12
True/False
A company can ratify a pre-incorporation contract thus releasing the False

promoter from any personal liability.
A promoter should avoid personal liability by utilising the Contracts False

(Rights of Third Parties) Act 1999 and giving rights of enforcement to
the company as third party.
(1) Since the company was not in existence at the time of the contract.
(2) The Act provides that the original parties remain liable on the contract.
13
True/False
A company cannot be registered unless it submits a copy of its articles of False

association when applying for registration.
Where articles are not registered, model (‘default’) articles prescribed by the Secretary of State will
apply.
14 By special resolution, unless there is provision for entrenchment, in which case unanimous consent or
a court order is required.
15 The Act
D Register of debentureholders
17 Adequate accounting records, that are sufficient to show the company’s financial position at any time
with reasonable accuracy, including daily entries of income and expenditure, a record of assets and
liabilities and (if applicable) statements of stock and stocktakings.
18
True/False
Small companies and dormant companies are not required to have their True
accounts audited.
Although not if the company is an investment or banking company.

19 Any four:
• Separate entity
• Members’ liability can be limited
• Company owns property and is liable on contracts
• Company can create floating charge
• Company has perpetual succession

20 Five differences between companies and ordinary partnerships:
• No formality required on creation
• Partnership need not register accounts and other documents
• Partnership has greater freedom and privacy and less cost through not having to comply with
requirements of companies’ legislation
• All partners can participate in management
• Withdrawal of capital is generally easier
186 Law ICAEW 2023

Chapter 8
Companies: ownership and

management
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 Directors
2 Members
3 Majority rule and minority protection
4 Meetings and resolutions
Summary
Self-test questions
Introduction
Learning outcomes
• Recognise how a shareholder can influence the management of a company through meetings
and resolutions, including shareholders’ rights to requisition a meeting
• Identify the various statutory rights of shareholders to challenge the management of the company
under the Companies Act 2006 and the Insolvency Act 1986
• Identify the ways in which a director may be appointed and removed
• Identify directors’ duties, explaining the consequences of any major breach
• Identify the powers of directors and in what circumstances they will bind the company in a
contract with third parties
Specific syllabus references for this chapter are: 2c, h, i, k, l, m.
8
Syllabus links
The issue of a director’s authority to bind the company relates to agency, which you studied
previously.
You will come across references to the members of a company passing resolutions in many areas of
company law, including insolvency and in relation to share capital. This chapter explains how such
resolutions come to be passed, whether in general meeting or otherwise.
8
Assessment context
whether or not a director has breached any of their statutory duties.
8

of this chapter.

questions
1 Directors Approach The material in this IQ1: Directors

Directors are granted Learn all of the rules section could easily This question
power and authority that are covered in be tested as a helps you to
under agency law to this section. This is knowledge or identify the
run a company. There one area of the scenario question. various types of
are important rules syllabus in which Expect to be director and
that control their you really must examined on the how they can be
appointment, their absorb all of the details of the removed from
power and how they details. legislation covered. office.
leave office. They owe
a number of duties to
the company as well.
Directors may be Stop and think
disqualified under Can you name the
law and be liable for statutory duties of a
188 Law ICAEW 2023

questions
civil and criminal director? Under IQ3: Directors’

penalties if they which authority
commit wrongful and circumstances can a This question
fraudulent trading. director be helps you to
disqualified? What understand the
is the difference authority of
between wrongful directors under
and fraudulent agency law.
trading?
IQ4: Directors’
disqualification
This question
helps you learn
the various
disqualification
periods for
directors.
2 Members Approach Knowledge questions IQ5: Members

Members are the Note the various could test your This question
owners of a company, rights that members understanding of tests your
otherwise known as have. Learn the whether a particular knowledge of
shareholders. They types of transaction needs what
have certain rights transactions with approval of the transactions
and their approval is directors that members. require the
needed to authorise require their approval of
certain transactions approval. members.
with directors. Stop and think
What is a substantial
property
transaction?
3 Majority rule and Approach This area could be IQ7: Unfairly

minority protection You need to read examined by a prejudicial
The general rule is and understand the scenario question conduct
that a company is rule from the that tests your This question
controlled by the will leading case of Foss knowledge of the will help you to
of the majority. This is v Harbottle before options available to a learn what
democratic, but what carefully studying minority in a unfairly
can the minority do if the statutory rights particular situation. prejudicial
they are unhappy or of minorities. It is conduct is.
feel that they are also important to
being treated learn the rules on
unfairly? derivative actions IQ8: Minority
and unfairly action
prejudicial conduct. This question
We will look at will test what you
liquidation in a later have learned
chapter, but it is about the
important to options available
understand how the to a minority.
just and equitable
ground for winding
ICAEW 2023 8: Companies: ownership and management 189

questions
up could be used
by a minority
shareholder.
Stop and think

What is the rule in
Foss v Harbottle?
What relief is
available under
s.994 of the
Companies Act
2006?
4 Meetings and Approach This is another area IQ9: General

resolutions It is important to with lots of rules to be meetings
Although the appreciate that only learned. Knowledge In this question
directors make the public companies questions could test you will learn
day-to-day operating have to have a your recall of these. who may and
decisions for a general meeting. However, a scenario may not call a
company, certain Private companies question could be general
decisions are can make all their used to test whether meeting.
reserved for decisions through a a meeting was
members. There are written resolution. properly convened.
several types of Learn the rules for IQ10: Notice
resolution that can be calling a general periods
used to make those meeting and the This question
decisions. required notice tests your recall
periods. Then learn regarding
the various types of consent to a
resolution available shortened notice
to companies and period.
the types of
decision that
require a special
resolution. Finally,
learn the rules on
quorum, voting,
proxies, records and
class meetings.
Stop and think

What type of
resolution is only
available to a
private company?
190 Law ICAEW 2023

1 Directors
Section overview
• The directors of a company manage the company’s business.

• The Companies Act 2006 and a company’s articles of association together dictate who can and
cannot be a director and how directors are appointed and removed.
• The Act and company articles also determine the extent of a director’s powers and their authority
to bind the company.
• Directors owe a number of duties to the company and face potential civil and criminal liability in
the event of breach.
References to ‘the Act’ and section numbers refer to the Companies Act 2006 (TSO, 2006) (‘CA’06’)
unless otherwise stated. Section numbers are given for reference only.
1.1 Directors and their appointment

The term ‘director’ refers to every person who occupies the position or fulfils the role of director (ie,
to conduct the company’s affairs), whatever they are called (s.250). The Companies Act 2006 does
not distinguish between the various types of director, either a person is a director with all the duties
associated with the office, or they are not.
Every company is required to have at least one director and a public company must have at least two
directors (s.154). Generally speaking, a director must be a natural person aged 16 or more (although
there are exceptions) and they do not need to hold any particular qualifications. There is no upper
limit for the age of a director.
Certain persons may be disqualified from acting as a director, either by the Company Directors
Disqualification Act 1986 (HMSO, 1986) or by the articles of association. A sole director cannot also
hold the position of auditor of the company. You should be familiar with the following types of
director:
Director How such a director comes to be in office
Director (on As provided by the articles, usually appointed:

incorporation or • by existing directors; or
subsequently)
• by ordinary resolution (directors of public companies should be voted on
individually (s.160)).
De facto director ie, anyone who acts as a director, although not validly appointed as one.
(literally ‘director in They become a director (and subject to all provisions concerning directors)
fact’) by virtue of their conduct, rather than by formal appointment. They have the
same powers as a properly appointed director.
Shadow director ie, someone “in accordance with whose directions or instructions the
directors are accustomed to act” save where that person is merely giving
advice in a professional capacity, for example lawyers and accountants.
Whether someone is a shadow director is a question of fact.
Alternate director The articles usually provide that a director may appoint an alternate director
to attend and vote at board meetings which they are unable to attend. The
alternate director may be another director or an outsider. Some articles
provide for such an appointment to be subject to the approval of the board.
Executive director ie, a director who is also charged with performing a specific role, eg, a
finance director, usually as an employee of the company. The articles usually
provide for the directors to appoint one or more of their number to any
executive function and on such terms as to remuneration and powers as they
see fit. If an executive director ceases to be a director, their office will also
terminate, but without prejudice to any claim they may have for breach of

Director How such a director comes to be in office
any service contract.
Non-executive ie, a director (appointed or otherwise as above) who does not have a
director particular function but generally just attends board meetings. Directors’
duties apply to non-executive directors in the same way as to executive
directors.
Many directors of public companies are non-executive and it is generally
regarded as a great strength for a company to have a board consisting of
both executive and non-executive directors. They are seen as helpful in
contributing an independent view to the board’s deliberations and ensuring
the continuing effectiveness of the executive directors and their
management of the company’s affairs.
A company normally appoints a chair of the board of directors who also acts
as chair at general meetings. They are usually regarded as a non-executive
director.
Managing director The articles usually provide for the directors to appoint one or more of their
(MD) number to be managing director(s), charged with carrying out day-to-day
management functions.
A director’s actions are valid even if their appointment is subsequently found to have been defective
or void (s.161).
Any change in the directors of a company should be recorded in the company’s register of directors
and notified to the registrar within 14 days.
1.2 Directors’ vacation of office

A director might leave office in any one of the following ways:
• death of the director or winding up of the company
• removal (see below)
• disqualification (see 1.8 below)
• resignation
• where they are required to do so by a provision in the articles (see below)
Model articles provide that a director should leave office where:
• that person ceases to be a director by virtue of any provision of the Companies Act 2006, or is
prohibited from being a director by law
• a bankruptcy order is made against that person
• a composition is made with that person’s creditors generally in satisfaction of that person’s debts
• a registered medical practitioner who is treating that person gives a written opinion to the
company stating that that person has become physically or mentally incapable of acting as a
director and may remain so for more than three months
• by reason of that person’s mental health, a court makes an order which wholly or partly prevents
that person from personally exercising any powers or rights which that person would otherwise
have
• notification is received by the company from the director that the director is resigning from office,
and such resignation has taken effect in accordance with its terms
In addition to any provision in the articles for removal, a company may remove a director from office
by passing an ordinary resolution to that effect (s.168). Special notice (of 28 days) must be given of
the intended resolution and the director then has the right to address the meeting and to request
that any written representations that they make be circulated to members or read out at the meeting.
Note that removal of a director may entitle the director to sue for breach of contract if they also have
a contract of service with the company. Note too that this power of removal may be limited in the
following ways:
192 Law ICAEW 2023

• A director who is also a member may have weighted voting rights given to them under the
constitution for such an eventuality, so that they can automatically defeat any motion to remove
them as a director (Bushell v Faith 1970).
• It is possible to draft a shareholders’ agreement stating that a member holding each class of share
must be present at a general meeting to constitute a quorum. If so, a member holding shares of a
certain class could prevent a director from being removed by not attending the meeting.
Interactive question 1: Directors

Which of the following terms describes a person in accordance with whose directions or instructions
the directors are accustomed to act?
A Alternate director
B Shadow director
C De facto director
D Non-executive director
Which of the following accurately states the requirements for the removal of a director?
E Special resolution with ordinary notice
F Ordinary resolution with special notice
G Ordinary resolution with ordinary notice
H Special resolution with special notice
Section 1 of the Company Directors Disqualification Act 1986 provides that a court may formally
disqualify any person from being (without leave of the court) a director (including a shadow director),
liquidator, administrator, receiver or manager of a company’s property or in any way directly or
indirectly being concerned or taking part in the promotion, formation or management of a company.
Disqualification is considered in section 1.8.
In addition, the articles may provide that a director must vacate office if they become bankrupt or of
unsound mind, or if they are absent from board meetings for, say, six consecutive months and the
directors resolve that they should vacate office on that account.
Interactive question 2: Resolution for removal of director

A company has three members who are also directors. Each holds 100 shares. Normally the shares
carry one vote each, but the articles state that on a resolution for a director’s removal, the director to
be removed should have three votes per share. On a resolution for the removal of Jacinta, a director,
Jacinta casts 300 votes against the resolution and the other members cast 200 votes for the
resolution.
Requirement
Has Jacinta validly defeated the resolution?
A No, the articles are invalid insofar as they purport to confer extra votes.
B Yes, the proceedings and articles are valid.
C Yes. While the articles are invalid and the voting is therefore 200 to 100 in favour, a special
resolution is required and the necessary 75% majority has not been obtained.
D No. A director is not entitled to vote on a resolution for their own removal.
1.3 Directors’ powers

The powers of the directors are defined by the company’s articles. Normally directors are authorised,
in general terms, to manage the business of the company and to exercise all the powers of the
company. The old requirement for companies to specify their objects (as charitable companies are

required to do under charities legislation and community interest companies might choose to do)
was removed by the Act and companies now have unrestricted objects (and, therefore, more
extensive powers) unless the articles specifically restrict them (s.31). The directors’ powers are to be
exercised properly and within the company’s constitution, but the directors are not agents of the
members and subject to their instruction as to how to act. There are, however, a number of
restrictions on these powers, some of which result in powers being placed in the hands of the
members rather than the directors.
Restriction Explanation
Statutory (general) The directors are statutorily bound to exercise powers only “for the purpose
for which they are conferred” (see section 1.5).
Statutory (specific) For example alteration of the articles and reduction of capital need a special
resolution, which the directors must secure from the shareholders in general
meeting before they can act. Directors’ actions which expressly require
members’ approval are detailed in section 2.3.
Articles For example the articles may set a maximum amount that the directors are
entitled to borrow, any greater amount needing approval of the company in
general meeting. (As to whether such a restriction will be effective against a
third party, see section 1.4 below.)
Members The members can exercise control over the directors’ powers:
• by passing a special resolution to alter the articles, thereby re-allocating
the powers between the board and the general meeting
• ultimately by removing directors from office
The directors’ powers are vested in them as a collective body and are exercised by the directors in
board meetings. Generally speaking, it is considered sufficient if the directors are in communication
with each other, usually by telephone, rather than necessarily being in one place at the same time
and articles may make such provision. Equally, even if the directors are assembled together, there
can be no board meeting if any of the directors object to a meeting being held in those
circumstances.
1.4 Directors’ authority and managing directors

If the board acting collectively or one director acting on their own has authority to enter into a
contract on behalf of the company, then the contract will be binding on the company. You will recall
that a director’s authority may be express or implied (actual authority) or it may be ostensible or
apparent authority. The position is as follows:
Authority Explanation
Express Binding
Implied Binding. Managing directors, and to some extent other executive directors
(such as sales directors or finance directors), are much more likely to bind the
company by their actions, since greater powers are usually delegated to them.
Thus a managing director has implied usual authority to make general business
contracts on behalf of the company (in addition to any actual authority given to
them by the board).
There is little guidance from statute or case law, on the other hand, on what
authority might be deemed to attach to non-executive directors or directors in
lower or middle management, but it will not be as wide ranging as that
attaching to a managing director. (Indeed, such case law as there is suggests
that it is very limited indeed.)
Ostensible Binding. If the board permits a director to behave as if they were a managing
director or give the impression that they are one, that director will have the
apparent or ostensible authority to enter into all commercial contracts relating
to the business as a managing director would have and to bind the company in
194 Law ICAEW 2023

Authority Explanation
respect of them.
It might be helpful to revise the principles of agency that you studied previously, and in particular the
case of Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964 in respect of managing
directors. Where a director would have authority but for a restriction placed on it, the position is
governed by s.40. This provides that “in favour of a person dealing with a company in good faith, the
power of the directors to bind the company or authorise others to do so, is deemed to be free of any
limitation under the company’s constitution” (s.40).
Note in particular:
• The section relates to any transaction or dealing between the company and a third party (ie, not
just to contracts).
• The other party is deemed to be acting in good faith unless the contrary is proved (and will not
be deemed to be acting in bad faith just because they know of the limitation).
• The limitations to be disregarded include any imposed on the directors by resolution or
agreement of the members.
Section 41 provides that s.40 will not apply where the person dealing with the company is a director
or person connected with a director. In such cases, the transaction becomes voidable at the instance
of the company and that party is liable to account for any gain and to indemnify the company against
any loss.
Interactive question 3: Directors’ authority

Under the articles of association of Farming Ltd the directors of the company need the consent of
the general meeting by ordinary resolution to borrow sums of money in excess of £50,000.
Mary has been appointed managing director of the company and she holds 1% of the issued shares
of the company. Mary has recently entered into two transactions for the benefit of Farming Ltd. First,
Mary arranged for the company to borrow £100,000 from Conifer Bank Ltd, secured by a floating
charge on the company’s assets. However, she failed to seek the approval of the members as
required by the articles. Second, she placed a contract worth £10,000 with Saw Ltd to buy some
agricultural machinery.
Requirement
Advise the directors of Farming Ltd whether they are bound by the agreements with Conifer Bank
Ltd and Saw Ltd.
A The company is not bound by either contract.
B The company is bound by both contracts.
C The company is only bound by the contract with Conifer Bank Ltd.
D The company is only bound by the contract with Saw Ltd.
1.5 Directors’ duties

For the first time, the Act provides a statutory code of most directors’ duties which take effect ‘in
place of’ the common law rules and equitable principles that used to make up the law on directors’
duties, but which will depend on those rules and principles for their interpretation and application
(s.170).
There are, of course, specific statutory duties owed by directors, such as the obligation to prepare
the directors’ report, and other common law duties may remain that have not been codified, such as
a duty to consider creditors’ interests when insolvency is inevitable. Of course, directors of listed
companies are required to comply, or to explain any non-compliance, with the UK Corporate
Governance Code and directors of unlisted companies are also advised to have regard to various
corporate governance guidelines and objectives. However, the duties listed below are of more

general application (indeed the Act refers to them as ‘general duties‘) and they are expressly stated
to apply to shadow directors also.
Duty Explanation
To act within A director must:

powers • act in accordance with the company’s constitution
(s.171)
• exercise powers only for the purpose for which they were conferred
If the directors infringe this rule by exercising their powers for a collateral
purpose, the transaction will be invalid unless it is approved or ratified by the
company in general meeting.
If the irregular use of directors’ powers is the allotment of shares, the votes
attached to the new shares may not be used in reaching a decision in general
meeting to sanction it.
Howard Smith Ltd v Ampol Petroleum Ltd 1974

The facts: Shareholders who held 55% of the issued shares intended to reject a
takeover bid for the company. The directors honestly believed that the bid’s
success was in the company’s interest and so allotted new shares to the
prospective bidder so that the shareholders opposed to the bid would then have
less than 50% of the enlarged capital and the bid would succeed.
Decision: The allotment was invalid. “It must be unconstitutional for directors to
use their fiduciary powers over the shares in the company purely for the purpose
of destroying an existing majority or creating a new majority which did not
previously exist.”
If the majority approve what has been done (or have authorised it in advance)
however, that decision is treated as a proper case of majority control to which the
minority must normally submit (see section 3).
Bamford v Bamford 1969

The facts: The directors of Bamford Ltd allotted 500,000 unissued shares to a third
party to thwart a takeover bid. A month after the allotment, an ordinary resolution
was passed ratifying the allotment, the holders of the newly issued shares not
voting. The claimants (minority shareholders) alleged that the allotment was not
made for a proper purpose.
Decision: The ratification was valid and the allotment was good. There had been a
breach of fiduciary duty but the act had been validated by an ordinary resolution
passed in general meeting.
To promote A director must act in the way they consider, in good faith, would be most likely to
the success promote the success of the company for the benefit of its members as a whole.
of the They should have regard to:
company
(s.172) • the likely long-term consequences of any decision
• the interests of the company’s employees
• the need to foster the company’s businesses relationships with suppliers,
customers and others
• the impact of the company’s operations on the community and the
environment
• the desirability of the company maintaining a reputation for high standards of
business conduct
• the need to act fairly as between members of the company
The duty is expressed to be subject to any legal rule or provision that requires
directors, in certain circumstances, to have regard to the interests of creditors.
What will promote the success of the company is a matter for the directors’ good
faith judgement.
196 Law ICAEW 2023

Duty Explanation
Under the Companies (Miscellaneous Reporting) Regulations 2018 (TSO, 2018),

directors must include a statement on this duty in the strategic report.
To exercise It does not mean that they are not exercising independent judgement where they
independent act in accordance with:
judgement • an agreement duly entered into by the company that restricts the future
(s.173) exercise of discretion by its directors; or
• the company’s constitution.
To exercise ie, the care, skill and diligence that would be exercised by a reasonably diligent
reasonable person with:
care, skill and • the general knowledge, skill and experience that may reasonably be expected
diligence of a person performing their functions as director
(s.174)
• their actual general knowledge, skill and experience
Thus it is no excuse for a director to say that they lacked expertise if a reasonable
director in their position would have that expertise. Furthermore, their actual
expertise may result in a higher standard than that of the reasonable director. The
courts have held, for example, that a director who signs an insurance proposal
without reading it may be liable in negligence.
An executive director with expertise in a particular area, or even a non-executive
director who is qualified or experienced in a relevant discipline, will be expected
to show a higher standard of care than simply attending board meetings. Even
someone with no commercial or business experience or qualification is required
(by the Act) to demonstrate the care that may be expected of a person fulfilling
their director’s role. Simply attending board meetings and not attending to the
company’s interests in between meetings is unlikely to be sufficient (unless it can
be shown that a director’s failure to prevent a fellow director’s wrongdoing did not
cause or contribute to the loss suffered).
Lexi Holdings plc (in administration) v Luqman 2009
The facts: Two sisters and their brother were directors of a company. The brother
had convictions for offences of dishonesty in the past. The sisters knew this but
played no part in the company, demanded no explanations from their brother of
his business dealings and did not advise the other directors, auditors and the
bank of his convictions. The brother took nearly £60 million in fictitious loans, false
facility letters and by misappropriation of company funds.
Decision: The Court of Appeal held that the sisters were, or ought to have been,
aware of various matters in relation to the fraud perpetrated on the company by
their brother. As a result, they were liable as they were in breach of their fiduciary
and common law duties of care owed to the company.
To avoid A director must avoid a situation in which they have or can have a direct or
conflict of indirect interest that conflicts or possibly may conflict with the interests of the
interest company or another duty. This duty is particularly applicable to the exploitation of
(s.175) any property, information or opportunity, (regardless of whether the company
could actually take advantage of it) but is expressly stated not to apply to any
conflict arising in relation to a transaction or arrangement with the company
(where ss.177 and 182 apply, see below).
Towers v Premier Waste Management Ltd 2012
The facts: A company director accepted a personal loan of equipment from a
customer without charge and without disclosing the transaction or seeking
approval of it. The customer then invoiced the company, which sued the director
for breach of duty.
Decision: The Court of Appeal held that the director had gained an advantage
from a potential conflict and had disloyally deprived the company of the
opportunity to object to an opportunity being diverted from the company to the

Duty Explanation
director personally. It was irrelevant that the company had suffered no loss or that
the director had no corrupt motive.
The duty is not infringed if the matter has been authorised by the directors. This
may happen:
• in a private company, provided the company’s constitution does not invalidate
such authorisation; or
• in a public company, provided the company’s constitution expressly allows
such authorisation.
In each case, the relevant director cannot be counted towards a quorum and their
votes will not be included in determining whether the authorisation is given.
If such authorisation is given there is no need for further approval by the members
unless the company’s constitution so provides.
If the case falls within the statutory provisions for matters requiring members’
approval (and these provisions are satisfied), then the director does not also need
to comply with this duty.
Not to accept A director must not accept a benefit from a third party by reason of their:
benefits from • being a director; or
third parties
(s.176) • doing (or not doing) anything as director.
Unless the acceptance of the benefit cannot reasonably be regarded as likely to
give rise to a conflict of interest.
If the case falls within the statutory provisions for matters requiring members’
approval (and these provisions are satisfied), then the director does not also need
to comply with this duty.
To declare Provided the director is, or ought reasonably to be, aware of the situation, they
interest in must declare the nature and extent of any such interest (direct or indirect) to the
proposed other directors, unless it cannot reasonably be regarded as likely to give rise to a
transaction or conflict of interest.
arrangement The notice may be made:
(s.177)
• at a board meeting;
• by notice in writing; or
• by a general notice, ie, that they have an interest in the third party and is
therefore to be regarded as interested in any transaction or arrangement with
that third party (in which case they should take reasonable steps to ensure that
such general notice is brought up at the next board meeting).
Provided such declaration is made, there is no need for approval by the members
or the board, unless the company’s constitution so provides or unless it is an
arrangement between a director and the company for the transfer of a ‘substantial
non-cash asset’ (see section 2.3).
Note that a specific duty exists likewise in relation to existing transactions or
arrangements as soon as is reasonably practicable (s.182). This duty applies (like
the other duties of directors) also to shadow directors (s.187). Breach of this
specific duty is punishable by fine.)
A person may continue to be subject to the duties in ss.175 and 176 even after they cease to be a
director, in certain circumstances (s.170 (2)).
One or more of the general duties may overlap, in which case each will apply. For example, taking a
bribe from a third party would contravene the duty not to accept benefits from third parties (s.176). It
might also amount to a failure to promote the success of the company for the benefit of its members
(s.172) and/or a failure to exercise independent judgement (s.173).
198 Law ICAEW 2023

Worked example: Directors’ duties
Xray Ltd intends to enter into a contract for the supply of medical supplies from a firm in which
Poppy, a director of Xray Ltd, is a partner. The terms of the contract are no less onerous than those of
contracts between the company and other suppliers, but nonetheless Poppy is concerned that she
may commit an offence if the contract goes ahead due to her interest in the firm.
Requirement
Advise Poppy.
Solution
Poppy is under a duty to avoid any situation in which she has an interest that, even potentially,
conflicts with the company’s interests, even if the company is not actually prejudiced as a result (it
may even fare better as a result). However, this duty does not apply to a conflict of interest arising in
relation to a transaction with the company, as is the case here. The relevant duty, with which Poppy
must comply, is a duty to disclose her interest to the other directors pursuant to s.177. She should
make such disclosure at a board meeting or in writing. She could provide a general disclosure of the
nature and extent of her interest in the firm, so that she is to be regarded as interested in any
transaction with it. Such general notice should be given at a board meeting or brought up at the next
meeting following it. If she fails to do so, the contract will be voidable at the instance of the company
and she could be liable to indemnify the company against any loss.
1.6 Breach of directors’ duties

A director in breach of any of the duties imposed on them may be required to make good any loss
suffered by the company, including accounting for any secret profits. Any contract entered into
between the company and a director may be rendered voidable by the director’s breach of duty. Any
property taken by the director from the company can be recovered if it is still in their possession. It
may be recoverable from a third party unless that third party acquired it for value and in good faith.
Where the breach has not yet occurred or is continuing, an injunction might be an appropriate
remedy.
If another director, or directors, is or are also in breach then their liability will be joint and several. In
the absence of any breach, however, a director will not be jointly liable with another who is in breach.
Legal action in respect of a breach of directors’ duties is most likely to be pursued under s.260 (see
section 3.3).
The articles of a company may impose more onerous requirements on its directors. They cannot,
however, dilute the duties except to the extent that is permitted by certain provisions. For example:
• s.173: that a director will not be in breach of the duty to exercise independent judgement if they
have acted in a way authorised by the constitution.
• s.175: some conflicts of interest by independent directors may be permitted, subject to the
constitution.
• s.180 preserves any rule of law that would otherwise be a breach of duty.
Any ratification of conduct amounting to negligence or other breach of duty by a director (or former
director or shadow director) must be made by an ordinary resolution of the members, disregarding
the votes of that director and any member connected with them (s.239).
Note that any provision to exempt a director from or indemnify them against liability for breach of
duty or negligence (or default or breach of trust) is void (s.232), save that a company may provide
insurance and qualifying indemnity in respect of third parties.
In any proceeding for negligence, default, breach of duty or breach of trust against an officer of the
company (or auditors), the court may relieve them of any liability if it considers that they acted
honestly and reasonably and that, having regard to all the circumstances of the case, they ought
fairly to be excused (s.1157).

Re D’Jan of London Ltd 1993
The facts: The defendant, a director of the company, signed an insurance proposal form without
reading it. The form was filled in by their broker. An answer given to one of the questions on the form
was incorrect and the insurance company rightly repudiated liability for a fire at the company’s
premises in which stock worth some £174,000 was lost. The company became insolvent and the
liquidator brought this action under s.212 of the Insolvency Act 1986 alleging that the defendant was
negligent.
Decision: In failing to read the form, the defendant was negligent. However, he had acted honestly
and ought therefore to be partly relieved from liability. The fact that he owned a 99% shareholding
was relevant, as the risk he took might have been seen as more unreasonable if he had owned a
lower stake in the company. (This case was brought on a provision from CA 1985 in line with s.1157
CA 2006.)
1.7 Wrongful and fraudulent trading

In addition, a director faces personal civil and criminal liability and possible disqualification (see
section 1.8 below) where they engage in wrongful or fraudulent trading.
Wrongful trading applies only where a company goes into insolvent liquidation and the liquidator
can show that, at some time before the commencement of the winding up, the director(s) knew or
should have known that there was no reasonable prospect that the company could have avoided
going into insolvent liquidation. However, no declaration of wrongful trading will be made where the
court is satisfied that the director(s) took every step that they ought to have taken in order to
minimise the potential loss to creditors (s.214 Insolvency Act 1986 (HMSO, 1986)).
The standard applied is that of a reasonably diligent person with the general knowledge, skill and
experience that might reasonably be expected of a person carrying out that particular director’s
duties (ie, a reasonable occupant of a similar post). Where a director has greater skill and experience
than a ‘normal’ director, they are also judged by reference to their own capacity. Thus the standard
expected of a listed company director would be higher than for the director of a small owner-
managed private company.
Where a director is liable under s.214 the court can order them to “make such contribution to the
assets of the company as the court thinks proper”. The fact that wrongful trading is not based on
fraud is not a reason for giving a nominal or low figure of contribution, although the figure should be
assessed in the light of all the circumstances of the case.
Fraudulent trading occurs where any business of a company is carried on with intent to defraud
creditors of the company (or of another person) or for any fraudulent purpose. The offence is
committed by any person who is knowingly a party to the business being carried in that manner.
Note that only persons who take the decision to carry on the company’s business in this way or play
some active part are liable. ‘Carrying on business’ can include a single transaction and also the mere
payment of debts as distinct from making trading contracts. The criminal offence (s.993 CA 2006)
may be committed whether or not the company has been or is in the course of being wound up and
is punishable by a fine and/or imprisonment for up to 10 years. It also gives rise to a civil liability for
the company’s debts on a winding up (s.213 Insolvency Act 1986). Thus, as in the case of wrongful
trading, a director may be ordered to make such contribution to the assets of the company as the
court thinks fit.
The assets available for distribution in a winding-up will (potentially) be much increased by a large
directors’ contribution. It serves as a warning to directors to take professional advice sooner rather
than later, as the prospect of making a personal contribution may prove much more expensive than
winding-up at the appropriate stage.
1.8 Disqualification of directors

The Company Directors Disqualification Act 1986 (HMSO, 1986) (CDDA) was introduced in
response to public disquiet with directors of failed companies being able to walk away from the
wreckage of a company with no personal liability, regardless of the reasons for which the company
failed. In many cases they would then go on to start new, very similar companies (so-called phoenix
companies) that had no liability to the previous creditors, who usually ended up with nothing.
The CDDA provides that a court may disqualify a person from being a director or insolvency
practitioner or receiver or manager of a company and from being concerned in the promotion,
200 Law ICAEW 2023

formation or management of any company except with leave of the court. In some circumstances an
order is in the courts’ discretion; in others, it is mandatory.
Disqualification period Grounds
A disqualification order for Where a person is convicted of a serious offence (usually in

up to 15 years may be connection with the promotion, formation, management or
made: liquidation of a company)
Where it appears in the course of the winding up of a company
that a person has been guilty of fraudulent trading (though not
necessarily convicted of the offence)
Where the Secretary of State considers it to be in the public
interest
Where a director is guilty of certain breaches of competition law
Where a director has participated in wrongful trading
A disqualification order for Where a person has been persistently in default in relation to
up to five years may be provisions of company legislation (and three convictions for
made: default in five years are conclusive evidence of persistent default).
A disqualification order must Where a person has been a director of a company which has at
be made, for a minimum of 2 any time become insolvent (whether while they were a director or
years and a maximum of 15 subsequently) and their conduct as a director of that company
years: makes them unfit to be concerned in the management of a
company. (The courts may also take into account their conduct as
a director of other companies, whether or not these other
companies became insolvent.) Directors can be disqualified under
this section even if they take no active part in the running of the
business. In uncontested cases, and where it is considered
expedient in the public interest, the Secretary of State may accept
a disqualification undertaking instead of seeking a disqualification
order (ie, an undertaking that the director will not act as a director
etc, or be concerned in the management etc, of a company).
Note that a bankruptcy order made against a person automatically disqualifies them from acting as
a director of a company or being concerned in the management or promotion of a company (s.11).
Offences for which directors have been disqualified include the following:
• insider dealing
• failure to keep proper accounting records
• failure to read the company’s accounts
• loans to associated companies on uncommercial terms to the detriment of creditors
The courts’ approach has been to view ‘ordinary commercial misjudgement’ as insufficient to justify
disqualification.
Re Uno, Secretary of State for Trade and Industry v Gill 2004
The facts: A group consisting of two furniture companies carried on trading while in serious financial
difficulties, while the directors tried to find a way out of the situation. Uno continued to take deposits
from customers for furniture to fund its working capital requirements.
Decision: The directors were not disqualified for acting in this way as their behaviour was not
dishonest or lacking in commercial probity and did not make them unfit to manage a company. They
had been trying to explore realistic opportunities to save the businesses and were not to blame for
the eventual collapse of the businesses and the subsequent loss of customers.
A lack of commercial probity, or gross negligence or total incompetence, however, might render
disqualification appropriate.

Secretary of State for Trade and Industry v Thornbury 2008
The facts: A director failed to carry out any further investigation after receiving verbal assurances
from other directors regarding the financial status of the company. The company was in breach of its
statutory obligations to pay HMRC.
Decision: Although the director had not been dishonest, it had not been reasonable for him to leave
matters in the other directors’ hands to such a degree. He was held to be unfit to be concerned in the
management of a company and disqualified for two years.
Note that recent government guidance has signalled a greater willingness to disqualify directors of
companies that are in breach of competition law. It seems that a director’s active involvement in the
breach will no longer be required. Rather, a director may face disqualification if it can be shown that
they had reasonable grounds to suspect a breach but failed to take steps to prevent it, or even where
they did not know of the breach but should, in all the circumstances (including their own skill and
experience) have known of it.
Breach of a disqualification order can result in a fine and/or imprisonment.
The following circumstances may result in the court imposing a lower period of disqualification in
mitigation:
• lack of dishonesty
• loss of director’s own money in the company
• absence of personal gain (such as excessive remuneration)
• efforts to mitigate the situation
• low likelihood of re-offending
Administrators, receivers and liquidators all have a statutory duty to report to the Department for
Business, Energy and Industrial Strategy (BEIS) on directors of companies in whose affairs they have
become involved, where they believe the conditions for a disqualification order have been satisfied.
The Secretary of State then decides whether to apply to the court for an order, but if they do decide
to apply, they must do so within two years of the date on which the company became insolvent.
Interactive question 4: Directors’ disqualification

Match the correct periods of disqualification with the following scenarios (in two cases the period is
the same):
(1) 2–15 years
(2) 5 years
(3) 15 years
Scenario Period
Persistent default in filing confirmation statements
Fraudulent trading
Wrongful trading
Where the court considers that their conduct makes them unfit to be considered
in the management of a company
202 Law ICAEW 2023

2 Members
Section overview
• Shareholders, being members of a company with a share capital, effectively own the company.
• The members exercise control over the directors where required by law and the company’s
articles.
Any subscriber of a company’s memorandum and any person entered on the company’s register of
members is a member of the company. A company may be formed with a single member, however, if
it is the company must include a statement on its register that there is only one member. Subject to
limited exceptions, a company cannot be a member of its holding company. Where a member owns
shares in a company, they are called a ‘shareholder’.
2.1 Regulation of the members

The members are regulated internally by the articles of association. These may be supplemented by
a shareholders’ agreement that deals with members’ rights and duties and which often offers more
protection to the individual or minority shareholders, for example by requiring unanimous consent to
an alteration to the articles, rather than the usual 75% majority. One advantage of a shareholders’
agreement is that it is a private document not requiring registration. Thus it might cover the following
matters in a wish to keep them off the public record:
• Confidentiality undertakings and non-competition restrictions, the right of certain shareholders to
appoint directors and dispute resolution
• Choice of bankers, cheque signatories and the company’s policy on loans and borrowing
A shareholders’ agreement is of course, a binding contract and therefore enforceable in and subject
to the courts’ jurisdiction. It is particularly common in the case of companies that were formerly, or
are in the nature of, a partnership.
2.2 Members’ rights and communication

Members have a number of rights including the right:
• to be sent a copy of annual accounts and reports
• to require directors to call a general meeting
• to appoint a proxy
A member may be entitled, under the company’s articles, to nominate another person to exercise all
or any of those rights in place of them.
Subject to any contrary provision in the company’s articles, a company may send communications in
electronic form, provided the member has agreed (generally or specifically).
A member of a listed company who holds shares on behalf of another person may nominate that
other person to enjoy information rights, ie, the right to receive a copy of all communications
required to be sent to members, including accounting reports (s.146). Such information can be
provided electronically unless a request is made for hard copies.
A member may take action to enforce personal rights of membership for example the right to vote
(Pender v Lushington 1877) or receive a due dividend. Note that this is not a derivative action, on
behalf of the company, but a personal action.
The right to a vote established in Pender v Lushington 1877 is based on the principle that a share is a
property to which certain rights attach. In that case, a shareholder held 1,000 shares and allocated
them to nominees, in blocks, to vote on his behalf. The chair at the meeting where the vote was held
refused to count the votes of the nominees. The court decided that this should not have occurred
and that all the votes of the nominees should have been counted.
2.3 Approval of directors’ actions

As mentioned in section 1, the Act provides for certain matters concerning directors (and shadow
directors) to require the approval of the members in general meeting in order to be valid. These are:

Matter requiring Notes Consequences of breach
approval
Service contracts (s.188) Approval is required if the service The provision is void and
contract provides for a director’s the contract is thereafter
employment to be a guaranteed term of deemed to include a term
two years or more (ie, not terminable by entitling the company to
the company in a lesser period or only in terminate it at any time on
specified circumstances). giving reasonable notice.
A written memorandum setting out the
proposed contract must be provided to
the members prior to the resolution
being passed.
Substantial property Approval is required for any arrangement The company faces no
transactions (s.190) where a director is to acquire from the liability for failure to obtain
company (or the company from the approval. The transaction is
director) a substantial non-cash asset, ie, voidable at the instance of
one (or more) whose (aggregate) value: the company except in
• exceeds 10% of the company’s asset specified circumstances,
value and is more than £5,000; or unless the members give
approval within a
• exceeds £100,000. reasonable period.
The section does not apply to The director (and possibly
transactions permitted under a relevant others) is liable to account
service contract or to payments for loss of to the company for any
office. gain and to indemnify the
There are other exceptions applicable to company against any loss
group companies, companies in winding or damage.
up or administration and to transactions
on recognised investment exchanges.
Loans to directors etc Approval is required for any loan by a The transaction is voidable
(s.197) company to a director or for any at the instance of the
guarantee or security by a company in company, except in
connection with a loan made by another specified circumstances,
party to a director. A written unless it is approved by the
memorandum setting out the details of company within a
the transaction proposed must be given reasonable period.
to the members. The director (and possibly
There are similar There are exceptions for: others) is liable to account
provisions dealing with to the company for any
• expenditure on company business, gain and to indemnify the
quasi-loans to directors defending proceedings or regulatory
and loans and quasi- company against any loss
action or investigation or damage.
loans to persons
connected with • minor transactions or ones in the
directors, credit ordinary course of business
transactions (public • intra-group transaction
companies only) and • money-lending companies
transactions related to
any of the above
Payments for loss of Approval is required for payments or The payment is held on
office (s.217) benefits to be made on loss of office or trust for the company.
retirement. Any director who
A written memorandum of the proposed authorised the payment is
payment (or other benefit) must be sent liable to indemnify the
to all members. company for any loss.
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Matter requiring Notes Consequences of breach
approval
There are exceptions for small payments

and payments in discharge of legal
obligations. (‘Small payments’ are
currently those of £200 or less, although
the Secretary of State does have power to
increase this figure.)
Note that directors still owe their general duties even if one of the above provisions apply (s.180).
This means that directors should only approve a loan to another director if they are confident that it
will not offend the duty to promote the success of the company. On the other hand, if members’
approval is sought for a loan to a director, then the duties to avoid conflicts of interest and not to
accept benefits from third parties will not apply. This is because the members have approved the
transaction, so even if there is a conflict of interest, they have agreed that they are happy with the
arrangement.
Interactive question 5: Members

Which two of the following require the approval of members?
A The issuance of a new service contract to a director with a minimum term of 18 months
B A director purchasing a company asset for £3,500 when the company’s asset value is £40,000
C The company lending a director £1,000
D A payment of £2,000 from the company to a director on their retirement
3 Majority rule and minority protection

Section overview
• Generally speaking, the company is controlled by the will of the majority. If the minority objects to
the majority’s actions, the basic rule is that it has no recourse because the company is the proper
claimant.
• However, the minority is given the right by statute to object in certain circumstances.
• Any member may also bring an action against the directors (on behalf of the company) for breach
of duty or negligence against the directors.
• Any member may apply to the court for relief where the affairs of the company have been
conducted in an unfairly prejudicial manner.
• Any member may, as a last resort, petition the court to wind up the company on the ground that it
is just and equitable to do so.
3.1 The rule in Foss v Harbottle

Although the directors can be said to ‘manage’ the company, it is the members who ultimately
‘control’ the company. Usually, a 75% majority gives complete control and a majority of over 50%
gives considerable influence, including the power to appoint and remove directors.
Furthermore, unlike directors, members may exercise their votes in their own interests and are not
required to act for the benefit of the company. Generally speaking, if the minority is unhappy with a
decision made by a majority, it has no recourse: the company (being a separate legal person) is the
proper claimant with the action vested in it. This is sometimes referred to as ‘the rule in Foss v
Harbottle‘.

Foss v Harbottle 1843
The facts: A shareholder (Foss) sued the directors of the company alleging that the directors had
defrauded the company by selling land to it at an inflated price. The company was by this time in a
state of disorganisation and efforts to call the directors to account at a general meeting had failed.
Decision: The action must be dismissed.
• The company as a person separate from its members is the only proper claimant in an action to
protect its rights or property.
• The company in general meeting must decide whether to bring such legal proceedings.
A minority can, however, take action in certain cases, in particular:
• Where statute specifically provides for a minority to have a particular power or to apply to the
court for example. The permitted minority is normally measured by being a minimum number of
members or by members holding a specified percentage of the company’s share capital or voting
rights (see 3.2 below).
• A derivative action for negligence, breach of duty, default or breach of trust by the directors
under s.260 (see section 3.3 below).
• A derivative action in respect of unfairly prejudicial conduct by the majority under s.994 (see 3.4
below).
• To petition the court for the company to be wound up on the grounds that it is just and equitable
to do to so (see 3.5 below).
Note, too, that a minority member may also pursue a personal action to enforce their rights of
membership.
To advise a minority shareholder of their rights firstly requires you to appreciate the context they are
in; that is, it is the majority that control a business. This means the minority will have to accept that
they will not always be happy with the decisions that the business makes.
3.2 Statutory rights of minorities

A minority of members is given a number of specific statutory rights, including the following:
Subject Required
Variation of class rights Holders of ≥ 15% of class of shares (or ≥ 15% of members
where no share capital) can apply to court for cancellation
(s.633)
Company meeting Can be requisitioned by holders of (usually) ≥ 5% of company’s

paid-up capital with voting rights (or ≥ 5% of voting rights
where no share capital) (s.303)
Notice of members’ resolutions Must be given by company on requisition of members holding

≥ 5% of voting rights (s.292)
Payment out of capital by Any member (or creditor) can apply to court to prohibit the
private company for the transaction (s.721)
redemption or purchase of its
shares
Registration of limited company Can be prevented by individual members

as unlimited
3.3 Derivative action on behalf of the company

A director’s duties are owed to the company, which means that the company is the proper claimant
in any proceedings for relief and a member cannot sue a director for breach of duty. However, under
s.260, a member may bring a derivative claim on behalf of the company in respect of an actual or
206 Law ICAEW 2023

proposed act or omission by a director (or former director or shadow director) that involves
negligence or breach of duty (or default or breach of trust).
It is not necessary to show that the wrongdoing directors control the majority of the company’s
shares. The member must first make out a prima facie case to the court and obtain permission to
continue the claim (or to take over a claim begun by the company or another member).
The member will be refused permission where the court is satisfied that:
• the relevant act or omission has been authorised by the company beforehand or ratified by the
company subsequently (remembering that any decision to ratify must be made not counting the
votes of the director concerned or any connected person, s.239); and
• a person acting in accordance with the duty to promote the success of the company would not
seek to continue the claim.
In deciding whether to grant or refuse permission, the court will have regard to the following:
• Whether the member is acting in good faith
• The importance that a person promoting the success of the company would attach to it
• Whether authorisation or ratification by the company is likely
• Whether the company has decided not to pursue the claim
• Whether its member could pursue the claim in their own right rather than on behalf of the
company
• The views of members with no personal interest in the matter
Kiani v Cooper 2010
The facts: K, a shareholder and director in Company X, sought permission to continue a derivative
action against C, the other shareholder and director, on behalf of Company X, in respect of
certain actions taken by C.
Decision: C had failed to produce any evidence in corroboration of his defence against K’s
allegations and permission was granted to pursue a derivative claim. The court took account of
the fact that K had acted in good faith throughout and considered that a hypothetical director
would wish to continue the claim against C. Although the court considered that K could have
petitioned for unfair prejudice (see below), the possibility of an alternative action was only one
factor and did not deny K the right to pursue a derivative claim under s.260.
The bullet points above concerning the factors that courts will consider when deciding whether to
accept permission for a derivative action claim can be used as a checklist by the client to determine
whether to proceed in the first place.
Interactive question 6: Derivative action

In a derivative claim against the directors of a company under s.260 CA’06, the court will consider
many factors.
Requirement
What are the three factors that will lead to a claim being unsuccessful in any event?
A That the act was ratified by the company
B That the claimant was not acting in good faith
C That the company authorises the act beforehand
D That a person acting in accordance with the duty to promote the success of the company would
not pursue the claim

3.4 Application for relief on the grounds of unfairly prejudicial conduct
Any member (including someone to whom shares have been transferred by operation of law, for
example on death) or the Secretary of State may apply to the court for relief under s.994 on the
grounds that the company’s affairs are being or have been conducted in a manner that is unfairly
prejudicial to the interests of the members generally or of some part of the members’ interests.
Application may also be made in respect of an actual or proposed act or omission that would be
similarly prejudicial.
There is no statutory definition of what constitutes unfairly prejudicial conduct, although it is
specifically provided that the removal of a company’s auditor from office on improper grounds
(including a divergence of opinion on accounting treatments or audit procedures) shall be treated as
unfairly prejudicial. It does not need to be illegal, nor even intentional or discriminatory; it is the
effect of the conduct that is considered.
The following are examples of conduct that has been held to be unfairly prejudicial in contravention
of the identical provision in earlier legislation (s.459 CA 1985):
• Exclusion and removal from the board where the company was one in which the director had a
legitimate expectation of being involved in management, ie, a quasi-partnership company.
Re Bird Precision Bellows Ltd 1986
The facts: A minority with 26% of the shares suspected the MD of this ‘quasipartnership’ company
of concealing bribes paid to secure contracts. When the DTI refused to investigate the minority
was removed from the board. They claimed that this amounted to unfairly prejudicial conduct.
Decision: The claim was allowed as it was a ‘quasipartnership’.
• Improper allotment of shares, for example, an allotment by a majority shareholder simply to
increase their holding.
• Making an inaccurate statement to shareholders, for example misleading them by recommending
acceptance of a bid by another company that the directors owned.
• Diversion of a company’s business to a director-controlled company.
Actions brought claiming that the following matters constituted unfairly prejudicial conduct failed:
• Failure by a parent company to pay the debts of a subsidiary.
• Non-compliance with the stock exchange rules, the City Code and the Cadbury Code.
• Failure by a fellow director and majority shareholder to increase the petitioner’s shareholding
(see O’Neill v Phillips 1999 below). However, where the excluding party has made a reasonable
offer to buy out the shares of the excluded shareholder, the exclusion is unlikely to be regarded
as unfairly prejudicial (provided the shares are properly valued and without applying a discount to
reflect the fact that it is a minority shareholding).
Whatever the reason for the application, the complaint must be based on prejudice to the member
as a member and not as an employee, nor as an unpaid creditor.
O’Neill v Phillips 1999
The facts: P owned a 75% shareholding, although O managed the company (following P’s decision
to take a less active role in the affairs of the company) and, at P’s suggestion, took 50% of the profits.
The possibility of increasing O’s shareholding to 50% was discussed but never acted upon. When
business declined, P resumed control. He demoted O to the position of branch manager and
withdrew his profit share. However, O remained a director. O claimed unfair prejudice for the
withdrawal of his profit share and the alleged repudiation of an agreement to increase his
shareholding.
Decision: The House of Lords held that there was no firm agreement to increase O’s shareholding
and so he had no legitimate expectation of such action that the law would enforce. It was considered
quite fair that P should retain a majority shareholding and exercise control in the way he did. Lord
Hoffman did say (obiter) that if there had been an actual agreement in O’s favour, his capacity as
member (and not just as employee) might have founded a claim since he had invested time and
money in the company.
The courts will not generally intervene in cases of dispute about management (even bad
management) save possibly where it results in serious financial damage to the company and the
minority’s interests. A breach of company law will not necessarily mean that there is unfairly
prejudicial conduct. However, where company law has been fully complied with, it may be said that
208 Law ICAEW 2023

relief under s.994 is unlikely to be given unless there are equitable considerations that make it fair in
all the circumstances. The provision cannot simply be invoked by shareholders when they do not like
the way a company is run.
Re A Company 1983
The facts: The petitioners’ grievance was the directors’ refusal to put forward a scheme of
reconstruction or a proposal to purchase their shares (by the company). The directors were
preoccupied with plans for diversification of the business.
Decision: The directors’ duty was to manage the company to its advantage as they saw it. It was not a
case of ‘unfair prejudice’.
The courts may also take the petitioner’s conduct into account when deciding whether certain
actions are unfairly prejudicial.
Re R A Noble & Sons (Clothing) Ltd 1983
The facts: C had provided the capital but left the management in the hands of the other director on
the understanding that he would be consulted on major company matters, but he was not consulted.
He confined himself to enquiries of the other director on social occasions and accepted his vague
assurances that all was well. The petition followed from a breakdown of the relationship.
Decision: C’s exclusion from discussion of company management questions was largely the result of
his own lack of interest. His petition was dismissed.
When a petition is successful, the court may make such order it thinks fit for giving relief in respect of
the matters complained of, including:
• Regulating the future conduct of the company’s affairs (for example that a controlling shareholder
shall conform to the decisions taken at board meetings).
• Authorising any person to bring legal proceedings on behalf of the company.
• Requiring the company to do an act that it has omitted to do or to refrain from doing an act
complained of.
• Providing for the purchase of shares of the minority by other members or by the company itself.
• Requiring the company to make any (specified) alterations to its articles, or not to make such
alterations without leave of the court.
Perhaps the most common type of relief is an order that either the controlling shareholder or the
company shall purchase the petitioner’s shares at a fair price. This ends a relationship that has
probably broken down beyond repair. The court may determine what is fair and need not make any
allowance for the fact that the shares to be bought are only a minority holding and do not give
control. The shares should be valued on the basis of their worth before it was diminished by the
controlling shareholders’ conduct. Where the articles provide a method for valuing shares, it should
be used unless it would be unfair to the petitioner.
When a client is seeking relief for unfairly prejudicial conduct, you need to exercise professional
scepticism. Remember that they are likely to be angry and upset and therefore are seeing things
from a biased perspective. You will need to come to your own conclusion of whether the conduct
was truly unfairly prejudicial.
Interactive question 7: Unfairly prejudicial conduct

Are the following likely to amount to unfairly prejudicial conduct under s.994 CA’06?
Yes/No
Failure of a parent company to pay the debts of its subsidiary
Diversion of the company’s business to a director-controlled company

Yes/No
Failure to call a general meeting
Late presentation of the company’s accounts
3.5 Just and equitable winding up

A member who is dissatisfied with the directors or controlling shareholders over the management of
the company may petition the court for a winding up on the grounds that it is just and equitable to
do so. The member must show that no other remedy is available, since winding up what may be an
otherwise healthy company is a drastic step. It is very much a remedy of last resort.
Re A Company 1983
The facts: The parties’ working relationship had completely broken down and they agreed that they
would settle the dispute by a sale of the minority’s shares to the majority. This settlement broke down
however, because they could not agree on the price and the minority then petitioned on the just and
equitable ground.
Decision: An order for liquidation on this ground may only be made ‘in the absence of any other
remedy’. As the parties had agreed in principle that there was an alternative to liquidation the
petition must be dismissed.
Orders have been made for winding up in the following situations:
• Where the company was formed for an illegal or fraudulent purpose
• Where there is a complete deadlock in the management of its affairs
Re Yenidje Tobacco Co Ltd 1916
The facts: Two sole traders merged their businesses in a company of which they were the only
directors and shareholders. They quarrelled bitterly, refused to speak to each other and
conducted board meetings by passing notes through the hands of the secretary. One sued the
other for fraud and he petitioned for compulsory winding up.
Decision: “In substance these two people are really partners” and by analogy with the law of
partnership (which permits dissolution if the partners are really unable to work together) it was
just and equitable to order liquidation.
• Where the directors deliberately withheld information so that the shareholders had no
confidence in the company’s management
Advising a client to seek a just and equitable winding up should be the last resort as it will mean the
end of the company. You should make sure that any such decision is based on sound reasoning and
all of the available evidence.
Interactive question 8: Minority action

Austen Ltd has three directors, Darcy, Bingley and Bennett. Together they own 85% of the shares in
the company. They agree to sell a plot of land to Wickham for £50,000, which is what they honestly
believe it to be worth. They do not, however, have the land professionally valued until later when it is
shown to be worth nearer £100,000. Elizabeth and Jane are two minority shareholders who are
considering bringing an action against the directors and the company.
Requirement
In what type of action are Elizabeth and Jane most likely to be successful?
A An action for relief on the grounds that the company’s affairs have been conducted in a manner
that is unfairly prejudicial to the members (s.994)
210 Law ICAEW 2023

B A derivative action for negligence or breach of duty by the directors (s.260)
C A petition for winding up the company on the just and equitable ground (s.122 IA 1986)
D A personal action to enforce their rights as members
4 Meetings and resolutions

Section overview
• Decisions affecting the existence, structure, and constitution of a company are reserved to the
company in general meeting, rather than the directors.
• Certain matters to be carried out by the directors also require a decision in general meeting.
• A decision of a company in general meeting is only valid and binding if the meeting is properly
convened by notice and if the business of the meeting is fairly and properly conducted. Therefore
the statutory rules on notice, quorum, proxies and voting need to be followed.
• The decision may need to be passed by an ordinary or a special resolution (depending on the
subject matter).
• Private companies are permitted to pass written resolutions, which means that they do not need
to hold general meetings except in very limited circumstances.
• There are also rules governing class meetings and single member companies.
Note that there are special rules in relation to ‘traded companies’, ie, companies with shares that
carry voting rights and are admitted to trading on a regulated market in an EEA state by or with the
consent of the company. (These rules are found in the Companies (Shareholders’ Rights)
Regulations 2009 (TSO, 2009).)
4.1 General meetings

A general meeting of the company may be called by:
• the directors;
• 5% of the members;
• the court (of its own motion or on the application of a director or member); or
• an auditor who gives notice of their resignation accompanied by a statement of the circumstances
connected with their resignation and requesting a meeting (s.518).
A general meeting of a public company must be called where the net assets fall to half or less of its
called-up share capital (s.656).
A meeting may be required and may specify any proposed resolution by members representing at
least 5% of the paid-up capital of the company that carries voting rights or (where there is no share
capital) at least 5% of the voting rights (s.303).
Within 21 days of any such requirement, the directors must call a meeting to take place within a 28-
day notice period. If they fail to do so, the members who requested the meeting (or any of them
representing over 50% of the total voting rights) may call a meeting to take place within three
months of the initial request to the directors. A lesser number may require the company to circulate a
statement of up to 1,000 words in respect of any resolution or other business to be dealt with at the
meeting (s.314).
Notice of at least 14 days (or longer if required by the articles) must be given unless shorter notice is
agreed to by at least 90% (or up to 95% if so required by the articles) of the nominal value of the
shares with voting rights or (where there is no share capital) at least 90% of the voting rights (95% in
the case of public companies).

Notice must be given to every member and every director (s.310). The notice must state the time,
date and place of the meeting and the general nature of the business to be dealt with. Note that in
particular cases special notice may be required (see 4.4 below).
Interactive question 9: General meetings

Bonanza Ltd is a company limited by shares which last held a general meeting six months ago.
Requirement
Which of the following cannot now call a further general meeting?
A The directors
B Members representing at least 5% of the paid-up capital with voting rights
C An auditor
D A company secretary
4.2 Annual general meetings

Every public company must hold an annual general meeting (AGM) during the six months following
its accounting reference date (s.336). Failure to do so renders every officer of the company who is in
default liable to a fine.
Notice of at least 21 days must be given unless all the members entitled to attend and vote agree to
shorter notice. The notice must state that the meeting is an AGM.
The members of a public company may require the company to give notice of a resolution to be
moved at the meeting, provided they represent at least 5% of the total voting rights or number at
least 100 with shares on which there is paid up an average of £100 or more per member (s.338).
The directors of a public company must lay its annual accounts and reports before the company in
general meeting (s.437). This is normally done at the AGM. Typically, other business will include the
declaration of a dividend and the appointment of directors and auditors.
A private company is not required to hold an AGM unless its Articles require it to do so.
Interactive question 10: Notice periods

In a public company, what percentage of the voting rights or nominal value of shares with voting
rights must consent to a notice period of less than 14 days?
For a general meeting
For an AGM
4.3 Resolutions at general meeting

Section 281 provides that resolutions can only be passed in accordance with the Act, namely:
• Private companies: as a written resolution or at a general meeting
• Public companies: at a general meeting
• Where a resolution is required but not specified, an ordinary resolution will be required (unless a
higher majority is required by the articles)
These are two types of resolution which might be passed by the company in general meeting:
212 Law ICAEW 2023

Type of Required Business Rules
resolution majority of the
votes cast
Ordinary > 50% Any business for which a special

resolution is not specifically
required by enactment or the
articles
Special ≥ 75% Where special resolution is The notice of the meeting

specifically required by must include the text of the
enactment or the articles, for resolution and specify that
example: it is to be moved as a
• change of name special resolution.
• alteration of the articles All special resolutions must

be filed with the Registrar
• reduction of share capital within 15 days.
• winding up the company
4.4 Written resolutions

Under s.288 the members or directors of a private company (but not a public company) may
propose a written resolution without the need to hold a meeting in respect of any matter except:
• removal of a director; or
• removal of an auditor
before the expiration of their period of office.
The same majority of votes is required for any written resolution as would be required if the
resolution were passed in general meeting. The expression ‘written resolution’ does not mean that
there is a requirement for writing in the sense of hard copy; a soft (or electronic) version is
acceptable. The members or directors (as the case may be) must comply with the procedural steps
for resolutions laid down by the Act, but the Act specifically acknowledges that meetings may be
held without persons being physically together in the same place (s.360A).
A written resolution must be passed within 28 days from its circulation (or any other period specified
in the articles). Once signified, a member’s agreement to a written resolution cannot be revoked. A
written resolution is passed once the necessary majority has signified agreement to it. Articles cannot
override a private company’s power to pass written resolutions (s.300).
4.5 Notice and special notice

As has been mentioned, 14 days’ notice is required for general meetings except:
• for AGMs of a public company, which require 21 days
• where special notice (of 28 days) is required to be given
The number of days always refers to clear days, that is excluding the day of the meeting and the day
on which notice is given or a request is received. Thus, for an AGM of a public company on Thursday
the 25th, notice must be given on Wednesday the 3rd.
Special notice of at least 28 days needs to be given where a resolution is proposed:
• to remove an auditor (s.510); or
• to remove a director or to appoint a substitute upon their removal (s.168).
The relevant director or auditor may submit written representations and require that they be
circulated to members with notice of the meeting or read out at the meeting. They are also entitled
to be heard at the meeting at which the resolution is proposed and/or the ensuing vacancy is filled.
4.6 Proceedings at meetings

Quorum
A quorum is the minimum number of persons required to be present at a general meeting. Generally
speaking (and subject to the company’s articles), a company must have a quorum of two members or

proxies or corporate representatives, save that a single member company may have a quorum of
one.
If the required number is not present, the meeting is said to be inquorate. Normally the articles
provide for an automatic and compulsory adjournment in such cases.
Voting
The rights of members to vote and the number of votes to which they are entitled in respect of their
shares are fixed by the articles. One vote per share is normal but some shares, for instance
preference shares, may carry no voting rights in normal circumstances. Voting may be either:
• by a show of hands, ie, where each member (or their proxy) has one vote irrespective of the
number of shares held and exercises that vote by raising hands; or
• (more commonly) by poll, ie, where each member and proxies representing absent members,
may use as many votes as their shareholding grants them. If a poll is taken, the result of the
previous show of hands is disregarded. (The Act provides that a poll may be demanded by a
certain contingent of members (s.321).)
In voting, either by show of hands or on a poll, the number of votes cast determines the result. Votes
which are not cast, whether the member who does not use them is present or absent, are simply
disregarded. Hence the majority vote may be much less than half (or three quarters) of the total votes
which could be cast.
Proxies
Every member of a company has a statutory right (s.324) to appoint one or more persons as their
‘proxy’, to exercise all or any of their rights to attend, speak and vote at a meeting of the company
and any more extensive rights conferred by the articles.
Records
As noted earlier, every company must keep the following records for 10 years (s.355) and available
for inspection by members:
• copies of all resolutions passed otherwise than at general meeting
• minutes of all general meetings
• details of decisions by sole member companies
Quoted companies must also publish on a website the results of polls at general meetings (s.341).
4.7 Class meetings

Class meetings may be held in respect of individual classes of shareholders or debenture holders
and the rules for these are usually found in the articles or the debenture trust deed respectively.
Generally speaking, most statutory provisions relating to meetings and resolutions also apply to class
meetings.
4.8 Single member private companies

Similarly, any enactment or rule of law applicable to companies with two or more members applies
equally to sole member companies (with any necessary modifications) (s.38). A single member may
conduct business informally without notice or minutes. However, they must still provide a written
record of any decision that should have been taken in general meeting (or written resolution) and
must comply with filing requirements in the normal way.
214 Law ICAEW 2023

Summary
Statute: purpose Statute: specific

Articles Members
for which conferred restrictions
Power
subject to
Appointment by Removal by ordinary resolution
ordinary resolution Death/winding up
Articles or Resignation
question of fact Directors Disqualification
de facto shadow alternate executive non-executive
Duties
Act within Promote Independent Care and skill Avoid Not accept Disclose interest
powers success judgement and diligence conflict benefits in transactions
Breach?
s.260
Fraudulent trading
Wrongful trading
Personal Criminal
Disqualification
liability sanctions
Discretionary Mandatory
Serious offence Insolvent

Fraudulent trading company unfit
SS:unfit (2–15 years)
Competition law
Wrongful trading
(all max 15 years)
Persistent default
(max 5 years)

AGM Proceedings
(21 days or 100% shorter) Quorum
Public company must Voting
Private may Proxies
Records
General meeting Resolutions

(14 days or 90% shorter)
Called by: • Ordinary
Directors • Special
Members (5%) • Written (private only)
Court (not removal of director or
Class meetings Auditor auditor)
Shareholders'
agreement Members Rights
Articles Majority
rule
APPROVAL
ACTION
over directors
Service s.260
Loans etc Personal s.122
contracts derivative
rights winding up
action
Substantial
Payments for Specific s.994 unfairly
property
loss of office statutory prejudicial
transactions
circumstances conduct
216 Law ICAEW 2023

indicated.
1. Do you know what a de facto director is? (Topic 1)
2. Do you know what the statutory duties of directors are? (Topic 1)
3. Can you state three matters involving directors that require the approval of members?
(Topic 2)
4. Do you know what the rule in Foss v Harbottle is? (Topic 3)
5. Do you know who may call a general meeting of a company? (Topic 4)



• Companies (Miscellaneous Reporting) Regulations 2018. (2018) SI 2018/860. London, TSO.
• Companies (Shareholders’ Rights) Regulations 2009. (2009) SI 2009/1632. London, TSO.
218 Law ICAEW 2023

Self-test questions

1 How many directors must a company have?
A public company must have at least directors. A private company must have at
least director.
2 What is a shadow director?

3 True or false?
True/False
A company may remove a director by special resolution provided it gives

special notice.
4 Name two ways which indicate that the power of the directors is subject to the will of the members in
general meeting.
5 List six of the general duties imposed on directors by CA’06.
True/False
The test of whether a director exercised reasonable care, skill and diligence
is partly objective, ie, the standard reasonably to be expected of someone
performing their role as director, but also partly subjective if having regard
to their actual general knowledge, skill and experience would require a
higher standard.
True/False
The offences of wrongful trading and fraudulent trading only apply when a
company goes into insolvent liquidation and may give rise to a personal
liability on the part of a director.
8 In what circumstances might the Secretary of State accept a disqualification undertaking instead of
seeking a disqualification order?
A Where the director has participated in wrongful trading
B Where the director is considered unfit to be concerned in the management of a company
C Where the director has been in persistent default of company law filing requirements
9 What is the principal advantage of a shareholders’ agreement?
10 Name three matters that concern directors but require approval of the members in a general
meeting and state briefly the consequences of breach.
11 State the rule in Foss v Harbottle.
12 What are the three possible actions available to a minority who is unhappy with the action of the
majority?

13 Under what two circumstances is a public company required to call a general meeting?
14 Name three instances when a written resolution cannot be used.
15 Where special notice is required, how many days’ notice must be given?
A 7 days
B 14 days
C 21 days
D 28 days
16 If the voting on a show of hands results in 58% in favour of a resolution and voting on a poll results in
61% in favour, which result counts?
this chapter.
220 Law ICAEW 2023


Correct answer(s):
B Shadow director
Correct answer(s):
F Ordinary resolution with special notice

B Yes, the proceedings and articles are valid.
This was confirmed in Bushell v Faith 1970. A is therefore wrong. C is wrong in stating the articles
are invalid and that a special resolution is needed; an ordinary resolution will suffice to remove a
director. A director can vote on their removal if they are a member; therefore D is incorrect.

B The company is bound by both contracts.
The company is bound by both agreements (assuming there is no lack of good faith on the
bank’s part). The transaction is beyond the authority of the managing director, Mary, in that she
failed to obtain an ordinary resolution of the company as required by its articles of association.
However, s.40 provides that, in favour of a person dealing in good faith with a company, the
power of the board of directors to bind the company or (importantly in this case) to authorise
others to do so, shall be deemed to be free of any limitation under the company’s constitution.
Therefore, the restriction placed on her actual authority (by the article requiring an ordinary
resolution) shall be deemed not to exist in favour of the third party, Conifer Bank Ltd.
Farming Ltd will also be bound by the contract with Saw Ltd, as this was within her implied usual
authority as managing director.
Scenario Period
Persistent default in filing confirmation statements 2
Fraudulent trading 3
Wrongful trading 3
Where the court considers that their conduct makes them unfit to be considered 1
in the management of a company

C The company lending a director £1,000
D A payment of £2,000 from the company to a director on their retirement
All loans to directors and payments for loss of office or on retirement require the approval of
members. Service contracts only need approval if they have a minimum term of two years or
more. Agreements to sell directors company assets only require approval if the asset is valued

over £100,000, or if the value exceeds 10% of the company’s asset value and is more than
£5,000.

A That the act was ratified by the company
C That the company authorises the act beforehand
D That a person acting in accordance with the duty to promote the success of the company would
not pursue the claim
If any of these matters are present, the claim will be unsuccessful. Whether or not the claimant is
acting in good faith (B) is one of the matters taken into consideration by the court, but is not
conclusive in the same way.
Yes/No
Failure of a parent company to pay the debts of its subsidiary No
Diversion of the company’s business to a director-controlled company Yes
Failure to call a general meeting Yes
Late presentation of the company’s accounts No

B A derivative action for negligence or breach of duty by the directors (s.260)
Elizabeth and Jane would most likely achieve the result they want by taking a derivative action
under s.260 CA’06. This statutory provision covers negligence by the directors and so a remedy
may be given. On the facts, it is not clear that a claim for unfairly prejudicial conduct would be
successful.

D A company secretary
For a general meeting 95%
For an AGM 100%
222 Law ICAEW 2023

1 A public company must have at least two directors. A private company must have at least one
director.
2 A shadow director is someone in accordance with whose directions or instructions the directors are
accustomed to act.
3
True/False
A company may remove a director by special resolution provided it gives False

special notice.
Special notice is required but only an ordinary resolution is needed.

4 Any two:
(1) Alteration of the articles requires special resolution
(2) Reduction of capital requires special resolution
(3) Borrowing power may need ordinary resolution
(4) Directors’ office is subject to members’ power to remove by ordinary resolution
5 Any six:
• To act within the company constitution and to exercise their powers only for the purposes for
which they were conferred
• To promote the success of the company
• To exercise independent judgement
• To exercise reasonable care, skill and diligence
• To avoid conflicts of interest
• Not to accept benefits from third parties
• To declare any interest in a proposed transaction or arrangement
6
True/False
The test of whether a director exercised reasonable care, skill and diligence True
is partly objective, ie, the standard reasonably to be expected of someone
performing their role as director, but also partly subjective if having regard
to their actual general knowledge, skill and experience would require a
higher standard.
True/False
The offences of wrongful trading and fraudulent trading only apply when a False
company goes into insolvent liquidation and may give rise to a personal
liability on the part of a director.
Fraudulent trading applies whether or not a company has been or is in the course of being wound
up. It is true, however that the commission of both offences can lead to a personal liability to
contribute to the company’s debts.

B Where the director is considered unfit to be concerned in the management of a company
9 It does not need to be registered or open to public inspection.
10 Any three:
Matter Consequence of breach
Service contracts Provision is void and contracts deemed to include provision for
termination on reasonable notice
Substantial property Contract is voidable, director liable to account for any gain and
transactions indemnify against any loss
Loans to directors etc Contract is voidable, director liable to account for any gain and
indemnify against any loss
Payments for loss of Payment is held on trust for the company, director liable to indemnify
office for any loss
11 In order to redress a wrong done to a company or its property or to enforce its rights, the proper
claimant is the company itself and not a member or members of the company.
12 Three possible actions:
• Derivative action under s.260 (if majority represented by directors)
• Derivative action under s.994 for unfairly prejudicial conduct
• Petition for the winding up of the company on the just and equitable ground (s.122 IA ‘86)
13 The following two circumstances are correct:
(1) An AGM every year
(2) Wherever its net assets are half or less of its called-up share capital
14 The following three instances are when a written resolution cannot be used:
(1) In a public company
(2) To remove an auditor
(3) To remove a director
D 28 days
16 The vote on a poll. If a poll is taken, the result of the previous show of hands is disregarded.
224 Law ICAEW 2023

Chapter 9
Companies: finance
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 Shares
2 Share capital
3 Loan capital and charges
Summary
Self-test questions
Introduction
Learning outcomes
• Identify the procedures for the issue of shares, including issues at a premium and pre-emption
rights
• Identify aspects of capital maintenance including
– reduction of capital
– redemption and purchase of a company’s own shares
– financial assistance for the purchase of a company’s own shares
– distribution of profits
• Identify share transfer requirements and disclosure requirements
• Identify the nature of fixed and floating charges, the rationale for the selection of a particular type
of charge, and the procedures for registering them
Specific syllabus references for this chapter are: 2d, f, g and n.
9
Syllabus links
In the previous chapter, you learned about companies limited by shares and this chapter now
explores the financing of such companies. You will learn about loans and charges over companies’
assets and, in the next chapter, consider further what happens when a company defaults on such
arrangements.
9
Assessment context
You can expect around four or five questions on the subject matter of this chapter on your
assessment. Questions on this chapter will be set as multiple choice, multi-part multiple choice or
which charge will take priority if the borrower cannot repay their debts.
9

of this chapter.

questions
1 Shares Approach As with other sections IQ1: Types of

All companies must Note the different in this chapter, much of share
have shares. There are types of shares and this material is highly This question
several different types the rights examinable and there helps you to
of shares that you need shareholders have are many rules to learn. understand
to be aware of. There (including class Questions on these the rights
are also some fairly rights). Then learn rules are likely to be that holders
complex rules the rules on knowledge based and of different
concerning the issue allotment, issue and test your shares have.
and transfer of shares transfer of shares. understanding of them.
that companies need to
apply.
Stop and think
What are the rights
of a preference
shareholder? Do
226 Law ICAEW 2023

questions
you understand
what pre-emption
rights are? What are
the rules on issuing
shares at a premium
and discount?
2 Share capital Approach The number of rules in IQ3:

Share capital is one When reading this this section makes it Maintenance
type of capital that material, keep in extremely examinable. of capital
companies have. Once mind the principle Expect knowledge This question
it has been created of capital questions to test rules tests your
there are restrictions on maintenance and on reducing share knowledge of
how it can be reduced protecting the capital and financial rules
in future. These interests of assistance. Scenario associated
restrictions, including creditors. Pay questions may ask you with the
the rules on dividends, particular attention to determine whether a principle of
are there to protect the to the rules on dividend has been capital
company’s creditors. reducing share calculated correctly. maintenance.
capital and the
circumstances in
which a company
can purchase its
own shares. Finally,
take note of what a
company’s
undistributable
reserves are and
how they are
involved in the
calculation of the
maximum dividend
payment.
Stop and think

When can a
company reduce its
share capital? What
is the permissible
capital payment?
When can
companies provide
financial assistance
to purchase their
shares?
3 Loan capital and Approach This is another section IQ4: Charges

charges Focus on the with an abundance of This is a very
Loan capital is another differences between rules that could be short
source of finance for the rights of examined alongside question that
companies and is often shareholders and insolvency situations. tests the
in the form of debenture holders. For example, a scenario point where a
debentures. Creditors Note the difference question could test floating
look for practical ways between fixed and your ability to apply the charge
to protect their loan floating charges, rules on priority of becomes a
and fixed and floating and learn the rules charges. fixed charge.
ICAEW 2023 9: Companies: finance 227

questions
charges are a common on priority and

way to do that. registration of
charges.
Stop and think

What are the rights
of debenture
holders? What is a
floating charge?
Could you prioritise
the repayment of
charges from
information in a
scenario?
228 Law ICAEW 2023

1 Shares
Section overview
• The most common types of share are ordinary shares and preference shares. A company may also
issue redeemable shares (which may take the form of ordinary or preference shares).
• Shares that have certain rights not enjoyed by other shares in the company are grouped in a class
and are said to have class rights.
• Generally speaking, shares may be allotted provided authority is given in the articles or by
ordinary resolution and they must first be offered to existing shareholders in proportion to their
existing holdings.
• Shares must be paid for in money or money’s worth. They can be issued at a premium but not, as
a general rule, at a discount.
• Shares are generally freely transferable and may be transferred in a paper or paperless format.
A share is a transferable form of personal property, carrying rights and obligations, by which the
interest of a member of a company limited by shares is measured. A member of a company who
holds one or more shares is a shareholder. References to ‘the Act’ are to the Companies Act 2006
(TSO, 2006) unless otherwise stated.
1.1 Types of shares

If the constitution of a company states no differences between shares, it is assumed that they are all
ordinary shares. However, often a company will choose to confer different rights on different classes
of share. You will remember that the statement of capital submitted on formation (or on subsequent
actions of the company that have an effect on share capital) includes the prescribed particulars of the
rights attached to each type of the company’s shares. Details are also likely to be included in the
company’s articles.
The most common types of share are ordinary shares and preference shares. They (and redeemable
shares) are described below:
Share Feature
Ordinary Ordinary shareholders have an automatic right to have their capital repaid and to
shares participate in the distribution of profit, when the company is wound up, provided
the company has surplus assets once creditors have been satisfied.
Dividends are payable to ordinary shareholders only according to declarations
made by the directors and they are not cumulative (whereas dividends payable on
preference shares are normally cumulative).
It is the ordinary shareholders who are normally offered the benefit of rights issues
and bonus issues.
All ordinary shareholders have statutory pre-emption rights (see section 1.4).
Preference Preference shareholders also have a right to have their capital repaid on a winding
shares up (unless the articles provide otherwise). If there is a surplus after repayment of
capital, ordinary and preference shareholders will share equally. Where preference
shares are expressed to carry a priority or preferential right to return of capital, the
amount paid up on each preference share is to be repaid before anything is
repaid to ordinary shareholders. In these circumstances, however, if there is a
surplus after repayment of capital, the preference shareholders will have no right
to share in that surplus.
Typically, preference shares will carry a prior right to a fixed dividend, in which
case:
• It is not a right to compel payment of a dividend, simply to receive a dividend
at the specified rate before any other dividend is paid or declared.

Share Feature
• The right to receive a preference dividend is deemed to be cumulative unless

the contrary is stated.
• On liquidation, the preference shareholders cease to be entitled to any unpaid
preference dividends unless:
– a dividend has been declared though not yet paid when liquidation
commences; and
– the articles (or other terms of issue) expressly provide that in a liquidation
arrears are to be paid in priority to return of capital to members.
• Holders of preference shares have no entitlement to participate in any
additional dividend over and above their specified rate unless that is expressly
provided.
Preference shares are usually expressed not to carry a right to vote (or only in
specified circumstances, such as failure to pay the preference dividend, variation
of their rights or a resolution to wind up). If there is no express provision, they carry
the same voting rights as ordinary shares.
Preference shareholders do not have rights of pre-emption unless they are
specifically conferred by the company’s articles of association or terms of issue of
the shares.
Redeemable A redeemable share is one that is issued on terms that it can be bought back by
shares the company at the option of the company or the shareholder (see section 2.4).
To issue redeemable shares, a public limited company’s articles must give the
authority to issue them. The articles of private companies may specifically exclude
or restrict their issue (s.684). The directors’ authority to determine the terms,
conditions and manner of redemption may also be given by an ordinary resolution
(even if it has the effect of amending the company’s articles). Redeemable shares
can only be issued when there are other shares issued that are not redeemable.
1.2 Class rights

Any share that has different rights from others is grouped with the other shares carrying identical
rights to form a class. The rights that attach to shares in that class which are different from the rights
enjoyed by all shareholders are called ‘class rights’.
The rights attached to a class of shares can be varied only in accordance with the articles or
according to the procedure set out in the Act by a special resolution of the class or written consent
from at least 75% in nominal value of the issued shares of that class.
The holders of at least 15% of the issued shares of the class in question (who did not consent or vote
in favour of the variation) may apply to the court, within 21 days, to have the variation cancelled as
‘unfairly prejudicial’. The court cannot, however, modify the terms of the variation.
A variation is ‘unfairly prejudicial‘ if the majority who voted in favour did so to gain an advantage
instead of considering the interests of the class as a whole (Re Holders Investment Trust 1971).
Note that the fact that the value of existing rights may be affected will not concern the court if the
rights themselves are unchanged. A class right is varied only if the right itself is altered. An alteration
that affects how the right ‘operates’, but which leaves the right unchanged is not a variation.
For example, where shares of one class are subdivided with the incidental effect of increasing the
voting strength of that class, the class rights of another class are not varied as a result, even though
the rights of the non-altered shares are, in practice, less valuable.
230 Law ICAEW 2023

Interactive question 1: Types of share
Which type(s) of share:
Ordinary/Preference
carries statutory rights of pre-emption in the absence of

any express provision?
carries a right to a dividend at a specified rate that is

deemed to be cumulative in the absence of any express
or implied provision to the contrary?
carries an automatic right to have capital repaid in the

event of the company being wound up?
carries a right to vote in the absence of any express

provision?
1.3 Allotment of shares

Shares are allotted when a person acquires the unconditional right to be included in the company’s
register of members in respect of those shares (s.558). Shares are generally said to be issued once
the allottee receives a letter of allotment or share certificate as evidence of their title. Once their
name is entered on the register of members, they are then a member of the company.
The general rule is that the directors of any company may allot shares on the following basis (s.551):
(a) There must be authority given either:
– by the articles; or
– by ordinary resolution.
It can be general or specific, conditional or unconditional.
(a) The authority must:
– state the maximum number of shares to be allotted; and
– state the expiry date for the authority, which must be not more than five years after the authority
(ie, after the incorporation or resolution).
The authority may be given, varied, renewed or removed by an ordinary resolution, even if this
constitutes an alteration of the articles (which would normally require a special resolution).
The rule does not apply to the allotment of shares in pursuance of an employees’ share scheme.
In addition, the directors of a private company with only one class of shares may allot shares of that
class unless (and to the extent that) it is prohibited by the company’s articles (s.550).
Any director who knowingly contravenes or allows a contravention commits an offence punishable
by a fine.
A rights issue is an allotment of additional shares made to existing members, usually pro rata to their
existing holding in the company’s shares. If the members do not wish to subscribe for additional
shares under a rights issue, they may be able to sell their rights and so obtain the value of the option.
A bonus issue is the capitalisation of the reserves of a company by the issue of additional shares to
existing shareholders, in proportion to their holdings. Such shares are normally fully paid-up with no
cash called for from the shareholders.
1.4 Rights of pre-emption

Whenever a company proposes to allot ‘equity securities‘ (usually ordinary shares for cash), it is
required to offer those shares first to holders of similar shares in proportion to their holdings (s.561)
and on the same or more favourable terms. These rights of existing company shareholders to be

offered new equity shares issued by the company pro rata to their existing holding of that class of
shares are called pre-emption rights.
The offer must be made in writing or in electronic form and must specify a period of not less than 21
days during which the offer may be accepted. Equity securities that have been offered to members in
this way but are not accepted may then be allotted on the same (or less favourable) terms to non-
members.
If equity securities are allotted in breach of these rules the members to whom the offer should have
been made may, within two years from delivery of the return of allotment, recover compensation for
their loss, if any, from those in default (s.563). The allotment will generally be valid.
These pre-emption provisions do not apply in the following cases:
Reason Explanation
Exceptions The Act provided that the provisions do not apply to allotments of:
• bonus shares
• securities to be wholly or partly paid up otherwise than in cash
• securities relating to an employees’ share scheme
Exclusions A private company may exclude all or any of the provisions in its articles,
either generally or in relation to allotments of a particular description.
Disapplication Directors of a private company with only one class of shares may be
authorised to allot equity securities as if s.561 did not apply by either:
• the articles; or
• special resolution.
Where directors are given authority by the company to allot shares, they may
also be given the power to allot equity securities as if s.561 did not apply by
either:
• the articles (where a general authority is given); or
• special resolution.
1.5 Shares at a discount

As a general rule, shares cannot be allotted at a discount to (or for a price which is less than) the
nominal value (s.580). If shares are allotted at a discount, the allottee is liable to pay the company an
amount equal to the amount of the discount, together with interest.
The no-discount rule only requires that, in allotting its shares, a company shall not fix a price that is
less than the nominal value of the shares. It may leave part of that price to be paid at some later time.
Thus £1 shares may be issued at a price of £1 but only partly paid – 75p on allotment and 25p when
called for or by instalment. The unpaid capital passes with the shares, if they are transferred, as a
debt payable by the holder at the time when payment is demanded.
More specifically (s.552), a company is prohibited from applying any of its shares or capital money in
paying any commission, discount or allowance to any person in consideration of their subscribing for
shares (or procuring subscriptions or agreeing to subscribe or procure subscriptions). This
prohibition applies regardless of how the shares or money are to be applied, whether in addition to
the purchase price of property acquired by the company or the contract price of work to be carried
out for the company or in being paid out of the nominal purchase money or contract price or
otherwise.
There is one exception, however, which entitles a company to pay a commission to someone who
agrees to subscribe or to procure subscriptions for shares, provided the company’s articles contain
the relevant authority and provided the commission paid does not exceed 10% of the issue price of
the shares or the amount authorised by the articles, whichever is less.
1.6 Shares at a premium

Shares may be issued at a premium, for cash or otherwise. In such cases, a sum equal to the premium
on each share must be transferred to a share premium account. If a company allots 100 of its £1
232 Law ICAEW 2023

(nominal) shares for £1.50 in cash, £1 per share is credited to the share capital account, and 50p to
the share premium account. The allotment would be shown in the balance sheet as follows:
Before share After share

issue issue
£ £
Cash 100 250
Share capital 100 200
Share premium – 50
100 250
That amount so transferred may be used to write off the expenses of the issue of those shares and
any commission lawfully paid on the issue. The account may also be used to pay up new shares to be
allotted to members as fully paid bonus shares. There are also special rules for group reconstruction
relief and merger relief, which relieve companies from the requirement to transfer any premium to a
share premium account. Thus if an acquiring company secures at least 90% of the equity capital of
another company as consideration for an allotment of its shares, any premium obtained from the
excess of the other company’s assets over the nominal value of its shares need not be transferred to
the share premium account.
Otherwise, the share premium account is treated as part of the company’s paid-up share capital and
is subject to rules on the reduction of capital set out in the Act. For example, a company cannot
distribute part of its share premium account:
• as a dividend;
• to write off expenses incurred in connection with the formation of the company; or
• to write off expenses incurred in connection with an issue of debentures.
When advising a client on whether to issue shares at a premium, it is important to understand

whether or not they may have use for the share premium account in the future.
1.7 Payment for shares

Shares must be paid up in money or money’s worth (including goodwill and know how). Thus
payment may be cash or a non-cash consideration of sufficient value. For instance, a company may
issue shares in payment of the price agreed in the purchase of a property. While a blatant and
unjustified overvaluation will be declared invalid, the courts generally will not wish to intervene in a
directors’ valuation of an asset acquired for shares if it appears reasonable and honest. To issue
shares ‘at par‘ is to obtain consideration equal to the nominal value. The prohibition on offering of
shares at a discount on nominal value does not prevent a company from issuing shares at a price that
is below market value.
Shares are deemed to be allotted or paid up in cash where the company receives:
• cash
• an undertaking to pay cash to the company (but not to another person) at a later date
• a cheque
• a release of its liability for a liquidated sum

There are additional rules which apply to public companies, as follows:
Rule Explanation
Subscribers (s.584) Shares taken by subscribers must be paid up in cash.
Services (s.585) Shares cannot be paid for by an undertaking by someone to do work or

perform services for the company or any other person.
1/4 paid up (s.586) Shares must be paid up at least as to one-quarter of the nominal value plus
the whole of any premium payable (except for shares allotted in pursuance
of an employees’ share scheme).
Long-term Shares cannot be allotted as fully or partly paid up otherwise than in cash if
undertaking (s.587) the payment is or includes an undertaking which may be performed more
than five years after the allotment.
Valuation of non- Any payment otherwise than in cash must be independently valued
cash consideration (subject to certain exceptions concerning mergers or an arrangement with
(s.593) another company).
Generally speaking, where an allotment is made in contravention of these provisions, the allottee is
liable to pay an amount equal to the nominal value of the allotted shares together with interest. They
may apply to the court for relief from such liability and the court may grant relief where it considers it
just and equitable to do so.
Interactive question 2: Issues of shares

The directors of Starwake plc propose to allot 1,000 shares with a nominal value of £5 each for cash.
Requirement
Answer the following questions by indicating ‘yes’ or ‘no’ for each.
Yes/No
(1) Can the company amend its articles of association to incorporate a provision
excluding the statutory rights of pre-emption?
(2) Is an authority to allot shares given by ordinary resolution sufficient?
(3) Can any of the shares be sold for £4.50 each on a fully paid-up basis
(4) Can any of the shares be sold for £5.50 each?
1.8 Transfer of shares

Shares are generally freely transferable in accordance with and subject to any restrictions contained
in the company’s articles (s.544).
Unlisted shares
Once the member-transferor and the transferee have reached agreement, the transferor holds the
shares as trustee for the transferee until registration but remains a member of the company with the
right to vote as they choose. Once the transferee pays for the shares, the transferor must vote as
directed by the transferee. Once the transferee’s name is entered on the register of members, the
transferor ceases to be a member and the transferee acquires all the member’s rights.
The transferor executes a stock transfer form in favour of the transferee and gives it to them with the
share certificate. Both are sent to the company for registration. Once the company receives a proper
instrument of transfer, it must either register the transfer and prepare a share certificate or give notice
234 Law ICAEW 2023

of refusal to the proposed transferee, with reasons for the refusal, within two months. Where notice
of refusal is given, the transferee’s beneficial interest is not affected (that is, they are still entitled to
any dividend or return of capital on winding up), but they cannot exercise all members’ rights,
including voting rights, until the transfer is registered and their name is entered on the register of
members. They are also entitled to such information as they may reasonably require as to the reasons
for the refusal (but they are not entitled to minutes of directors’ meetings). Where the company fails
to comply with these provisions, it and its officers are guilty of an offence punishable by a fine.
There is no requirement for certification where shares are transmitted by operation of law, for
example where a bankrupt member’s trustee in bankruptcy or a deceased member’s personal
representative becomes entitled to the member’s shares.
Listed shares
Securities may be transferred without a written instrument.
CREST Co Ltd is a private company owned by a number of firms connected with all sections of the
equities market. The company is currently the approved operator of an electronic system that
enables shareholders to hold and transfer their securities without the need for written instruments of
transfer. Under the CREST system, a member appoints a custodian broker to hold their shares under
a customer agreement, which provides for the broker to deal with the shares only in accordance with
the shareholder’s directions. Any transfer of shares is normally completed in three days.
Regulations under the Act (made by either the Treasury or the Secretary of State) may provide that
companies may be required (rather than just permitted) to adopt such a paperless holding and
transfer of shares (s.785). Such regulations might impose such a requirement in relation to particular
types of company or security or provide for the company to pass an ordinary resolution to that effect.
You should be aware that there are very detailed rules for the disclosure of substantial interests in the
relevant share capital (essentially voting shares) of public companies. For example, in the case of
companies listed on the Official List or AIM, issuers are obliged to publish their total share capital
and voting rights at the end of each calendar month in which a change has occurred. A shareholder
must notify the issuer (by completing a notification form) where their percentage of voting rights
reaches 3% of the total voting rights of the company, and each 1% thereafter. It follows that this
threshold may be reached even where a shareholder does not actually deal in the shares. They are
therefore obliged to make the notification within two trading days of when they became or should
have become aware of the notifiable change. These provisions are set out in the Disclosure and
Transparency Rules (published by the Financial Conduct Authority).
2 Share capital
Section overview
• The capital that is invested in a company limited by shares by shareholders is called its share
capital.
• A company’s share capital can be increased and altered in a number of ways, but there are strict
controls on any reduction of capital.
• In certain circumstances a company may acquire its own shares, by redemption or purchase, and
private companies may be permitted to fund such an acquisition out of capital.
• Private companies may give financial assistance for the acquisition of their shares but public
companies are prohibited from doing so, save in certain circumstances.
• Dividends represent a return on capital invested and, generally speaking, must be paid out of
distributable profits only.
It is a fundamental principle of company law that limited companies should use their share capital
only for the purposes of the business and should not be allowed to diminish or return any part of that
capital to the detriment of company creditors or minority shareholders. This maintenance of capital
principle is upheld by various provisions in the Act that limit capital reduction schemes, restrict the
freedom of a company to purchase its own shares and give financial assistance to aid share
purchases, strictly control the circumstances in which capital may be used for the redemption and

purchase of shares, as well as restricting the scope for making dividend payments and utilising
payments of share premiums.
Remember too that a public company must satisfy the authorised minimum share capital
requirement (currently £50,000).
2.1 Types of capital

The word capital is used in different ways in relation to companies. You should be familiar with the
following terms:
Term Meaning
A company A company that has power under its constitution to issue shares (s.545).
having a share
capital
Issued or Shares that have been issued or allotted as the case may be (s.546) (including
allotted share shares taken by the subscribers on the formation of the company).
capital A company need not issue all its share capital. Any part of it not issued is called
unissued share capital.
Called-up share So much of the share capital as equals the aggregate amount of the calls made
capital on its shares plus share capital that is paid up without being called and share
capital to be paid at a specified future date under the articles or terms of
allotment of the relevant shares (s.547).
Equity share The issued share capital excluding any part of it that, neither as respects
capital dividends nor as respects capital, carries any right to participate beyond a
specified amount in a distribution (ie, usually a company’s ordinary share
capital, since preference shares usually carry a right to a fixed return).
Loan capital Loan capital describes the company’s borrowed money.
Context example: Types of capital

Portions Ltd has 100 £1 (nominal shares) of which it has issued 80. It has received 25p per share on
application and has called on the holders for a further 15p per share.
Its share capital is £100. Its issued share capital is £80. Its called-up share capital is £32 and its paid
up share capital is £20.
2.2 Reduction of share capital

There are several reasons why a company may wish to reduce its share capital. For example, if its
share capital exceeds the company’s needs, or if the company’s net assets have fallen in value to
below that of the share capital and that position is likely to be permanent. In either case, the purpose
of reducing share capital would be to reflect the financial needs and position of the company more
accurately.
A reduction in share capital may be achieved by:
• reducing the liability of shareholders on partly paid shares
• cancelling paid-up share capital that is not represented by assets
• repaying share capital that is surplus to the company’s needs
Examples of how the three methods work are given in the table below. The tables which follow
demonstrate how the second and third methods work in practical terms.
Method Example Effect
Reducing the liability of Company X has £1 nominal The shares become fully paid
shareholders on partly paid value shares of which 60p has shares of 60p and the
236 Law ICAEW 2023

Method Example Effect
shares been paid up. The company shareholders cannot be

cancels the uncalled 40p per required to pay the cancelled
share. 40p per share.
Cancelling paid-up share Company Y has £1 nominal The company’s negative net
capital that is not represented value shares but has negative assets value is eliminated, and
by assets net assets so that assets are the business can begin paying
only supported by 60p of dividends if profitable.
nominal value. The company Shareholders own fully paid-up
reduces the nominal value of shares that have a nominal
the shares to 60p per share. value of 60p each.
Repaying share capital that is Company Z has £1 nominal Company assets (cash) are
surplus to the company’s value shares and surplus profit reduced by 40p per share. The
needs and cash which equates to 40p shareholders own fully paid-up
per share. The company shares that have a nominal
reduces the nominal value of value of 60p each.
the shares to 60p and returns
40p per share to the
shareholders.
Example: Company Y
Before Reduction of capital After

£’000 £’000
Net assets 1,200 1,200
Share capital 2,000 (800) 1,200

Retained earnings (800) 800 –
Shareholders’ funds 1,200 1,200
Example: Company Z
Before Reduction of capital After

£’000 £’000
Net assets 2,400 (400) 2,000
Share capital 1,000 (400) 600

Retained earnings 1,400 1,400
To protect the interest of creditors, companies are only permitted to reduce their share capital in
accordance with the two procedures prescribed by the Act (s.641) and described below. These
procedures are designed to reassure creditors that the business has sufficient capital invested, while
giving directors some flexibility in managing the business effectively and the ability to return unused
capital in an appropriate manner.
Essentially these procedures mean that a public company has to go to court to achieve a reduction
in share capital, but a private company can choose not to go to court if they do not want to.

Both procedures are subject to any restriction or prohibition contained in the company’s articles of
association:
• A private or public company may reduce its capital by special resolution confirmed by the court.
In most cases, any such confirmation is subject to creditors’ rights to object to the reduction and
to the court being satisfied that all creditors so entitled have either consented to the reduction or
had their subsisting debts or claims discharged or secured. If a reduction is confirmed for a public
company that results in the nominal value of the allotted share capital falling below the authorised
minimum, the company must be re-registered as a private company unless the court directs
otherwise.
• A private company may alternatively choose to reduce its capital by special resolution supported
by a solvency statement given by all of the directors in a prescribed form (within 15 days prior to
the resolution being passed) confirming the company’s ability to pay its debts over a period of 12
months (s.643). This method is only permissible where there is at least one member remaining
who holds a non-redeemable share (so that a private limited company cannot reduce its share
capital to nothing without the court’s approval).
A copy of the resolution and a statement of capital, together with a copy of the solvency statement or
court order must be filed with the Registrar.
The benefits to a private company of using a solvency statement, rather than going to court, to
reduce its share capital include the faster speed of the procedure and the lower cost of filing
documents, rather than involving expensive legal representation in court.
If the net assets of a public company are (or fall to) half or less of the company’s called up share
capital, the directors must call a general meeting in order to consider whether any steps need to be
taken to deal with the situation.
The share premium account and capital redemption reserve are treated as share capital and can
therefore be reduced using the above procedure. This allows the company to clean up its capital by
removing old balances.
Members’ liability is reduced accordingly following a permitted reduction in capital. Any reserve
arising from a reduction of capital may be treated as a realised profit for the purposes of
distributions.
A private company can seek to reduce its share capital by supporting its application with a solvency
statement. You should consider whether such statements are accurate given the true financial
situation of the company, rather than accepting just what the directors say.
2.3 Other alteration of share capital

A company may, however, increase or alter its share capital as follows and in each case must give
notice to the Registrar of the alteration, accompanied by a statement of capital, within one month:
Alteration Rule
Increase (s.617) By allotting more shares (see 1.3 above).
Subdivision or A limited company may pass an ordinary resolution to:

consolidation • subdivide its shares into shares of a smaller nominal amount than its
(s.618) existing shares; or
• consolidate and divide its share capital into shares of a larger nominal
amount than its existing shares.
The proportion between the amount paid and amount unpaid on the
original shares must remain the same. For example, if £1 is unpaid on a £10
share that is subsequently subdivided into 10 £1 shares, there will then be
10p unpaid on each of those 10 shares.
(Note that a company’s share capital may also be altered as a result of a redenomination from one
currency to another (s.622). Such a redenomination may also result in a reduction of capital in order
238 Law ICAEW 2023

to round up or down nominal values in the new currency. If such a reduction is needed, it must not
exceed 10% of the nominal value of the reduced allotted share capital and a special resolution is
required.)
2.4 Redemption of shares

Redeemable shares may not be redeemed unless they are fully paid. Unless the terms of redemption
provide otherwise, the shares must be paid for on redemption.
Redeemable shares may only be redeemed (paid) out of:
• distributable profits of the company; or
• the proceeds of a fresh issue of shares made for the purposes of the redemption.
However, private limited companies may also redeem shares out of capital subject to certain
conditions (which apply also to a purchase of shares described in section 2.5 below).
These conditions provide that the company may make a ‘permissible capital payment’ (PCP) towards
the redemption of shares. The amount of the PCP is the balance remaining once any available profits
and proceeds from a fresh issue of shares (issued for the purpose of the redemption) have been
used up (s.711).
For example, Company S needs to redeem £400,000 of shares; it has £200,000 of available profit
and has raised £150,000 from the issue of fresh shares, then the PCP will be £50,000.
Share capital + Share capital +

undistributable undistributable
Before reserves Redemption reserves After
£’000 £’000
(250)
(400) cash out
for redemption
+ 150 cash in
from sale of
Net assets 1,700 new shares 1,450
(250)
(400) shares
redeemed +
Share capital 1,000 150 new shares 750
£1,500m
Share premium 250 £1,450m 250
Revaluation
reserve 150 150
200
Capital Transfer from
redemption retained
reserve 100 earnings 300
(200)
Transfer to
capital
Retained redemption
earnings 200 reserve –
Shareholders’
funds 1,700 1,450
Such a payment of capital can only be made where the directors’ statement and auditor’s report
support the payment and it is approved by a special resolution (disregarding the voting rights of

shares that will be redeemed). Any proposed payment out of capital must be publicised
appropriately and creditors must be given an opportunity to apply to court for the cancellation of the
resolution. The payment must be made within five and seven weeks after the resolution is passed.
When shares in a company are redeemed, the shares are treated as cancelled and the amount of the
company’s issued share capital is reduced by the nominal value of the shares redeemed. Notice of
redemption, together with a statement of capital, must be given to the Registrar within one month.
2.5 Purchase of own shares

The general rule is that companies are prohibited from acquiring their own shares. However, it can
be allowed in the following limited circumstances (s.658):
• For the redemption or purchase of shares in accordance with the Act (see below)
• For the acquisition of shares in a permitted reduction of capital
• For the purchase of shares to comply with a court order (eg, buying out an unfairly prejudiced
minority)
• For the forfeiture, or surrender, of shares in accordance with a company’s articles where there is a
failure to pay for them
A company’s potential ability to purchase its own shares may be an attractive option to individual
investors who are concerned that other shareholders might not wish to buy them, or may not have
sufficient funds to do so. This ability also enables the resolution of disputes and difficulties where one
member wishes to retire or resign, and the remaining shareholders do not wish to (or cannot)
purchase their shares and do not want an outsider brought in.
Subject to any restrictions in the articles, a company can only purchase its own shares where the
shares are fully paid and the shares must be paid for on purchase.
As with the redemption of shares, the purchase must be made using available profits and the
proceeds of a fresh issue. However, a private company can also use a permissible capital payment
once it has exhausted its profits and funds from the fresh issue.
A market purchase, ie, one made on a recognised investment exchange, must be authorised by a
resolution of the company that specifies the maximum number of shares that can be acquired and
states a maximum and minimum price that can be paid for them.
An off-market purchase, ie, one that is not conducted through a recognised investment exchange,
must be authorised by a contract approved by a special resolution (disregarding the voting rights of
the shares to be purchased).
A return giving details of the purchase must be sent to the Registrar of Companies within 28 days.
Purchased shares are usually cancelled, although in some cases (generally speaking, where the
shares are listed or traded on the AIM or regulated market) the company may elect to hold them ‘in
treasury’. Treasury shares may be sold at a later date without obtaining prior authority from the
company’s members for the sale.
Where shares are redeemed or purchased out of a company’s profits, the amount by which the
company’s issued share capital is diminished when shares are cancelled must be transferred to the
capital redemption reserve. That reserve is treated as part of the company’s paid up share capital,
except that it may be used to pay up new shares to be allotted to members as fully paid bonus
shares.
Context example: Purchase of shares and permissible capital payment (PCP)

Company Q wishes to purchase £200 million of its share capital.
240 Law ICAEW 2023

Company Q balance sheet at 31/12/200X (purchase of £200 million of shares at par)
Share capital + Share capital +

undistributable undistributable
Before reserves Purchase reserves After
£’000 £’000
(200)
200m cash
payment for
Net assets 1,000 shares 800
(200)
200m shares
Share capital 300 purchased 100
£850m
Share premium 250 £800m 250
Revaluation
reserve 200 200
150
Capital Transfer from
redemption retained
reserve 100 earnings 250
(150)
Transfer to
capital
Retained redemption
earnings 150 reserve –
Shareholders’
funds 1,000 800
The net effect of the above transaction has been a reduction in the creditors’ buffer, or permissible
capital payment (PCP), of £50 million.
The permissible capital payment is an important calculation to get right. You should structure your
calculation carefully, perhaps using a pro forma like the one in the example above.
2.6 Financial assistance for the purchase of shares

Under the Act, private companies are not prohibited from giving financial assistance for the
acquisition of their shares. However, public companies are subject to restrictions.
Financial assistance may be given in various ways, for example by way of a gift of money to buy the
shares, or by guaranteeing or providing security for a loan given by a third party for the purposes of
purchasing shares.
A public company (or its subsidiary) is prohibited from giving financial assistance at or before the
time of an acquisition of shares in the public company, unless the principal purpose of the assistance
is something other than the proposed acquisition (s.678) or the giving of assistance is only an
incidental part of some larger purpose and (in either case) it is given in good faith in the interests of
the company.

The same prohibition applies to any financial assistance to be given by a public company for the
acquisition of shares in its private holding company.
However, financial assistance may be given for the purpose of certain transactions by:
• private companies
• public companies where the assistance does not reduce the company’s net assets or, to the extent
that they are reduced, the assistance is given out of distributable profits
The permitted transactions include:
• where the lending of money is in the company’s ordinary course of business;
• where the financial assistance is given in good faith in the interests of the company for the
purposes of an employees’ share scheme; and
• the making of loans to employees (not directors) in good faith to enable them to acquire fully
paid shares in the company.
Breach of the financial assistance rules is a criminal offence (s.680), punishable by fine and/or
imprisonment, and is also likely to affect the contracts concerned and result in civil liability for breach
of directors’ duties.
Any recommendation to offer financial assistance to purchase shares should be based on what is
permitted technically in the Companies Act 2006.
Interactive question 3: Maintenance of capital

Might the following transactions by a retail limited company be permitted under the Companies Act
2006?
Public Private
company company
The buy-back of redeemable shares out of capital
The purchase of a company’s own shares out of capital
The provision of a loan to a director for the purpose of acquiring

shares in the company
A reduction of capital authorised by the court
2.7 Dividends
A dividend is one type of distribution of a company’s assets to members of the company. The
general rule is that any distribution can only be made out of profits that are available for the purpose
and not out of capital.
Profits available for distribution are accumulated realised profits (which have not been distributed or
capitalised) less accumulated realised losses (which have not been previously written off in a
reduction or reorganisation of capital).
A dividend is a debt only when it is declared and due for payment. A shareholder (ordinary or
preference) is not entitled to a dividend unless it is declared in accordance with the procedure
prescribed by the articles and the declared date for payment has arrived. The directors may decide
to withhold profits and cannot be compelled to recommend a dividend.
242 Law ICAEW 2023

A public company may only make a distribution if its net assets are, at the time, not less than the
aggregate of its called-up share capital and undistributable reserves. The dividend that it may pay is
limited to such amount as will leave its net assets at not less than that aggregate amount (s.831).
Undistributable reserves are defined as:
• share premium account
• capital redemption reserve
• any surplus of accumulated unrealised profits over accumulated unrealised losses (known as a
revaluation reserve)
• any reserve that the company is prohibited from distributing by statute or by its articles
In the example below, Company A plc cannot make a distribution which brings its net assets below
the total of its share capital and undistributable reserves (£1m share capital + £0.25m share premium
account + £2m revaluation reserve). Therefore, the maximum dividend permitted can bring the
company’s net assets down from £5 million to £3.25 million and this is £1.75 million.
The company decided to pay a dividend of £0.75 million which reduces its retained earnings to £1
million and its net assets to £4.25 million.
Company A plc Dividend Company A plc

£’000 £’000
(750)
Dividend paid out
Net assets 5,000 of cash 4,250
Share capital (fully paid up) 1,000 1,000

Share premium account 250 250
Revaluation reserve 2,000 2,000
(750)
Dividend paid out
of retained
earnings (a
Retained earnings (all realised distributable
profits less all realised losses) 1,750 reserve) 1,000
If a distribution is made in contravention of the Act and the receiving member knows or has
reasonable grounds for believing that the distribution is made unlawfully, that member will be liable
to repay it (or a sum equal to its value where the distribution is made otherwise than in cash) (s.847).
The directors may also be liable to repay the amount of the dividend as a result of the breach of
directors’ duties which will have occurred.
In Bairstow v Queens Moat Houses plc 2000, nearly £27 million of dividend was authorised by
directors when there were insufficient distributable profits. The directors were held to be in breach of
their fiduciary duties and liable to repay the amount of the dividends to the company. Members with
actual or constructive knowledge of the unlawful payments were also liable to repay the dividends
received.
3 Loan capital and charges

Section overview
• A company may choose to raise loan capital rather than share capital. A debenture is the
document that records the terms of any loan.

• A company may enter into a fixed or floating charge by way of providing security for its
borrowing.
• The lender or debenture holder is then a secured creditor and will rank in priority to unsecured
creditors in any liquidation of the company.
• Charges need to be registered.
3.1 Debentures and rights of debenture holders

A debenture is the written acknowledgement of a debt by a company, which normally contains
provisions as to repayment of capital and interest. A debenture may be secured on some or all of the
assets of the company by the creation of a charge over the company’s assets. However, a document
relating to an unsecured loan is also a debenture in company law. A debenture is usually a formal
legal document.
Like shareholders, debenture holders own transferable company securities that are usually long-term
investments in the company and the procedure for issue and transfer of shares and debentures is
very similar.
There are, however, important differences:
Factor Shareholder Debenture holder
Role Is a member or owner of the Is a creditor of the company

company
Voting rights May vote at general meetings May not vote
Cost of investment Shares may not be issued at a Debentures may be offered at a

discount discount
Return Dividends are only paid out of Interest must be paid when it is due
distributable profits and when
directors declare them
Redemption Statutory restrictions on redeeming No restriction on redeeming

shares debentures
Liquidation Shareholders are the last people to Debentures must be paid back
be paid in a winding up before shareholders are paid
From the investor’s standpoint, debenture stock is often preferable to preference shares since the
former offers greater security and yields a fixed income.
From the company’s standpoint, raising capital by borrowing has obvious advantages but it has to
bear in mind also the disadvantages of the rate of interest payable and, in particular, the liability
imposed by any charge that is created in order to secure the loan.
Charges are an encumbrance upon real or personal property granted by one party (the chargor) that
gives another party (the chargee) certain rights over that property, usually as security for a debt owed
to the charge holder. The most common form of charge is by way of legal mortgage, used to secure
the indebtedness of borrowers in house purchase transactions. In the case of companies, charges
over assets are most frequently granted to persons who provide loan capital to the business. The
charge is secured over a company’s assets and gives to the creditor a prior claim over unsecured
creditors (and may give them priority over other secured creditors) to payment of their debt out of
those assets. Charges are of two kinds, fixed and floating.
3.2 Fixed charges

A fixed charge is a form of protection given to secured creditors relating to specific assets of a
company. It attaches to the relevant asset as soon as the charge is created. By its nature a fixed
charge is best suited to fixed assets which the company is likely to retain for a long period.
244 Law ICAEW 2023

A company is not permitted to deal with, or dispose of, assets that are subject to a fixed charge
without the consent of the charge holder. If the company does dispose of the asset it will either repay
the secured debt out of the proceeds of sale so that the charge is discharged at the time of sale, or
transfer the asset to the purchaser still subject to the charge.
The charge grants the holder the right of enforcement against the identified asset in the event of
default in repayment so that the creditor may realise the asset to meet the debt owed. Fixed charges
rank first in order of priority in liquidation.
When they come to enforce the charge, the chargee may find that the value of the asset does not
fully discharge the debt. In a liquidation, the unpaid balance then falls to be an unsecured debt.
Note that if a fixed charge is created to secure a debt within six months before a company becomes
insolvent, then it may be invalid as a preference (see the chapter on insolvency).
3.3 Floating charges

Unlike a fixed charge, a floating charge permits a company to deal with the charged assets without
the permission of the charge holder until such time as the charge crystallises (thereby becoming a
fixed charge). The nature of a floating charge can be described as follows:
• a charge on a class of assets of a company, present and future;
• which class is, in the ordinary course of the company’s business, changing from time to time;
• until the holders enforce the charge, the company may carry on business and deal with the assets
charged.
A floating charge is often created by express words but no special form of words is essential. If a
company gives to a chargee rights over its assets while retaining freedom to deal with them in the
ordinary course of business, that will be a charge which ‘floats’. The particular assets subject to a
floating charge cannot be identified until the charge attaches by crystallisation, at which point the
floating charge is converted into a fixed charge on the company’s assets. A floating charge is not
restricted, however, to current assets, such as book debts or stock in trade (inventory). A floating
charge over ‘the undertaking and assets’ of a company (the most common type) applies to future as
well as to current assets. For this reason it is not possible to identify the assets to which a floating
charge relates (until crystallisation).
Events causing crystallisation are as follows.
• The liquidation of the company
• Cessation of the company’s business (which may occur on the crystallisation of another floating
charge)
• Active intervention by the chargee, generally by way of appointing a receiver
• Any event specified in the charge, such as non-payment of interest on the due date or notice
given by the chargee that the charge is converted into a fixed charge (on whatever assets of the
relevant class are owned by the company at the time of the giving of notice)
A charge may provide for automatic crystallisation when a specified event – such as a breach of some
term by the company – occurs, whether or not the chargee learns of the event and whether or not the
chargee wants to enforce the charge as a result of the event. If the relevant clause specifies that, on
the event happening, the floating charge is converted to a fixed one, then it is likely to be valid.
However, if the clause provides only that a company is to cease to deal with charged assets on the
occurrence of a particular event, it may not be valid.
3.4 Identification of charges as fixed or floating

It is not always immediately apparent whether a charge is fixed or floating and whatever label is
given to it by the parties is not conclusive. Chargees often do not wish to identify a charge as being
floating when it was created, because under the Insolvency Act 1986 (HMSO, 1986), if a receiver is
appointed, preferential creditors must first be paid out of the charged assets (s.40 IA 1986).
The general rule is that a charge over assets will not be registered as fixed if it envisages that the
company will still be able to deal with the charged assets without reference to the chargee.
Additionally, a floating charge, if created within 12 months before liquidation, may become void
automatically on liquidation (s.245 IA 1986).

3.5 Comparison of fixed and floating charges
A fixed charge is normally the more satisfactory form of security since it confers immediate rights
over identified assets. However, a floating charge has some advantage in being applicable to current
assets that may be easier to realise than fixed assets subject to a fixed charge. If, for example, a
company becomes insolvent, it may be easier to sell its stock than its empty factory.
The principal disadvantages of floating charges to the chargee are as follows:
• The holder of a floating charge cannot be certain until the charge crystallises (often through the
company failing) which assets will form their security.
• Even when a floating charge has crystallised over an identified pool of assets the chargee may
find themselves postponed to the claim of other creditors as follows:
– A judgement creditor or landlord who has seized goods and sold them may retain the
proceeds if received before the appointment of the debenture holder’s receiver (s.183 IA).
– Preferential debts (for example remuneration and holiday pay owed to employees) may be
paid out of assets subject to a floating charge unless there are other uncharged assets available
for this purpose (ss.40 and 175 IA).
– The holder of a fixed charge over the same assets will usually have priority over a floating
charge on those assets even if that charge was created before the fixed charge (see below).
– A creditor may have sold goods and delivered them to the company on condition that they are
to retain legal ownership until they have been paid (a Reservation of title clause).
– The Enterprise Act 2002 (TSO, 2002) also introduced a clause into the Insolvency Act 1986
stating that a ‘prescribed part’ of the company’s net property will be available to unsecured
creditors, regardless of any charges over that property. This introduces an element of
‘proportionality’ for unsecured creditors. The amount of money that is to be so prescribed, or
‘ring-fenced’, is set by the Secretary of State.
• As noted above, a floating charge may become invalid automatically if the company creates the
charge to secure an existing debt and goes into liquidation within a year thereafter (s.245 IA); the
period is only six months with a fixed charge.
Interactive question 4: Charges

What is the term used to describe the point at which a floating charge is converted into a fixed
charge?
3.6 Rationale for choice of charge

When securing an asset with a charge (for example when the loan is a mortgage over property), it is
likely that the lender will specify the type of charge that is acceptable to them. However, where the
borrower has the freedom to choose the type of charge they are willing to accept (for example,
where it is offering debentures to the market), then it is important to choose the type of charge which
is most appropriate to the business’s circumstances.
As we saw earlier, the key factor to consider where an asset is secured with a fixed charge, is that the
business cannot deal with the asset without the consent of the chargeholder. This means that the
business is restricted in the use of the asset. It also means that when the asset is sold, the
chargeholder either has to be paid back what they are owed, or the charge must move with the asset
(something that is likely to put any potential new owner of the asset off from buying it). This means
that fixed charges are only used where the business is expecting to hold on to the asset for a long
period of time, rather than for current assets such as inventory.
Floating charges do not place such restrictions over the use of assets, so they are usually used for
assets such as inventory that the business is not expecting to hold for too long.
Another factor that should be considered when choosing the type of charge is the event of the
business facing financial difficulties in the future. If the business is unable to make repayments on
loans secured over company property (for example the head office building), then the chargeholder
could undermine the whole business by requiring the sale of the charged asset. Alternatively, as we
246 Law ICAEW 2023

shall see in the next chapter, certain qualifying floating charges allow the chargeholder to appoint an
administrator of the business and therefore place the business into administration.
3.7 Registration of charges

A company must keep available for inspection:
• a copy of every instrument creating a charge which is required to be registered; and
• a register of charges, listing all fixed and floating charges and giving the names of the chargees,
the amount of the charge and a short description of the property charged
either at the company’s registered office or at another place specified in regulations and notified to
the Registrar. They must be available for inspection by any creditor or member free of charge and by
any other person on payment of a fee.
When a company creates a charge specified in the Act, it must also deliver prescribed particulars,
together with the instrument by which the charge is created or evidenced, to the Registrar (s.860)
within 21 days, beginning on the day after the charge is created (s.870). Registration may,
alternatively, be effected by a person interested in the charge, rather than the company.
The Registrar enters details of the charge in the register (including its date, the name of the chargee,
the amount secured and short particulars of the property charged). They then issue a certificate of
registration of the charge, which is conclusive evidence that the registration requirements have been
satisfied. The company must then endorse a copy of that certificate on any debenture issued by the
company thereafter, the payment of which is secured by the registered charge (s.865).
Failure to register is an offence punishable by fine, although the court may extend the period for
registration where it is satisfied that the failure (or mistake) was inadvertent or not likely to prejudice
the company’s creditors or shareholders, or otherwise just and equitable (s.873).
Failure to register will also affect the validity of the charge. Non-compliance with s.860 renders the
charge void against any:
• liquidator;
• administrator; and
• creditor
of the company. The money secured by the (void) charge is then immediately payable.
3.8 Lender’s remedies

An unsecured creditor may sue the company for the debt or apply to the court for the appointment
of an administrator or petition for a compulsory winding-up. A secured creditor may, in addition,
appoint a receiver in respect of the property charged.
Liquidation, administration and receivership are addressed in the next chapter.

Summary
Shares
Ordinary shares Preference shares

Pre-emption rights Right to fixed dividend
Right to capital Class Usually cumulative
Dividends as declared rights Usually no right to vote
Rights and bonus issues Right to capital (priority)
No pre-exemption unless express
Allotment of shares
needs authority
Rights of pre-emption
Payment
General not at discount
Premium goes to share premium
account
Public companies: special rules
Shareholder Transfer Transferee
Unlisted Listed
Stock transfer form CREST
Company two months to
register of refuse with reason
248 Law ICAEW 2023

Increase
(by allotment)
Alteration
• Subdivision
Share capital
• Consolidation
• Redenomination
Decrease Dividends
Generally prohibited but • Available profits only
permitted exceptions • Public company
Redemption of shares Purchase of own shares • Financial assistance

• Distributable profit • Distributable profits • Permitted transactions
• Fresh issue • Fresh issue • Restrictions on public
• Capital: private company • Capital: private company companies
only (subject to only (subject to
conditions) conditions)
Loan/Debenture
Loan capital
Charge as security
Register within 21 days
Fixed Floating
Chargeholder needs to consent to dealing Freedom to deal without chargeholder's consent
Priority over floating charges Crystallisation (eg, liquidation, receiver, specified event)
Invalid as preference: 6 months period Invalid as preference: 12 months period

indicated.
1. Do you know what the rights of preference shareholders are? (Topic 1)
2. Can you explain what pre-emption rights are? (Topic 1)
3. Can you explain the difference between issued and called-up share capital? (Topic 2)
4. Can you list a company’s undistributable reserves? (Topic 2)
5. Can you explain the difference between a fixed and floating charge? (Topic 3)

250 Law ICAEW 2023


• Enterprise Act 2002. (2002). London, TSO.

Self-test questions

1 If a company fails to pay preference shareholders their dividend, they can bring a court action to
compel the company to pay the dividend.
A True
B False
2 Which of the following are rights of preference shareholders (unless excluded by the articles)?
A The right to receive a dividend is cumulative.
B If the company goes into liquidation, preference shareholders are entitled to claim all arrears of
dividend from the liquidator.
C As well as rights to their preference dividends, preference shareholders can share equally in
dividends payable to ordinary shareholders.
D Preference shareholders have a priority right over ordinary shares for the return of their capital.
E Preference shareholders have equal voting rights to ordinary shareholders.
3 What is meant by ‘called-up share capital’?
4 What is the majority of the relevant class required to consent to a variation of class rights?
A 51%
B 75%
C 90%
D 100%
5 What minimum percentage of shareholders in a class may apply to the court for a variation of class
rights to be cancelled?
A 5%
B 10%
C 15%
D 20%
6 Where authority to allot shares is given to directors in the company’s articles, what type of resolution
is required to vary or renew that authority given that it results in an alteration of the articles?
7 Fill in the blanks in the statements below.
A issue is an allotment of additional shares to existing members in exchange for

consideration payable by the members.
A issue is an allotment of additional shares to existing members where the

consideration is effectively paid by using the company’s reserves.
8 Do rights of pre-emption apply in the following cases?
Yes/No
A bonus issue
An allotment of ordinary shares for cash
An allotment of shares to be partly paid up

otherwise than in cash
252 Law ICAEW 2023

Yes/No
An allotment of shares pursuant to an

employees’ share scheme
9 Can a company issue shares:
Yes/No
at a discount?
at a premium?
otherwise than for cash?
10 A share premium account can be used for discounts on the issue of debentures.
A True
B False
11 When a company receives an instrument of transfer, it must register the transfer or give notice of
refusal within what time period?
12 Name two ways in which a private company may lawfully reduce its share capital.
13 Name three ways in which a company’s share capital can be altered (but not reduced).
14 What type of resolution is required to authorise the redemption of shares?
15 Name three safeguards that are required for a private company to be authorised to redeem or
purchase its shares out of capital.
16 What restrictions, if any, apply to a private company providing financial assistance for the purchase of
its shares?
17 Can a private company purchase its own shares where they are partly paid up, provided it has
sufficient distributable profits?
18 Fill in the blanks in the statements below.
A public company cannot make a distribution if it would reduce the company’s net assets to below
the aggregate of its and .
19 Which of the following are correct statements about the relationship between a company’s ordinary
shares and its debentures?
A Debentures do not confer voting rights, while ordinary shares do.
B The company must pay interest on debentures and dividends on ordinary shares.
C A debenture holder takes priority over a member in liquidation.
20 What are the principal characteristics of a floating charge?
21 Company law requires a company to maintain a register of charges and to make it available for
inspection by the public, not just members and creditors.
A True
B False
22 In which of the following situations will crystallisation of a floating charge occur?
A Liquidation of the company
B Disposal by the company of the charged asset
C Cessation of the company’s business

D After the giving of notice by the chargee if the contract so provides
23 Within how many days of creation do most charges need to be registered?
A 7 days
B 14 days
C 21 days
D 28 days
24 What particulars of a charge must the Registrar be sent when the charge is registered?
25 What main remedies are available to a secured debenture holder to enforce their security?
this chapter.
254 Law ICAEW 2023

Ordinary/Preference
carries statutory rights of pre-emption in the absence of Ordinary

any express provision?
carries a right to a dividend at a specified rate that is Preference

deemed to be cumulative in the absence of any express
or implied provision to the contrary?
carries an automatic right to have capital repaid in the Ordinary/Preference

event of the company being wound up?
carries a right to vote in the absence of any express Ordinary/Preference

provision?
Yes/No
(1) Can the company amend its articles of association to incorporate a provision No
excluding the statutory rights of pre-emption?
(2) Is an authority to allot shares given by ordinary resolution sufficient? Yes
(3) Can any of the shares be sold for £4.50 each on a fully paid-up basis No
(4) Can any of the shares be sold for £5.50 each? No
(1) Only a private company may do so.

(2) Authority may be given either in the articles or by ordinary resolution.
(3) Shares cannot be allotted at a discount.
(4) Shares may be allotted at a premium.
Public Private
company company
The buy-back of redeemable shares out of capital No Yes
The purchase of a company’s own shares out of capital No Yes
The provision of a loan to a director for the purpose of acquiring No Yes

shares in the company
A reduction of capital authorised by the court Yes Yes

Crystallisation
256 Law ICAEW 2023

B False
The company may decide not to pay any dividend, or may be unable to because it does not have any
distributable profits. What the preference shareholders have is a right to receive their dividends
before other dividends are paid or declared.
A The right to receive a dividend is cumulative.
E Preference shareholders have equal voting rights to ordinary shareholders.
A and E are implied rights; the others have to be stated explicitly.
3 A company’s called-up share capital is so much of the share capital as equals the aggregate amount
of the calls made on its shares plus share capital that is paid up without being called and share
capital that is to be paid at a specified future date.
B 75%
A special resolution of the relevant class or written consent from at least 75% in nominal value of the
issued shares of that class.
C 15%
The holders of at least 15% of the issued shares of the class in question (who have not themselves
consented to the variation).
6 An ordinary resolution, even though an alteration in the articles takes place (which would normally
require a special resolution). Remember that authority to allot need not be given in the articles, it can
be given by ordinary resolution.
7 A rights issue is an allotment of additional shares to existing members in exchange for

consideration payable by the members.
A bonus issue is an allotment of additional shares to existing members where the consideration is
effectively paid by using the company’s reserves.
8
Yes/No
A bonus issue No
An allotment of ordinary shares for cash Yes
An allotment of shares to be partly paid up No

otherwise than in cash
An allotment of shares pursuant to an No

employees’ share scheme

9
Yes/No
at a discount? No
at a premium? Yes
otherwise than for cash? Yes
However, note that the non-cash consideration must be independently valued in the case of a public
company.
B False
11 Two months
12 Two ways a private company can lawfully reduce its share capital:
(1) By a special resolution approved by the court
(2) By a special resolution supported by a directors’ solvency statement
13 Three ways a company’s share capital can be altered:
(1) Allotment of more shares
(2) Subdivision
(3) Consolidation
14 An ordinary resolution
15 Any three:
(1) A directors’ statement
(2) An auditors’ report
(3) A special resolution
(4) Public notice of the proposed payment
16 None
17 No, a company can only purchase its own shares when they are fully paid.
18 A public company cannot make a distribution if it would reduce the company’s net assets to below
the aggregate of its called-up share capital and undistributable reserves .
A Debentures do not confer voting rights, while ordinary shares do.
C A debenture holder takes priority over a member in liquidation.
While the company has a contractual duty to pay interest on debentures, there is no necessity for it to
pay dividends on shares. B is therefore incorrect.
20 A floating charge can be described as:
• a charge on a class of assets, present and future
• which class is in the ordinary course of the company’s business changing from time to time
• until the holders enforce the charge, the company may carry on business and deal with the assets
charged
A True
258 Law ICAEW 2023

A Liquidation of the company
C Cessation of the company’s business
D After the giving of notice by the chargee if the contract so provides
A, C and D are situations where a floating charge will crystallise. As the charge does not attach to the
asset until crystallisation, B is incorrect.
C 21 days
24 The following particulars must be sent:
• A copy of the charge
• The amount of the debt that it secures
• The property to which the charge applies
• The person entitled to it
25 Main remedies to enforce security:
• Take possession of the asset subject to the charge and sell it
• Appoint a receiver of it

260 Law ICAEW 2023
Chapter 10
Insolvency law: corporate

and personal
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 Administration
2 Charges and receivership
3 Company voluntary arrangements
4 Liquidation
5 Individual voluntary arrangements
6 Bankruptcy
Summary
Self-test questions
Introduction
10
Learning outcomes
• Identify the nature and function of:
– company voluntary arrangements
– administration orders
– receivership
– compulsory and voluntary liquidation (including relevance of secured debt)
• Identify the main implications of insolvency law, including:
– the principal means of termination of companies or other business entities
– the priorities on a liquidation of the distribution of assets including rights of creditors and
employees (including secured assets)
– bankruptcy and other responses to personal insolvency
Specific syllabus references for this chapter are: 2o and p.
10
Syllabus links
This chapter looks at the termination of a company by winding-up and dissolution (but also
compulsory voluntary arrangements and administration, which are both designed to avoid
termination). In discussing the rights of secured and unsecured creditors, it is also related to your
studies on debentures and company charges.
10
Assessment context
The legal issues discussed in this chapter could be assessed in conjunction with other areas of
company law, for example the incorporation of a company, fraudulent and wrongful trading and
financing by loan capital. You might be asked to advise on appropriate courses of action available to
members or creditors in a scenario involving a company in financial difficulties. An awareness of
personal bankruptcy and individual voluntary arrangements may be needed in the context of
discussing partners’ liabilities.
When a company is in financial difficulties, there are several courses of action open to its members
and creditors. Some are aimed at rescuing the company as a going concern, others are aimed at
bringing the life of the company to an end, whether insolvent or not. Thus, administration is
designed to rescue the company as a going concern or, at least, to secure a better result for the
company’s creditors as a whole than would be likely on a winding-up. A secured creditor may
appoint a receiver to realise the charged assets and satisfy the debt secured. Company voluntary
arrangements are also designed to rescue the company and prevent it from being wound up.
Liquidation, on the other hand, is the act of terminating the company’s life and winding up its
business.
10

of this chapter.

questions
1 Administration Approach Knowledge IQ1: Administration

Administration is a Note the rules on questions could This question tests
method of protecting who can appoint an test your some general
a company while an administrator and understanding of knowledge about
insolvency the objectives of the rules of administration.
administration, for
262 Law ICAEW 2023

questions
practitioner attempts administration. example by asking

to rescue it from Learn the duties of you who can
being liquidated. an administrator appoint an
and what happens administrator.
as a consequence
of administration.
Stop and think

What duties does an
administrator owe
to a company? What
are the advantages
of administration?
2 Charges and Approach Knowledge IQ2: Receivership

receivership Focus on fixed questions could This question tests
Creditors who have charge receivers ask you about the your knowledge of
security for their and the relationship role of a receiver who can appoint an
debts can appoint a between compared to an administrative
receiver to sell the administration and administrator. receiver.
charged asset to receivership.
repay the debt. This
option is only
available to fixed Stop and think
chargeholders. Those What are the
with floating charges benefits to a
must use creditor of
administration or appointing a fixed
company voluntary charge receiver?
arrangements
instead.
3 Company voluntary Approach CVA procedures IQ3: Company

arrangements Note the main are particularly voluntary
CVAs are an points about CVA examinable. You arrangements
alternative to procedures and the may be tested in a This question tests
administration or effects of a knowledge some general
liquidation. The moratorium. question about knowledge of
objective is to help a how a CVA is CVAs.
company agree approved by
alternative solutions Stop and think creditors.
to repaying its debts Is a creditor
that creditors find meeting needed to
acceptable. approve a CVA?
4 Liquidation Approach Scenario IQ4: Insolvency

Companies are Focus on the main questions may test This question tests
liquidated if they are areas of members’ your ability to your knowledge on
insolvent and cannot and creditors’ apply the rules on liquidation and
repay their debts. voluntary liquidation, such administration.
They can also be liquidation and as the grounds for
liquidated before this compulsory liquidation and
stage if the owners liquidation. Make who will be repaid IQ5: Avoidance of
wish to close the sure you know how out of a company’s charges
business down for each liquidation is assets. In this question you
other reasons. begun and who will be tested on
ICAEW 2023 10: Insolvency law: corporate and personal 263

questions
appoints the your ability to

liquidator. Then identify transactions
learn the roles of a that a liquidator can
liquidator and the avoid.
order of priorities
on liquidation.
IQ7: Priorities on
liquidation
Stop and think In this question you
Which party starts a will apply your
creditors’ voluntary knowledge of the
liquidation? What priorities for
are the grounds for payment in a
compulsory liquidation.
liquidation? Who
has top priority for
payment in a
liquidation?
5 Individual voluntary Approach A scenario IQ8: Individual

arrangements In this short section, question may ask voluntary
IVAs are effectively focus on what an you to advise a arrangements
the same as CVAs but IVA is and how they client on whether This question tests
for individual people work. It is important an IVA is some general
who are struggling to understand the appropriate for knowledge of IVAs.
with their debts. They pros and cons for them.
are an alternative to the individual and
becoming bankrupt. their creditors.
Stop and think

Is a court involved in
an IVA?
6 Bankruptcy Approach Knowledge IQ9: Bankruptcy

You can think of Focus on the rules questions could This question tests
bankruptcy as a kind of when and how an test your ability to your knowledge of
of liquidation but for individual might be determine the some bankruptcy
individuals. However, made bankrupt, the order of priority rules.
the difference is that effect on them of for creditors in a
the individual will being bankrupt, and bankruptcy.
come out of how their assets are
bankruptcy alive and distributed to
debt free. It is usually creditors.
a last resort because
it does involve certain
implications, Stop and think
potentially over a What is the
long period of time. minimum amount a
creditor must be
owed to petition for
the debtor’s
bankruptcy? What is
the effect on an
ICAEW member of
being made
bankrupt?
264 Law ICAEW 2023


1 Administration
Section overview
• Administration is relevant where a company is in financial difficulties but not necessarily insolvent
or close to insolvency.
• Administration results in a moratorium on actions against the company.
• An administration order is an order of the court that puts an insolvency practitioner in control of
the company, principally to insulate the company from its creditors and with a view to rescuing the
company as a going concern.
1.1 The purpose of administration

The purpose of administration, originally set out in the Insolvency Act 1986 (HMSO, 1986) (‘IA ‘86’)
was substantially revised by the Enterprise Act 2002 (TSO, 2002). The law governing administration
can be found in the new schedule B1 to the IA ‘86. The role of the administrator is now to carry out
the following, in the order set out:
• To rescue the company as a going concern.
• If this is not reasonably practicable, to achieve a better result for the company’s creditors as a
whole than would be likely with a winding-up.
• If neither is reasonably practicable, and provided the administrator does not unnecessarily harm
the interests of the creditors as a whole, then to realise the company’s assets to make a
distribution to one or more preferential or secured creditors.
(The term ‘unnecessarily harm’ is not defined and will no doubt be tested in the courts before its
meaning is made clear.) Where there are no funds available for the unsecured creditors, the
administrator will realise the company’s assets and make payments to preferential creditors, and
fixed and floating chargeholders, and will arrange for the company to be placed into creditors’
voluntary liquidation.
1.2 Appointment of an administrator

An administrator is appointed either by the court or out of court according to the following
requirements.
A court must be satisfied that the company is, or is likely to become, unable to pay its debts and that
the order is reasonably likely to achieve the purpose of the administration.
Applicant Appointment by court Appointment out of

court
Company Ordinary Apply to the court and show Cannot appoint in

resolution that: specified circumstances,
• the company is or is likely including where the
to be unable to pay its company is already in
debts; and liquidation or
administration or where
• an administration order is applications are pending
Directors (this is the most Majority
reasonably likely to
usual type of decision Otherwise must give five
achieve the purpose of
appointment) days’ prior notice to any
administration
QFCH. Must file at the
Must give notice of court:
application to QFCH (below)
who may intervene • notice of the intended
appointment and
actual appointment
266 Law ICAEW 2023

Applicant Appointment by court Appointment out of
court
• statutory declarations
that the company is
likely to become
unable to pay its
debts and as to the
appointment being
lawfully and properly
made
• statement from
administrator that
purpose of
administration
reasonably likely to be
achieved and that
they consent to the
appointment
One or more creditors May apply to the court Not applicable
Qualifying Floating Must show that: Must give two days’ prior
Charge Holder (QFCH) • the floating charge is a notice to any prior QFCH
(ie, at least one floating qualifying floating before any appointment
charge which on its own charge; and is made
or together with other • it is enforceable. Must file in court:
fixed or floating charges • notice of appointment
amounts to a charge over A QFCH may apply even if
the whole or substantially the company is in • statutory declaration
the whole of the liquidation as to lawfulness of
company’s property. The Must notify any other QFCH appointment and
floating charge must enforceability of the
contain power to appoint charge
an administrator (or • statement by
administrative receiver).) administrator that
purpose of
administration likely
to be achieved and
that they consent to
the appointment
No appointment can be
made out of court if the
company is in liquidation
or administration (or
administrative
receivership).
Context example: Petition for administration order

A has sold goods worth £29,567 to B Ltd on credit. B Ltd has exceeded the credit terms extended. A
has discovered that the management of B Ltd is experiencing difficulties but believes that the
business is sound and that the debt could be paid if the business were managed properly. A is also
aware that B Ltd has a loan from the bank which is secured by a floating charge.
A suspects that the bank might seek to wind up the company and fears that this might mean that the
unsecured debts may not be paid. A therefore applies to the court for an administration order so that
debt collection will be frozen while an action plan is implemented to ensure that debts can be paid.

1.3 The duties of the administrator
As soon as they take office, the administrator must take control of the company’s property and use
their powers to manage the company in accordance with any proposals that have been approved by
creditors or according to any directions given by the court. In particular, they must take a number of
steps including the following:
Timescale Event
Within 7 days File notice of their appointment with the Registrar of Companies.
Require any of the company’s officers and employees to provide a statement
of affairs (who have 11 days to comply with any such request).
Within 8 weeks Submit a statement of their proposals for achieving the aim of administration
to:
• the Registrar
• the company’s creditors
• the company’s members
The administrator should seek creditor acceptance of their proposals by the
deemed consent procedure or another authorised consent method (see
section 4.2 on creditor’s voluntary liquidation). The administrator is also
required to invite creditors to form a creditor’s committee and to ask for
nominations to such a committee.
One year after The administrator’s appointment is terminated unless extended by the court
appointment or (once only) by a prescribed majority of the creditors.
1.4 The consequences of administration

The administrator takes on the powers previously enjoyed by the directors and generally “may do
anything necessarily expedient for the management of the affairs, business and property of the
company” (s.59 (1) IA ‘86). The administrator’s powers are set out in Schedule 1 IA’86. Specifically,
they may:
• remove or appoint a director
• call a meeting of members or creditors
• apply to court for directions regarding the carrying out of their functions
• make payments to secured or preferential creditors
• make payments to unsecured creditors, if the administrator feels that to pay the unsecured
creditor will help the achievement of the administration (for example, if the company has been
denied further supplies by a major supplier unless payment is tendered), and otherwise with the
permission of the court
• present or defend a petition for the winding up of the company
Any creditor or member of the company may apply to the court if they feel that the administrator has
acted or will act in a way that has harmed or will harm their interest. The court may take various
actions against the administrator.
During the period of administration and from the presenting of a petition for an administration order,
the following consequences take effect:
268 Law ICAEW 2023

The company’s The company continues to trade as before and this is the main benefit of
business administration. The company’s website and documents must state that the
business is being run by an administrator.
Moratorium There can be:

• no resolution or court order to wind up the company
• no enforcement of fixed charges or other security over the company’s
property (except with the consent of the administrator or the court)
• no recovery of property which the company has on a HP or leasing
arrangement or enforcement of retention clauses (without the consent
of the administrator or the court)
• no other legal proceedings (including forfeiture of a lease) can be
commenced against the company (except with the consent of the
administrator or the court)
Assets subject to a The administrator can sell property that is subject to a floating charge and
floating charge use the proceeds for the business without obtaining the chargee’s consent
(§ 70 Sch B1 IA’86).
Assets on HP or The administrator can sell such assets with approval of the court and
subject to fixed proceeds must be used to pay off the owner or chargee (§ 72 Sch B1 IA’86).
charge
Directors Directors’ powers are suspended but they remain in office. The
administrator may choose to remove existing directors or appoint new
ones.
Employees Employees are not automatically dismissed (since the administrator is the
agent of the company, which continues to be the employer) but the
administrator may terminate contracts of employment.
Transactions at an These may be avoided (see section 4.5).

undervalue and
preferences
1.5 Advantages of administration

Administration may be preferable to liquidation for the following reasons:
• For the company, it does not necessarily cease to exist at the end of the process and it also
provides temporary relief from creditors to allow breathing space to formulate rescue plans.
• For the members, as they will continue to have shares in the company. If the administration is
successful, regenerating the business should enhance share value and will restore any income
from the business.
• For the creditors, who should obtain a return in relation to their past debts. Any creditor may
apply to the court for an administration order and qualifying floating chargeholders may appoint
an administrator without reference to the court. It may also be in the interests of the creditors to
have a continued business relationship with the company once the business has been turned
around.
Interactive question 1: Administration

Which of the following statements regarding administration is incorrect?
A The sole purpose of administration is to rescue the company as a going concern.
B A company can apply to the court for it to be put into administration if it passes an ordinary
resolution to that effect.
C During administration, an administrator can choose to remove the existing directors and appoint
new ones.

D While in administration, the company is protected from legal proceedings brought against it
unless the administrator consents to them.
Any person acting as an administrator must not only be technically competent, but they also need to
be able to understand the context that each business operates in so that they can make decisions in
the company’s best interest.
2 Charges and receivership

Section overview
• A secured creditor with a charge over land usually has the power to appoint a receiver in the
event of the borrower’s default.
• A receiver will realise the charged asset in order to pay off the chargeholder’s debt.
• With some exceptions, administrative receivers can no longer be appointed by floating
chargeholders.
The term ‘receiver’ has, somewhat confusingly, come to be used to denote two types of office, one of
which was virtually abolished by changes made to the Insolvency Act 1986 by the Enterprise Act
2002, while the other remains.
2.1 Administrative receiver

An ‘administrative receiver’ is appointed by a floating chargeholder and is essentially a manager with
control over the whole, or substantial part, of the company’s property and wide powers over its
business. Subject to any conflicting provision contained in the charge document, their powers are
extensive and include the power to borrow, to take legal proceedings, to appoint professional
advisers and to pay off creditors with preferential rights (Sch. 1 IA ‘86). However, with some
exceptions, administrative receivers can no longer be appointed by holders of floating charges
created on or after 15 September 2003. As a result, administration and company voluntary
arrangements are much more likely to be adopted in the case of company insolvency, as alternatives
to liquidation.
2.2 Fixed charge receiver

The term ‘receiver’ may also indicate a ‘non-administrative receiver’ or ‘LPA receiver’ (so-called
because such receivers were traditionally appointed under the Law of Property Act 1925 (HMSO,
1925)). The scope for these receivers was not curtailed by the Enterprise Act 2002 and, on the
contrary, some commentators report rising activity in the receivership market.
A receiver may be appointed by the holder of a fixed charge over land in the event of the borrower’s
default. Their role is to collect rent and/or sell the property. Unlike liquidators, administrators and
trustees in bankruptcy, a receiver does not need to be a qualified insolvency practitioner and, in
practice, will often be a surveyor or other property specialist. Although their main concern is to
realise the property for the benefit of the lender, they also owe a duty of care to the borrower to act
prudently and to have regard to their interests (but not to go to extensive lengths to enhance the
value of the property before selling it, by pursuing planning applications or renewing leases, for
example).
The appointment of a receiver may provide a relatively quick and inexpensive remedy for a lender
and may be attractive where a straightforward exercise of their power of sale is not appropriate.
Although the appointment of a receiver is often followed by liquidation, it is quite possible for the
270 Law ICAEW 2023

company to remain solvent and to continue in business once the receiver has performed their duties
and vacated office. The appointment of a receiver will normally cause floating charges to crystallise
and become fixed charges (although they are ranked as floating charges on a winding up, since they
were created as such).
2.3 Relationship between administration, administrative receivership and receivership

Where a company is in administrative receivership, an administrator can only be appointed by the
court and only in specific circumstances. The appointment of an administrator automatically
dismisses the administrative receiver and prevents any future appointment of an administrative
receiver.
Where an LPA receiver has been appointed, an administrator can still be appointed. In such cases,
the administrator is entitled to require the LPA receiver to vacate office. Once a company is in
administration, fixed chargeholders cannot enforce their security, except with the consent of the
administrator or the court.
Interactive question 2: Receivership

Which of the following parties are permitted to appoint an administrative receiver?
A The company’s directors
B The company’s administrator
C The company’s floating chargeholders
D The company’s fixed chargeholders
3 Company voluntary arrangements

Section overview
• Company voluntary arrangements (CVAs) were introduced by the Insolvency Act 1986 and are
intended to avoid a company being wound up.
• A CVA is an agreement between the company and its creditors, which sets out how the company’s
debts are to be paid and in what proportions.
• A company is entitled to continue trading for the duration of the CVA.
A CVA may comprise either one or both of a ‘composition of debts’ (where the company agrees to
pay a limited proportion of its total debt, eg, 60p in the pound) or a ‘scheme of arrangement’ (where
the company agrees to pay its debts over a defined period, typically 3–5 years). A CVA may result in
one or more creditors taking an interest in the company by way of a debt-equity swap.
3.1 The procedure

In practice, a CVA is often part of the administration process but it need not be. A company may
appoint a nominee, who will be a qualified insolvency practitioner, to consider its proposals for a
CVA. This may be at any time, whether the company is solvent or not, and the nominee will be
required to report to the court as to whether they consider the proposed CVA has a reasonable
prospect of being approved and implemented. If insolvency proceedings have already commenced,
however, the procedure may be initiated by an administrator or liquidator, who will then act as
nominee.
Creditor approval of a CVA is required, either by the deemed consent procedure or an alternative
consent method. Physical creditor meetings are not required unless the creditors specifically
requisition one.
If approved, the CVA becomes binding on all unsecured creditors. Preferential creditors, however,
retain their priority, and secured creditors remain entitled to enforce their security against the

company (unless they agree otherwise). Approval of the CVA must be reported to the court and the
court may discharge any administration or winding up order previously made.
Any creditor entitled to vote may also challenge the approval of a CVA within 28 days of the court
being notified of the results of the creditors’ and members’ meetings. Such a challenge must be on
the grounds:
• that the CVA unfairly prejudices their interests; and/or
• that there has been some material irregularity at or in relation to the meetings at which the
proposed CVA was considered.
In the event of a successful challenge, the court may revoke or suspend the approval of the CVA
and/or give directions regarding further meetings to consider a revised proposal or to reconsider the
original proposal.
Once approved (and if not successfully challenged), the nominee acts as the supervisor and
implements the CVA.
Scenario questions could test your ability to recommend the most appropriate solution to the
situation in hand (for example choosing between administration, CVA or liquidation). In such cases,
you will need to consider the facts of the case and the relevant insolvency rules, as well as how
particular stakeholders might respond given their own perspectives. For example, a creditor might
not agree to a CVA if it does not leave them significantly better off than administration or liquidation.
3.2 Moratorium
By important changes introduced by the Insolvency Act 2000 (TSO, 2000), where the directors of a
small company wish to propose a CVA, they may apply for a short moratorium, during which they can
prepare and submit a proposal to their creditors. (This gave small companies the significant
advantage of a ‘breathing space’ which, otherwise, was only available by entering into
administration.)
Prescribed documents must be submitted to the court, including the proposed CVA, a statement of
the company’s affairs and confirmation that the nominee believes the proposal to have a reasonable
prospect of being approved and implemented. Once these documents are filed, a moratorium of 28
days will come into effect, subject to extension of up to two months with the agreement of both the
members and creditors’ meetings. The existence of the moratorium must be advertised and stated
on all business documents. It should also be notified to the Registrar of Companies.
The effects of the moratorium include:
• No winding up or other insolvency proceedings can be commenced during the moratorium
period.
• No security over the company’s property be enforced, or any legal process undertaken.
• Any winding-up petitions presented before the moratorium will be stayed and a floating charge
cannot crystallise.
• The company cannot requisition or hold any meeting without the consent of the nominee or
court.
• Other than in the ordinary course of business, the company can only sell property or pay off pre-
moratorium debts, with the approval of the nominee or creditors’ committee (if there is one) and,
if the property is charged, the consent of the chargeholder or court.
• The nominee must monitor the company’s affairs during the moratorium and the moratorium will
be terminated if the nominee withdraws their consent to act, provided they do so properly and on
specified grounds.
3.3 Ability to continue trading

The company may continue trading during the life of a CVA, although existing creditors are likely to
renegotiate the terms of their dealings with the company and seek greater protection, for example
by obtaining directors’ personal guarantees of new liabilities and including retention of title clauses
in contracts for the sale of goods.
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Interactive question 3: Company voluntary arrangements
Which of the following statements regarding company voluntary arrangements (CVAs) is correct?
A Proposals for a CVA must be written by an administrator or liquidator
B Creditor approval for a CVA is required at a physical meeting of creditors
C CVAs are binding on all creditors
D CVAs are not available to solvent companies
4 Liquidation
Section overview
• Winding up, or liquidation, is the process of terminating the life of a company and is carried out
by a liquidator.
• A company is most likely to be wound up where it has become insolvent.
• Liquidation may proceed as a members’ voluntary winding up (where the company is solvent) or
as a creditors’ voluntary winding up.
• Alternatively, liquidation may be imposed compulsorily on the company by the court.
• The liquidator is bound to realise the company’s assets and apply the proceeds in a particular
order, including distributing any surplus to contributories once creditors have been satisfied.
4.1 Members’ voluntary liquidation

Subject to the requirement for a declaration of solvency (see below), the members may resolve to
wind up the company either:
• by ordinary resolution where the articles provide for dissolution on the expiry of a fixed term or
the happening of a specified event (this is rare); or
• by special resolution for any reason whatsoever.
The winding up is deemed to commence when the resolution is passed and notice must be given in
the Gazette within 14 days. The Gazette is the government journal that contains official public records
such as those relating to wills and probate as well as insolvency notices.
A voluntary winding up is a members’ voluntary winding up only if the directors make and deliver to
the registrar a declaration of solvency (s.89 IA ‘86).
This is a statutory declaration that the directors have made full enquiry into the affairs of the company
and are of the opinion that it will be able to pay its debts in full, together with interest (at the
applicable rate), within a specified period not exceeding 12 months. It is a criminal offence
punishable by fine or imprisonment for a director to make a declaration of solvency without having
reasonable grounds for it. The declaration must:
• be made by all the directors or, if there are more than two, by a majority of them; and
• include a statement of the company’s assets and liabilities as at the latest practicable date before
the declaration is made.
The declaration must be:
• made not more than five weeks before the resolution to wind up is passed; and
• delivered to the registrar within 15 days after the meeting (s.89 IA ‘86).
The company may appoint a liquidator by passing an ordinary resolution to that effect. If the
liquidator later concludes that the company will be unable to pay its debts, they must call a meeting
of creditors and lay before them a statement of assets and liabilities (s.95 IA ‘86).
In a members’ voluntary winding up the creditors play no part, since the assumption is that their
debts will be paid in full. However, a members’ voluntary liquidation may become a creditors’

voluntary liquidation where the liquidation process is not progressing to the satisfaction of the
company’s creditors.
Company directors may be criminally liable for making a false declaration of solvency and are likely
to request that an accountant is involved in deciding whether one can be made. The severity of the
punishment means that such decisions should be made very carefully, without bias and having
thoroughly tested any assumptions before making any judgement.
4.2 Creditors’ voluntary liquidation

Where a company intends to wind up voluntarily (and passes an ordinary or special resolution to that
effect as the case may be) but the directors are unable to make a declaration of solvency, the
liquidation proceeds as a creditors’ voluntary winding up, even if in the end the company pays its
debts in full (s.96 IA ‘86). Despite its label, this type of liquidation is not initiated by the creditors.
The directors must nominate a liquidator and deliver to the creditors a notice seeking their decision
on the nomination of a liquidator. This must be done either by a ‘deemed consent’ procedure, or by
one of a number of alternative consent methods (such as correspondence, electronic voting, virtual
meetings, physical meetings, or any other procedure that enables all creditors entitled to participate
in the making of the decision to participate equally). Under the deemed consent procedure, the
directors write to the creditors with their proposal. If less than 10% of the creditors in value object,
the proposal is deemed to be approved.
The date for the decision of the creditors on the nomination of the liquidator must be after three
working days following delivery of the notice but within 14 working days of the resolution to wind up
the company.
Creditors must be sent a statement of the company’s affairs within seven working days of the
decision to wind up the company. It must be received no later than the business day before the
decision date. They are also entitled to request that a meeting is held.
4.3 Compulsory liquidation

A company may be obliged to wind up by the court on the petition of, usually, a creditor or member.
It tends to be a less straightforward and more time-consuming and expensive process than a
voluntary winding-up. Around 90% of all compulsory liquidations follow a creditor’s petition and
most of these are on the grounds of the company’s insolvency.
A petition may be brought for a compulsory winding up on one of seven statutory grounds (s.122 IA
‘86), the most significant of which are:
Ground Explanation
That the company is unable A creditor must (in petitioning on the grounds that the company is
to pay its debts (s.122 (1)(f)) unable to pay its debts) show either:
• that they are owed more than £750 and has served on the
company at its registered office a written demand for payment
and the company has neglected, either to pay the debt or to
offer reasonable security for it within 21 days;
• that they have attempted to enforce a judgment against the
company by execution on the company’s property but it has
failed to satisfy the debt; or
• that, taking into account the contingent and prospective
liabilities of the company, it is unable to pay its debts as they
fall due or that its assets are less than its liabilities.
That it is just and equitable to This ground is usually relied on by a member who is dissatisfied
wind up the company with the directors or controlling shareholders over the
(s.122(1)(g)) management of the company (for example, where there is
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Ground Explanation
management deadlock or where relations within a quasi-

partnership break down). It must be shown that no other remedy is
available.
A member’s petition to wind up the company on the grounds that it is just and equitable to do so,
will only be considered if the company is solvent (otherwise they have nothing to gain from it) and
they have been a registered shareholder for at least 6 of the last 18 months before the petition
(subject to some exceptions).
The BEIS (Department for Business, Energy and Industrial Strategy) may petition for the compulsory
winding up of a company:
• if a public company has not obtained a trading certificate within one year of incorporation
• following a report by BEIS inspectors that it is in the public interest and just and equitable for the
company to be wound up
On a compulsory winding up, the court will usually appoint the official receiver (an officer of the
court) as liquidator, although they may be replaced by an insolvency practitioner at a later date. The
official receiver must investigate (s.132) the causes of the failure of the company, and generally, its
promotion, formation, business dealings and affairs.
The liquidation is deemed to have commenced at the time (possibly several months earlier) when
the petition was first presented, with the following consequences:
• Any disposition of the company’s property and any transfer of its shares subsequent to the
commencement of liquidation is void unless the court orders otherwise.
• Any legal proceedings in progress against the company are halted (and none may be
commenced) unless the court gives leave.
• Any seizure of the company’s assets after commencement of liquidation is void.
• The employees of the company are automatically dismissed and the liquidator assumes the
powers of management previously held by the directors.
• Any floating charge crystallises.
• The assets of the company may remain the company’s legal property but under the liquidator’s
control, unless the court orders the assets to be vested in the liquidator.
• The business of the company may continue, but it is the liquidator’s duty to continue it with a view
only to realisation, for instance by sale as a going concern.
Worked example: Petition for compulsory liquidation

A has sold goods worth £29,567 to B on credit. B Ltd has exceeded the credit terms extended and A
has presented B Ltd with a written demand to their registered office, which B Ltd has not responded
to after a month. B Ltd have sold on the goods which they purchased from A and do not dispute the
value of the invoice.
Requirement
What action can A take?
Solution
A can petition the court for the compulsory winding up of the company because the company has
failed to satisfy its demand for a debt of over £750 within 21 days. They will petition on the ground
that the company is unable to pay its debts.
Interactive question 4: Insolvency

Zorro Ltd incorporated 15 years ago and is in the business of supplying pet foods and products to
small retailers. After 13 successful years it borrowed £150,000 to expand its premises and the loan
was secured by a fixed charge on those premises. Due to a nearby out-of-town retail park completed
18 months ago, Zorro Ltd has suffered a significant downturn in its business. One of its regular

suppliers of Bunny Mix, who often extended credit terms over short periods and who was also
suffering due to the new retail park, has recently tried to recover a debt of £1,725 against the
company but has received no reply to its latest written demand 25 days ago. The directors of the
supplier are seriously concerned that the business will not be repaid but would rather see Zorro Ltd
recover its fortunes in spite of the retail park.
Requirements
4.1 Can the supplier petition the court for a compulsory winding up?
4.2 Can the supplier appoint an administrator in the hope that the company can be rescued?
4.4 The role of the liquidator

Once a liquidator is appointed, whether in a voluntary or a compulsory winding up, their role is to:
• settle the list of contributories (ie, members who have a liability to contribute in the event of a
winding up)
• collect and realise the company’s assets
• discharge the company’s debts
• redistribute any surplus to the contributories according to the entitlement rights attached to their
shares
On their appointment, the powers of the directors cease save to the extent that they are permitted to
continue by the liquidator or (in a voluntary winding up) by the company or creditors as appropriate.
Once the liquidation is complete, the liquidator must act as follows:
• In a voluntary winding up, they must prepare an account showing how the winding up has been
dealt with and lay it before a meeting of the members and/or creditors. Within the following week
they should then file details with the Registrar who will enter the details on the company’s file and
the company will be deemed to be dissolved three months thereafter.
• In a compulsory winding up, the liquidator must go back to the court which then makes an order
dissolving the company. They then file the order and the Registrar records on the company file
that the company is dissolved as from the date of the order.
4.5 Avoidance of charges

In certain cases, charges or transactions entered into or debts incurred by the company may be
invalidated, as follows:
Transaction Explanation
Charges Charges not registered within 21 days are void against the liquidator and creditors
(and the chargee becomes an unsecured creditor).
Transactions A transaction ‘at an undervalue’ is a gift or a transaction in the two years before
at an liquidation (or administration), by which the company gives consideration of
undervalue greater value than it receives, for instance a sale at less than full market price
(s.238 IA ‘86), unless the company enters into it:
• in good faith
• for the purpose of carrying on its business
• believing on reasonable grounds that it will benefit the company
Preferences A company ‘gives preference’ to a creditor or guarantor of its debts if it does

anything:
• by which their position will be benefited if the company goes into insolvent
liquidation
• with the intention of producing that result
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Transaction Explanation
• six months before the commencement of liquidation with a person

unconnected with the company or two years in the case of a connected person
(‘connected’ generally means a director, shadow director or associate) (s.239 IA
‘86)
Floating A floating charge created within 12 months before winding up (or two years if
charge given to a connected person) may be void or voidable.
You will recall that if the liquidator can show that the directors are guilty of wrongful or fraudulent
trading the court may order that they be personally liable for some or all of the company’s debts.
Worked example: Transactions at an undervalue and preferences

Bhindi is a director of BHD Ltd. On 1 April 20X3 the company gifted one of its surplus vehicles to
Bhindi’s mother. At the time, the vehicle was worth £12,000 and Bhindi was concerned that the
business might struggle to pay its creditors over the next few months. With this in mind, she
approved the early repayment of a loan that her father gave the business when it started. BHD Ltd’s
financial situation worsened, and it went into liquidation on 31 May 20X4.
Requirement
Explain whether BHD Ltd made a transaction at an undervalue or gave a preference.
Solution
The gifting of the company vehicle to Bhindi’s mother was a transaction at an under value because
less than the market price of the vehicle was received, and the transaction occurred less than two
years ago. There were no business grounds for the transaction and the company did not benefit from
it (in fact it was in a worse position because if the vehicle had been sold to a third party instead it
might have eased the company’s financial situation).
The business gave a preference to Bhindi’s father by settling his loan early less than two years ago.
This benefited him at the expense of the other creditors. If the early repayment was not made, then
he would have been in the same situation as the other creditors when the company went into
liquidation. Instead, he has not lost out financially. The fact he is Bhindi’s father means he is
connected to the company.
Interactive question 5: Avoidance of charges

Trading Ltd has recently begun a process of liquidation (in February 20X4) following resolutions by
the members and creditors to wind up the company. Anna and Didi, the two directors, have been
researching insolvency on the internet and it has led them to be concerned over a number of
transactions entered into by Trading Ltd over the past few years. They advise you that Trading Ltd has
actually been unable to pay its debts since April 20X3.
Requirement
They ask for your advice as to whether the following transactions might be avoided by the liquidator.
Yes/No
A floating charge in favour of Adam plc for £100,000 created in March 20X1
A sale of 10 cars in March 20X2 for £80,000. Anna and Didi knew that they were
probably worth over £90,000 but they honestly believed that the sale would be in
the best interest of keeping the company afloat

Yes/No
A purchase in August 20X3 of some car spares for £10,000 which Anna made as a
bit of a favour for the vendor. She suspected that they were only worth £7,500
A loan that Didi made to the company a few years previously was paid off in June
20X2
4.6 Priorities on liquidation

A liquidator in a compulsory winding up must, and in a voluntary winding up is likely to, adhere to
the following prescribed order for distributing the company’s assets:
Priority Explanation
1 Costs Including the costs of getting in the assets, liquidator’s remuneration and
all costs incidental to the liquidation procedure
2 Preferential debts • Employees’ wages (for a prescribed period and subject to a

prescribed maximum)
• Accrued holiday pay
• Contributions to an occupational pension fund
These rank equally
3 Secondary HMRC. Taxes collected from employees and customers that are held
preferential temporarily by the business and due to be paid over to HMRC (for
creditors example income tax and VAT)
4 Floating charges Subject to an amount ring-fenced (protected for unsecured creditors, see
below)
5 Unsecured A certain percentage of assets is ‘ring-fenced’ for unsecured creditors

ordinary creditors where there is a minimum fund for distribution of £10,000, namely 50%
of the first £10,000 of floating charge realisations and 20% of the floating
charge realisations thereafter (subject to a prescribed maximum)
6 Deferred debts For example dividends declared but not paid and interest accrued on
debts since liquidation
7 Members Any surplus is distributed to members according to their rights under the
articles or the terms of issue of their shares
Note that secured creditors with fixed charges (and indeed floating charges) may appoint a receiver
to sell the charged asset, passing any surplus to the liquidator. In the event of a shortfall they must
prove for the balance as unsecured creditors.
Also, remember that floating chargeholders are secured creditors. This means that a floating charge
holder who faces a shortfall on their debt cannot share in the amount protected (ring-fenced) and
available to unsecured creditors. However, they are still entitled to priority over any amounts left after
the prescribed part has been paid to the unsecured creditors.
4.7 Priority of charges

Businesses may have more than one charge in issue over the same property. Where these charges
are given to different creditors, their priority must be determined. For example, if charges are created
over the same property to secure a debt of £5,000 to X and £7,000 to Y and the property is sold
yielding only £10,000, then either X or Y is paid in full and the other receives only the balance
remaining out of £10,000 realised from the security (unless they rank equally).
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The main points to remember in connection with the priority of any charges are as follows:
• Fixed charges rank according to the order of creation (ie, the one created first takes priority).
• Floating charges also take priority according to the order of creation.
• A fixed charge created before a floating charge has priority.
• A floating charge created before a fixed charge will only take priority over the latter if, when the
latter was created, the fixed chargee had notice of the floating charge.
A floating charge holder may seek to protect themselves by prohibiting the company from creating a
subsequent fixed charge over the same asset (a ‘negative pledge clause‘). In the absence of such a
clause the fixed charge will rank first since, although created later, it attaches to the property at the
time of creation (whereas the floating charge attaches at the time of crystallisation). Once a floating
charge has crystallised it becomes a fixed charge and a fixed charge created subsequently ranks
after it.
Interactive question 6: Priority of charges

Which of the following statements concerning the priority of charges is correct?
A Floating charges automatically have priority over fixed charges.
B Fixed charges automatically have priority over floating charges.
C The creation of a negative pledge clause automatically protects the priority of a floating charge.
D Fixed and floating charges have equal priority. The order of all charges is determined by the
creation date.
Assessment questions may require you to decide who will be paid from the proceeds of a
liquidation. Coming to this conclusion requires precise application of the technical rules you have
studied.
Interactive question 7: Priorities on liquidation

Buffers Ltd has an issued share capital of 5,000 × £1 shares and is in compulsory liquidation. The
liquidator has a fund of £8,500 available for distribution and needs to distribute the fund to settle the
following claims so far as possible:
• The directors declared a dividend of 10p, six months ago but it has not been paid.
• The liquidation costs, including remuneration, amount to £2,500.
• Moneylender plc had a floating charge over the company’s stock in trade which has now
crystallised and the value is £4,000.
• The company’s employees have been paid, except for accrued holiday pay worth £1,200.
• Mr Staples, the local stationery supplier is an unsecured creditor and is owed £830.
It is clear that there will not be a surplus for distribution to the members.
Requirements
7.1 Which debt will be discharged first?
7.2 Will Mr Staples receive all of the money owed to him?
7.3 Will the members receive the dividend?
7.4 Do the ring-fenced provisions apply?

Before the company is finally dissolved, its property will be distributed according to the priorities
explained above. However, in some cases, a company can be struck off the company register without
liquidation. In this instance, any property vests in the Crown as bona vacantia. This means that there is
no known person entitled to it. However, the Crown has the power to disclaim it, in which case any
interested person may apply to the court to have the property vested in them on such terms as the
court sees fit.
5 Individual voluntary arrangements

Section overview
• An individual voluntary arrangement (IVA) is an arrangement available to an individual (including

sole traders and partners) to reach a compromise with their creditors, with the aim of avoiding
bankruptcy.
• IVAs are governed by the Insolvency Act 1986 and supervised by licensed insolvency
practitioners.
Sole traders and partners may well wish to pursue the option of an IVA in order to protect the survival
of their business. An IVA normally provides for the debtor to pay reduced amounts towards their
total debt over a period of, usually, five years. Once approved, an IVA binds all of the debtor’s
creditors and none may petition for bankruptcy.
5.1 The procedure

An individual may apply to the court for an interim order where they intend to submit a proposed
arrangement to their creditors. This application need not include details of the proposed
arrangement in full although it often will. Such an interim order effectively imposes a moratorium on
actions against the debtor and creditors cannot take any action against them (although a secured
creditor may continue to enforce their security against the debtor).
The individual’s nominee (who must be a licensed insolvency practitioner) is required to submit their
comments on the proposal’s chances of success.
The creditors may reject the proposals or accept them (with or without modification) either by
deemed consent or an alternative consent method. Once approved, a supervisor is appointed (who
is usually the nominee) to be responsible for supervising the scheme and distributing sums to the
creditors. Upon completion of the IVA, assuming all its terms are complied with, the debtor is fully
discharged from all liabilities contained in it.
Application may be made to the court on the basis that the terms of the IVA are unfairly prejudicial to
a creditor or that there has been some material irregularity in relation to a meeting of the creditors. In
addition, a creditor may petition the court for bankruptcy in exceptional circumstances, for example
where the debtor fails to comply with the terms of the IVA.
(Note that an IVA can be made without the added protection of an interim court order and that there
is also an alternative ‘fast track’ procedure available to post-bankruptcy IVAs where the official
receiver is the proposed nominee. In such cases, the creditors receive the proposal on a ‘take it or
leave it’ basis.)
5.2 Advantages and disadvantages of an IVA

The advantages of an IVA are as follows:
Advantages
For the individual • The sole trader or partner is permitted to continue in business and to
operate a normal bank account (but without an overdraft facility).
• There is flexibility in drawing up the proposals to suit their personal
and financial circumstances.
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Advantages
• They do not suffer the restrictions that would be imposed by

bankruptcy, for example not being able to act as a director of a
limited company.
• Details of IVAs are not published in the press as details of bankruptcy
are.
For the creditor • It is essential that an IVA is considered as it is likely to give greater
satisfaction to creditors than bankruptcy would.
• The costs of administering an IVA are significantly less than
bankruptcy, thus enabling a higher return to creditors.
However, there are some disadvantages, namely:

• The period of an IVA is usually five years, which is longer than in bankruptcy.
• There is no opportunity for a trustee in bankruptcy to investigate the debtor’s actions or the
possibility of hidden assets.
Note that the debtor’s home and assets are still at risk unless excluded from the IVA and that if the
terms of the IVA are not complied with, they may still be made bankrupt.
Interactive question 8: Individual voluntary arrangements

Which of the following statements regarding individual voluntary arrangements (IVAs) is correct?
A Partners in a partnership may apply for an IVA to protect the business
B Those subject to an IVA may not act as a director of a limited company
C IVAs last a maximum of three years
D IVAs completely protect the individual from bankruptcy
6 Bankruptcy
Section overview
• A person may become bankrupt either by applying online themselves, or by a creditor petitioning
the court for their bankruptcy.
• Bankruptcy is effectively the equivalent for a sole trader or partnership (or other individual) of a
compulsory winding up in the case of a company.
• It should be considered as a last resort after IVAs.
6.1 The procedure

A debtor can apply for bankruptcy online with the Insolvency Service for the payment of a fee. An
adjudicator will review the application and decide whether or not to make the debtor bankrupt.
A creditor can petition the court to make a debtor bankrupt if they are owed a debt, or a share of a
debt, that is £5,000 or more.
The court can also be petitioned by the supervisor of an IVA where the debtor breaches the terms of
the IVA or if the debtor gave false information to obtain the IVA.
The court hearing will normally take place at least 14 days after the service of the petition to give
time for the debtor to file objections and for creditors to attend. If the court is satisfied that the
debtor is unable to pay their debts as and when they fall due, it will make a bankruptcy order.

Where a creditor petitions for bankruptcy, they will be able to show that the debtor is unable to pay
their debts, if they can show that:
• they have served a statutory demand on the debtor that has not been satisfied; or
• their attempt to enforce a judgement order has not been satisfied.
6.2 The effect of bankruptcy

Regardless of how the bankruptcy commenced, once a bankruptcy order is made, the debtor
becomes an undischarged bankrupt and is subject to a number of personal restrictions, for example:
• They cannot act as a director of a company or an insolvency practitioner.
• They cannot borrow more than £500 without telling the lender about their bankruptcy.
• Under ICAEW rules, they may not practise as a chartered accountant.
The court may stay any action against the debtor from the date of the petition and, generally
speaking, the bankrupt can no longer be sued by their creditors once the order is made. There are
exceptions however, for example a secured creditor can still enforce their security.
The bankrupt’s estate automatically vests in the trustee in bankruptcy (subject to the rights of secured
creditors) and does not need any written contract or transfer of rights or property. The trustee in
bankruptcy has extensive powers, although some are subject to the court’s approval.
Note that the bankrupt’s ‘estate’ is defined to exclude:
• such tools of the trade and other items as are necessary for use personally in their employment,
business or vocation
• such clothing and household provisions as are necessary to satisfy the basic domestic needs of
the bankrupt and their family
• property held by the bankrupt on trust for another person
• certain tenancies protected in some way by legislation
6.3 Distribution to creditors

The trustee in bankruptcy must require the creditors to prove their debts (which they do by
completing proof forms) and they will then rank them according to the prescribed order and make
payments accordingly. The order is as follows:
Debt Explanation
1 Costs The costs of realising the estate, the remuneration of the trustee and
incidental expenses
2 Pre-preferential As provided by certain statutory provisions, for example funeral

debts expenses where the bankrupt is deceased
3 Preferential debts Remuneration of employees (for a prescribed period and subject to

a prescribed maximum)
Sums payable in connection with occupational pension schemes
Accrued holiday pay
4 Secondary HMRC. Money owed by the individual to HMRC (for example for
preferential income tax and national insurance contributions)
creditors
5 Ordinary debts Where the fund is insufficient to pay all unsecured creditors they rank
equally
6 Interest Creditors may prove for interest up to the date of bankruptcy (and
therefore only if all preferential and ordinary creditors have been
paid in full)
7 Postponed debts For example, a debt owed to the bankrupt’s spouse
8 Surplus Any surplus is returned to the bankrupt (this is of course unlikely)
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Once the trustee has completed the distributions, they report to the creditors who will usually release
them from their trusteeship.
6.4 Discharge of bankruptcy

One year after the bankruptcy order, a bankruptcy is discharged (although they may be made
subject to a bankruptcy restrictions order or undertaking for between 2 and 15 years where they
were culpable to some extent for their insolvency). This means that all their debts are treated as
discharged, all personal restrictions are lifted and effectively their slate has been wiped clean.
However, there may remain a certain stigma attached to a discharged bankrupt and their credit
history will have been damaged.
Interactive question 9: Bankruptcy

Which of the following statements regarding bankruptcy is incorrect?
A Creditors may petition for bankruptcy when the debtor owes them a minimum of £3,000.
B When a bankrupt’s assets are distributed to creditors, amounts owed to HMRC are repaid before
other ordinary debts.
C ICAEW members who are made bankrupt may not practice as a chartered accountant.
D A person made bankrupt may borrow up to £500 without telling the lender about their
bankruptcy.

Summary
Corporate
Company voluntary Liquidation

arrangement
• Nominee Members' Compulsory Creditors’ voluntary

• Approval of voluntary • Petition by • Members'
creditors • Usually creditor resolution
• Moratorium special or member • No declaration
(small companies resolution • Court order of solvency
only) • Declaration • Creditors approve
• 7 grounds
• Continue trading of solvency (including nominee liquidator
insolvent and by 'deemed
Receivership just and consent' or
equitable) virtual meeting
• Secured creditor Liquidator

appoints (rarely
court)
Role Avoidance Priorities
• Realise assets
• Pay off debts • Contributories • Cost
• Assets • Pref debts
• Powers in charge
• Debts • Floating charges
• Suplus • Unsecured
Administration • Deferred
• Members
3 purposes
Appointment
Charges
• Unregistered
By Out of within 21 days
court court
Transactions at an
Duties undervalue
• File notice of appointment • 2 years
• Require statements of affairs • Exceptions
• Submit proposals
Prefer
• Hold creditors' meeting
• 6 months/2 years
Powers
• Directors' power Floating charges
• Anything 'necessarily expedient' • 12 months/2 years
• Sch. 1 IA '86
Moratorium
• No winding up
• No enforcement of fixed charge
without consent
• No recovery of HOP property
• No legal proceedings
284 Law ICAEW 2023

Personal
IVAs Bankruptcy
Member/nominee
Online Creditor's
application petition
Proposal to court
Interim order Court order (official receiver)
Moratorium Undischarged
bankrupt
restrictions
Distribution
Discharge BRO/undertaking
Discharge

indicated.
1. Do you know what the role of an administrator is? (Topic 1)
2. Do you know who can appoint a fixed charge receiver? (Topic 2)
3. Do you know the effects of a moratorium under the Insolvency Act 2000? (Topic 3)
4. Do you know the two main circumstances under the Insolvency Act 1986 where a
company may be put into compulsory liquidation? (Topic 4)
5. Can you give one advantage for the individual and one for a creditor of an individual
voluntary arrangement? (Topic 5)
6. Do you know the minimum amount that a creditor must be owed in order to petition for
bankruptcy of the debtor? (Topic 6)

286 Law ICAEW 2023

• Enterprise Act 2002. (2002). London, TSO.

• Insolvency Act 2000. (2000). London, TSO.
• Law of Property Act 1925. (1925). London, HMSO.

Self-test questions

1 Who may apply to the court for an administration order but cannot appoint an administrator out of
court?
2 What must an administrator do:
(1) within seven days?
(2) within eight weeks?
3 What does CVA stand for?
4 The normal duration of a CVA is:
A Up to 12 months
B 3–5 years
C 5–10 years
5 What are the two most important grounds for compulsory liquidation?
6 A members’ voluntary winding up is where the members decide to dissolve a solvent company.
A True
B False
7 A creditor must satisfy one of three criteria in order to petition for a compulsory winding up. What are
they?
8 Who will the court appoint as liquidator in a compulsory winding up?
9 Certain transactions may be avoided if they occur within a certain time period of insolvency. Match
the time period with the transaction.
• Six months
• One year
• Two years
Response
Floating charge in favour of an unconnected person
Transaction at an undervalue
Preference in favour of an unconnected person
10 Put the following six points in order to represent the correct priority in a distribution of assets on a
compulsory winding up:
(1) Floating charges
(2) Deferred debts
(3) Preferential debts
(4) Members
(5) Costs
(6) Unsecured ordinary creditors
11 Name four effects of a compulsory liquidation order.
12 Can an individual who is subject to an IVA still act as a director of a company?
288 Law ICAEW 2023

this chapter.


A The sole purpose of administration is to rescue the company as a going concern.
Rescuing the company as a going concern is one, but not the sole purpose of administration.
The other purposes include to give a better result to the creditors as whole rather than winding
the company up, and to realise company assets to pay preferential or secured creditors. The
other statements are all correct.

C The company’s floating chargeholders
Administrative receivers are appointed by floating chargeholders. However, like LPA receivers,
their use is becoming less common as administration and company voluntary arrangements
have taken over. The driver for this is that holders of floating charges created on or after 15
September 2003 are not entitled to appoint an administrative receiver.

C CVAs are binding on all creditors
CVAs are binding on all creditors, even if they did not vote for them. However, creditors may
challenge the CVA in court if they are unhappy with it. Proposals for a CVA should be written by a
qualified insolvency practitioner; they do not have to be an administrator or liquidator. Although
creditor approval is needed, there does not need to be a physical meeting. The deemed
consent procedure (or another method) can be used. Solvent companies as well as insolvent
companies may apply for a CVA.

4.1 Yes. As a creditor who is owed more than £750 and whose written demand has not been
satisfied in 21 days, the supplier can petition the court on the grounds that the company is
unable to pay its debts.
4.2 No. The supplier is an unsecured creditor with no floating charge, so appointing an
administrator is not an option open to it. However, it may apply to the court to appoint an
administrator.
Yes/No
A floating charge in favour of Adam plc for £100,000 created in March 20X1 No
A sale of 10 cars in March 20X2 for £80,000. Anna and Didi knew that they were No
probably worth over £90,000 but they honestly believed that the sale would be in
the best interest of keeping the company afloat
A purchase in August 20X3 of some car spares for £10,000 which Anna made as a Yes
bit of a favour for the vendor. She suspected that they were only worth £7,500
290 Law ICAEW 2023

Yes/No
A loan that Didi made to the company a few years previously was paid off in June Yes
20X2
(1) Floating charges created within the previous 12 months can be avoided.
(2) It is a transaction at an undervalue within the past two years but it will not be avoided where the
company entered into it in good faith for the purposes of carrying on the business and believing
it to be in the company’s best interests.
(3) This is a transaction at an undervalue within the previous two years.
(4) This is a preference given to a connected person and within the two years before liquidation.

B Fixed charges automatically have priority over floating charges.
Fixed charges have priority over floating charges. Negative pledge clauses will only protect the
priority of a floating charge if the fixed charge holder was notified of it when the fixed charge
was created.

7.1 The costs of the liquidation, including the liquidator’s remuneration.
7.2 He will receive £800 of the £830 owed, after payment of the costs, holiday pay (being a
preferential debt) and floating charge.
7.3 No. This is a deferred debt that ranks after unsecured creditors and the fund is insufficient to
pay the debt.
7.4 No, as the fund available for distribution is below £10,000.

A Partners in a partnership may apply for an IVA to protect the business
Sole traders and partners can apply for an IVA to protect their business. Those subject to an IVA
may act as a director of a limited company. IVAs generally last for five years. IVAs do not
completely protect an individual from bankruptcy; a creditor may petition for bankruptcy where
the individual fails to comply with the terms of the IVA.

A Creditors may petition for bankruptcy when the debtor owes them a minimum of £3,000.
Creditors may petition for bankruptcy when the debtor owes them £5,000 or more. All of the
other statements are correct.

1 A creditor with no minimum value of debt (if they are not also a qualifying floating charge holder)
2 An administrator must:
(1) file notice of their appointment with the Registrar
(2) submit a statement of their proposals to the Registrar and the company’s members and creditors
3 Company voluntary arrangement
B 3–5 years
5 Two grounds for compulsory liquidation:
(1) Company is unable to pay its debts.
(2) It is just and equitable to wind up the company.
A True
7 Criteria for a compulsory winding up:
• They are owed more than £750 and the company has failed to satisfy their written demand for
payment within 21 days.
• Their attempts to enforce a judgement order by execution have failed.
• The company is unable to pay its debts.
8 The official receiver
9
Response
Floating charge in favour of an unconnected person One year
Transaction at an undervalue Two years
Preference in favour of an unconnected person Six months
10 5, 3, 1, 6, 2, 4
11 Any four:
• Official receiver appointed as liquidator
• Liquidation deemed to have commenced at time when petition first presented
• Disposition of company property since commencement of liquidation deemed void
• Legal proceedings against the company are halted
• Employees are dismissed
• Any floating charge crystallises
12 Yes
292 Law ICAEW 2023

Chapter 11
Criminal law
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 Money laundering
2 Bribery
3 Fraud
4 Law and ethics
5 Whistleblowing
Summary
Self-test questions
Introduction
11
Learning outcomes
• Identify offences and their consequences under the anti-money laundering legislation, identify
the obligations on professional accountants to detect and help prevent money laundering, and
select appropriate courses of action to protect professional accountants from criminal liability
• Identify instances and consequences of bribery
• Identify instances and consequences of fraud in a given scenario, including:
– the effect of the Fraud Act 2006
– threats to consumers through cybercrime
– offences created under the Computer Misuse Act 1990
– fraudulent trading
– insider dealing
• Identify circumstances where accountants will be protected from dismissal and victimisation if
they raise concerns about malpractice in the workplace
Specific syllabus references for this chapter are: 3b, c, d and e.
11
Syllabus links
There are links with directors’ duties, which we have already considered, since directors can be in a
position to carry on fraudulent trading for example. Your Assurance and Audit and Assurance studies
will also address professional ethics generally and, in particular, the obligation and authority of an
auditor or assurance provider to make a protected disclosure.
11
Assessment context
identification of an appropriate response, which may be in the form of providing advice, such as how
to deal with suspected money laundering.
Students can expect about five questions on criminal law in the assessment.
11

of this chapter.

questions
1 Money laundering Approach This is a highly IQ1: Money

As discussed in the This section examinable area. laundering and
first part of this contains important Scenario questions professional
section, money information for you may test your ability scepticism
laundering will be of to apply as a future to apply what you This question
great significance in ACA, as well as have learned to a tests
your career as an knowledge for your practice context. professional
accountant. It is assessment. Focus Knowledge questions scepticism in
perhaps the most on the detail in the may test detailed regard to
likely crime that Proceeds of Crime aspects of the potential money
accountants will Act 2002 and Proceeds of Crime laundering.
encounter, so it is vital Money Laundering Act 2002 and Money
that you not only Regulations 2017. Laundering
Regulations 2017.
294 Law ICAEW 2023

questions
learn the rules for IQ2: Reporting

your exam, but also Stop and think money
apply them in your laundering 1
future career. Could you identify and IQ3:
the ‘red flags’ of Reporting
money laundering? money
Can you explain the laundering 2
various money
laundering Both of these
offences? Can you very short
explain the duties of questions test
an accountant in your knowledge
relation to money on reporting
laundering? money
laundering.
2 Bribery Approach Scenario questions IQ4: Bribery

Accountants have a Learn all four of the may ask you to This question
risk of being bribed bribery offences as identify whether helps you to
or being put under well as the defence bribery has been identify whether
pressure to commit and penalties for committed in a bribery is being
bribery by clients. It is committing it. particular situation. committed.
important to also be
aware of the limits of
allowed corporate
hospitality.
3 Fraud Approach Scenario questions IQ5: Fraud and

Fraud is a key Learn the different might ask you to cybercrime
financial crime and is types of fraud and identify types of This question
often linked to how it is linked to cybercrime being tests your
cybercrime. cybercrime. Also committed. knowledge of
learn the threats Knowledge questions types of fraud.
consumers face may test the
from cybercrime definitions of the
and how they can types of fraud.
protect themselves.
The Computer
Misuse Act and
fraudulent trading
are also important
areas to focus on.
Insider dealing is of
great relevance to
many accountants,
and it is important
to understand the
offences that might
be committed.
Stop and think

Could you explain
the three types of
fraud and the
threats to
ICAEW 2023 11: Criminal law 295

questions
consumers from
cybercrime?
4 Law and ethics Approach Knowledge questions IQ7: Law and

As a Chartered Ethics is an may test your ethics
Accountant you have important part in all knowledge of the This question
a duty to not only act aspects of your fundamental tests your ability
within the law, but studies as an ACA principles. Scenario to identify
also to embody the student and much questions may test ethical threats.
ICAEW Code of of this section is their practical
Ethics for members. likely to be familiar application.
to you already.
Make sure that you
know the five
fundamental
principles as well as
the threats and
safeguards to
accountants in
business and public
practice.
Stop and think

Can you explain the
five fundamental
principles? What
safeguards can you
put in place if there
are threats to these
fundamental
principles?
5 Whistleblowing Approach Knowledge questions IQ8:

Whistleblowing Focus on the three are likely to test your Whistleblowing
involves employees key areas of knowledge of what is This question
disclosing qualifying and is not a protected tests your
wrongdoing by their disclosure, public disclosure. understanding
employer. The interest and of protected
purpose is to bring appropriate person. disclosures.
the public’s attention
to what is happening.
Employees who make Stop and think
such disclosures face Could you identify a
significant threats protected
which the law disclosure from one
attempts to prevent. that is not
protected?
296 Law ICAEW 2023

1 Money laundering
Section overview
• Money laundering is the process by which the proceeds of crime (either cash or other property)
are converted into assets which appear to have a legitimate (rather than illegal) origin.
• ‘Relevant persons’, including accountants in practice, are required by law to report any knowledge
or suspicion of money laundering to the authorities (currently the National Crime Agency (NCA).
• The primary legislation on money laundering is the Proceeds of Crime Act 2002 (POCA 2002),
supplemented by the Money Laundering Regulations 2017 (‘the Regulations’).
As an accountant and future member of ICAEW, money laundering is not an issue that will disappear
after passing your exam. ICAEW is a supervisor under the money laundering regulations that you will
be studying shortly, and the organisation supports the Economic Crime Plan for the UK. This plan
was developed by the Economic Crime Strategic Board (ECSB), an organisation that has both the UK
Home Secretary and Chancellor in joint control.
While the plan is targeted at supervisory bodies, such as ICAEW, there will be increased attention on
the activities of accountants in preventing and reporting money laundering, and therefore the rules
on money laundering are going to have significant impact on your future career.
Before covering the money laundering rules, we will seek to answer four key questions that, as a
future ACA, you are going to have to be aware of as part of your day-to-day job. The questions are:
• What is money laundering?
• What criminal offences create proceeds of crime?
• What are the ‘red flags’ for money laundering?
• How, as a Chartered Accountant, could you be implicated in money laundering?
1.1 What is money laundering?

The term ‘money laundering’ covers any activity by which the apparent source and ownership of the
proceeds of crime are changed, in such a way that the cash or other assets appear to have been
obtained legitimately.
‘Proceeds of crime’, termed ‘criminal property’ in the Proceeds of Crime Act (POCA) 2002 (TSO,
2002), refers to any assets which have been procured by means of a criminal act. A criminal act is one
which constitutes an offence against the state, punishable by fines and/or imprisonment.
Methods which criminals might use to launder money include the following:
• buying and selling luxury goods, for example cars – thereby obtaining a seemingly respectable
payment from the subsequent buyer
• buying investments and cashing them in
• overpayment of tax
• depositing money with a solicitor or accountant, then requesting the return of funds
• feeding cash into cash-based businesses
• buying chips in a casino and then cashing in unspent chips
Many such transactions take place through the internet and are generally known as
‘cyberlaundering’.
1.1.1 What criminal offences create proceeds of crime?

Before money laundering can happen, a criminal offence must have occurred for the proceeds of
crime to be generated. Any criminal offence will create proceeds of crime. Some examples include:
• illegal arms sales
• drug smuggling
• human trafficking
• prostitution

• tax evasion (such as under the Criminal Finances Act 2017 below)
• bribery
• other financial fraud
A key reason for money laundering rules, is not only to prevent the money laundering itself from
happening, but also to make it harder for criminals to gain financially from the underlying crimes.
Therefore, by preventing money laundering, society should hopefully see fewer instances of these
crimes occurring.
1.1.2 Criminal Finances Act 2017

The Criminal Finances Act 2017 (TSO 2017) potentially makes companies and other business
organisations (the relevant body) criminally liable if their employees or agents (the associated
person) are involved in tax evasion.
Under the Act, an offence will be committed if:
• There is criminal tax evasion by a taxpayer or business under existing UK or foreign tax evasion
law.
• An associated person of the relevant body facilitated the tax evasion under existing aiding and
abetting law.
• The relevant body failed to prevent the associated person from committing the aiding and
abetting offence.
A relevant body will not be liable if it had reasonable prevention procedures in place to prevent the
associated person being involved in tax evasion, or it was unreasonable or unrealistic for it to have
such procedures in place.
1.1.3 What are the red flags for money laundering?

Criminals will go to great lengths to disguise the money laundering process. They know that
professionals, especially those involved in financial services – such as accountants – will be looking
out for any suspicious activity. However, there are a number of potential warning signs that may
indicate money laundering is taking place, for example:
• unusually large or frequent transactions or activity compared to what is normal for an individual
• cash deposits into bank accounts that cannot be justified
• large increases in the size of account balances
• transferring large amounts of cash using money transfer services, especially if the money is going
overseas
• unwillingness to discuss business activities or provide other business-related information
• inconsistencies in information being provided (such as different home addresses on ID
documentation)
There are of course many other potential red flags to look out for. However, the key things to
remember are any transactions that are out of the ordinary, inconsistent, or cannot be explained
reasonably.
Do not assume that these red flags are proof that money laundering is happening. To come to any
conclusion, you need to step back and use all of your experience and the available evidence.
1.1.4 As a Chartered Accountant, how could you become implicated?

As a Chartered Accountant, working either in business or public practice, you could become
implicated in money laundering either as part of the money laundering process itself, or if you
become aware that money laundering is taking place.
To avoid being implicated in the money laundering process itself, you need to maintain an
awareness of transactions you are processing, keeping in mind the red flags mentioned above. If you
are at all concerned about the nature of a transaction then you should make sure your concerns are
noted, and be sure to follow any appropriate procedures or policies that are in place to protect you.
298 Law ICAEW 2023

While becoming part of the money laundering process is possible, it would be a great risk for a
criminal to attempt to involve an accountant. It is more likely that any implication would be through
knowledge or suspicion that it is occurring. As we shall see shortly, as an accountant you have a legal
duty to report knowledge or suspicion of money laundering and it is therefore important that you
apply all of the appropriate rules and regulations that have been put in place.
1.2 Proceeds of Crime Act (POCA) 2002 – the offences

The POCA 2002 sets out the offences described in the table below:
Offence Description Defences Penalty
Money 1) Concealing criminal property, ie, A report was made 14 years’

laundering concealing or disguising its nature, to MLRO or NCA. imprisonment
source, location, ownership etc, or It was intended to Unlimited fine
removing it from UK make a report to
2) Arranging ie, being concerned in MLRO/NCA but
an arrangement, knowing or there was a
suspecting that it will facilitate the reasonable excuse
acquisition, use or control of criminal for not having done
property by or on behalf of another so.
person
3) Acquiring, using or possessing (3 only) If the person

criminal property acquired, used or
4) Knowingly inciting or assisting possessed the
another person to commit or property for
attempt to commit any of the above ‘adequate
offences consideration’ and
did not know that
such payment might
facilitate criminal
conduct.
Failure to Failure to inform MLRO or NCA as There was a Five years’

report soon as practicable, of any reasonable excuse imprisonment
knowledge or suspicion that another for not making a Unlimited fine
person is engaged in money report.
laundering The person does not
know or suspect
Failure to inform MLRO/NCA of any money laundering
information which raises reasonable and their employer
grounds for suspicion (ie, an offence has not provided
can be committed if a person should them with
have been suspicious in the appropriate training.
circumstances)
Tipping off Disclosing to a third person that a The person did not Two years’
disclosure or report has been made know or suspect that imprisonment
to the NCA or other appropriate the disclosure was Unlimited fine
person, where that disclosure is likely to prejudice
likely to prejudice any investigation the investigation.
that might be carried out as a result The person had
of the report lawful authority or
reasonable excuse
Disclosing that an investigation is to make the
being contemplated or carried out, disclosure.
where that disclosure is likely to
prejudice such an investigation

Note that the reasonable excuse defences have been interpreted narrowly by the courts but fear of
physical violence or other menaces would almost certainly be sufficient.
1.3 The Money Laundering Regulations 2017

The Money Laundering Regulations 2017 (TSO, 2017) came into effect in June 2017. They set out a
prescriptive approach in the form of a firm-wide written risk assessment that includes a number of
factors that must be taken into account. Amendments to these regulations were introduced in 2019.
The Regulations apply to ‘relevant persons’, such as:
• credit and financial institutions
• accountants in practice including auditors, insolvency practitioners, external accountants and tax
advisers
• independent legal professionals, including solicitors and barristers
• estate agents
• casinos
• ‘high-value dealers’ (those who sell goods for cash over 10,000 euros (‘cash’ in this context means
coins, notes and travellers’ cheques only))
The Regulations are designed to achieve two purposes:
• to enable suspicious transactions to be recognised and reported to the law enforcement
agencies; and
• to ensure that if a client comes under investigation in the future, a relevant person can provide
part of the audit trail.
The Regulations cover areas such as:
• whole firm risk assessment
• internal controls
• policies, controls and procedures
• client due diligence (CDD)
• politically exposed persons (individuals who hold high public office or perform a prominent
public function, such as politicians, civil servants and local government officials)
• reliance on third parties
The expression ‘customer due diligence’ includes:
• identifying customers and their agents and verifying their identity
• identifying and verifying companies through their registered number, registered address and
place of business
• identifying any beneficial owners, including understanding the ownership and control structure of
corporate customers, and recording any difficulties encountered in identifying beneficial
ownership
• obtaining information on the purpose and nature of the business relationship
• identifying politically exposed persons as well as their families or close associates
Relevant persons must carry out CDD measures when they:
• establish a business relationship
• carry out an occasional transaction
• carry out a business formation service (even if it is a one-off)
• suspect money laundering or terrorist financing
• doubt the veracity or accuracy of information obtained
This is to be done on a risk-sensitive basis. There are also simplified and enhanced rules that may be
followed depending on the risk profile.
For potential clients that are companies and partnerships, in order to carry out CDD measures
effectively, the professional bodies advise that relevant persons should identify who has ultimate
control or significant influence, for example:
• executive directors
300 Law ICAEW 2023

• senior financial managers
• significant shareholders
• substantial loan creditors
The importance of record-keeping is that if an investigation is mounted into suspected money
laundering, and information is lacking from the client, the investigators may require information from
the practitioner. Records must be kept for a minimum of five years.
These internal systems have been outlined in your Assurance Workbook and will be discussed more
fully at the application stage in Audit and Assurance.
Non-compliance with any of the Regulations is a criminal offence in itself, regardless of whether
money laundering has taken place. The maximum sentence is two years’ imprisonment or an
unlimited fine, or both.
1.4 Duty to report

Generally speaking, accountants working in practice or other ‘relevant persons’ must report
knowledge or suspicion of money laundering to a nominated officer within their workplace (usually
called the Money Laundering Reporting Officer, or ‘MLRO’). The MLRO has a duty to consider the
facts and, if appropriate, to report the matter to the National Crime Agency (NCA), usually by
submitting a Suspicious Activities Report. Sole traders are not required to nominate an officer and,
therefore, report directly to the NCA. Failure to comply with the duty to report will mean a potential
criminal liability, but making an authorised disclosure (eg, to an MLRO or NCA) may provide a
defence against a charge of money laundering.
By way of example, a report should be made in the following circumstances:
• where a new customer is reluctant to provide proof of their identity or there appears to be no
genuine reason for them to use the business’s services;
• where the customer’s transaction is not of the type or size normally conducted by that customer;
• where a cash transaction is unusually large; or
• where the customer requires a payment to be made to a third party who appears to have no
connection with the transaction.
Accountancy firms are also required to report to Companies House any discrepancies they find
between the information the firm holds about a customer and the information held in the Companies
House Register.
1.5 Knowledge and suspicion

If a relevant person has knowledge, or virtual certainty, that money laundering has taken place, this
must be reported to the NCA. Belief or probability (ie, more than 50% likelihood) that such an
offence has been committed should also be reported.
‘Suspicion’ is more difficult to define. The courts have interpreted it as being something less than
knowledge or belief but more than speculation. Although suspicion is by nature personal and
subjective, it should still be built on some objective foundation. There should be some degree of
consistency in the way that a firm’s MLRO treats possible causes of suspicion.
If there are reasonable grounds for suspicion, the activity concerned should be reported. But this
should not necessarily be taken to include higher-than-normal risk factors which may affect certain
types of business or certain areas of a business’s operation.
For example, the fact that a client, or a client’s supplier, demands payment in cash is not in itself
suspicious, unless there are grounds for suspicion that the objective of this is tax evasion or some
other criminal activity. Some of the questions that should be asked might be as follows:
• Is the transaction or activity normal for this customer?
• Does the transaction or business make sense from a business/personal point of view?
• Has the pattern of transactions changed?
• Where the transaction is with an entity in another country is there a good business reason for this?
Firms must ensure that all staff are properly trained in, know, and understand the procedure for
dealing with suspicions, including the identity of the MLRO.

It is also essential that firms follow the Regulations on awareness and training so that staff are able to
identify, and therefore report, suspicious transactions.
Note that suspicious activities include anything as described above which has come to a relevant
person’s attention during the course of their business. This need not be the activity of a client itself.
1.6 Confidentiality and privileged circumstances

Generally speaking, the need to make a report takes precedence over considerations of client
confidentiality. The Act offers protection where information rightly disclosed under the Act results in
a breach of confidentiality. Accountants should take care not to disclose information that is not
relevant to the offence known or suspected.
However, the Act does provide that where a relevant professional adviser receives information in
privileged circumstances, it shall be a defence to a charge of failing to report, provided there is no
intention of furthering a criminal purpose. Thus, if a client asks for advice on tax law and the purpose
of seeking that advice is to evade paying taxes, the tax adviser would not be bound or excused by
legal privilege and should make a report of suspicion of money laundering. If a client feared that tax
evasion had mistakenly taken place and was seeking clarification with the intention of ceasing to
evade taxes, then legal privilege applies, and no report should be made.
Privileged circumstances are limited to the provision of legal advice and acting in respect of
litigation. Relevant professional advisers are accountants, auditors and tax advisers who are
members of a relevant professional body, such as ICAEW.
Context example: Professional privilege

Rita is an accountant working in the forensic department of her firm. She has been asked to be an
expert witness in a personal injury case. During the course of an interview with the claimant, Bob, in
which Rita is seeking to ascertain the lost earnings for the relevant period, Bob tells her that he has
not always reported all his earnings to HMRC in recent years.
This constitutes a money laundering offence, as he has been retaining the proceeds of criminal
conduct (failing to declare his proper income to HMRC). However, the information is received in
privileged circumstances and Rita is not required to report this knowledge.
This exemption is a potentially difficult area for accountants as they may be involved in giving advice
on legal issues as part of a portfolio of services and therefore will need to exercise judgement as to
when a suspicion has been formed in privileged circumstances.
You should note that this is a specific legislative provision which means that certain information
received by an accountant in specific circumstances need not be disclosed. It is not the same as the
broader ‘legal professional privilege’ which, as a matter of law, attaches to all communications
between a person and a solicitor or barrister where those communications are in respect of litigation
or the giving of legal advice. That general privilege does not extend to accountants, even where
accountants give advice on tax or other legal matters.
R (on the application of Prudential plc) v Special Commissioner of Income Tax 2013
The facts: The Prudential was served with notices during a tax investigation by HMRC, requiring it to
disclose documents concerning its tax liability. The Prudential argued that the documents contained
tax advice from accountants and were therefore protected by legal advice privilege.
Decision: The Supreme Court held that legal advice is privileged only where it is given by solicitors,
barristers and appropriately qualified overseas lawyers, unless specific legislation provided
otherwise.
Context example: Money laundering

Joleen is an audit manager who is reviewing the audit of White Group Ltd. The White Group is a
large group of companies, of which White Group Ltd (WGL) is the ultimate parent company. WGL’s
subsidiaries are all trading companies which operate in a variety of industries. This is as a result of
diversification from the original company which manufactured machine parts. There seems to be little
business justification for the nature of the diversification, and although the various subsidiary
companies of WGL carry out very different businesses, there seem to be a high number of
transactions and transfers between them. WGL also has a subsidiary overseas in a country well known
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to be a tax haven. Joleen discovers that small but regular transfers of cash from each of the other
subsidiaries have been made to this overseas subsidiary.
Joleen has begun to suspect that the White Group is being used to launder the proceeds of criminal
money. In addition to the existence of the overseas subsidiary which is receiving repeated small
transfers from all the businesses, many of the businesses are cash-rich despite not having very good
trading records, and recent investigation of some transfers between the fancy goods retail outlet and
the metal parts manufacturing company caused her to be suspicious, as there appeared to be no real
business purpose for them.
As Joleen has reasonable suspicion that the group may be carrying on money laundering, she
should make a report to her firm’s MLRO who will decide whether to report to the NCA. If she does
not do so, she is committing the crime of failing to report. In carrying out a number of transactions for
the group, she may be committing the crime of assisting money laundering to take place. If she
makes a report, she must then take care not to commit the offence of tipping off, by making any
other party aware of the fact that she has suspicions and has raised them with the authorities.
Interactive question 1: Money laundering and professional scepticism

Angela is an auditor working at Frazzle Ltd. She has been auditing the journals put through after the
trial balance had been extracted which therefore affect the financial statements. There is one round
sum journal relating to cash which appears to have no justification, for which the description reads
‘Transfer per CB’ and which the accountant cannot explain. CB is the managing director. During the
course of the audit, Angela has also noticed a distinct change in the lifestyle of CB from previous
years. He is driving an expensive car and his address as noted in the company records has changed
to an address in a much more lavish part of town. None of this is explained by payroll transactions in
respect of CB.
Requirement
Angela should:
A Do nothing. She has no grounds for reasonable suspicion of criminal activity, as the change in
the managing director’s lifestyle might be explained by a legacy or a lottery win.
B Ask the managing director about what the transfer relates to. If the answer causes her to be
suspicious that illegal activity might be taking place, given the other factors causing suspicion,
she should make a report to her MLRO.
C Make a report to the MLRO without delay and not query the transaction with the managing
director, as that might constitute the offence of tipping off.
D Make a report to the MLRO without delay and let the company accountant know that such a
report has been made as a professional courtesy.
Interactive question 2: Reporting money laundering 1

One of your clients, a builder, always requires payment in cash. You have no evidence that he is
evading income tax, only the knowledge that he is paid in cash.
Requirement
Should your MLRO report this as a suspicion to NCA?
A Yes
B No

Interactive question 3: Reporting money laundering 2
A client tells you over a business lunch that he is having a swimming pool installed at his home. The
contractors have asked for payment in cash, which he suspects is because they will not be declaring
it to HMRC.
Requirement
Do you have a duty to disclose this to NCA?
A Yes
B No
2 Bribery
Section overview
• Bribery is an extremely serious offence which undermines public confidence in administrative,

professional and judicial affairs.
• Bribery is involved primarily with the offering or receiving of gifts or payments.
The Bribery Act 2010 (TSO, 2010) came into force on 1 July 2011. The Act is intended to simplify the
previous law on bribery and corruption, which was to be found in common law and a number of
statutes.
2.1 Bribery offences

The Act creates four main offences:
• bribing another person
• being bribed
• bribing a foreign public official
• corporate failure to prevent bribery
The offence of bribing another person is committed where a person offers, promises or gives a
financial or other advantage to another person, intending the advantage either to induce that person
to perform improperly a relevant function or activity or to reward them for such improper
performance. The bribe does not need to be accepted for the offence to be committed, just that an
offer of a bribe was made. It is irrelevant whether the person offered is the same person as the one
who performs the function. It is also an offence if the person knows that the acceptance of the
advantage would itself constitute improper performance of a relevant function or activity. It does not
matter in either case whether the offer is made directly or through a third party.
The offence of being bribed is committed where a person requests or accepts or agrees to receive a
financial or other advantage improperly or as a reward for improper performance or intending that
improper performance should result. It does not matter whether the advantage is received or to be
received through a third party nor whether the advantage is for the benefit of the receiving party or
another person.
In both of these offences, a ‘relevant function or activity’ includes any function of a public nature or
any activity connected with business or carried out in the course of employment and applies where
the person performing that function or activity is in a position of trust or is otherwise expected to
perform it in good faith or impartially. The function or activity is relevant even if it has no connection
with the UK and is performed outside the UK. ‘Improper’ performance means performance which
does not meet the standard that a reasonable person in the UK would expect.
The offence of bribing a foreign public official is committed where a person offers, promises or gives
any financial or other advantage to the official or a third party with the official’s consent or
acquiescence or at their request and that official is not permitted or required by the written law
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applicable to them to be so influenced. This must be done with the intention of influencing the
official in that capacity and to obtain or retain business or an advantage in the conduct of business.
The Act also provides a new offence of failing to prevent bribery. This is committed by a commercial
organisation that fails to prevent an offence being committed by a person who performs services for
or on behalf of the organisation in any capacity, including as agent, employee or subsidiary.
Commercial organisations for these purposes include companies and partnerships based in the UK
or doing business in the UK. The organisation does have a defence, however, if it can prove that it
had in place ‘adequate procedures’ designed to prevent persons associated with it from committing
bribery.
‘Adequate procedures’ is not a defined term but the Secretary of State has recently published
guidance about procedures that a relevant commercial organisation may put in place to prevent its
employees and others from committing bribery, in order to avail itself of this defence. The size of an
organisation and the extent of its exposure to risk will be taken into account in considering the steps
which it is expected to take. However, senior management is expected to take responsibility for an
organisation’s anti-corruption programme and the organisation’s staff must be trained in its
procedures, which must be kept under review.
The guidance makes it clear that the extension of hospitality and gifts is permitted where the
purpose is to establish or encourage good business relations, but will fall foul of the Act where the
purpose is to persuade the other party improperly to award business or favours to the organisation.
When deciding whether hospitality is actually a bribe, the authorities will review all the facts available
to them. This would include the level of hospitality offered, the way in which it was provided and the
level of influence the person receiving it had on the business decision in question. However, as a
general rule, reasonable and proportionate hospitality (given the type of business) is unlikely to be in
breach of the law.
When thinking about the various bribery offences it is important to consider not just the information
you are given, but also what information you are missing (information gaps). This will help you to
avoid jumping to the wrong conclusions about a particular situation.
2.2 General defence and penalties

A person charged with a bribery offence may have a defence if they can prove that their conduct was
necessary for the proper exercise of any function of an intelligence service or the proper exercise of
any function of the armed forces when engaged on active service.
Proceedings for an offence under the Act may only be instituted by or with the consent of either the
Director of Public Prosecutions, the Director of the Serious Fraud Office or the Director of Revenue
and Customs Prosecutions.
The maximum penalty under the Act is 10 years’ imprisonment and/or an unlimited fine.
Interactive question 4: Bribery

Indicate whether an offence of bribery is committed in the following instances.
Yes/No
Financial Wizards LLP extends an invitation to 20 senior partners in three local

accountancy firms to be wined and dined at the England vs Wales Six Nations rugby
match, in the hope of securing new business.
Jack offers a HMRC inspector a sum of money to turn a blind eye to a minor
irregularity in his financial records, but the inspector refuses to accept it.

3 Fraud
Section overview
• We shall address fraud as a basic criminal offence as well as in the context of fraudulent trading
and insider dealing.
• Fraud can be committed by an abuse of position or failing to disclose information as much as by
deliberately making false representations.
• Directors and others can be guilty of fraudulent trading where they carry on a business with an
intent to defraud creditors or for any fraudulent purpose.
• Insider dealing is the criminal offence of dealing in securities while in possession of sensitive
information as an insider.
3.1 Fraud
Fraud is essentially an activity that leads to gain for oneself and a loss for a victim. Historically,
prosecutions for fraud were made under various common law and statutory offences relating to
defrauding and deception. The Fraud Act 2006 (TSO, 2006) has now established a single statutory
offence of fraud, which offence can be committed in three ways:
Fraud by false Dishonestly making a false representation of fact or law, intending

representation thereby to make a gain for themselves or another or to cause another
party loss or expose that party to the risk of making loss.
Fraud by failing to Dishonestly failing to disclose to another person information which they
disclose information are under a legal duty to disclose thereby intending to make a gain for
themselves or another or to cause another party loss or expose that
party to the risk of making loss.
Fraud by abuse of Occupying a position in which they are expected to safeguard, or not to
position act against, the financial interest of another person, and dishonestly
abusing that position, thereby intending to make a gain for themselves
or another, or to cause another party loss or expose that party to the risk
of suffering loss. It is likely that ‘abuse’ will be widely construed.
The maximum penalty for fraud under the Act is 10 years’ imprisonment and an unlimited fine.
A person also commits an offence if they possess, make or supply any ‘article’ that is used in fraud.
Under the Act, ‘articles’ include any program or data held in electronic form and so also applies to
cybercrimes.
3.2 Threats to consumers through fraud and cybercrime

The National Crime Agency’s website states that “Criminals have been quick to take advantage of
the opportunities offered by the Internet, particularly the growth in e-commerce and online banking.
Specialist criminal groups target individuals, small businesses and large corporate networks to steal
personal information in bulk in order to profit from the compromised data available to them.”
While the types of attack are the same whether the victim is an individual consumer or a business, the
objectives are often different. In a commercial setting, the criminal’s objective is often to steal
information that can be sold, to hold systems to ransom so the business cannot operate or to
damage the business itself. For individual consumers, the objective is often to steal money, obtain
money through blackmail or extortion as well as threatening to delete important data (such as photos
or other important files) unless a ransom is paid.
The website identifies a number of common cyberthreats to consumers that include:
• Phishing: bogus emails that ask the user for security information and personal details
• Webcam manager: where the user’s webcam is taken over
• File hijacker: where the user’s files are hijacked and held to ransom
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• Keylogging: where criminals record what the user types onto their keyboard
• Screenshot manager: where screenshots are taken of the user’s computer screen
• Ad clicker: where a user’s computer is directed to click a specific link
The following table explains six forms of cyber-enabled fraud identified by a UK Home Office Report,
Cybercrime: A review of the evidence (Home Office, 2013). These cyberthreats often result in fraud
by representation as they are designed to make a gain or cause another party to suffer a loss.
Form of cyber-enabled fraud Description
Electronic financial fraud Online banking frauds where individuals are persuaded to
transfer money out of their bank account, or via internet-
enabled card-not-present fraud. In this case, funds are taken
out of a bank account without the knowledge of the
cardholder. The perpetrator is able to do this without the bank
card by entering the card details manually.
E-commerce fraud is related to these types of fraud, but are in
relation to retail sales transactions that take place online.
Fraudulent sales through online In this type of fraud, bogus websites are set up which appear
auction or retail sites to be selling goods and services. Such goods and services are
not provided once paid for. Some websites may sell
counterfeit goods or tickets, which lead consumers to believe
that what they are buying is a genuine item (such as a
particular brand) when they are not.
Mass-marketing frauds and These scams persuade individuals to part with their money
consumer scams because they are told it will go to charities or for disaster relief,
for example. Other examples are pyramid schemes and fake
lotteries where the individual believes they will receive a larger
sum of money in future.
Phishing scams This is a type of mass-marketing fraud. Fraudulent emails that

look legitimate (for example from HMRC) are used to ‘fish’ for
personal details, such as names and passwords. Spear-
phishing is a form of phishing that is more targeted (for
example at people in a particular age-group) to increase the
chance of success.
Pharming Users are directed to a fake website that looks legitimate (such
as the individual’s bank) to obtain their personal details.
Online romance (or social A more long-term fraud, individuals are targeted and form an
networking/dating website) fraud online relationship with the fraudster. After a period of time,
the victim is persuaded to part with their money or personal
information.
When receiving emails and using the internet it is important to remember where information and
messages come from and why you have been given them. Taking time to think about things carefully,
rather than trusting everything you see will help protect yourself and your employer from
cybercrime.
3.2.1 Protection against cybercrime

The ‘Cyber Essentials’ scheme was developed by the UK Government and industry bodies to show
organisations how to protect themselves against low-level cyber risks. However, the scheme can also
be used by consumers to help reduce their risk of fraud from cybercrime.
The following table explains five controls that can provide protection.

Controls Technical protections
Firewalls to secure internet Boundary firewalls can help secure a consumer’s internet
connections connection and are often built into operating systems.
Specialist software, known as internet gateways, can also
be used. This software intercepts network traffic in and out
of a system.
Applying the most secure settings Consumers can apply secure configuration settings that
for devices and software ensure their devices are set up with cyber security as a
priority.
Control who has access to devices Consumers can apply a form of access control – a range of
and software physical and network procedures that restrict access to
devices and software, such as through passwords and
touch and voice ID.
Protect against viruses and other Virus and malware protection software prevents and
malware removes unwanted programs from a system.
Keep devices and software up to Consumers should apply patch management – ie, ensuring
date (also known as ‘patching’) the latest updates to software are installed.
These controls are often very effective against cyber threats from malicious software (such as key
logging, webcam manager, screenshot manager and file hijacking). However, they are less effective
when a human is involved, such as in phishing scams or ad clicker. In these cases, controls might flag
up that an action is particularly risky but may not be able to prevent the individual becoming a victim.
Interactive question 5: Fraud and cybercrime

Zena trades as an accountant, although she does not hold any professional qualifications. One of her
wealthy clients has recently been given a tax refund, which was paid into one of Zena’s client
accounts rather than to the client directly. The amount of the refund was £5,000. Zena knew that, to
the client, this amount was tiny and would go unnoticed, so she transferred the refund to her own
personal account.
Requirements
Zena has committed the offence of fraud by false representation.
A True
B False
Phishing and pharming are examples of fraud by failing to disclose information.
C True
D False
3.3 The Computer Misuse Act 1990

The Computer Misuse Act 1990 (TSO, 1990) aims to secure computer material against unauthorised
access or modification, and for connected purposes. Those found to have committed an offence face
punishment by imprisonment or a fine.
It makes the following illegal:
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• Unauthorised access to computer material (eg, gaining access to a computer or system by using
stolen login details or by bypassing the security system)
• Unauthorised access with intent to commit or facilitate commission of further offences (eg,
gaining access to a system in an attempt to commit fraud)
• Unauthorised acts with intent to impair, or with recklessness as to impairing, operation of
computer, etc (eg, hacking)
• Unauthorised acts causing, or creating risk of, serious damage (eg, ransomware, shutting down
important systems such as those operated by the NHS)
• Making, supplying or obtaining articles for use in the above offences (eg, creating viruses or
designing malware to allow the other offences to be committed)
3.4 Fraudulent trading

Fraudulent trading is both a criminal and civil offence, which may be committed where a business is
carried on with intent to defraud creditors of the company or creditors of any other person or for any
fraudulent purpose.
The criminal offence, punishable by an unlimited fine and/or imprisonment for up to 10 years, arises
under s.993 Companies Act 2006 (TSO, 2006) regardless of whether or not the company is in
liquidation (which means that the offence can be committed even while the company is operating as
a going concern). Fraudulent trading is generally associated with directors but it may be committed
by any person who is knowingly a party to the fraudulent manner of trading, for example a company
secretary or financial adviser. The offence may also be committed by non-corporate traders, under
parallel provisions contained in the Fraud Act 2006.
It is difficult to extract from cases involving fraudulent trading a clear definition of the phrase but it
seems that some positive act is needed and not just neglect. Furthermore, there must be some
element of dishonesty and the test for intent to defraud is essentially subjective, concerned with the
defendant’s state of mind or intentions at the time of the alleged fraudulent trading. ‘Any fraudulent
purpose’ is widely defined and has been said to cover frauds against future creditors as well as
existing ones.
Where a court considers that a person (usually, but not necessarily, a director) has been guilty of
fraudulent trading, it may disqualify that person for up to 15 years from acting as a director or being
involved in the management of companies, under the Company Directors Disqualification Act 1986
(HMSO, 1966).
Fraudulent trading also carries civil liability for any persons who were knowingly parties to it. Any
such person may be held liable for some or all of the debts of the company, as the court may decide.
This civil liability only arises where the company is in liquidation and only the liquidator can apply to
court for a declaration of civil liability (s.213 IA).
Context example: Fraudulent or wrongful trading?

Arlene, a director of Five-a-Day Ltd is aware that the company has a number of debts outstanding
and the finance director has advised her that he can see no way of the company recovering its
profitability sufficiently to settle its debts in the foreseeable future. However, when the sales director
of Sunshine Fruits Ltd offers Arlene a consignment of pineapples for £800 with 50% to be paid on
delivery and 50% three months later, she accepts, optimistic that it might aid the recovery of the
company.
There is a possibility that Arlene may be guilty of fraudulent trading and liable to criminal sanctions
(as well as civil remedies) and, if the finance director is party to the transaction in any way (although
this seems unlikely), he may also be liable. However, it is necessary for the prosecution to show an
intent to defraud creditors or the carrying on of business for any fraudulent purpose.
Knowing full well that a company has no hope of paying its debts may be sufficient in certain
circumstances, although case law on this offence is not very extensive or clear and it is arguable that
more is required, for example, deliberately moving assets out of a company and into another
company (especially where that other company is also controlled by the director). Often the offence
of wrongful trading (which imposes civil liability where a company is in liquidation and a director
knew or should have known that there was no reasonable prospect of avoiding insolvent liquidation)

is more easily proved and is likely to be more appropriate in this case. (Unlike fraudulent trading, the
offence of wrongful trading is limited to directors.)
3.5 Insider dealing

Insider dealing is governed by the Criminal Justice Act 1993 (HMSO, 1993).
The principal offence of insider dealing is dealing in securities while in possession of inside
information as an insider, the securities being price-affected by the information. It is also an offence
to:
• encourage another to deal in them; or
• disclose the information other than in the proper performance of one’s employment, office or
profession.
Some of these terms need explanation:
Dealing Dealing is acquiring or disposing of, or agreeing to acquire or dispose of,

relevant securities whether directly or through an agent or nominee or a
person acting according to direction.
Encouraging another Where a person, having information as an insider, encourages another

to deal person to deal in price-affected securities in relation to that information,
knowing or having reasonable cause to believe that dealing would take
place. It is irrelevant whether:
• the person encouraged realises that the securities are price-affected
securities
• the inside information is actually given to that person (so, a simple
recommendation to the effect that “I cannot tell you why but now
would be a good time to buy shares in Bloggs plc” would infringe the
law)
• any dealing actually takes place
Securities Securities include shares, debt securities and warrants and must be
regulated on a regulated market such as the stock exchange. Unlisted
securities or face-to-face transactions are not included.
Inside information Inside information is ‘price sensitive information’ relating to a particular

issuer of securities that are price-affected and not to securities generally.
The information must not have been made public but must be
information which, in the event that it were made public, would be likely
to have a significant effect on the price of the securities. It must be specific
or precise (for example, information that a takeover bid would be made
for a specific company or details of how much would be offered for
shares).
Insider A person has information as an insider if it is (and they know it is) inside
information, and if they have (and know they have) it from an inside
source, that is:
• through being a director, employee or shareholder of a company or by
having access to it because of their employment, office or profession
(eg, as auditor); or
• through a source within either category.
Defences
The individual has a defence regarding dealing and encouraging others to deal if they can show
that:
• they did not expect there to be a profit or avoidance of loss;
• they had reasonable grounds to believe that the information had been disclosed widely; or
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• they would have done what they did even if they did not have the information.
Note that where information is disclosed in the course of one’s employment or profession, no
offence is committed. Thus where an auditor passes on information to the partner responsible for the
audit they are not guilty of an offence. If the partner then deals, they may potentially be liable but the
auditor will not be.
Penalties
Maximum penalties given by the statute are seven years’ imprisonment and/or an unlimited fine.
Contracts remain valid and enforceable in civil law.
Interactive question 6: Insider dealing

Meena is an audit junior working on the audit of a large client. During a meeting with Clive (the
client’s financial controller), she discovers a number of errors in past audits that caused a number of
assets to be significantly undervalued. Meena discussed the matter with Faye, the firm’s partner
responsible for the audit, and it was decided that an adjustment will need to be disclosed in the
financial statements. Faye knows that the adjustment will cause an increase in the client’s share price
and tells her friend Lukaz about the situation and advises him to buy shares in the client. Lukaz buys
the shares.
Requirement
Who has committed an insider dealing offence?
A Clive and Meena only
B Meena and Faye only
C Faye and Lukaz only
D Faye and Clive only
3.5.1 Market abuse

As insider dealing is a criminal offence, the standard of proof required to convict is high. This means
that it can be difficult to obtain a conviction for insider dealing. To counter this difficulty, the offence
of market abuse was created. Cases of those suspected of market abuse are heard under the civil
law, rather than criminal law. Civil law has a lower standard of proof than criminal law, so individuals
can be brought to account for wrongs under the market abuse regulations when they may have
escaped justice under the insider dealing rules.
Market abuse is a wide-ranging offence that covers a number of potential wrongs that a person
might commit. In general, a person will have committed market abuse if they fail to observe the
standard of behaviour reasonably expected of a person in their position in relation to the market.
4 Law and ethics

Section overview
• Chartered accountants accept the responsibility of acting in the public interest and also the role
of being at the forefront of the fight against domestic and international corruption in all its forms.
• Accountants must have regard to ethical codes from ICAEW and other relevant bodies in addition
to the legal requirements of statute and regulations already discussed in this chapter.
The commission of the criminal offences which you have just studied causes a major distortion of
trade, undermines the development of emerging markets and impacts upon a company’s reputation
and ability to secure investment.
Of course, accountants should conduct themselves at all times with the utmost integrity in providing
their services, but over and above this, they are encouraged to play a role proactively in upholding

ethical standards for tackling corruption on a domestic and international level. It goes without saying
that acts of bribery, fraud and insider dealing are unethical as well as criminal acts.
You will be aware that many issues of corporate governance have arisen in response to high profile
corporate and accounting scandals and a significant influence in such matters is the profound effect
that allegations and investigations of criminal activity can have on companies and executives. It is the
criminal law, as well as the regulatory law, that is responsible for introducing and formulating
governance requirements and criminal sanctions provide an effective means of achieving sound
corporate governance.
If you come across anything which points to any of the criminal activities discussed in this chapter,
then you will need to consider whether the information you have discovered and may wish to
disclose is confidential or whether there is a duty to disclose it in the public interest or as required by
law, thus overriding the duty of confidentiality. It goes without saying that you should investigate the
matter first, to check your understanding of the relevant act and the circumstances in which it took
place, as you will be aware that not all suspicions turn out to be well founded and an unwise
disclosure could be extremely detrimental to many, including you.
In summary, you will need to consider:
(a) Consulting with or reporting to any person in accordance with any legal requirement (for
example, the MLRO or NCA in relation to money laundering, a prescribed body in relation to
whistleblowing or the police in the event of fraud)
(b) Referring to guidance from ICAEW or other relevant body (for example, the ICAEW code of
ethics and the CCAB guidance on money laundering procedures)
(c) Obtaining legal advice from a solicitor or in-house lawyer
(d) Having preliminary discussions with your senior work colleague responsible for the work you are
doing
(e) Seeking advice from the ICA Ethics Advisory Service
4.1 The ICAEW Code of Ethics for members

The ICAEW Code of Ethics for members is based on five fundamental principles. Members are
expected to embody these principles and may be found to have acted unethically if they have
breached them. They should not allow pressure to result in them breaching the fundamental
principles nor should members pressure others into breaking them either.
The five fundamental principles are:
(a) Integrity: straightforward and honest in business and professional relationships.
(b) Objectivity: not allow bias, conflict of interest or influence of others to override professional or
business judgement.
(c) Professional competence and due care: be aware of all prevailing knowledge necessary to give
professional service and apply the same diligently to affairs of the client in accordance with
technical and professional standards.
(d) Confidentiality: respect the confidentiality of information acquired as a consequence of
professional or business engagements and not use the same for personal advantage or that of
third parties.
(e) Professional behaviour: comply with laws and regulations and not to discredit the profession.
The Code identifies a number of threats to these ethical principles and sets out safeguards that an
accountant can use to protect themselves. There are separate threats and safeguards of accountants
in business and in public practice.
4.1.1 Threats for accountants in business

The Code outlines areas where there may be conflict for the professional accountant between
furthering the legitimate aims of their organisation and their absolute duty to comply with the
fundamental principles:
(a) Self-interest – financial interests, loans or guarantees; incentive compensation arrangements;
inappropriate personal use of corporate assets; concern over employment security; commercial
pressure from outside the employing organisation.
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(b) Self-review – business decisions or data being subject to review and justification by the same
professional accountant in business responsible for making those decisions or preparing that
data.
(c) Advocacy – when furthering the legitimate goals and objectives of their employing
organisations, professional accountants in business may promote the organisation’s position,
provided any statements made are neither false nor misleading. Such actions generally would
not create an advocacy threat.
(d) Familiarity – a professional accountant in business in a position to influence financial or non-
financial reporting or business decisions having an immediate or close family member who is in
a position to benefit from that influence; long association with business contacts influencing
business decisions; acceptance of a gift or preferential treatment, unless the value is clearly
insignificant.
(e) Intimidation – threat of dismissal or replacement of the professional accountant in business or a
close or immediate family member, over a disagreement about the application of an accounting
principle or the way in which financial information is to be reported; a dominant personality
attempting to influence the decision-making process, for example with regard to the awarding of
contracts or the application of an accounting principle.
4.1.2 Safeguards for accountants in business

To comply with the Code, professional accountants are required to consider whether their actions or
relationships might constitute threats to their adherence to the fundamental principles and where
these are significant, to implement safeguards.
These safeguards might be generic, created by the profession or regulation or developed in the
working environment by the individual or their organisation.
If effective safeguards are not possible, they are required to refrain from the action or relationship in
question.
The Code sets out the types of safeguards in the work environment which might be applied to
overcome these threats:
• leadership that stresses the importance of ethical behaviour and the expectation that employees
will act in an ethical manner
• policies and procedures to empower and encourage employees to communicate ethics issues
that concern them to senior levels of management without fear of retribution
• policies and procedures to implement and monitor the quality of employee performance
• systems of corporate oversight or other oversight structures and strong internal controls
• recruitment procedures emphasising the importance of employing high calibre competent
personnel
• timely communication of policies and procedures, including any changes to them, to all
employees, and appropriate training and education on such policies and procedures
4.1.3 Threats for accountants in public practice

(a) Self-interest – a firm or professional accountant having a financial interest in an assurance client;
a firm which has undue dependence on fees from a client or fears losing a significant client; a
firm which enters into a contingent fee arrangement with a client; a member of the firm enters
into employment negotiations with a client; a firm which develops a significantly close
relationship with a client; a professional accountant discovers a significant error when evaluating
the results of professional services carried out in the past by a member of the firm.
(b) Self-review – a firm designs a financial reporting system and is then asked to issue an assurance
report on the effectiveness of the same system, a firm which has prepared the original data used
to produce records that are reviewed as part of an assurance engagement; a member of the
assurance team has been a director of the client; a member of the assurance team has been
employed by the client and is now able to significantly influence the subject matter of the
engagement.
(c) Advocacy – the firm promotes shares in an audit client; the professional accountant acts as an
advocate on behalf of a client in litigation.

(d) Familiarity – a member of the engagement team having an immediate or close family member
who is a director or officer of the assurance client; a member of the engagement team having a
close or immediate family member who is employed by the client who is in a position to
significantly influence the subject matter of the engagement; a director or officer of the client or
employee is in a position to exert significant influence over the subject matter having recently
been the engagement partner at the firm providing assurance services; the acceptance by a
member of the engagement team of gifts or preferential treatment from a client, unless the value
is inconsequential; members having a long association with the assurance client.
(e) Intimidation – a firm that is threatened with dismissal by a client; an audit client indicating that it
will not award non-assurance related work to the firm if the firm disagrees with the client’s
accounting treatment; a firm being threatened with legal action by a client; a firm being
pressured to reduce fees; a professional accountant being pressured to agree with a member of
the client’s staff due to the employee’s level of expertise on a particular matter.
4.1.4 Safeguards for accountants in public practice

The Code details the following safeguards relating to the professional accountant’s work
environment to overcome the threats explored above, these include:
• leadership of the firm that promotes compliance with the fundamental principles and establishes
the expectation that assurance team members will act in the public interest
• policies or procedures for establishing and monitoring compliance with the fundamental
principles by all personnel
• compensation, performance appraisal and disciplinary policies and procedures that promote
compliance with the fundamental principles
• management of the reliance on revenue received from a single client
• the engagement partner having authority within the firm for decisions concerning compliance
with the fundamental principles, including decisions about accepting or providing services to a
client
• educational, training and experience requirements
• processes to facilitate and address internal and external concerns or complaints
The Code also sets out a number of engagement-specific safeguards which a firm can employ:
• Assigning additional time and qualified personnel to required tasks when an engagement has
been accepted might address a self-interest threat.
• Having an appropriate reviewer who was not a member of the team review the work performed
or advise as necessary might address a self-review threat.
• Using different partners and engagement teams with separate reporting lines for the provision of
non-assurance services to an assurance client might address self-review, advocacy or familiarity
threats.
• Involving another firm to perform or re-perform part of the engagement might address self-
interest, self-review, advocacy, familiarity or intimidation threats.
• Disclosing to clients any referral fees or commission arrangements received for recommending
services or products might address a self-interest threat.
• Separating teams when dealing with matters of a confidential nature might address a self-interest
threat.
Interactive question 7: Law and ethics

Kelly works as an accountant in business. A year ago, she was asked to work review and update
standard costs within the management accounting system. She has now been asked to analyse the
accuracy of the business’s standard costs.
Requirement
Does Kelly face an ethical threat?
A Yes
B No
314 Law ICAEW 2023

5 Whistleblowing
Section overview
• UK law gives people at work protection when they raise genuine concerns about criminal or civil
offences, danger to health and safety or the environment, a miscarriage of justice or the cover up
of any of these.
• A disclosure must be a qualifying disclosure, made in good faith to the appropriate person in the
appropriate manner, and the person making it must have a reasonable belief that the information
is valid.
‘Whistleblowing’ is the name commonly given to workers making a disclosure of wrongdoing

(usually) by their employer. That wrongdoing is often, though not necessarily, of a criminal nature.
The relevant legislation is the Public Interest Disclosure Act 1998 (TSO, 1998), which inserts a
number of new provisions in the Employment Rights Act 1996 (TSO, 1996). Note that the legislation
does not impose an obligation to whistleblow, rather it protects individuals who choose to do so,
whether as a matter of conscience or ethics or because they are following internal rules and
procedures.
The Enterprise and Regulatory Reform Act 2013 (TSO, 2013) also applies and requires that the
employee is whistleblowing because it is legitimately in the public interest for them to do so. It is a
measure to prevent employees making disclosures just because they have a personal grievance
against their employer.
This protection is afforded to workers generally (and not just to ‘employees’) and there is no
requirement as to age or length of service. It therefore includes agency and home workers, but self-
employed people and volunteers are not included. The protection means that any worker who is
victimised or sacked in breach of the Act can present a complaint to an employment tribunal that
they have been subjected to a detriment in contravention of the statutory provisions. They may seek
an interim order to keep their job and/or compensation. Awards of compensation are uncapped and
based on the losses suffered.
In order to receive protection, the disclosure made by a worker must be:
• a qualifying disclosure of information
• made in the public interest
• made to the appropriate person
5.1 Qualifying disclosure

A disclosure is a qualifying disclosure if, in the reasonable belief of the worker making it, the
information disclosed tends to show one or more of the following:
• that a criminal offence has been committed, is being committed or is likely to be committed;
• that a person has failed, is failing or is likely to fail with any legal obligation to which they are
subject;
• that a miscarriage of justice has occurred, is occurring or is likely to occur;
• that the health and safety of an individual has been, is being or is likely to be endangered;
• that the environment has been, is being or is likely to be damaged; or
• that information tending to show any matter falling within these categories has been, is being or
is likely to be deliberately concealed.
The wrongdoing disclosed is commonly a wrongdoing committed by the employer, but a disclosure
could also be made about the acts of fellow workers. In BP plc v Elstone 2010, it was held that a
worker was entitled to pursue a claim where he had suffered detriment caused by his current
employer in respect of protected disclosures that he had made during his previous employment. A
provision in the Enterprise and Regulatory Reform Act 2013 provides for the employer to be

vicariously liable for acts of co-workers, subject to a defence if the employer takes all reasonable
steps to prevent the co-worker’s wrongdoing.
The test of reasonable belief is subjective in that it is specific to the worker making the disclosure.
However, the fact that the belief has to be reasonable implies that rumour or unfounded suspicions
will not be sufficient. Thus, in Bill v D Morgan plc 2000, an accountancy assistant was held not to have
a ‘reasonable belief’ for these purposes, where he could not point to any documentation to back up
his allegations of financial and accounting irregularities.
Where the disclosure is of something ‘likely to occur’ the worker should tread very carefully. It is likely
that an employment tribunal determining whether the disclosure is protected or not would want to
see evidence that there were objective and verifiable grounds for their belief that the event would
occur. A disclosure which amounts to a mere expression of opinion rather than fact is not a qualifying
disclosure (Goode v Marks & Spencer plc 2010).
5.2 Public interest

The requirement that a disclosure must be made in the public interest was introduced by ERRA 2013.
The term ‘public interest’ is not defined.
A previous requirement for a disclosure to have been made ‘in good faith’ in order to be protected
was repealed by ERRA 2013. Where a disclosure is not made in good faith, however, the court or
tribunal may reduce the amount of compensation by up to 25%. The term ‘good faith’ is not defined
in the legislation, but generally can be taken to mean that the intention is honest, and not the result
of a grudge, antagonism towards the employer or some ulterior personal motive.
When considering making a disclosure under the Public Interest Disclosure Act, you need to think
about what is in the public interest.
5.3 Made to appropriate person

The spirit of the Act is to encourage workers to raise concerns internally in the first instance but it
does make provision for the disclosures to be made otherwise. In order to be a protected disclosure,
the disclosure must be to one of the persons specified by the Act. Under the Small Business,
Enterprise and Employment Act 2015 (TSO, 2015) the prescribed person to whom a disclosure was
made is required to report annually on the disclosures that they receive.
Type of disclosure Requirements
Internal To the employer or other responsible person
Legal adviser In the course of obtaining legal advice
Minister To a Minister of the Crown (where the worker is in a public body such as the
NHS)
Prescribed person/ To bodies prescribed by the Secretary of State (and in respect of subject
regulator categories also prescribed), such as the Health and Safety Executive, HMRC
or the Financial Conduct Authority. Normally the matter disclosed will need
to be something in which there is a serious public interest.
Wider To other persons, such as the media, police, MPs or non-prescribed

regulators, provided it is reasonable in all the circumstances and the
disclosure is not made for personal gain and provided the worker:
• reasonably believed they would be victimised if they raised the matter
internally or with a prescribed person;
• reasonably believed a cover up was likely and there was no prescribed
person; or
• had already raised the matter internally or with a prescribed regulator.
316 Law ICAEW 2023

Type of disclosure Requirements
Whether it is reasonable in all the circumstances will depend on a number

of factors, including the seriousness of the matter and whether it is
continuing, the identity of the person to whom disclosure is made, whether
there has been a breach of confidentiality and whether the worker complied
with relevant procedures.
5.4 Protection
A worker has the right not to be subjected to “any detriment by any act, or any deliberate failure to
act” by their employer as a result of having made a protected disclosure. The right not to suffer a
detriment covers a number of issues, such as lack of promotion, lack of training or opportunity,
unjustified disciplinary action, pay issues or failure to renew contracts as a result of having made a
protected disclosure. In addition, an ‘employee’ who is dismissed or selected for redundancy
principally for having made a protected disclosure shall be regarded as having been automatically
unfairly dismissed. A worker who is not an ‘employee’ and is dismissed may rely on the general right
not to suffer a detriment.
An employment tribunal may award compensation to any worker who has been victimised for
making a protected disclosure. The amount of such compensation will be whatever the tribunal
considers to be just and equitable, having regard to the loss suffered and the nature of the
complaint.
Compensation may include an amount for injury to feelings and it is not subject to a maximum limit.
(In January 2009, for example, a railworker was awarded £200,000 for whistleblowing after he was
pressurised to lie about an accident he witnessed.)
Context example: Whistleblowing

Jazmin is an accountant at Calibrations Ltd. She has recently come across documents that show that
the company is illegally dumping waste into a local river. She raised this issue with the managing
director who ignored her. She spoke to the managing director again and threatened to tell the
external auditors, so he fired her.
Jazmin has a substantiated (and therefore reasonable) belief that the company is breaking the law.
She has correctly raised this with the managing director.
Jazmin’s disclosure to the managing director therefore qualifies as a protected disclosure. She is
therefore given employment protection. She can make a claim for unfair dismissal which is likely to
be found in her favour (since dismissal for making a protected disclosure is automatically unfair)
unless the MD can prove she was dismissed for another reason. If the tribunal confirms she has been
unfairly dismissed, she can claim compensation from Calibrations Ltd.
5.5 Gagging clauses

Any confidentiality clause or ‘gagging clause’ in an employment contract or severance agreement
which seeks to limit a worker’s right to make disclosures or is, in any other way, in conflict with the
Act, will be void to the extent of any such conflict.
Interactive question 8: Whistleblowing

Harvey is concerned that his manager committed a criminal offence while working and is attempting
to cover it up. He does not believe anyone else in the organisation is involved but does not think he
will be taken seriously if he raises the matter internally. Therefore, he has contacted the media about
the issue.
Requirement
Has Harvey made a protected disclosure?
A Yes
B No

318 Law ICAEW 2023

Summary
Money laundering
Proceeds of Crime Act '02 Money Laundering Regulations '17

Internal procedures
• Reporting
Failure to • MLRO
Money laundering Tipping off
report • Record keeping
Concealing Prejudice
investigation • Customer due diligence
Arrangement to
5 years/ • Training
facilitate (Knowing report/
fine
Acquisition/use/ invenstigation)
possession
Lack of
Inciting/assisting training?
14 years/ Reasonable 2 years/

fine excuse? fine
'Knowledge'
'Suspicion'
Report to NCA/MLRO
Employer's procedures
Bribery
Bribery Act 2010 General defence: necessary for intelligence

services or armed forces (active service)
Bribing another Bribing a public Failing to prevent bribery

Being bribed
person foreign official (commercial organisations)
Defence if adequate procedures

10 years imprisonment
and/or unlimited fine
Ministry of Justice guidance
Unlimited fine

Fraud
Fraud Act 2006 Fraudulent trading Insider dealing

• False representation (Companies Act 2006) (Criminal Justice Act 1993)
• Failing to disclose information • Carry on insolvent business • Dealing
• Abuse of position • Intent to defraud creditors • Encouraging another to deal
• Cybercrime • Or any fraudulent purpose • Disclosing information other
• Computer Misuse Act 1990 than in the proper course
10 years and/or fine Make good company debts 7 years and/or fine
(director) disqualification
10 years and/or fine
ICAEW Code of Ethics

• Threats
• Safeguards
• Accountants in business and
public practice
By a worker • Criminal offence

• Failure of legal obligation
Whistleblowing
• Miscarriage of justice
Qualifying disclosure
• Health and safety
Public Interest Disclosure Act '98 • Environment
Reasonable belief
• Concealing information
In the public interest
Protection against detriment (except to legal adviser) • Employee
• Legal adviser
To appropriate person
• Ministers
• Prescribed body
Keep job Compensation
• Wider
– If victimised/cover-
up/already raised
320 Law ICAEW 2023

indicated.
1. Do you know the three money laundering offences covered by the Proceeds of Crime
Act 2002? (Topic 1)
2. Do you know the four bribery offences covered by the Bribery Act 2010? (Topic 2)
3. Do you know the three types of fraud that can be committed under the Fraud Act 2006?
(Topic 3)
4. Can you state the five fundamental principles in the ICAEW’s Code of Ethics for
members? (Topic 4)
5. Can you explain what a qualifying disclosure is under the Public Interest Disclosure Act?
(Topic 5)


• Bribery Act 2010. (2010). London, TSO.

• Computer Misuse Act 1990. (1990). London, TSO.
• Criminal Finances Act 2017. (2017). London, TSO.
• Criminal Justice Act 1993. (1993). London, HMSO.
• Enterprise and Regulatory Reform Act 2013. (2013). London, TSO.
• Employment Rights Act 1996. (1996). London, TSO.
• Fraud Act 2006. (2006). London, TSO.
• Home Office (2013). Cyber crime: A review of the evidence; Research Report 75; Chapter 2:
Cyber-enabled crimes – fraud and theft. [Online]. Available from:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/fi
le/248621/horr75-chap2.pdf [Accessed 28 April 2022].
• ICAEW Code of Ethics (2020). [Online]. Available from: https://www.icaew.com/technical/trust-
and-ethics/ethics/icaew-code-of-ethics/icaew-code-of-ethics [Accessed 28 May 2022].
• Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer)
Regulations 2017. (2017) SI 2017/692. London, TSO.
• Proceeds of Crime Act 2002. (2002). London, TSO.
• Public Interest Disclosure Act 1998. (1998). London, TSO.
• Small Business, Enterprise and Employment Act 2015. (2015). London, TSO.
322 Law ICAEW 2023

Self-test questions

1 Which Act governs the law on whistleblowing?
2 A person making a qualifying disclosure must be able to show, on the balance of probabilities, that
the matters alleged are true.
A True
B False
3 A worker must make a disclosure to their employer in the first instance.
A Yes
B No
4 Which of the following applies in the event of a valid whistleblowing?
A The worker is entitled to keep their job.
B The employer is liable to a fine.
C The worker may claim damages.
D The employer must make a written apology to the worker.
5 The Fraud Act 2006 makes the following criminal offences:
Fraud by false
Fraud by information
Fraud by position
6 Can a person be found guilty of fraudulent trading only once the company is in liquidation?
A Yes
B No
7 Dealing in securities while possessing inside information as an insider is an offence. What are the
other two principal offences of insider dealing?
8 Would the following statement constitute an offence under the Criminal Justice Act 1993? If so,
which offence?
“I can’t tell you why, but now would be a good time to buy shares in Bloggs plc.”
9 What is the maximum penalty for insider dealing?
10 Complete the blanks:
Inside information is relating to a of securities that are

and not to securities generally. It must, if , be likely to have a
significant effect on and it must be specific or .
11 A person who accepts a bribe is guilty of an offence as well as the person who pays it.
A True
B False

12 Define money laundering.
13 Identify which of the following statements are true and which are false.
True/False
It is a defence to the offence of failing to report a suspicion of money

laundering that a person had not had sufficient training to understand
the legal requirement on them.

laundering that a person formed the suspicion in privileged
circumstances.

laundering that a person disclosed their suspicion to the relevant MLRO
at their firm.
14 Indicate which of the following statements are true and which are false.
True/False
The maximum prison sentence for an accountant assisting in money

laundering is five years.
The maximum prison sentence for an accountant failing to make a report

of a suspicion of money laundering is five years.
There is no prison sentence for the offence of tipping off, this is

punished by fine only.
15 Where an accountant gives advice on matters of revenue law, their advice is said to be protected by
legal professional privilege and need not be disclosed under any circumstances.
A True
B False
this chapter.
324 Law ICAEW 2023


C Make a report to the MLRO without delay and not query the transaction with the managing
director, as that might constitute the offence of tipping off.
If Angela did nothing, she might be committing the offence of failing to report a reasonable
suspicion. On the basis of the cash transfer, coupled with the other observations Angela has
made, this appears to be a case of reasonable suspicion rather than mere speculation and, while
it might be reasonable not to make further enquiries (although making normal audit enquiries
does not necessarily constitute tipping off), she should not do nothing at all.
It would be best if Angela reported her suspicion to the MLRO. If Angela were also to inform the
company accountant of her report, she would be committing the offence of tipping off. Despite
any personal or professional regard Angela has for the company accountant and any potential
trouble he might be in, Angela should not inform him about the report. Nor should she discuss
her concerns with the managing director, since he is himself the object of the suspicion and to
do so would also constitute tipping off.

B No
It is common for builders and similar small businesses to require payment in cash, and this fact
alone need not excite suspicion. However, if any other aspect of the client’s business appears
abnormal (eg, a lifestyle more lavish than his declared income might suggest), then suspicion of
tax evasion should be reported to NCA.

A Yes
If the information comes to you during the course of your business this must be reported.
Although the possibility of tax evasion is not an issue between you and your client, the suspicion
of the criminal act has been communicated to you at a lunch which you have attended because
of your business.
The intention to commit a crime (in this case tax evasion) can itself be a crime, and although you
do not know for a fact that the contractor intends to evade tax, it seems probable that he does.
You should not inform the client of your action, as this could constitute ‘tipping off’ under s.333
POCA 2002. Your report to the NCA can name only your client: if the NCA decides to investigate,
it can ask for the information from your client.
Note: If the information came to you through a friend, you would not need to make a report,
although your friend might be advised either to refuse to deal with the contractor or at least not to
talk about it to anyone.
Yes/No
Financial Wizards LLP extends an invitation to 20 senior partners in three local No

accountancy firms to be wined and dined at the England vs Wales Six Nations rugby
match, in the hope of securing new business.

Yes/No
Jack offers a HMRC inspector a sum of money to turn a blind eye to a minor Yes
irregularity in his financial records, but the inspector refuses to accept it.
(1) Such corporate hospitality is likely to be regarded as entirely proper and will not constitute an
offence under the Bribery Act 2010.
(2) The offer of a financial advantage constitutes an offence of bribery, regardless of whether or not
it is accepted.

Correct answer(s):
B False
Zena committed fraud by abuse of position. Even though she is not qualified, she is in a position of
trust and has a duty to safeguard the financial interest of her clients. By transferring the refund to
her own account, she failed to do this and created a gain for herself.
Correct answer(s):
D False
Phishing and pharming are examples of fraud by false representation. The emails or websites used
falsely represent another organisation.

C Faye and Lukaz only
Clive and Meena passed on information in the course of their employment so they did not
commit any offence. Faye committed the offence of encouraging another to deal when she told
Lukaz to buy the shares. Lukaz committed the offence of dealing because Faye’s comments
amount to inside information and Lukaz knows that Faye is an insider.

A Yes
Kelly faces a self-review threat because she is being asked to analyse the accuracy of the
standard costs that she had previously reviewed and updated.

B No
While the disclosure relates to a matter in the public interest (a criminal offence), it was not made
to the appropriate person. Even though he did not think he would have been taken seriously, he
should have raised the matter internally first (there is no evidence that he would have been
victimised for doing so). If no one took any notice of him then he could have raised the matter
outside of the organisation (such as with the media).
326 Law ICAEW 2023

1 The Public Interest Disclosure Act 1998
B False
The disclosure must be made in the reasonable belief that it is true.
B No
This is generally desirable but not compulsory.
C The worker may claim damages.
A: This is in the discretion of the court.
B and D: The Act affords protection to the worker rather than imposing sanctions on the employer.
5 Fraud by false representation
Fraud by failing to disclose information
Fraud by abuse of position
B No
Civil liability (IA 1986) depends upon the company being in liquidation but the criminal offence (CA
2006) can be committed regardless of whether or not the company is in liquidation.
7 Two principal offences of insider dealing:
• Encouraging another to deal
• Disclosing inside information other than in the proper performance of one’s employment, office
or profession
8 Yes. The offence of encouraging another to deal. It is immaterial whether the person actually deals.
9 Seven years’ imprisonment and/or an unlimited fine.
10 Inside information is price-sensitive information relating to a particular issuer of securities that

are price-affected and not to securities generally. It must, if made public , be likely to have a
significant effect on price and it must be specific or precise .
A True
The Bribery Act 2010 contains an offence of being bribed.
12 Money laundering is the term given to attempts to make the proceeds of crime appear respectable.
It covers any activity by which the apparent source and ownership of money representing the
proceeds of crime are changed so that the money appears to have been obtained legitimately.

13
True/False
It is a defence to the offence of failing to report a suspicion of money True

laundering that a person had not had sufficient training to understand
the legal requirement on them.

laundering that a person formed the suspicion in privileged
circumstances.

laundering that a person disclosed their suspicion to the relevant MLRO
at their firm.
14
True/False
The maximum prison sentence for an accountant assisting in money False

laundering is five years.
The maximum prison sentence for an accountant failing to make a report True
of a suspicion of money laundering is five years.
There is no prison sentence for the offence of tipping off, this is False
punished by fine only.
B False
Although an accountant may not be required to report information concerning the commission of a
money laundering offence by their client, which they receive in such circumstances, the more general
‘legal professional privilege’ extends only to solicitors, barristers and suitably qualified foreign
lawyers and not to accountants, even if they advise on tax laws.
328 Law ICAEW 2023

Chapter 12
Employment law
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 ‘Employee’ status and its significance
2 The employment contract
3 Unfair dismissal
4 Wrongful dismissal
5 Redundancy
Summary
Self-test questions
Introduction
12
Learning outcomes
• Identify who is an employee and the main legal consequences of employment status
• Identify the key features of employment contracts and recognise circumstances in which an
employment contract may be terminated and the consequences arising
• Identify when dismissal constitutes:
– a wrongful dismissal
– an unfair dismissal
• Identify the circumstances where an employee can claim a statutory redundancy payment
• Identify employers’ obligations under social security law
• Identify the responsibilities of employers under the Equality Act 2010
Specific syllabus references for this chapter are: 4c, d, e, f, g and h.
12
Syllabus links
The practical effects of accounting for employees are looked at in Accounting, and auditing payroll
systems are addressed in Assurance.
12
Assessment context
You may expect several questions on employee status and the contents of an employment contract.
Redundancy, wrongful dismissal and unfair dismissal are particularly important assessment topics.
12

of this chapter.

questions
1 ‘Employee’ status Approach A scenario question IQ1: Employee

and its significance Two key areas to may require you to or
Whether a person is focus on are how identify whether an independent
employed or self- you determine individual is an contractor?
employed has great whether an employee of In this scenario
significance because individual is independent question you
only employees have employed or self- contractor. will apply the
certain rights of employed and the tests of
protection. significance of the employment.
distinction between
the two.
Stop and think

Could you
determine an
individual’s
employment status
if you were given
facts about them?
330 Law ICAEW 2023

questions
2 The employment Approach Knowledge questions IQ3: Duties

contract The key takeaway may test your recall of This question
Employees work from this section is employer or employee helps you to
under terms that form that employment duties. learn the
an employment contract is just like duties that
contract. The contract any other contract employers and
is an important with regard to how employees
document in the it is formed. Learn have to each
event of a the difference other.
disagreement between one and
between an written particulars.
employee and their The duties of
employer. employees and
Social security and employer and
the Equality Act have notice periods are
impacts on highly examinable
employment and must be clearly
contracts. The understood.
Equality Act also Social security and
affects the the Equality Act
recruitment and both affect the
selection process rights employees
before individuals are have whilst working
employed. for an employer.
Stop and think

Can you list three
duties each for
employees and
employers? What is
the notice period
for an employee
who has been
employed for five
years?
3 Unfair dismissal Approach A scenario question IQ4: Unfair

In this section we look There are a number may require you to dismissal 1
at the first type of of legal rules to identify whether an These short
employee dismissal. learn in this section. individual has been scenarios test
An employee who is Focus on who is fairly or unfairly your
dismissed may feel it able to claim unfair dismissed. understanding
is unfair on them, but dismissal, what of what
certain types of constitutes unfair constitutes
dismissal are legally dismissal as well as unfair
unfair and entitle the the automatically dismissal.
employee to a unfair and
remedy. potentially fair
reasons for IQ5: Unfair
dismissal. Consider dismissal 2
the importance of This is a
employers acting knowledge test
reasonably and of unfair
learn the remedies dismissal.
for unfair dismissal.
ICAEW 2023 12: Employment law 331

questions
Stop and think

What are the
automatically unfair
reasons for
dismissal? What is
the significance of
an employer
establishing a
potentially fair
reason for
dismissal?
4 Wrongful dismissal Approach A knowledge question IQ6: Wrongful

This type of dismissal In this section it is could test your dismissal
is essentially a breach important to understanding of what This question
of the employment understand the the remedy for helps you to
contract, usually difference between wrongful dismissal is. understand
failure by an unfair and wrongful what wrongful
employer to give the dismissal and to dismissal is.
required notice to an appreciate the
employee they are relevance of notice
dismissing. periods. Note how
summary dismissal
is linked to wrongful
dismissal and what
the remedy for
unfair dismissal is.
Stop and think

When can an
employee claim
wrongful dismissal?
5 Redundancy Approach A scenario question IQ7: Non-

This form of dismissal Redundancy is the could ask you to advise renewal of a
occurs when an third method of a client on their rights fixed-term
employee’s role is no dismissal that you following redundancy. contract
longer required by will study. You need Students often
the business. There to understand how struggle with
are some strict rules redundancy is what happens
on redundancy that established and at the end of a
must be followed. who has a right to a fixed term
Not all employees will redundancy employment
be entitled to a payment. contract if it is
redundancy payment. not renewed.
This question
Stop and think helps you to
How is a understand.
redundancy
payment
calculated?
332 Law ICAEW 2023


1 ‘Employee’ status and its significance
Section overview
• An ‘employee’ can be distinguished from an ‘independent contractor’ or self-employed person.

• An employee is treated quite differently from an independent contractor in a number of respects,
including taxation, social security, health and safety, employment protection and liability in tort.
An employee is someone who is employed under a contract of service, ie, a contract of employment,
which can be express or implied and oral or in writing. An independent contractor is someone who
works under a contract for services and is also described as ‘self-employed’. A traditional equity
partner with a capital stake in the firm, involvement in management decisions and a share in profits
and losses is not an employee. Nor is a fixed share equity partner (Tiffin v Lester Aldridge LLP 2012).
Whether so-called ‘partners’ are employees will depend on the facts of each case. A salaried partner,
for example, is likely to be an employee for employment law purposes.
The courts are often faced with determining whether someone is an employee or an independent
contractor. In doing so, the wording of any contract will not be conclusive (but may be relevant) and,
instead, the courts will apply a multiple test, taking into account a number of factors described
below. None of these factors is conclusive and the weight attached to each may vary. This multiple
test looks at the economic reality underpinning the employment relationship and asks whether, on
balance, the person can be said to be working ‘on their own account’ or is better described as an
‘employee’.
There are three essential elements, or conditions, that must be present in order for the contract of
service (and thus the employer/employee relationship) to exist, namely:
Condition Explanation
Personal service The employee must have agreed to provide their own work and skill in the
performance of a service for their employer. However, the fact that an employee
is able to delegate that performance in limited circumstances (for example
when they are sick or only with permission) will not mean that this condition is
not met.
Control There must be some element of control exercisable by the employer over the
employee. This means that there must be a contractual right of control over the
employee, it is not simply about who controls their day-to-day work (Troutbeck
SA v White and Todd 2013).
Mutuality of There must be an obligation on the employer to provide work and an obligation
obligations on the employee to do that work. Thus a ‘casual worker’ who works as and when
required, even if in preference to others, cannot be an employee because there
is no ‘mutuality of obligations’.
If these factors are not present there can be no contract of service. The fact that they are present,
however, does not mean that there will be a contract of service. The level of service and degree of
control will be taken into account along with the other factors listed below:
Factors taken Explanation Significance of factor

into account
Personal Can they delegate or subcontract the The greater the freedom to delegate,
performance task to another person if they so the less likely someone will be
choose and, if so, to what extent? considered to be an employee (and
total freedom will mean that the
condition of personal service is not
satisfied).
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Factors taken Explanation Significance of factor
into account
Degree of Ie, if and to what extent the employer The greater the degree of control, the
control can tell the employee not only what to more likely someone will be
do but also how and when to do it. Are considered to be an employee.
there any restrictions on where they
work or for how long they work, for
example?
Mutuality of Ie, whether there is an obligation on The existence of a mutuality of

obligations the employer to provide work and an obligations is consistent with a
obligation on the employee to contract of employment.
perform that work.
Contractual The courts will consider the terms of Contractual terms may not be
provisions any contract between the parties. conclusive but, for example, including
provisions as to holiday and sick pay
will make it more likely that the
contract will be treated as a contract of
service.
Tools and Who provides and maintains the tools To the extent that such matters are the
equipment and equipment needed for the job? responsibility of the employer, the
more likely someone will be
considered to be an employee.
Uniform Do they wear any uniform or display If so, they are more likely to be
any logo belonging to the ‘employer’? considered to be an employee.
Employer’s Can they use the employer’s support If so, they are more likely to be
support staff staff? considered to be an employee.
Payment of tax, Are they paid gross or is tax deducted Deduction of tax and national
NI at source? insurance by the employer suggest a
contract of employment.
Financial Do they undertake any financial The more they assume responsibility
responsibility responsibility for investment or risk for such matters (and profits from
(for example as a result of delays in the good performance) the less likely they
performance of services they have will be considered to be an employee.
agreed)? Likewise, to what extent can
they profit from sound management in
the performance of their task?
Sole ‘employer’ Do they work for more than one To the extent that the person is able to
person? work for more than one employer,
they are less likely to be considered as
an employee.
Length of For how long has there been a The longer the relationship, the more
service working relationship between the likely they will be considered to be an
parties? employee.
It is fair to say that the nature of the claim brought before the court may influence its deliberations.
For example, if the claim relates to a breach of health and safety obligations, there will be a real
public interest in recognising an employer/employee relationship because of the statutory and
common law duties owed by an employer to an employee. Similarly, an employment tribunal might
conclude that someone is an employee, notwithstanding that the tax authorities treat them as a self-
employed person.

Context example: Employee or independent contractor?
A builder’s labourer is paid his wages without deduction of income tax or national insurance
contributions and calls himself a self-employed contractor providing services. The person for whom
he works can dismiss him, decide on which site he works and direct him as to the work he does, and
also provides the tools that he uses. He is injured in an accident and sues on the basis that his
‘employer ‘owes him a legal duty of ensuring his safety.
Notwithstanding that he is paid gross and calls himself self-employed, it is likely that the other factors
will tip the balance and he will be regarded as an employee working under a contract of
employment.
To decide whether someone is an employee or independent contractor you will need to interpret a
range of information from different sources.
Interactive question 1: Employee or independent contractor?

Charles saw a sign advertising vacancies at a local building site. He contacted the foreman and was
told that he would be required but that, because work depended on the weather conditions, he
would work as and when required and would not be given an employment contract. He was also told
that he would be accountable for his own income tax and national insurance. The foreman added
that, like all of his employees, he would be provided with tools and that at the beginning of each day
he would be told whether he would be needed and, if so, which site he would be working on that
day. Lateness or theft of materials would lead to his dismissal.
Requirement
Which of the following best describes his legal status?
A Charles is an employee because the provision of tools and control over his work, plus the fact
that he is told that he could be dismissed for lateness or theft indicate that he is an employee.
B Charles is not an employee due to the fact that he has to account for his own tax and national
insurance.
C Charles is an employee because he has responded to a job advertisement and the foreman
referred to the contractors as employees.
D Charles is not an employee because the fact that work is dependent on weather conditions
means that there is no mutuality of obligations.
However, there are several other practical reasons why the distinction between a contract of service
(employed) and a contract for services (self-employed) is important.
Significance of the distinction
Employee Self-employed
Wrongful Can claim wrongful dismissal. Cannot claim wrongful dismissal.

dismissal
Employment There is legislation that confers As we shall see below, increasingly,

protection protection and benefits upon employment protection is given to
employees under a contract of ‘workers’ rather than ‘employees’.
service, including: ‘Workers’ is more widely defined and will
• minimum periods of notice often include those normally regarded as
independent contractors as well as
• entitlement to statutory employees. It is important that you know
redundancy payment
336 Law ICAEW 2023

Significance of the distinction
Employee Self-employed
• remedies for unfair dismissal to which term the legislation applies, for
• health and safety protection example, statutory protection against
unfair dismissal applies to ‘employees’,
(Sometimes the protection is but working time protection applies to
subject to the employee having ‘workers’. Note, too, that statutory health
completed a certain amount of and safety obligations on employers
continuous service.) often relate to both employees and
independent contractors.
Insolvency In liquidation, an employee has

preferential rights as a creditor for
payment of outstanding salary and
redundancy payments, up to
certain limits.
Implied terms There are rights and duties implied These implied rights and duties do not
in an employment contract by generally apply to a contract for services.
common law and statute, for
example a mutual duty of trust and
confidence.
Tortious acts Employer is generally vicariously Liability of person hiring an independent

liable for tortious acts of contractor for contractor’s acts severely
employees, committed in the limited unless there is strict liability.
course of employment.
Taxation Deductions for income tax must be The self-employed are taxed under the
made by an employer under PAYE self-assessment system and are directly
(pay as you earn) from salary paid responsible to HMRC for tax due.
to employee. The employer is
responsible for paying the
deductions to HMRC.
VAT An independent contractor may have to

register for, and charge, VAT.
Social security Employers must pay secondary Independent contractors pay Class 2 and
Class 1 contributions on behalf of 4 contributions.
employees.
Employees make primary Class 1
contributions.
There are also differences in
statutory sick pay and levies for
industrial training purposes.
Interactive question 2: Importance of employment status

Indicate whether or not each of the following statements represents the legal and economic
consequences that would follow a finding that someone is employed under a contract of service as
opposed to a contract for services.
Yes/No
The company for which they work is required to declare and administer their
income tax under PAYE.

Yes/No
The company will not be vicariously liable for any tort committed by them.
If the company is liquidated, they will have preferential rights to payment of

salary.
They may be entitled to claim unfair dismissal in the event of their dismissal.
1.1 Workers
As well as employees and independent contractors, UK law recognises a third category of
employment – the worker. Workers are a group that fall short of being recognised as employees, but
nonetheless provide work for an organisation, so they do not fall into the independent contractor
category either.
The law provides some protection to workers (such as payment of at least the minimum wage and to
be given the minimum amount of paid leave) but not all of the benefits that are given to employees
(such as protection against unfair dismissal and the right to request flexible working).
The case of Uber BV and others (Appellants) v Aslam and others (Respondents) 2021 demonstrated
how those employed in the gig economy could be categorised as workers rather than as
independent contractors. In this case, the fact that Uber assigned rides to Uber drivers, set rates paid
to them and disciplined them based on their ratings was enough to achieve worker status. This
affected Uber’s business model as it meant that, for example, Uber drivers have to be paid for the
time they are logged onto the app regardless of whether they are needed for rides.
2 The employment contract

Section overview
• An employment contract is usually made in writing although it can be created orally.

• Where there is no written contract covering them, an employer must provide a written statement
of prescribed particulars within two months of the commencement of the employment.
• Certain duties are implied into a contract of employment on the part of the employee and
employer, by common law and by statute.
An employment contract needs agreement between the parties, consideration and an intention to
create legal relations just like any other contract. It may be written or oral. A written contract is likely
to contain a number of express terms as to pay, hours, place of work and any special agreements
between employee and employer going beyond legally required employment rights (such as
maternity pay offered in excess of the statutory minimum).
The case of Methodist Conference v Preston 2013 demonstrates the importance of intention to create
legal relations in an employment contract. In this case, a Methodist church minister was held not to
be an employee because the arrangements, such as the lifelong commitment to the church by the
minister, and the payment of maintenance and support, rather than a salary, was inconsistent with an
intention to be legally bound.
Generally speaking, a change in contract terms can only be made with the consent of both parties to
the contract. Also, a new piece of legislation may result in a change to a term in an employment
contract. Sometimes, an express term in the contract can give rights of variation, for example where a
‘mobility clause‘ allows an employer to require an employee to work at a different location. In such
cases, the employer must exercise the power reasonably since the courts will imply terms of trust and
respect which have the effect of overriding a strict application of contractual obligations.
United Bank Ltd v Akhtar 1989
338 Law ICAEW 2023

The facts: An employee had a mobility clause in his employment contract under which he could be
required to work anywhere in Great Britain. His employer gave him notice on 5 June that he would
be transferred from Leeds to Birmingham as from 8 June. The employer refused the employee’s
request for a three-month delay, based on his wife’s ill-health and the need to sell his house. The
employee’s subsequent request for 24 days’ leave in order to sort out his affairs and to commence
work in Birmingham on 10 July was unanswered. When pay was stopped with effect from 5 June, the
employee resigned and claimed that he had been constructively dismissed.
Decision: The employee’s claim succeeded. It was an implied term that the employer should exercise
his right under the express provision reasonably, including giving reasonable notice.
2.1 Requirement for written particulars

On or before the first day of employment, the employer must give to an employee or worker a
written statement of prescribed particulars of their employment (s.1, TSO, 1996), namely:
• the names of employer and employee
• the date on which employment began
• whether any service with a previous employer forms part of the employee’s continuous period of
employment
• the scale or rate of pay and the intervals at which it is to be paid
• hours of work (including any specified ‘normal working hours’)
• the title of the job that the employee is employed to do (or a brief job description)
• any holiday and holiday pay entitlement
• sick leave and sick pay entitlement
• pensions and pension schemes
• length of notice of termination to be given on either side
• details of disciplinary procedures (or reference to where they can be found)
The last four particulars may be given by way of separate documents. The written particulars do not
constitute an employment contract, although they provide persuasive evidence of what the contract
contains. If the employee has a written contract of employment covering these points and has been
given a copy, it is not necessary to provide them with separate written particulars.
If the employer fails to comply with these requirements the employee may apply to an employment
tribunal for a declaration of what the terms should be. The tribunal may award compensation to an
employee claiming unfair dismissal if the particulars are incomplete.
2.2 Employee’s implied duties

Common law implies a number of duties on the part of the employee into any contract of
employment:
Duty of faithful service The employee has a fundamental duty of faithful service or fidelity to
(fidelity) their employer. Thus an employee who works for an employer’s
competitor in their spare time, or who frustrates the commercial
objectives of their employer, is in breach of this duty. Similarly, where
an employee accepted personal commissions from suppliers on
orders that they placed with them for goods supplied to their
employer, they were justifiably dismissed and liable to account to the
employer for the commissions.
To obey lawful and The employee must show obedience to the employer’s instructions
reasonable orders unless they require them:
• to do an unlawful act;
• to expose themselves to personal danger (not inherent in their
work); or
• to do something outside their contract.

Not to misuse This duty will not necessarily cease when the employment ceases.
confidential information (Note that when someone invents or writes something as part of their
employment, the right to the patent or copyright will normally belong
to their employer.)
To exercise reasonable The employee must demonstrate reasonable competence, care and
care and skill skill in the performance of their work, bearing in mind the degree of
skill and experience that the employee professes to have.
Personal service The contract of employment is a personal one and so the employee
may not delegate their duties without the employer’s express or
implied consent.
Trust and confidence This is a mutual obligation imposed on both parties and is based on
respect and consideration for each other. An employee should not, for
example, make unjustifiable complaints or false accusations about
their employer.
2.3 Employer’s implied duties

The employer owes the following duties at common law:
To pay reasonable This duty is subject to any express provision, for example to pay a
remuneration rate fixed by the parties, or to pay nothing during a lay-off.
To indemnify employees To indemnify the employee against expenses and losses incurred in
the course of employment.
Health and safety This is normally expressed as a duty to protect the employee against
reasonably foreseeable risks to their health, safety and welfare at
work. Health and safety obligations are also imposed by statute.
This common law duty is three-fold and incorporates the obligations
to provide:
• safe plant and appliances
• a safe system of work
• reasonably competent fellow employees
To provide work To provide work. Generally speaking, an employer will not be liable
for failing to provide work as long as they continue to pay wages (so
liability is more likely to arise where someone is paid on a
commission basis).
To provide accurate An employer does not have a duty to provide a reference (but if they
reference (where one is do provide one, they must exercise reasonable care and skill to
provided) ensure that the information contained in it is accurate and gives a fair
impression of the employee. In particular, an employer cannot
divulge information that is not known to the employee (for example
customers’ complaints against the employee).
Not to disclose The employer must not divulge confidential information about the
confidential information employee to a third party without the employee’s consent.
To maintain mutual trust The employer must treat the employee with due respect and
and confidence consideration. They must not, for example, conduct their business in
a disreputable fashion, thereby damaging the employee’s reputation
and future employment prospects.
There is no duty to protect an employee’s property.

Breach of a legal duty, if it is important enough, may entitle the injured party to treat the contract as
discharged and to claim damages for breach of contract at common law. In addition, a breach of an
employer’s duty might give rise to a claim for wrongful and/or unfair dismissal.
340 Law ICAEW 2023

Interactive question 3: Duties
Identify whether the following statements are true or false in relation to the duties of the employer
and the employee.
Requirements
There is a duty of mutual trust and confidence between the employer and the employee.
A True
B False
An employer has a duty to pay reasonable remuneration.
C True
D False
An employer does not owe a duty to provide a reference for their employee.
E True
F False
An employee must always obey their employer’s instructions.
G True
H False
Legislation also imposes a number of implied duties on employers. Many of these duties are
concerned with ‘family-friendly’ employment and the ‘work–life balance’, for example provisions
regarding maternity and paternity rights, flexible working arrangements and time off work. The
principal duties implied by statute are as follows:
Subject Duty
Pay Under legislation protecting equal pay, contractual employment terms

such as sick pay, holiday pay and working hours should be as favourable
as those given to an employee of the opposite sex who is performing
equal work or work of equal value, unless a ‘genuine material factor’ exists
that justifies the discrepancy (for example, employees in London receiving
a higher hourly rate than employees in Aberystwyth).
Health and safety The Health and Safety at Work Act 1974 (HMSO, 1974) imposes general
duties on employers, including a duty to ensure the continuing good
health, safety and welfare of their employees, as far as is practicable. This
general duty includes the following obligations:
• To provide and maintain plant and systems of work that are safe and
without risk
• To make arrangements to ensure safe use, handling, storage and
transport of articles/substances
• To provide adequate information, instruction, training and supervision
• To maintain safe places of work and ensure that there is adequate
access in and out
• To provide a safe and healthy working environment
Certain additional duties are imposed on employers in particular

categories, for example designers and manufacturers who must ensure
that the articles designed or manufactured are safe and that there is
adequate testing and examination. There are also extensive health and
safety regulations which may be generally applicable or specifically
applicable to particular hazards or risks.

Subject Duty
Contravention of the Act is an offence punishable by an unlimited fine

and/or up to two years’ imprisonment. If an offence is committed by a
company, any director or other officer who consented to or was
responsible for commission of the offence will also be guilty and liable to
the penalties mentioned.
Social security law See table below.

and work-life balance
Equality Not to discriminate on certain grounds such as race, sex, disability, religion
or belief, sexual orientation or age (see Equality Act below).
2.4 Employer’s duties under social security law and work-life balance
The following table summarises the main duties of employers regarding social security and work-life
balance rules.
Employer duty Description
National insurance Employers must pay secondary Class 1 contributions on behalf

of employees.
Flexible working Employees have the right to apply for a change in terms and
conditions of employment in respect of hours, time and place of
work and not to be unreasonably refused.
Ante-natal care Employees have the right not to be unreasonably refused time
off for antenatal care during working hours.
Maternity leave Employees are entitled to statutory maternity leave of up to 52

weeks if they give 15 weeks’ notice of their due date to their
employer.
Maternity pay Employees are entitled to statutory maternity pay which is paid
for 39 weeks during statutory maternity leave.
It is only paid if the employee has at least 26 weeks’ service at
the time of giving notice and earns more than a statutory
minimum.
The amount of maternity pay received is based on the
employee’s salary and is subject to a statutory maximum.
Paternity leave Employees who have been with their employer for at least 26
weeks before the 15th week before the baby is due can claim
paternity leave.
Eligible employees are entitled to take either one week or two
consecutive weeks paid paternity leave.
Paternity pay As with maternity pay, paternity pay is based on salary and
subject to a statutory maximum.
Shared parental leave and pay Employees who are entitled to maternity leave must take a
minimum of two weeks’ leave after the birth of their baby (four
weeks for factory workers) but they have the option to share the
balance of their maternity leave and pay allowance with their
partner if they wish. This is known as shared parental leave and
statutory shared parental pay.
Adoption leave and pay Employees who have adopted a child have a right to statutory
adoption leave and statutory adoption pay.
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Employer duty Description
The rules for qualifying for this, and the amounts of leave and
pay, are the same as for statutory maternity leave and pay.
Parental leave Employees with a minimum of one year’s continuous service

who have parental responsibility are entitled to unpaid parental
leave of 18 weeks to care for each child up to the child’s
eighteenth birthday.
Parental bereavement leave Parents who lose a child under the age of 18 (including
stillbirths after 24 weeks) are entitled to two weeks’ paid leave
under the Parental Bereavement (Pay and Leave) Act 2018
(TSO, 2018).
2.5 Equality Act 2010

The objective of the Equality Act 2010 (TSO, 2010) is to ensure equal treatment for employees,
applicants for employment and contract workers, and to outlaw direct and indirect discrimination,
harassment and victimisation in the workplace.
Definitions
Direct discrimination: Treating people less favourably than others because of a protected
characteristic.
Indirect discrimination: Applying a policy or practice which disadvantages people with a protected
characteristic.
Harassment: Any unwanted conduct related to a relevant protected characteristic.
Victimisation: Being treated badly because of performing a protected act.
Worked example: Discrimination 1

Alana applied to work on an oil rig and was accepted to join a six-month training programme. Having
passed the initial physical examination, she was dismayed that she was unable to complete the basic
equipment training because the standard drilling equipment is too large for her to use. Although she
is of above-average height for a woman, Alana’s hands and fingers are simply not large enough to
grip and handle the equipment safely. Consequently, she has been asked to leave the training
programme.
Requirement
Has Alana been discriminated against?
Solution
Alana has a case for indirect discrimination. The oil rig company’s choice of equipment clearly
discriminates against people with smaller hands, a characteristic most likely to found amongst female
candidates. The company should re-instate Alana and either change the equipment or provide a
suitable alternative for her to use instead.
2.5.1 Protected characteristics

Under the Act, employees have the right to not be treated differently to others because of a
‘protected characteristic‘. All terms of employment are covered, such as pay, sick pay, holiday pay
and working hours, and the Act applies to all forms of full-time and part-time work.
The ‘protected characteristics‘ are:
• age
• disability
• sex (including sexual orientation or gender re-assignment)

• race (that is colour, nationality and ethnic or national origins)
• religion or belief
• marriage or civil partnership
• pregnancy or maternity
2.5.2 Objective justification test

When considering a case of discrimination, courts apply an ‘objective justification’ test. Employers
can avoid liability for discrimination if they can prove that their actions were a ‘proportionate means
of meeting a legitimate aim’.
Actions are proportionate if the discriminatory effect is significantly outweighed by the benefits of
achieving the aim. For example, if there is no reasonable alternative for the employer. However, if the
aim can be achieved with less discrimination, that option should be followed.
Legitimate aims include the needs of the business and efficiency, health and safety reasons, and any
particular training requirements of the job.
Worked example: Discrimination 2

Raj applied for a job as a counsellor. Shortly after applying, he received a letter back which explained
that his application would not be considered because he is a male and the job advert clearly stated
that only female applicants are being sought because the counsellor role is to work with female
victims of domestic abuse.
Requirement
Advise Raj regarding whether he has been discriminated against and if the employer has any liability
to him.
Solution
Raj has been the subject of direct discrimination because his application has been refused on the
basis of his sex. However, the employer will not be liable because the nature of the work means that
this discrimination is necessary.
2.6 Notice provisions

Notice may be given without specific reason for so doing, unless the contract requires otherwise. If
the contract states that notice may only be given in specific circumstances, then generally it may not
be given for any other reason. The notice must specify the date of its expiry.
It is a matter of negotiation between the employer and the employee how much notice is to be given
by either party in order to terminate the contract. In the absence of an express provision, common
law requires that a party gives reasonable notice, depending on the employee’s position, the nature
of the job and so forth. Additionally, statute lays down certain minimum periods which apply. This
notice period depends on the employee’s length of continuous service with the employer:
Length of continuous employment Statutory minimum notice
≥1 month but < 2 years Not less than 1 week
≥2 years but < 12 years Not less than 1 week per year of continuous employment
≥12 years Not less than 12 weeks
Either party may waive their entitlement to notice or accept a sum in lieu of notice.
During the period of notice an employee is entitled to pay at a rate not less than the average of their
earnings over the previous 12 weeks.
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3 Unfair dismissal
Section overview
• Employees covered by the statutory provisions for unfair dismissal have the right not to be
unfairly dismissed.
• Breach of this right allows an employee to bring a claim for unfair dismissal to an employment
tribunal.
• Reasons for dismissal are considered to be either automatically unfair or potentially fair.
• Remedies include re-instatement, re-engagement and compensation.
Legislation has widened the scope of protection to employees and increased the range of remedies
available in the event of dismissal. Unfair dismissal is governed by the Employment Rights Act 1996
as amended by the Employment Act 2008 (TSO, 2008).
3.1 The claim for unfair dismissal

Certain categories of employee are excluded from the statutory unfair dismissal code, including
(generally speaking) persons employed to work outside Great Britain and employees dismissed
while taking unofficial strike or other industrial action.
Otherwise, in order to pursue a claim for unfair dismissal, the employee must have been
continuously employed for at least two years, whether full-time or part-time, with the same (or an
associated) employer. (Note that employees who began their employment before 6 April 2012 may
bring an unfair dismissal claim after only one year.)
In calculating continuous employment, it is possible for certain weeks to be excluded without them
breaking the continuity, for example time spent on strike or on service in the armed forces. Also,
where a business or undertaking is transferred and the employee then works for the transferee of the
business, that change will not constitute a break in the employee’s length of continuous
employment.
However, where the reason for dismissal is automatically unfair (see 3.3 below), for example where
the employee is pregnant, then there is no continuous employment requirement. Nor does the
requirement apply where the reason for dismissal is the employee’s political opinion or affiliation.
The employee must make a claim to an employment tribunal within three months of the effective
date of termination, that is to say:
• where there is termination by notice, the date on which the notice expires
• where there is termination without notice, the date on which the termination takes effect
• where an employee’s fixed-term contract is not renewed, the date on which that term expires
The employee must show:
• that they are a qualifying employee; and
• that they have in fact been dismissed.
3.2 Dismissal
Dismissal for the purposes of an unfair dismissal claim may occur in one of three situations:
• the non-renewal of a contract for a fixed term or specific task;
• a termination by the employer, with or without notice; or
• a constructive dismissal.
Constructive dismissal occurs where the employer repudiates some essential term of the contract,
for example by the imposition of a complete change in the employee’s duties, and the employee
resigns.
To establish constructive dismissal, an employee must show that:
• their employer has committed a serious breach of contract
• they left because of the breach

• they have not ‘waived’ the breach, thereby affirming the contract
If they fail to show that they are treating the contract as repudiated (for example by walking out) they
cannot claim that they have been constructively dismissed. Examples of breaches of contract which
have led to claims of constructive dismissal include the following:
• a reduction in pay
• a complete change in the nature of the job
• a failure to provide a suitable working environment
The breach must be a serious one. Thus, in one case, an employer’s refusal to give an advance
against holiday pay was not sufficient.
Where there is more than one cause for the employee’s resignation, the claimant must prove that the
employer’s repudiation was ‘an effective cause’ rather than ‘the effective cause’ of the resignation.
In Wright v North Ayrshire Council 2013, it was held that the claimant’s resignation was due, in part, to
the need to care for their partner, but because the employer had not dealt with their grievances
properly, this was sufficient to be considered as a cause of the resignation and therefore the claim of
constructive dismissal was upheld.
Whether or not a dismissal has occurred is a question of fact and will depend on all the
circumstances. Where an employee is dismissed, with or without notice, or where a fixed-term
contract is not renewed, they are entitled to request a written statement of the reasons for their
dismissal within 14 days (provided they have been continuously employed for at least two years).
Any statement giving the reasons for dismissal which was provided by the employer will be
admissible evidence in this regard. The fact that notice was given does not mean that an employee
cannot bring a claim for unfair dismissal.
The following means of termination do not constitute dismissal for the purpose of unfair dismissal:
• where the employee resigns (unless it is a case of constructive dismissal);
• where the contract is frustrated; or
• where the parties come to a mutual agreement to terminate the employment.
Constructive dismissal can be problematic to prove but could be tested in a scenario question. The
best approach is to consider the facts of the scenario and then to apply the basic rule on constructive
dismissal; did the employee leave because the employer repudiated their employment contract?
3.3 Automatically unfair reasons for dismissal

Some reasons are automatically unfair. These include:
• Pregnancy or pregnancy-related illness
• A spent conviction under the Rehabilitation of Offenders Act 1974
• Trade union membership or activities
• Dismissal on transfer of an undertaking (unless there are ‘economic, technical or organisational
reasons’ justifying the dismissal)
• Taking (or proposing to take) steps to protect themselves or others where they believe there to be
serious and imminent danger
• Seeking to enforce statutory rights (for example relating to the national minimum wage, working
time regulations or Sunday working)
• Making a protected disclosure under the Public Interest Disclosure Act 1998
In these cases, the employee is not required to have two years’ continuous employment.
3.4 Potentially fair reasons for dismissal

Once the employee has shown that they were dismissed, it is then for the employer to show the
principal reason for the dismissal and that it was one of the potentially fair reasons (listed in s.98).
If the employer cannot satisfy the tribunal in this way, the dismissal is unfair.
346 Law ICAEW 2023

If the tribunal is satisfied that the reason was one justifying dismissal, then it must decide whether the
employer acted reasonably. Both criteria must be satisfied in order for a dismissal to be fair.
There are six grounds on which a dismissal is capable of being fair:
Reason
Capability or If the employer dismisses for want of capability on the part of the employee, the
qualifications employer has to establish that the lack of capability at the time of dismissal was
of such a nature and degree as to justify a dismissal, taking into account:
• what the contract requires
• the general standard of performance of their employees in this trade
• the previous standard of performance of the dismissed employee themselves
‘Capability’ is to be assessed by reference to skills, aptitude, health or any other

physical or mental quality. ‘Qualification’ means any academic or technical
qualifications relevant to the position that the employee holds. There must be a
contractual obligation (express or implied) to hold the relevant qualification in
order that a dismissal for lack of it can be considered fair.
The lack of capability or qualification must be sufficiently serious and it may arise
from one particular incident or a series of incidents. Thus, for example, a shop
manageress who left her shop dirty and untidy, who failed to maintain cash
registers and who did not put stock away was fairly dismissed.
In another case, an airline pilot who landed his plane negligently on one
occasion was held to have been fairly dismissed. It was recognised that the
degree of professional skill was so high in his case that even small departures
from that standard could be sufficiently serious as to justify dismissal.
Employee’s It is not necessary to prove that the employee is guilty of the alleged
misconduct misconduct, only that the employer genuinely and reasonably believes them to
be. Various types of misconduct have been held to justify dismissal, including
abusive language, drink and drug abuse, theft and dishonesty, violence,
downloading pornography, racial and sexual harassment and persistent lateness
or absenteeism.
Redundancy If an employee is dismissed mainly or only on the ground of redundancy (see

section 5.1), they may claim remedies for unfair dismissal if they can show one of
the following:
• There were one or more other employees in similar positions who might have
been made redundant and that they were selected for redundancy in breach
of a customary arrangement or agreed procedure.
• They were selected for a reason connected with trade union membership.
A redundancy selection procedure should be in conformity with good industrial

relations practice, ie:
• The employer should give as much warning as possible of impending
redundancies.
• The employer should consult with the trade union as to the best means of
achieving the desired management result.
• It should be possible to check criteria for selection against such things as
attendance records, efficiency at the job and length of service.
• The employer should ensure that the selection is made fairly.
• The employer should consider whether an offer of alternative employment
can be made.
Statutory This applies where there is a legal prohibition or restriction on either the
restriction employer or the employee which prevents the employment from being
continued lawfully (for example, if a doctor or a solicitor employed as such is

Reason
struck off the relevant professional register, or an employee loses their driving
licence, which they need to be able to do their job).
Some other Ie, some other substantial reason that could justify the dismissal of an employee
substantial holding the position that the employee held. Thus, dismissal has been
reason considered fair where, for example:
• The employee was married to one of their employer’s competitors.
• The employee refused to accept a change of shift working, made in the
interests of the business and with the agreement of a large majority of other
employees.
• The employee’s alleged paedophile activity substantially risked the
reputation of their public sector employer (even though the employee was
not convicted of any offence).
Following the abolition of the default retirement age, an employer who wishes
to dismiss an employee on retirement grounds will need to satisfy this ground of
‘some other substantial reason’. They will need to show that the retirement age is
proportionate and objectively justified and also that a fair procedure has been
followed.
Interactive question 4: Unfair dismissal 1

Indicate whether or not Asif and Beatrice are entitled to pursue a claim for unfair dismissal in the
following situations.
Yes/No
Asif has been employed for 12 months, having commenced

employment in March 2012, and has been given three months’ notice of
dismissal.
Beatrice commenced employment in May 2012 and had been

employed for four months when she was dismissed without notice
because her employer discovered that she was pregnant.
3.5 Reasonableness
Once the employment tribunal is of the view that the dismissal occurred for a potentially fair reason,
it is then required to review the circumstances and to decide whether ‘on the basis of equity and the
substantial merits of the case’, the employer acted reasonably in dismissing the employee. Whether
the employer has acted reasonably or unreasonably is a question of fact depending on all the
circumstances, including the size and resources of the business. The tribunal will consider:
• Have relevant procedures been followed? These may include internal procedures, contractual
provisions or a code of practice relevant to the employment. In particular, the tribunal will have
regard to the Acas code of practice in this area (see 3.6 below) in deciding whether the employer
behaved reasonably.
• Did the employer take all circumstances into consideration? For example, if an inexperienced
employee is struggling to do their work, the employer is expected to help by advice or
supervision in the hope that they may improve.
• What would any reasonable employer have done?
Except in the most flagrant cases, it is not reasonable for an employer to dismiss an employee
without first warning them that if they continue or repeat what has happened at least once they are
348 Law ICAEW 2023

likely to be dismissed. The tribunal might conclude that demotion (or some other step short of
dismissal) might have been fair where dismissal was not.
In the case of a dismissal for want of capability or qualifications, reasonableness by the employer can
be demonstrated by, for example:
• consultation with the employee to determine areas of difficulty
• allowing a reasonable time for improvement
• providing training if necessary
• considering all alternatives to dismissal
If the employer relies on ill health as the grounds of incapability there must be proper medical
evidence. The employer is entitled to consider their own business needs.
In Coulson v Felixstowe Dock & Rly Co Ltd 1975, an employee was off work for considerable periods
of time due to ill health. He was given six months to prove his fitness and warned that he would be
regraded if he could not do so. He became ill again and was dismissed. It was held that the employer
had acted reasonably and could not be expected to keep a job open indefinitely. The tribunal had to
consider the fairness to the business as well as to the employee.
Interactive question 5: Unfair dismissal 2

Indicate whether or not each of the following statements is correct.
The dismissal of an employee will constitute an unfair dismissal if it:
Yes/No/Maybe
is on the grounds of pregnancy
relates to an employee seeking to enforce the minimum wage
is on the grounds of the employee’s misconduct
is due to the employee taking part in unofficial industrial action
3.6 The effect of procedural irregularity

A dismissal may be unfair if it is carried out in breach of a relevant procedure relating to workplace
dispute resolution. In these circumstances the tribunal may increase any award by up to 25% as a
result of the employer’s unreasonable failure to comply with that procedure. The tribunal may also
reduce an award by up to 25% as a result of any unreasonable failure by the employee (s.3
Employment Act 2008).
The relevant procedure for these purposes is the Code of Practice on disciplinary and grievance
issues published by the Advisory, Conciliation and Arbitration Service (Acas). Broadly speaking, this
provides for investigation before taking action, notification to the employee of the nature of the
disciplinary measures, a meeting to be held (where the employee has the right to be accompanied)
and for the employee to be able to appeal against any decision made against them. The Code does
not lay down a mandatory or rigid set of rules and does not prescribe time limits in which steps must
be taken. Rather it sets out a set of standards which should be adhered to in any internal policy or
procedure drawn up by the employer and provides for steps to be taken promptly and without
unreasonable delay. The Code is designed to encourage informal resolution and the emphasis is
very much on communication and conciliation, aimed at avoiding the need for proceedings at an
employment tribunal. The Code does not apply to redundancy dismissals and non-renewal of fixed-
term contracts.
Acas has a discretion to offer conciliation services in the event of any dispute before it is presented to
the tribunal and a duty to conciliate during any tribunal proceedings.

Note that if disciplinary action had already been taken before 6 April 2009 (the date on which the
relevant provisions of the Employment Act 2008 came into force), the previous law will apply. In
these circumstances, it is likely that a ‘statutory dismissal and disciplinary procedure’ will govern the
procedure that the employer must follow in dismissing or taking disciplinary action against an
employee and a breach of that procedure, if applicable, will render any dismissal automatically
unfair.
3.7 Remedies for unfair dismissal

The remedies for unfair dismissal are more wide-ranging and may well be more advantageous to an
employee than the remedy for wrongful dismissal. They are as follows:
Remedy Description
Re-instatement An order that the employee may return to the same job without any break of
continuity.
In deciding whether to exercise these powers, the tribunal must take into
account whether the complainant wishes to be re-instated and whether it is
reasonably practicable and just for the employer to comply. Such orders are in
fact very infrequent.
Re-engagement An order that the employee is given new employment with the employer (or
their successor or associate) on terms that are comparable with the old job or
otherwise suitable.
The Employment Appeal Tribunal has ruled that an order for re-engagement
should not be made if there has been a breakdown in confidence between the
parties. This was in a case where the employee was dismissed following
allegations of drug dealing on company premises and time-keeping offences.
Compensation Compensation may be ordered in three categories (in each case subject to
statutory maximums that are updated from time to time):
• A basic award, calculated by reference to the employee’s length of service
and age and which is subject to a prescribed maximum amount. It is liable
to be reduced where the employee unreasonably refuses an offer of re-
instatement or otherwise behaves unreasonably. The basic award is also
reduced by the amount of any redundancy payment made. However, the
basic award is made for unfair dismissal regardless of the loss suffered by
the employee and there is no duty on the employee to mitigate any loss.
• A compensatory award, being such amount as the tribunal considers to be
‘just and equitable in all the circumstances, having regard to the loss
sustained by the complainant in consequence of the dismissal in so far as
that loss is attributable to action taken by the employer’ (and taking account
of the basic award). This will be in respect of any additional loss of earnings,
expenses and benefits and will be assessed on common law principles of
damages for breach of contract, including a duty on the employee to take
reasonable steps to mitigate any loss. Note that the statutory maximum
does not apply to unfair dismissals on whistleblowing or reporting health
and safety grounds.
• An additional award, which can only be awarded if the employer does not
comply with an order for re-instatement or re-engagement and does not
show that it was impracticable to do so. It comprises between 26 and 52
weeks’ pay (subject to a prescribed maximum, as with the basic award).
In addition, a tribunal may order the employer to pay consequential losses to the employee to reflect
any financial loss suffered as a result of the employer making unauthorised deductions or failing to
make redundancy payments (s.7 Employment Act 2008).
350 Law ICAEW 2023

4 Wrongful dismissal
Section overview
• Wrongful dismissal is a common law action that applies where an employer dismisses an
employee in breach of contract.
• Summary dismissal may be justified in exceptional circumstances.
• The usual remedy for wrongful dismissal is damages but an injunction or declaration may be
awarded.
4.1 Unfair dismissal or wrongful dismissal?

Although claims are most commonly brought for unfair dismissal nowadays, an action for wrongful
dismissal can be brought instead or at the same time (although this is very rare). It might even be
more advisable in certain circumstances, for example:
• Where an award of damages would exceed the statutory maximum for compensation in an unfair
dismissal case
• Where a claim for unfair dismissal has not been brought within three months of the effective date
of termination (an action for wrongful dismissal can be brought within six years of the breach)
• A dismissal might be ‘fair’ but nonetheless wrongful, if insufficient notice is given
• An employee might not qualify to bring a claim for unfair dismissal, for example if they lack the
necessary period of continuous employment
Cases are commonly brought in the county court or High Court although employment tribunals have
a concurrent jurisdiction.
4.2 What constitutes wrongful dismissal?

Wrongful dismissal occurs where the employer dismisses the employee in breach of the contract of
employment. By way of example, wrongful dismissal may occur in any of the following
circumstances:
• Where the employer terminates the employment with no notice
• Where the employer terminates the employment with less notice than is required by the contract
or the statutory minimum periods of notice (see section 2.4)
• Where the employer terminates a contract for a fixed term or specific task before the expiry of
that fixed term or before completion of the specific task
• Where the employee is selected for redundancy in breach of a selection procedure incorporated
in their contract
• Where the employer wrongfully repudiates the contract and the employee ‘accepts’ their breach
by resigning (this is the common law counterpart of the statutory ‘constructive dismissal’
discussed in relation to unfair dismissal)
• Where the contract provides for dismissal on specific grounds and the employee is dismissed on
some other ground not included in the contract
If the contract provides for the employer to terminate the contract without notice but subject to
payment of a sum of money in lieu of notice, any dismissal is not wrongful but the employee may sue
for the agreed sum under the contract in the event that the payment is not forthcoming. They will not
be under any duty to mitigate their loss in such circumstances. Even where notice is given, it may still
be possible for an employee to show some other breach and that they were wrongfully dismissed.
4.3 Summary dismissal

The employer will be justified in dismissing an employee summarily (ie, with no notice or insufficient
notice) in certain circumstances, in which case they incur no liability. The following are examples of
conduct by an employee which could justify summary dismissal by their employer:
• The wilful refusal to obey a lawful and reasonable order

• Gross misconduct, in connection with the business (or outside it if it is sufficiently grave), for
example, acceptance of a secret commission, disclosure of confidential information or assault on
a fellow employee
• Dishonesty, where the employee is in a position of trust
• Gross or persistent negligence (and a lesser degree of neglect may suffice for senior employees)
for example where an airline pilot landed their plane in a way that caused alarm among
passengers and crew
• Breach of an express term of the contract or work rules where the employee has been made
aware that such a contravention will not be tolerated (for example, airline pilots may be subject to
instant dismissal if they are found to be drunk or taking drugs)
Whether a dismissal is justified will be a question of fact based on the standards of ordinary people
and the standards prevailing at the time (and decisions from old cases may be distinguished on this
basis).
Summary dismissal also occurs where an employer is unable to continue to employ the employee,
for example where a personal employer dies, an employing firm of partners is dissolved, an
employing company is compulsorily wound up, or the employee’s place of employment is
permanently closed.
Interactive question 6: Wrongful dismissal

Indicate whether or not each of the following represents circumstances under which an employer is
likely to incur liability for wrongful dismissal:
Yes/No
The employee has resigned as a result of their employer’s serious breach of

contract.
An employee who has worked for an employer for six years is given one
month’s notice of dismissal.
The contract between employer and employee states that the employee
cannot be dismissed during a three-month training period and the employer
dismisses the employee after two months.
The employee is guilty of gross negligence.
4.4 Remedies for wrongful dismissal

Generally, the only effective remedy available to a wrongfully dismissed employee is a claim for
damages based on the loss of earnings. The measure of damages is usually the sum that would have
been earned if proper notice had been given, together with any other actual or potential benefits to
which the employee was entitled. The employee is under a duty to mitigate their loss by, say, seeking
other employment. The ‘reasonableness’ (or otherwise) of the employer’s conduct will not be
relevant, nor will questions of contributory conduct by the employee. The only issue is whether or not
the employer is in breach of the contract of employment.
In rare cases an application might be made for an injunction to restrain a breach of contract or
declaration as to what the employee’s rights are. Both of these remedies are equitable and therefore
in the court’s discretion. Of course in the event of a breach of contract by the employer that falls short
of a wrongful dismissal, the employee may sue for any loss suffered.
352 Law ICAEW 2023

In real-life, unfair and wrongful dismissal cases may not be clear cut and often need expert advice
before deciding how to proceed with a case. You should be conscious of the limits of your own
expertise and seek legal advice is appropriate.
5 Redundancy
Section overview
• Redundancy is a form of dismissal (and may be fair or unfair depending on the circumstances).
• Redundancy gives rise to a right to a statutory redundancy payment provided certain criteria are
met.
5.1 What is redundancy?

A dismissal is treated as caused by redundancy if the only or main reason is that:
• the employer has ceased, or intends to cease, to carry on the business for the purposes for which
the employee has been employed;
• the employer has ceased, or intends to cease to carry on the business in the place where the
employee was employed; or
• the requirements of that business for employees to carry out work of a particular kind, or for them
to carry out the work in the place where they were so employed, have ceased or diminished.
If the employee’s contract contains a mobility clause, enabling the employer to require them to work
at other places than their present place of employment, then any such requirement (because there is
no longer work at their present place of employment) will not constitute redundancy. However, the
tribunal has held that the fact that there is a mobility clause does not mean that ‘the place where the
employee was employed’ is extended to include every place where they could be employed.
The proper test for determining whether or not an employee is redundant is to see whether there
has been a reduction of the employer’s requirements for employees to work at the place where the
person concerned is employed. This is a question of fact.
In British Broadcasting Corporation v Farnworth 1998 a radio producer’s fixed-term contract was not
renewed and the employer advertised for a radio producer with more experience. It was held by the
EAT that the less experienced radio producer was indeed redundant as the requirement for her level
of services had diminished.
5.2 The right to a redundancy payment

Redundancy pay is calculated on the same basis as the basic award for unfair dismissal (ie, according
to age and length of service).
A person may claim a redundancy payment, provided they:
• are an ‘employee‘ within the Employment Rights Act 1996 (self-employed and partners are not
covered);
• have been continuously employed for at least two years at the relevant date; and
• follow the procedure for making a claim set out in the Act.
They must show that they have been:
• dismissed by reason of redundancy; or
• laid off or kept on short time for four or more consecutive weeks or six weeks in a period of 13
weeks. (They are ‘laid off’ in any week in which they earn nothing due to lack of work. They are
‘kept on short time’ in any week in which they earn less than half a normal week’s pay.)
They must apply to the employment tribunal within six months from the relevant date of termination
(although the tribunal has a discretion to allow a late claim within the following six months).
They will not be entitled to a redundancy payment if they:

• are guilty of misconduct which would justify dismissal;
• refuse a reasonable offer to renew their contract; or
• unreasonably refuse an offer of suitable alternative employment in the same capacity, at the same
place and on the same terms and conditions as their previous employment, not being perceived
as lower in status.
When there is a difference between the terms and conditions of a new contract and the previous
contract, the employee is entitled to a four-week trial period in the new employment. If either party
terminates the new contract during the trial period, it is treated as a case of dismissal for redundancy
at the expiry date of the previous employment. The employee can also still bring a claim for unfair
dismissal.
Redundancy payments are often an important calculation to make when a business is deciding
whether to close down or relocate an operation. It is important to clearly present calculations in a
format that is easy for others to understand and verify.
Context example: Redundancy

Amy works for Sparkle Windows Ltd in its factory in Basingstoke where she has worked for 18 years.
Her contract contains a mobility clause providing that she may need to work in Winchester or
Bournemouth if required. When Sparkle Windows Ltd closed the factory in Basingstoke, Amy
travelled to Bournemouth but after a few weeks she resigned, saying that the travelling was making
her ill and claiming statutory redundancy payment. Her employer refused, relying on the mobility
clause in the contract.
Amy is entitled to a statutory redundancy payment. She is an employee with more than two years’
continuous employment and has been dismissed for reasons of redundancy, namely that Sparkle
Windows Ltd no longer has need of employees at the place where Amy was employed. The fact that
she could be required to work elsewhere in Bournemouth and Winchester did not mean that she was
to be regarded as being employed in those places.
Interactive question 7: Non-renewal of fixed-term contract

Nick commences employment under a three-year contract with Equis Ltd. After two years, he is given
notice that the contract is not to be renewed.
Requirement
Which of the following claims might he seek to bring against Equis Ltd?
A Wrongful dismissal
B Unfair dismissal
C Constructive dismissal
D Redundancy pay claim
354 Law ICAEW 2023

Summary
Not to disclose
confidential
information
Provide work Equal pay
Remuneration
Employer Not to
Indemnity Note some statutory duties discriminate
owed to 'employees', some
Health and Trust and
to 'workers'
Notice safety confidence
Statutory
minimum Mutuality of Contractual Tools and No. of
Tax
obligations? provisions equipment employers
Personal Restriction
service?
Employee on place
Financial Length of
Control? Delegation Uniform
responsibility service
Statement of
written particulars
NO
YES
'independent contractor'
Employment
Sch E Tax Sch D
contract
Class 1 Social security Class 2&4
Implied
duties Vicarious Tort X
liability
Fidelity
Apply Implied terms X
Personal
service
VAT Register
Trust and Employment
confidence Applies May apply if
protection 'worker'
Reasonable legislation
care and skill
Obey lawful and Preferential Insolvency X

creditor status
reasonable
orders Can claim Wrongful
X
Dismissal
Not misuse
confidential
information

Wrongful dismissal
Before Employee
Insufficient fixed Redundancy Any breach accepts
No notice
notice expiry in breach of contract employer's
repudiation
Justified?
Yes
(gross misconduct, gross or No
persistent neglect, Liable for wrongful
dishonesty, willful refusal) dismissal
Damages Injunction Declaration
Redundancy
'Employee' with 2 No misconduct Statutory

years' continuous No unreasonable Dismissal Reason redundancy
employment refusal payment
Employer ceased business for

purposes for which employee
employed
or
Employer cease business in place
where employee employed
or
Requirements for work of
particular kind or in particular
place ceased or diminished
356 Law ICAEW 2023

Unfair dismissal
'Employee' claim
within 3 months
Non renewal fixed contract
Show dismissed Termination by employer with
or without notice
Constructive dismissal
Employer shows
reason
Potentially fair Automatically unfair
Pregnancy
Capability/qualifications Spent conviction
Misconduct Employer Trade union
Legal prohibition acted Transfer (unless...)
Some other substantial reason reasonably Statutory rights
Averting danger
Protected disclosure
Unreasonable breach of
Yes disclipinary code unfair 25%
No
No liability increase/decrease in award
Remedies
Re-instatement Re-engagement Compensation
Basic
Compensatory
Additional

indicated.
1. Can you explain the factors that you would use to decide whether an individual is
employed or self-employed? (Topic 1)
2. Can you state three duties of employers and employees? (Topic 2)
3. Do you know the automatically unfair reasons for dismissal? (Topic 3)
4. Do you know the difference between wrongful and unfair dismissal? (Topic 4)
5. Do you know who would be eligible for a redundancy payment? (Topic 5)

358 Law ICAEW 2023

• Employment Act 2008. (2008). London, TSO.

• Employment Rights Act 1996. (1996). London, TSO.
• Equality Act 2010. (2010). London, TSO.
• Fraud Act 2006. (2006). London, TSO.
• Health and Safety at Work Act 1974. (1974). London, HMSO.
• Parental Bereavement (Pay and Leave) Act 2018. (2018). London, TSO.

Self-test questions

1 Identify six of the factors taken into account in determining whether or not someone is an
independent contractor rather than an employee.
2 True or false: Working for more than one employer is an automatic sign of self-employment.
A True
B False
3 Are partners employees?
4 True or false: Unless there is a mutuality of obligations, to provide and to perform work, there cannot
be a contract of employment and the person working cannot be an employee.
A True
B False
5 Name five matters in respect of which the distinction between employed and self-employed workers
is important.
6 When must an employer provide a written statement of employment particulars where no contract
has been provided?
7 Which of the following are duties owed by the employer by health and safety legislation?
A To ensure adequate access to places of work
B To make provision for medical personnel at the place of work
C To ensure the safekeeping of an employee’s personal effects while they are engaged in their
work duties
D To provide a healthy working environment
8 What is the statutory minimum period of notice to which an employee with five years’ continuous
service is entitled?
9 What is the necessary period of continuous employment for an unfair dismissal claim where dismissal
is for the following reasons?
Period of continuous employment
Lack of qualification
Making a protected disclosure
Pregnancy
10 List the five potentially fair reasons for dismissal.

11 Name three automatically unfair reasons for dismissal.
12 By how much may an award be adjusted in order to take account of an unreasonable failure to
comply with the Acas code of practice in a dismissal?
13 Which is the most frequent remedy awarded for unfair dismissal?
A Compensation
B Re-engagement
C Re-instatement
360 Law ICAEW 2023

14 Is summary dismissal ever justified? If so, when? Give two examples.
15 Name the three remedies available for wrongful dismissal.
16 What is the necessary period of continuous employment in a claim for a statutory redundancy
payment?
this chapter.


D Charles is not an employee because the fact that work is dependent on weather conditions
means that there is no mutuality of obligations.
Assuming that there is no intention for Charles to be paid even when he is not required to work,
then he is a casual worker and not an employee because there is no mutuality of obligations. If
he were to be paid even in the absence of work, he would be an employee. In those
circumstances, even though he does not receive an employment contract, the facts indicate a
contract of service, since the employer provides the tools, controls when and where he works
and reserves the right to dismiss him.
Yes/No
The company for which they work is required to declare and administer their Yes
income tax under PAYE.
The company will not be vicariously liable for any tort committed by them. No
If the company is liquidated, they will have preferential rights to payment of Yes
salary.
They may be entitled to claim unfair dismissal in the event of their dismissal. Yes
An employer may be vicariously responsible for their employee’s tortious acts

Correct answer(s):
A True
Correct answer(s):
D False
The duty is to pay the remuneration agreed between the parties (which, arguably, might not be
‘reasonable’). However, in the absence of any express provision, the duty is then to pay
reasonable remuneration.
Correct answer(s):
E True
However, if they do choose to provide one, they are obliged to ensure that it is accurate and fair.
Correct answer(s):
H False
362 Law ICAEW 2023

They need not obey if obedience to the instruction would require them to do an unlawful act,
expose themselves to personal danger or do something outside their contract.
Yes/No
Asif has been employed for 12 months, having commenced Yes

employment in March 2012, and has been given three months’ notice of
dismissal.
Beatrice commenced employment in May 2012 and had been Yes

employed for four months when she was dismissed without notice
because her employer discovered that she was pregnant.
In both cases unfair dismissal may have taken place. Asif meets the continuous employment
requirement (of one year, because they were employed before April 2012) and has been dismissed,
so qualifies as a candidate for unfair dismissal if the circumstances surrounding the dismissal were
unfair. Although Beatrice has not been employed continuously for two years, this is irrelevant as she
has been dismissed for pregnancy.
Yes/No/Maybe
is on the grounds of pregnancy Yes
relates to an employee seeking to enforce the minimum wage Yes
is on the grounds of the employee’s misconduct Maybe
is due to the employee taking part in unofficial industrial action No
Pregnancy-related dismissal is automatically unfair.

Dismissal as a result of the employee trying to enforce the national minimum wage is automatically
unfair.
The misconduct must be sufficiently serious.
An employee dismissed for this reason is not a qualifying employee within the Act.
Yes/No
The employee has resigned as a result of their employer’s serious breach of Yes
contract.
An employee who has worked for an employer for six years is given one Yes
month’s notice of dismissal.
The contract between employer and employee states that the employee Yes
cannot be dismissed during a three-month training period and the employer
dismisses the employee after two months.
The employee is guilty of gross negligence. No
The employer is likely to incur liability for wrongful dismissal in all cases except the last, since gross
negligence on the employee’s part will justify summary dismissal.

B Unfair dismissal
D Redundancy pay claim
Unfair dismissal or a claim for redundancy pay, provided they can prove the requisite facts.
However, non-renewal cannot give rise to a claim for wrongful dismissal (although termination
before the expiry of a fixed-term contract would). Constructive dismissal is not relevant in this
scenario.
364 Law ICAEW 2023

1 Any of the following:

• Who provides and maintains tools and equipment
• Whether the person can delegate or subcontract
• Whether the person wears the employer’s uniform or displays its logo
• Whether tax is deducted at source
• Whether the person works for one or more parties
• Whether there is any restriction on hours or place of work
• Whether holiday and/or sick pay is provided for
• The length of employment
B False
3 Generally speaking, no (although a salaried partner, for example, maybe).
A True
5 Any of the following:
• Social security
• Taxation
• Employment protection
• Tortious acts
• Health and safety
• Implied terms
• VAT
• Rights on insolvency
6 On or before the first day of the employment.
A To ensure adequate access to places of work
D To provide a healthy working environment
8 Five weeks (one week for each year’s continuous service)
Period of continuous employment
Lack of qualification Two years
Making a protected disclosure None
Pregnancy None
10 Five fair reasons for dismissal:

• Lack of capability or qualification

• Employee’s misconduct
• Legal prohibition
• Redundancy
• Some other substantial reason
11 Any three:
• Pregnancy
• Spent conviction
• Trade union membership or activities
• Enforcement of statutory right
• Protected disclosure
• Taking steps to avert danger to health and safety at work
12 By up to 25% more (employer’s failure) or less (employee’s failure).
A Compensation
14 Yes, in cases of serious breach of contract by the employee (for example gross negligence or wilful
refusal to obey lawful instructions).
15 Three remedies:
• Damages
• Injunction
• Declaration
16 Two years
366 Law ICAEW 2023

Chapter 13
Data protection and

intellectual property law
Introduction
Learning outcomes
Syllabus links
Assessment context
Learning topics
1 The Data Protection Act 2018
2 Intellectual property
Summary
Self-test questions
Introduction
13
Learning outcomes
• Identify the key requirements of the Data Protection Act 2018, on the use of personal information
and how the Act can affect the manner in which information systems are used by businesses
• Recognise the requirements of protecting intellectual property, including digital contexts
Specific syllabus references for this chapter are: 4a and b.
13
Syllabus links
You will, or you may, have already dealt with information processing and security in Business,
Technology and Finance. The Data Protection Act is one of the reasons information must be kept
secure.
13
Assessment context
Although data protection and intellectual property are relatively minor areas of the syllabus, you
should be prepared for questions on their practical application.
13

of this chapter.

questions
1 The Data Protection Approach A knowledge IQ1: Data

Act 2018 Learn what data question could test Protection Act
How companies controllers, your recall of the 2018
acquire and use data processors and rights individuals This question
is becoming subjects are. Then have under the Data reinforces your
increasingly focus on the Protection Act 2018. understanding
sophisticated. This principles of data of the Data
Act sets out a number protection and the Protection Act
of principles for rights of data 2018 by asking
businesses to follow subjects. Learn the you to apply it.
and gives a number exemptions from
of rights to those who the Act.
have data held about
them.
Stop and think
What are the six
data protection
principles?
2 Intellectual property Approach Knowledge questions IQ2: Protecting

Intellectual property In this final short could ask you to intellectual
is effectively section, you need to identify various types property
intangible assets, understand what of intellectual This question
such as patents and intellectual property property. tests your
copyrights. Many is and the methods knowledge of
businesses are built of protecting it. the rules on
on developing Learn the offences copyright.
intellectual property in relation to
and it is vital that their intellectual
368 Law ICAEW 2023

questions
rights are protected. property.
Stop and think

What is a design
right? How long are
music recordings
protected by
copyright for?
ICAEW 2023 13: Data protection and intellectual property law 369
1 The Data Protection Act 2018
Section overview
• The Act is concerned with personal data (subject to some exemptions) held on computer-based
information systems and manual files.
• The purpose of the Act is to protect individuals from misuse of information held about them and
to give them more control and rights in relation to it.
• The Act provides a framework of rules which implements and supplements the EU’s General Data
Protection Regulation (GDPR).
• The Act requires all those who hold or process personal data to comply with data protection
principles in relation to that data.
• Individuals are given rights in relation to their personal data, such as rights of access and the right
to rectify inaccurate data.
The Data Protection Act 2018 (TSO, 2018) is an Act which sets out the UK’s approach to data
protection. The Act embodies the principles and rights of the EU’s General Data Protection
Regulation (GDPR) which came into force in May 2018. However, the Act goes further by setting out
a framework of rules which are wider in scope than the GDPR.
Data controllers determine the purpose and means of processing personal data.
Data processors are responsible for processing personal data on behalf of a controller.
Data subjects are identified or identifiable individuals (not companies) to whom personal data
relates.
It is important to note that although data controllers may delegate the processing of data to a data
processor, they are not relieved of the responsibility to ensure that the data is processed in
accordance with the Act.
Worked example: Data controllers, processors and subjects

Ensign plc collects personal data from its customers (private individuals) and this is shared between
all business units.
Logan is the company’s Information Technology Director and part of her role is to determine how
data is to be collected, the reasons for collecting the data and for purchasing technology and
designing the procedures used to process the data.
Mila works in the marketing department. Her role is to use the data which has been collected from
customers and to conduct data analysis on it by following the procedures given to her by Logan and
using the technology provided to her.
Requirement
Identify the data controller, processor and subject.
Solution
Ensign plc’s customers are each a data subject. They are private individuals and the data collected
about them is personal.
Logan is the data controller. She determines the purpose and means of processing personal data.
Mila is a data processor. She is responsible for processing personal data on behalf of a controller.
When applying the Data Protection Act, it is important to identify which party is the data controller,
processor and subject. Carefully identify all the parties involved and from the facts available to you,
decide which party has which role.
370 Law ICAEW 2023

1.1 Scope and purpose
The Data Protection Act applies where personal data is held on computer-based information systems
or manual files. All organisations are covered by the Act, large or small, profit or non-profit making,
incorporated and unincorporated.
Personal data covers any information related to an identifiable living individual. This means any living
person who can be directly or indirectly identified by reference to an identifier such as a name,
reference number, location or online identifier.
Note that as well as covering the recording of facts, the Act also covers other information such as the
expression of opinion about an individual.
The information below describes the rules on general data processing. However, the Act also
includes extra, specific rules as regards data processing for law enforcement and by the intelligence
services that we will not go into further.
1.2 Enforcement
Under the Act, the Information Commissioner is the UK’s regulator for data protection. The
Information Commissioner has statutory powers to enforce non-compliance with the Act. They must
be informed within 72 hours of a data breach that affects the rights and freedoms of individuals. In
high-risk cases, the individuals must be notified as well.
Non-compliance with the Act may result in:
• a criminal conviction where a criminal offence has been committed under the Act (for example for
the re-identification of data with an individual after it had been anonymised); or
• a fine of up to €20 million (approximately £18 million depending on the exchange rate) or 4% of
the organisation’s global turnover imposed by the Information Commissioner.
1.3 The data protection principles

The Act enacts the following data protection principles from the GDPR:
The principles
Lawfulness, fairness There must be valid grounds for holding the data. Data must be used
and transparency fairly and there must be clarity, openness and honesty in how the data is
used from the start.
Purpose limitation The purpose for recording the data must be recorded and made clear to
the data subject from the start. Under the Act, the purpose must be
specified, explicit and legitimate. If data is used for a new purpose then
consent must be obtained unless there are legal grounds for using the
data.
Data minimisation Under the Act, data must be adequate (sufficient to fulfil the purpose),
relevant (linked rationally to the purpose) and not excessive (limited to
what is necessary to fulfil the purpose).
Accuracy Reasonable steps must be taken to ensure the data is not incorrect or
misleading. Under the Act, ongoing processing must be accurate and
kept up to date. Data which is found to be inaccurate or misleading must
be corrected.
Storage limitation Under the Act, data should not be kept for longer than is necessary for
the purpose for which it was processed. There should be a retention
policy that can be justified. Data which is no longer needed should be
destroyed or anonymised.
Integrity and Under the Act, data processing must take appropriate security measures
confidentiality as regards risks that might arise. Appropriate technical and
(security) organisational measures should be in place to protect the data.
1.4 The rights of data subjects
The Act also enacts the following rights of data subjects from the GDPR:
The right
The right to be Individuals have the right to be informed about the collection and use of
informed their personal data. Privacy information includes the purposes for which
data is collected, retention periods and who the information is shared
with. This must be given to the individual when the personal data is
collected or within a month if the data was collected from another
source.
The right of access Individuals have the right to access the information which is held about
them. They can request the information verbally or in writing and it must
be provided within one month, and in most circumstances, must be free
of charge.
The right to Individuals have the right for inaccurate information held about them to
rectification be rectified and incomplete information be made complete. They can
request the rectification verbally or in writing and it must be completed
within one month. In certain circumstances the right may be refused.
The right to erasure This is also known as the right ‘to be forgotten’. Individuals have the right
to have information held about them erased. They can request the
erasure verbally or in writing. The right only applies in certain
circumstances and the individual must be given a response within one
month.
The right to restrict Individuals have the right to have their data restricted or suppressed.
processing This means that the data can be held but not processed. They can
request the restriction verbally or in writing. The right only applies in
certain circumstances and the individual must be given a response within
one month.
The right to data Individuals have the right to obtain data that they have given to the data
portability controller and to reuse it in a different service. For example, data held by
an individual’s online banking app can be requested by that individual
and transferred to another bank or smartphone app provider.
The right to object Individuals have the right to object to the processing of their data. In
regard to direct marketing, the individual has an absolute right to object.
In other circumstances, the right can be refused if there is a compelling
reason to do so. They can object verbally or in writing and a response
must be given within one month.
Rights in relation to Individuals are granted rights where data held about them is used to
automated decision make automated decisions about them, or where data evaluation about
making and profiling them is automated (profiling). There are strict circumstances where these
processes can be used and the individual has a right to information
about the processing and to request human intervention or to challenge
decisions made following the processing.
1.5 Exemptions from the Act

There are a number of exemptions from the Act which means that the data protection principles and
the data subject’s rights will not apply.
• Employers may process data without employee consent provided they are acting in compliance
with employment law (for example processing staff administration matters and payroll).
• Academic institutions, such as universities, are exempt from the rules on data processing,
provided the data is processed for academic purposes (for example as part of a research project).
• Scientific and historical research organisations are exempt where meeting the principles would
impair their core activities.
372 Law ICAEW 2023

• Individual rights are limited where they can be abused to commit crimes, disrupt legal
proceedings or otherwise disrupt public authorities and regulators.
Just like the ICAEW’s Ethical Principles, the application of the data protection principles requires the
exercise of professional judgement. What is important is your ability to justify how and why you
applied the principles as you did.
Interactive question 1: Data Protection Act 2018

Kylie is a data subject of Compliance Bank plc. She asked to see the information held about her by
the bank and paid a fee of £10 to do so. From this, she discovered that some data was inaccurate, as
it had not been updated to reflect the fact that Kylie has remarried and changed her name. She is
also cross that the bank continues to send her marketing emails for loans that she does not want.
Kylie decides to visit her local branch of the bank and asks for the marketing emails to stop within
two weeks and for the data to be corrected.
Requirement
Yes/No
Does the bank face a fine for holding inaccurate data on Kylie?
Was the bank correct in charging Kylie £10 to see her data?
Must the bank respond within two weeks to Kylie’s demand that the marketing
emails cease?
Must the bank correct the data it holds about Kylie?
2 Intellectual property
Section overview
• Intellectual property is an intangible asset that is created from the knowledge or skill of
employees.
• There are a number of methods available to protect intellectual property. Some are granted
automatically; others have to be applied for.
Intellectual property (IP) is a form of intangible asset that a company creates through the application
of skill and knowledge of its employees. Examples of intellectual property include:
• the names of products or brands (eg, brand names)
• inventions (eg, bagless vacuum cleaners)
• the design or look of products (eg, design of car engines)
• items that the employees wrote, made or produced (eg, digital products such as music, books or
film)
2.1 Protecting digital intellectual property
Due to the nature of digital intellectual property, it is quite easy for unscrupulous parties to steal and
profit from it. Examples of misuse include:
• ripping or downloading music for redistribution
• copying DVDs for resale
• plagiarising written material, such as in textbooks, for inclusion in other publications
There are a number of methods that a company can use in order to legally protect its intellectual
property, whether digital or otherwise. However, to gain protection the owner of the IP must have
either created it or transferred ownership from the person or organisation that did. Examples of
protection include:
Method of IP Explanation
protection
Copyright Automatic protection is given for IP that is written, in the form of music, film, art
and internet content. This is of most relevance to digital products such as music
and film.
The protections offered are:
• written, dramatic, musical and artistic work – 70 years from the author’s
death
• sound and music recording – 70 years from when first published
• films – 70 years after the death of the director, screenplay author and
composer
• broadcasts – 50 years from when first broadcast
• layout of published editions of written, dramatic or musical works – 25 years
from when first published
Design right Automatic protection is given for an object’s design.

Lasts for 15 years after the design right was created or 10 years after it was
sold, whichever is earlier.
Trademark Protection for product names, jingles and logos. This must be applied for and
granted.
Lasts for 10 years.
Registered Relates to the design of a product, such as its packaging, patterns, colours and
design decoration. Protection must be applied for and granted.
Lasts for 25 years.
Patent Applies to inventions and products, such as machines or parts of machines.

Protection must be applied for and granted.
Lasts for 20 years.
Intellectual property law is a highly specialist area. As an accountant you are expected to have an
understanding of the main issues, but be careful when offering advice and making recommendations
in this area. Very often, the most appropriate course of action will be to recommend passing the
matter over to a lawyer with a great deal of experience in this area of law.
2.2 Offences in relation to intellectual property

Intellectual property law is covered by a substantial amount of legislation. The key pieces of
legislation include the following:
374 Law ICAEW 2023

Legislation Offence examples
Trade Marks Act 1994 (HMSO, Unauthorised use of a trademark

1994) A gain is made, or a loss is created through the unauthorised
use of a trademark. For example a website uses the trademark
of another business in order to gain sales or deprive the real
owner of sales.
Copyright, Designs and Patent Criminal liability for making, dealing with or using illicit
Act 1988 (HMSO, 1998) recordings
Selling, hiring or exhibiting copyrighted material. For example,
the public performance of copyrighted music, such as a
business streaming music to its customers.
Registered Designs Act 1949 Offence of unauthorised copying etc, of design in course of
(HMSO, 1949) business
Creating a product using the exact or materially similar design
specifications of another product.
Fraud Act 2006 (TSO, 2006) Fraud by false representation

Making a gain or causing a loss by making a fraudulent
representation about a product. For example, passing off a
product as made by one company when in fact it is a copy.
There are various ways that an organisation can protect its intellectual property. In some instances, it
might not be obvious at first glance which is the most appropriate law to use. To help make the
decision, carefully identify the asset to be protected and what exactly the organisation needs to
protect. Remember that more than one solution might be available.
Interactive question 2: Protecting intellectual property

Helen has begun recording podcasts that she distributes through her website. She is keen to ensure
that her work is protected and understands that it will have copyright protection for a number of
years.
Requirement
For how long will Helen’s podcasts be protected by copyright?
A 25 years after the publication date
B 25 years after Helen’s death
C 70 years after the publication date
D 70 years after Helen’s death
Summary
Data Protection Act
GDPR principles GDPR rights
• Lawfulness, fairness • The right to be informed

and transparency • The right of access
• Purpose limitation • The right to rectification
• Data minimisation • The right to erasure
• Accuracy • The right to restrict processing
• Storage limitation • The right to data portability
• Integrity and • The right to object
confidentiality (security)
• Rights in relation to automated
decision making and profiling
Intellectual property (IP)
Types of IP Methods of IP protection Legislation
• Brand names • Copyright • Trade Marks Act 1994

• Product design • Design right • Copyrights, Designs and
• Created work such as • Trademark Patents Act 1988
music and film • Registered design • Registered Designs Act 1949
• Patent • Fraud Act 2006
376 Law ICAEW 2023

indicated.
1. Do you know the principles and rights of the Data Protection Act 2018? (Topic 1)
2. Can you state the five methods of protecting intellectual property? (Topic 2)

• Data Protection Act 2018. (2018). London, TSO.

• Trade Marks Act 1994. (1994). London, HMSO.
378 Law ICAEW 2023

Self-test questions

1 The Data Protection Act applies to all companies in the UK.
A True
B False
2 Which of the following statements does not describe one of the data protection principles?
A Personal data shall be accurate and, where necessary, kept up to date.
B Personal data shall not be kept for longer than six years.
C Personal data shall be adequate, relevant and not excessive.
this chapter.
Yes/No
Does the bank face a fine for holding inaccurate data on Kylie? Yes
Was the bank correct in charging Kylie £10 to see her data? No
Must the bank respond within two weeks to Kylie’s demand that the marketing No
emails cease?
Must the bank correct the data it holds about Kylie? Yes
(1) A breach of the Act makes the bank liable for a fine.
(2) Data subjects should not usually be charged to see their data.
(3) The bank has a month to respond.
(4) Kylie has a right for inaccurate data to be rectified.

C 70 years after the publication date
Sound and music recordings are protected for 70 years after the publication date.
380 Law ICAEW 2023

A True
B Personal data shall not be kept for longer than six years.
The principle is that data shall not be kept for longer than is necessary for the purpose for which it is
processed.
382 Law ICAEW 2023
Appendix
384 Law ICAEW 2023
Terminology
Acceptance An unqualified agreement to the terms of the offer.
Administration A process whereby a moratorium is imposed on creditors’ actions against

the company while an insolvency practitioner attempts to rescue the
business as a going concern.
Administrator A person appointed to carry out an administration.
Agent A person authorised to act for another (the principal) and bring that other
into legal relations with a third party.
Annual general Every public company is required to hold a meeting of each its members
meeting (AGM) each year at which it is usual, but not obligatory, to transact the ‘ordinary
business’ of the company. Such business may include consideration of
the accounts, declaration of a dividend and appointment of auditors.
Anticipatory breach Renunciation by a party to a contract of their contractual obligations

before the date of performance.
Articles of association Rules governing the internal conduct of a company’s affairs, such as
appointment, powers and proceedings of directors, alteration of capital
structure, dividends and so on.
Auditor A person appointed by the company in a general meeting to report

whether the accounts reflect a true and fair view of the company’s affairs.
Breach of contract Where a party does not perform their contractual obligation sufficiently.
Bribery Giving or receiving money, goods or services to induce a party’s

improper performance of an official duty.
Business name A name used by a company other than the registered one.
Capacity The ability or power of a person to enter into legal relationships or carry
out legal acts.
Care, duty of The care owed by one person to another which, if broken, may give rise
to an action for negligence.
Claimant The party who brings a claim in a civil court. They were previously known
as the plaintiff.
Company An entity registered under the Companies Act 2006 or any earlier
Companies Act.
Compulsory A liquidation initiated when a creditor petitions the court.

liquidation
Confirmation Statements that confirm to the Registrar that there have been no changes
statements to the information held by them about the company during the previous
12 months, or, if changes have been made, they record the changes that
have occurred.
Conflict of interest Where the personal interests of an individual clash with another party’s
interests that they have the power to control.
Consideration Consists either in some right, interest, profit or benefit accruing to one
party to a contract, or some forbearance, detriment, loss or responsibility
given, suffered or undertaken by the other. Broadly, the element of value
that each party contributes to the contract.
ICAEW 2023 Appendix 385

Constitution Documents which set out the rules for governing a company and include
(company) the articles of association and member resolutions relevant to the
constitution.
Contract An agreement which legally binds the parties.
Contract of A contract of employment is a contract of service or apprenticeship,

service/employment whether express or implied, and (if it is express) whether it is oral or in
writing.
Creditors’ voluntary A form of liquidation where a company does not provide a declaration of
liquidation solvency. If no such declaration is made, the liquidation proceeds as a
creditors’ voluntary winding up even if in the end the company pays its
debts in full.
Crystallisation The point at which certain events cause a floating charge to be converted
into a fixed charge.
Damages The sum claimed or awarded in a civil action in compensation for the loss
or injury suffered by the claimant.
Defendant The person against whom a civil action is brought or who is prosecuted
for a criminal offence.
Derivative claim A remedy available to a minority shareholder to redress a wrong done to

the company. Such an action is brought where those who have
committed the offence control the company, and thus, under Foss v
Harbottle could prevent it from taking action. Any benefit obtained will
accrue to the company since the claim is derived from and made on
behalf of the company.
Director A person who takes part in making decisions and managing a company’s
affairs.
Dividend A distribution of profits to members made in proportion to their

shareholdings.
Estoppel A party is prevented from retracting their words or conduct where

another has relied upon and acted on them.
Exclusion clause Contract clause purporting to exclude or restrict liability.
Executed A performed, or executed, act in return for a promise.

consideration
Executory A promise given for a promise, not a performed act.

consideration
Express term A term that is clearly agreed to by the parties in a contract to be a term of
that contract. In examining a contract, the courts will look first at the terms
expressly agreed by the parties.
Fiduciary duty A duty imposed upon certain persons because of the position of trust
and confidence in which they stand in relation to another. This is
particularly relevant to company directors.
Fixed charge A charge attaching to a particular asset on creation. The asset in question
is usually a fixed asset, which the company is likely to retain for a long
period. If the company defaults in payment of the debt the holder can
realise the asset to meet the debt. Fixed charges rank first in order of
priority in a liquidation.
Floating charge A charge on a class of assets of a company, present and future which
changes in the ordinary course of the company’s business. Until the
holders enforce the charge the company may carry on business and deal
386 Law ICAEW 2023

with the assets charged. It attaches to the assets only on crystallisation.
Fraud Using misrepresentation to obtain an unjust advantage.
Fraud on the minority Discrimination by the majority shareholders against the minority. The
minority may have a remedy at common law.
Fraudulent trading Carrying on business and incurring debts when there is to the knowledge
of the directors no reasonable prospect that these debts will be repaid,
ie, with intent to defraud the creditors. Persons so acting may be liable for
the debts of the company as the court may decide.
Freedom of contract Principle that parties may contract on the terms which they choose.
Gagging clause A term in an employment contract or severance agreement that restricts

the ability of a party to make disclosures about their employment.
Gazette An official publication in which certain notices must be inserted as

prescribed by statute, for example the appointment of a liquidator.
Good faith Fair and open action without any attempt to deceive or take advantage of
knowledge of which the other party is unaware.
Implied term Term deemed to form part of a contract even though not expressly
mentioned by the parties.
Injunction An equitable remedy in which the court orders the other party to a
contract to observe contractual terms.
Insider A person has information as an insider if it is (and they know it is) inside
information, and if they have (and know they have) it from an inside
source through being a director, employee or shareholder of a company
or by having access to it because of their employment, office or
profession (eg, as auditor), or through a source within either category.
Intellectual property A form of intangible asset that a company creates through the application
of skill and knowledge of its employees.
Intention to create Element necessary for an agreement to become a legally binding

legal relations contract.
Insolvency The inability to pay creditors in full after realising all the assets of a
business.
Insolvency Persons acting as a liquidator, administrative receiver or administrator

practitioner must be insolvency practitioners, authorised by the professional body to
which they belong or the relevant government department.
Invitation to treat Indication that someone is prepared to receive offers with a view to
forming a binding contract. It is not an offer in itself.
Lifting the veil (of A company is normally to be treated as a separate legal person from its
incorporation) members. ‘Lifting the veil’ means that the company is identified with its
members or directors or that a group of companies is to be treated as a
single commercial entity. An example of this is to prevent fraud.
Limited liability Limitation of the liability of members to contribute to the assets of a

business in the event of a winding up. Liability is limited to any amounts
outstanding on members’ shares including any premium.
Liquidated damages Fixed sum agreed by parties to a contract and payable in the event of a
breach.
Liquidation A process by which a company ceases to exist, otherwise known as a

winding up. May take the form of a compulsory liquidation, a members’

voluntary liquidation or a creditors’ voluntary liquidation.
Liquidator A person who organises a company’s liquidation or winding up. Their task
is to take control of the company’s assets with a view to their realisation
and the payment of all debts of the company and distribution of any
surplus to members.
Listed company A company whose shares are quoted on a recognised stock exchange.
Managing director One of the directors of the company appointed to carry out overall day-
to-day management functions.
Member Shareholder of a company.
Members’ voluntary A form of liquidation where the directors have made a declaration of
winding up solvency and the members have passed a resolution that the company be
wound up.
Memorandum of A memorandum in the prescribed form stating that the subscribers wish
association to form a company and agree to become members of the company and,
in the case of a company with a share capital, agree to take at least one
share each. It must be authenticated by each subscriber.
Minutes A written, indexed record of the business transacted and decisions taken
at a meeting. Company law requires minutes to be kept of all company
meetings. Minutes of general meetings should be available for inspection
by members.
Misrepresentation False statement made with the object of inducing the other party to enter
into a contract.
Mitigate An action by the injured party to limit the effect of any loss or damage
caused by the defendant.
Negligence This may refer to the way in which an act is carried out, that is carelessly,
or to the tort which arises when a person breaches a legal duty of care
that is owed to another, thereby causing loss to that other.
Objects The aims and purposes of a company.
Off-the-shelf company A company that has been ‘ready-made’ and available to purchase by
those wishing to incorporate their business quickly.
Offer A definite promise to be bound on specific terms.
Ordinary resolution A resolution carried by a simple majority of votes cast.
Ordinary share A share which gives the holder the right to participate in the company’s
surplus profit and capital. The dividend is payable only when preference
dividends, including arrears, have been paid.
Partnership The relation which subsists between persons carrying on a business in

common with a view of profit.
Past consideration Something already done at the time that a contractual promise is made.
Penalty clause A term in a contract that fixes a specific sum to be payable to the injured
party in the event of breach of contract. The objective is to penalise the
party in breach rather than to recover actual losses.
Perpetual succession The company continues to exist despite the death, insolvency, or insanity
of any member or director, any change in membership or any transfer of
shares.
Poll Where shareholders vote on company resolutions and the number of

votes they may cast is related to the size of their shareholding.
388 Law ICAEW 2023

Preference shares Company shares which entitle the holder to a fixed rate of dividend and
priority of repayment ahead of ordinary shareholders.
Pre‑incorporation A contract purported to be made by a company or its agent before the

contract company has received its certificate of incorporation. An agent may be
made personally liable on such a contract which will be unenforceable
against the company.
Private company A company which may not offer shares to the public, and which has not
been registered as a public company.
Privity of contract A principle of contract law that states only parties to a contract may sue
on it.
Promoter Person who undertakes to form a company by making the appropriate

business preparations.
Proxy A person appointed to vote on company resolutions by the shareholder.
Public company A company registered as such under the Companies Act. The principal
distinction between public and private companies is that only the former
may offer shares to the public.
Quasi-loan An agreement between two parties where one pays the other’s debts on
the condition that the second party agrees to reimburse them at some
later date.
Quantum meruit As much as they have deserved. A restitutory award that may be granted
in cases of breach of contract to reflect the value of the work done.
Quorum Minimum number required to be present for a valid meeting to take

place.
Ratification Occurs in agency law where the agent acts on behalf of the principal
before the agency agreement is created. The principal agrees to be
bound by those acts once the agency agreement is formed.
Re In the matter of. Seen in some case names.
Registered office A business address to which communications with a company may be

sent.
Registration Process by which a company comes into being, which involves the filing
of documents with the relevant authority and the issuance of a certificate
of registration.
Remoteness of Relationship between a wrongful act and the resulting damage which
damage determines whether or not compensation may be recovered. Different
principles apply in contract and in tort.
Repudiation A breach of contract that is caused by the party in breach rejecting or

renouncing the terms of the contract.
Riba The concept of unlawful gain. This is usually translated as interest.
Sale of goods A contract whereby the seller transfers or agrees to transfer the property
in goods for a money consideration called the price.
Secretary (company) An officer of a company appointed to carry out general administrative

duties. Every public company must have a secretary.
Shadow director A person in accordance with whose instructions other directors are
accustomed to act.
Share A member’s stake in a company’s share capital.

Sole trader A business vehicle that involves a single individual who contributes
capital to start the enterprise, runs it with or without employees, and
personally earns the profits or stands the losses of the venture.
Specific performance An equitable remedy in which the court orders the defendant to perform
their side of a contract.
Standard form A standard document prepared by many large organisations and setting
contract out the terms on which they contract with their customers.
Subsidiary company A company under the control of another company, its holding company.
Third party A party that does not have a legal connection with a contract but who
might be affected by it.
Tort A wrongful (but not necessarily criminal) act by one person to another.
No contractual relationship is needed between the parties for a liability to
be created.
Unenforceable A contract that will not be enforced by the court in the event of its breach.
contract
Unlimited liability Members do not have limited liability and in the event of liquidation
members are required to contribute as much as needed to repay the
company’s debt in full.
Void contract Not a contract at all. The parties are not bound by it and if they transfer
property under it they can sometimes recover their goods even from a
third party.
Voidable contract A contract which one party may avoid, that is, terminate at their option.
Property transferred before avoidance is usually irrecoverable from a
third party.
Whistleblowing Where an individual makes disclosures about an organisation that they

are employed by, usually related to illegal or unethical actions occurring.
Winding up A process by which a company ceases to exist, otherwise known as a

liquidation. May take the form of a compulsory winding up, a members’
voluntary winding up or a creditors’ voluntary winding up.
Wrongful trading The term used where directors of an insolvent company knew or should
have known that there was no reasonable prospect that the company
could have avoided insolvency and did not take sufficient steps to
minimise the potential loss to the creditors.
390 Law ICAEW 2023

Glossary of terms
392 Law ICAEW 2023
Direct discrimination: Treating people less favourably than others because of a protected
characteristic.
Harassment: Any unwanted conduct related to a relevant protected characteristic.
Indirect discrimination: Applying a policy or practice which disadvantages people with a protected
characteristic.
Riba: The concept of unlawful gain. This is usually translated as interest.
Victimisation: Being treated badly because of performing a protected act.
ICAEW 2023 Glossary of terms 393

394 Law ICAEW 2023
Index
396 Law ICAEW 2023
A Avoidance of charges, 276
Acceptance, 30
B
Access control, 308
Balance of probability, 5
Accounting records, 168
Bankruptcy, 281
Accounts and reports, 158
Bankruptcy order, 201
Accounts and reports requirements, 168
Bankruptcy proceedings, 134
Accused, 5
Battle of the forms, 40
Actual express authority, 86
Being bribed, 304
Actual implied authority, 86
Bonus issue, 231
Adequacy, 35
Bonus shares, 233
Administration, 266, 269
Breach of a disqualification order, 202
Administrative receiver, 270
Breach of contract, 60, 340
Administrator, 202, 247, 266
Breach of directors’ duties, 199
Advantages of administration, 269
Breach of duty of care, 103
Advantages of incorporation, 172
Breach of warranty of authority, 89
Agency, 80, 195
Bribe, 198
Agency by consent, 80
Bribery, 304
Agency by estoppel, 81
Bribery Act 2010, 12, 304
Agency of necessity, 81
Bribing a foreign public official, 304
Agents, 80
Bribing another person, 304
Agreement, 25
Business efficacy, 39
Allotment of shares, 231
Business names, 164
Alteration, 165
Alteration of articles, 165 C
Alteration of share capital, 238 Called-up share capital, 236
Alternate director, 191 Capacity, 25
An intention to create legal relations, 25 Capital redemption reserve, 240, 243
Annual accounts, 169, 203 Case law, 7
Annual general meetings, 212 Certificate of incorporation, 160, 166
Anticipatory breach, 60 Certificates of registration of charges, 166
Application, 159 Change of company name, 163
Appointment of an administrator, 266 Charges, 244, 270, 276
Approval of directors’ actions, 203 Chartered accountant, 282
Articles, 231 Choice of laws, 8
Articles of association, 164, 203 Civil law, 5
Asset-freezing injunction, 65 Claimant, 5
Audit exemption, 135 Class meetings, 214
Audit requirements, 171 Class rights, 230
Audited accounts, 110 Codifying legislation, 6
Auditor’s report, 110, 169 Common law, 7
Auditors, 158 Communication of acceptance, 31
Authority, 194 Companies (Directors’ Report) and Limited
Authority and liability of LLP members, 136 Liability Partnerships (Energy and Carbon
Report) Regulations 2018, 170
Authority of the agent, 85
Companies (Miscellaneous Reporting)
Automatically unfair reasons for dismissal, 346
Regulations 2018, 169, 197
ICAEW 2023 Index 397

Companies (Shareholders’ Rights) Regulations Custom, 39
2009, 211 Cybercrime, 306
Companies Act 2006, 110, 152, 169, 191, 229,
309 D
Company, 152 Damages, 5, 61, 112
Company Directors Disqualification Act 1986, Data controllers, 370
155, 191, 193, 200, 309
Data processors, 370
Company is a sham, 155
Data Protection Act 2018, 12, 370, 370
Company limited by guarantee, 153
Data protection principles, 371
Company limited by shares, 153
Data subjects, 370
Company meeting, 206
De facto director, 191
Company records, 166
Dealing, 310
Company Secretary, 158, 167
Death of the director, 192
Company voluntary arrangements, 271
Debenture, 244
Compulsory liquidation, 274
Declaration of solvency, 273
Computer Misuse Act 1990, 308
Deed, 35
Confidentiality, 312
Defences, 111
Confirmation statement, 167
Defendant, 5
Consequences of administration, 268
Deferred debts, 278
Consideration, 34, 338
Delegated legislation, 7
Consolidating legislation, 6
Derivative action, 203
Constructive dismissal, 345
Derivative action on behalf of the company, 206
Consumer Credit Act 1974, 26
Derivative claim, 206
Consumer Credit Act 2006, 26
Design right, 374
Consumer Rights Act 2015, 67
Direct discrimination, 343
Continuously employed, 353
Director, 158, 191, 269, 282
Contract, 25
Directors and their appointment, 191
Contract for services, 334, 336
Directors’ authority, 194
Contract of employment, 334
Directors’ duties, 195
Contract of service, 334, 336
Directors’ powers, 193
Contracts (Rights of Third Parties) Act 1999, 41,
Directors’ remuneration report, 169
162
Directors’ report, 169
Contributory negligence, 111
Directors’ service contracts, 166
Control, 334
Directors’ statement and auditor’s report, 166
Copyright, 374
Directors’ vacation of office, 192
Copyright, Designs and Patent Act 1988, 375
Disadvantages of incorporation, 172
Counter-offer, 29
Discharge of the contract, 58
Courts, 39
Disqualification, 136, 192
Creditor, 247, 269
Disqualification of directors, 200
Creditors’ interests, 195
Disqualify, 193
Creditors’ voluntary liquidation, 266, 274
Distribution to creditors, 282
Criminal Finances Act 2017, 298
Dividends, 242
Criminal Justice Act 1993, 310
Duress, 25
Criminal law, 5
Duties of an agent, 83
Crystallisation, 245
Duties of the administrator, 268
Crystallised, 279
398 Law ICAEW 2023

Duty of care, 102, 136 Floating charge holder, 279
Forbearance or waiver of existing rights, 36
E
Formation of an LLP, 134
E-commerce fraud, 307
Foss v Harbottle, 205
Effect of bankruptcy, 282
Fraud, 200, 306
Electronic Communications Act 2000, 26
Fraud Act 2006, 306, 375
Electronic financial fraud, 307
Fraud by abuse of position, 306
Employee, 269, 353
Fraud by failing to disclose information, 306
Employee’s implied duties, 339
Fraud by false representation, 306
Employer’s implied duties, 340
Fraudulent and wrongful trading, 155
Employer/employee relationship, 334
Fraudulent or wrongful trading, 136
Employment Act 2008, 345
Fraudulent sales through online auction or retail
Employment contract, 338 sites, 307
Employment Rights Act 1996, 315, 345 Fraudulent trading, 200, 309
Enabling legislation, 6 Freedom of contract, 25, 38
Encouraging another to deal, 310 Frustration, 59
Enterprise Act 2002, 246, 266, 270
Enterprise and Regulatory Reform Act 2013, 315 G
Entrenchment, 165 Gagging clauses, 317
Environment Act 2021, 12 General Data Protection Regulation (GDPR), 370
Equality Act 2010, 12, 343 General duties, 196
Equity securities, 231 General meeting, 203, 206, 211
Equity share capital, 236 Gross negligence, 201
Exclusion clauses, 65, 112 Groups of companies, 154
Executed, 34 Guarantee, 26
Executive director, 191

H
Executory, 34
Harassment, 343
Existing contractual duty owed to a third party,
Health and Safety at Work Act 1974, 341
36
Existing contractual duty owed to the promisor, I
36
ICAEW Code of Ethics, 312
Existing statutory duty, 35
Illegality, 25
Expectation interest, 63
Implicitly required, 40
Express terms, 38, 338
Implied terms, 39, 337
F Incidental authority, 86
Failing to prevent bribery, 305 Incoterms, 10
Failure of a pre-condition, 30 Indirect discrimination, 343
Failure to report, 299 Individual voluntary arrangements, 280
Fiduciary duties, 131 Information Commissioner, 371
Financial assistance for the purchase of shares, Information rights, 203
241 Injunction, 65
Firewalls, 308 Inside information, 310
Firm, 130 Insider, 310
Fixed charge, 244, 246 Insider dealing, 310
Fixed charge receiver, 270 Insolvency Act 1986, 134, 155, 200, 245, 266
Floating charge, 245, 277

Insolvency Act 2000, 272 Loans to directors, 204
Insolvency practitioner, 275, 282 Loss caused by the breach, 105
Integrity, 312
M
Intellectual property, 373
Maintenance of capital, 235
Intention to create legal relations, 33
Majority rule and minority protection, 205
International Chamber of Commerce, 8, 10
Managing director, 192
International law, 8
Mandatory injunction, 65
Internet-enabled card-not-present fraud, 307
Market abuse, 311
Invitation to treat, 27
Mass-marketing frauds and consumer scams,
Islamic finance, 10
307
Issued or allotted share capital, 236
Measure of damages, 63, 101
J Meetings and resolutions, 211
Judicial precedent, 7 Members, 203, 269
Just and equitable, 206, 274 Members’ rights, 203
Just and equitable winding up, 210 Members’ voluntary liquidation, 273
Memorandum of association, 159
L Micro-entities, 170
Lack of commercial probity, 201 Misrepresentation, 26
Lapse of time, 29 Mistake, 25
Law of Property Act 1925, 270 Mitigation of loss, 63
Law Reform (Contributory Negligence) Act 1945, Mobility clause, 338, 353
111
Model articles, 164
Law Reform (Frustrated Contracts) Act 1943, 59
Money laundering, 297, 299
Legal personality, 152
Money Laundering Regulations 2017, 12, 300
Legislation, 6
Money or money’s worth, 233
Legitimate profit, 161
Moratorium, 272
Liability of the parties, 88
Mutuality of obligations, 334
Licensed insolvency practitioner, 280
Lifts the veil, 154 N
Limitation period, 101 Name, 157, 163
Limited by guarantee, 157 Negative pledge clause, 279
Limited by shares, 157 Negligence, 102, 199
Limited companies, 156 Negligent misstatement, 102, 106
Limited liability, 153 Net assets, 243
Limited liability partnerships, 134 New partner, 133
Limited Liability Partnerships Act 2000, 134 Nominal value, 233
Limited Liability Partnerships Regulations 2001, Non-cash consideration, 233
135 Non-executive director, 192
Limited Partnership Act 1907, 134 Not to accept benefits from third parties, 198
Liquidated damages, 64 Notice, 213
Liquidation, 244, 245, 273, 309 Notice provisions, 344
Liquidator, 202, 247, 276
Listed company, 203 O
Listed shares, 235 Objectivity, 312
Loan capital, 236, 243 Objects, 194
400 Law ICAEW 2023

Off-the-shelf company, 161 Priorities on liquidation, 278
Offer, 27 Priority of charges, 278
Offeror, 27 Private company, 157
Official receiver, 275 Privileged circumstances, 302
Online romance (or social networking/dating Privity of contract, 41, 80
website) fraud, 307 Proceedings at meetings, 213
Ordinary partnerships, 129 Proceeds of Crime Act (POCA) 2002, 12, 297,
Ordinary resolution, 192, 199, 212, 231, 273 299
Ordinary shares, 229 Professional advice, 106
Ostensible or apparent authority, 87 Professional behaviour, 312
Professional competence and due care, 312
P
Prohibited names, 163
Par, 233
Prohibitory injunction, 65
Parental Bereavement (Pay and Leave) Act 2018,
Promoter, 161, 162
343
Proper claimant, 206
Partner retires, 133
Prosecution, 5
Partners, 280
Protected characteristics, 343
Partners’ liability and authority, 132
Provisions of the Partnership Act, 130
Partnership, 129
Proxies, 214
Partnership Act 1890, 114, 129, 130, 133
Public company, 157, 212, 243
Passage of risk, 9
Public interest, 316
Past, 34
Public Interest Disclosure Act 1998, 315
Patch management, 308
Publication of accounts and reports, 170
Patent, 374
Purchase of own shares, 240
Payment for shares, 233
Pure economic loss, 102
Payments for loss of office, 204
Purpose of administration, 266
Penalty clauses, 64
Performance, 58 Q
Personal data, 371 Qualifying disclosure, 315
Personal liability, 136 Quantum meruit, 58
Personal service, 334 Quorum, 213
Pharming, 307 Quoted companies, 158
Phishing scams, 307
Phoenix companies, 200 R
Poll, 214 Ratification, 82, 199
Postal rule, 32 Reasonable doubt, 6
Postponed debts, 282 Receiver, 202, 247
Potentially fair reasons for dismissal, 346 Receivership, 270
Pre-emption rights, 158, 232 Records, 214
Pre-incorporation contract, 161 Records of resolutions and minutes, 166
Preference shares, 229, 244 Redeemable shares, 229, 230, 239
Preferences, 269, 276 Redemption of shares, 239
Preferential creditors, 266 Reduction of share capital, 236
Preferential debts, 278, 282 Redundancy, 347, 353
Prescribed method, 31 Register of charges and copies of charges, 166
Primary legislation, 6 Register of directors, 166

Register of directors’ residential addresses, 166 Shares at a discount, 232
Register of members, 166 Shares at a premium, 232
Register of people with significant control, 166 Sharia law, 10
Registered design, 374 Show of hands, 214
Registered Designs Act 1949, 375 Small Business, Enterprise and Employment Act
Registered office, 135 2015, 316
Registration documents, 159 Small- and medium-sized companies, 170
Registration of charges, 247 Sole traders, 128, 280
Rejection, 29 Spear-phishing, 307
Reliance interest, 63 Special notice, 192, 213
Remedies, 61 Special relationship, 102, 106
Remedies for unfair dismissal, 350 Special resolution, 157, 163, 273
Remedies for wrongful dismissal, 352 Specific performance, 64
Remoteness of damage, 61 Standard form contract, 25
Removal, 192 Statement of capital, 229
Repayment of capital, 229 Statement of capital and initial shareholdings,

160
Repudiatory breach, 60
Statement of compliance, 160
Request for information, 29
Statement of guarantee, 160
Res ipsa loquitur, 103
Statement of intention, 27
Resolutions, 212
Statement of proposed officers, 160
Revocation, 29
Statute, 39
Riba, 10
Statutory instrument, 7
Rights issue, 231
Statutory rights of minorities, 206
Rights of an agent, 84
Strategic report, 169
Rights of data subjects, 372
Subject to contract, 33
Rights of debenture holders, 244
Substantial property transactions, 204
Rights of pre-emption, 231
Sufficiency, 35
Road Traffic Act 1972, 41
Summary dismissal, 351
Rome II, 39
Supervisor, 280
S Supply of Goods and Services Act 1982, 39
Safeguards for accountants in business, 313 Sustainability, 11
Safeguards for accountants in public practice,
314 T
Sale of Goods Act 1979, 67 Termination and insolvency of an LLP, 136
Secondary legislation, 7 Terms of the contract, 38
Secure configuration, 308 The Gazette, 273
Securities, 310 Threats for accountants in business, 312
Separate legal person, 205 Threats for accountants in public practice, 313
Separate legal personality, 152 Tipping off, 299
Service contracts , 204 To act within powers, 196
Shadow director, 191, 193, 199 To avoid conflict of interest, 197
Share capital, 235 To declare interest in proposed transaction or

arrangement, 198
Share premium account, 232, 243
To exercise independent judgement, 197
Shareholders’ agreement, 193, 203
Shares, 229
402 Law ICAEW 2023

To exercise reasonable care, skill and diligence, Virus and malware protection, 308
197 Void contract, 26
To promote the success of the company, 196 Voidable, 204
Tort, 101 Voidable contract, 26
Tort of deceit, 89 Volenti non fit injuria, 111
Trade Marks Act 1994, 375 Voting, 214
Trademark, 374
Trading certificate, 160, 166 W
Trading without a trading certificate, 156 Waiver of existing debt, 37
Transactions at an undervalue, 269, 276 Weighted voting rights, 193
Transfer of shares, 234 Whistleblowing, 315
Treasury shares, 240 Winding up, 160, 201
Type of company, 153 Workers, 338
Type of resolution, 213 Written particulars, 339
Types of capital, 236 Written resolutions, 158, 213
Types of company, 156 Wrongful dismissal, 336, 351
Types of shares, 229 Wrongful profit, 161
Wrongful trading, 200
U
UN, 8
UN Convention on Contracts for the International
Sale of Goods (UNCISG), 8
Undistributable reserves, 243
Undue influence, 25
Unenforceable contracts, 26
Unfair Contract Terms Act 1977, 67
Unfair dismissal, 345
Unfairly prejudicial, 230
Unfairly prejudicial conduct, 206, 208
Unissued share capital, 236
United Nations, 8
Unlimited companies, 156
Unlimited company, 153
Unlisted shares, 234
Unsecured creditors, 266
Unsecured loan, 244
Usual authority, 86
Usury, 10
V
Variation of class rights, 206
Veil of incorporation, 154
Vicarious liability, 113
Vicarious liability and agency, 114
Vicarious liability and partnership, 114
Victimisation, 343

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The Institute of Chartered Accountants in England and Wales

1 Legal principles and international law 1

ICAEW 2023 Contents iii

iv Law ICAEW 2023

Ethics and professional scepticism

Syllabus area Weighting (%)

1 The impact of civil law on business and professional services 35

2 Company and insolvency law 40

3 The impact of criminal law on business and professional services 10

4 The impact of law in the professional context 15

ICAEW 2023 Introduction v

Syllabus and technical knowledge grids

Student support team

ICAEW Business and Finance Professional (BFP)

vi Law ICAEW 2023

Skill area Overall objective

Assimilating and using Understand a business or accounting situation, prioritise by

Concluding, Apply technical knowledge, skills and experience to support

ICAEW 2023 Introduction vii

Legal principles and

Chapter study guidance

Topic Practical signiﬁcance Study approach Exam approach Interactive

1 Types of law Approach Scenario questions IQ1: Civil and

2 Law ICAEW 2023

do case law and

2 International law Approach Scenario questions IQ2: UN

Stop and think

3 Islamic ﬁnance Approach Knowledge questions

Stop and think

4 UK law supporting Approach Knowledge questions

ICAEW 2023 1: Legal principles and international law 3

sustainability Understand how UK knowledge of

4 Law ICAEW 2023

1.1 Civil law

Aspects of civil law Description

1.2 Criminal law

Aspects of criminal law Description

ICAEW 2023 1: Legal principles and international law 5

The burden of proof is with the prosecution. This means it is up to the

1.3 Cases where both civil and criminal law apply

Context example: Criminal and civil law

Interactive question 1: Civil and criminal law

See Answer at the end of this chapter.

1.4.1 Primary legislation

6 Law ICAEW 2023

1.5 Case law

1.5.1 Linking case law and legislation

ICAEW 2023 1: Legal principles and international law 7

• International law helps businesses to trade across borders.

2.1 UN Convention on Contracts for the International Sale of Goods (UNCISG)

2.1.1 Scope of the convention

Professional skills focus: Assimilating and using information

2.1.2 Obligations of the buyer and seller

8 Law ICAEW 2023

If the contract does not set out the place of

If the contract does not set out the time of

To deliver goods of the quantity, quality and

If the contract does not set out the quantity,

2.1.3 Passage of risk