Law reviewed to August 2026
Miltiades J. Violares | Barrister at Law
Violares Law LLC | Nicosia, Cyprus | violareslaw.com
This revised manual provides an educational introduction to selected principles of Cyprus law relevant to commercial and corporate practice.
The law is stated as reviewed on 6 August 2026. Legislation, procedural rules, administrative practice and case law change. Readers must consult the legally binding Greek text in the Official Gazette, the latest consolidated legislation and applicable transitional provisions. This manual does not create a lawyer–client relationship and is not a substitute for advice on particular facts
Triantafyllides J: “...the legal doctrine of necessity in public law is in reality the acceptance of necessity as a source of authority for acting in a manner not regulated by law but required, in prevailing circumstances, by supreme public interest, for salvation of the State and its people”
Article 169 C: International treaties enjoy a superior force than any other Domestic legislation.
“...agreements duly ratified...have a superior force to municipal law from the date of their publication in the Official Gazette...”
Legislation / Statute law: It is usually made in areas so complicated or unique where common law alternatives are unlikely or would take too long to develop.
The Hof R can make law as it sees fit, or as directed by the EU. Hof R makes new law and repeals and overrules old law.
Most of the times is a law of detailed nature, made by subordinate bodies who have given the power to do so by statute (i.e Council of Ministers).
Article 188 C: In force as long as they do not contradict with constitutional provisions.
Turkish religious properties Law.
The basis of the case law is that the law is interpreted by the courts and evolves as cases are heard ➔ It is a Judge-made law
Judicial precedence is based on the view that the function of the judge is to decide cases in accordance with existing case law.
i.e. Judges of lower courts have a duty to follow cases/judgments of the Supreme Court. Precedent of the Supreme Court has to be followed in accordance with certain rules.
1. It must form part of the ratio decidendi of the case
2. Legal Precedent is formed only by Superior courts.
i.e. Decisions of the Supreme Court bind lower courts ➔ District Court is bound by precedents set by the Supreme Court
Common Law: This is the Law which applies to England and Wales and according to section 29(1)(c) of Law 14/60 is applicable to Cyprus.
Equity: A body of rules which was brought to introduce fairness into the UK legal system and offer alternative remedies when Legal Remedies were not sufficient.
Are Safeguarded by:
• All laws or administrative actions in contrast with HR = Void
• Breach of constitutional provision: Right to an action to the Supreme Court
Cyprus has ratified and adopted the Convention by Law 39/62 and by that time the convention is incorporated to the national law with superior force.
Since 1 July 2023, Cyprus has a three-tier appellate structure. A separate Court of Appeal is ordinarily the second-instance court for civil and criminal matters. At the apex, the Supreme Court exercises the civil and criminal jurisdiction assigned by the Constitution and Law 33/1964, including specified third-instance jurisdiction subject to leave, while the Supreme Constitutional Court is the apex court for constitutional and administrative/revisional matters.
The Court of Appeal may sit in civil, criminal and revisional divisions. New Civil Procedure Rules entered into operation in 2023 and require cases to be dealt with justly and at proportionate cost. Any legacy court diagram below must be read subject to this revised structure.
Offer + Acceptance (Without qualifications)
The Contracting parties intend to be subject to Legal consequence if any breach arises ➔ NOT when your dad offers to buy to you a new car if you pass your Law exams
Loss or Detriment in return for the benefit received ➔ In a contract for a haircut, the customer gets his/her hair cut (benefit) and in return pays the price (detriment).
This is the power/ability of a person to be able to be a party to a contract
Minors (-18): Are capable to become a party to a contract only:
(i) For the provision of the necessary goods (i.e clothes/medical attention etc)
(ii) Necessary contract beneficial to minors (i.e contract of employment)
⇨ Not for loans/unnecessary goods > unless the minor ratifies them within reasonable time of reaching 18
Mentally incapable persons: Have capacity to contract only if they understand the consequences in forming a contract.
Some contracts must follow certain formal requirements prescribed by law (Most of the contracts don’t ➔ An oral agreement is as much binding as a written one)
Examples of contracts that need to be made in writing:
The purpose of the Contract must be legal. If it is not legal then it is void. Furthermore the law lists certain contracts that are void:
(Contracts not made by undue influence or duress or misrepresentation or mistake )
Void: No legal effect on either party / As if there was NO contract formed in the first place.
Example: A contract lacking consideration is void.
Voidable: A valid contract, unless and until it is brought to an end at the request of one of the parties (usually the innocent party). The exercise of this option is known as Rescission. So… one or more parties have the power to either ratify (keep the contract alive) or avoid it.
This can take place when the person enters into a contractual relation by oppression (when someone holds a gun to your head.
➔ Property transferred under a void contract must be handed back to the transferor.
➔ If the transferee retains goods s/he could be sued by the real owner for wrongful detention.
Unenforceable Contracts: Contracts that have some legal consequences, but they aren’t enforceable in an action for damages due to a defence (i.e limitation period - 6 years).
Bilateral: Each party undertakes obligations. There is an exchange of promises and the parties are bound by their promises. (i.e Contract for sale: The seller transfer goods and the buyer pays the price)
Unilateral: Only one party makes promises and the other is free to choose whether to perform or not. However, once the one party chooses to perform, the party making the promise is bound. (▲ Carlill v Carbolic Smoke Ball)
Examples:
Andreas says to Maria, “if you kiss me, I will give you a euro” ➔ This is a unilateral contract; Andreas wants a kiss not a promise to kiss.
If instead he says, “If you promise to kiss me, I promise to give you a euro” ➔ If Maria promises to kiss him there is a bilateral contract.
Must be clear/not vague or uncertain in its interpretation
Example: Jimmy offers to buy “some of Michael garden equipment for €100”. Could a contract results?
Answer: No. Jimmy offer is too vague. “Some of” does not create an offer sufficiently certain to be enforceable; a court could not supply the missing terms to fulfil the intent of the parties.
+ The statement made must sufficiently identify the offeree (person whom the offer is made) in order for the statement to constitute an offer ➔ No one except the offeree (or the class of offerees) can accept an offer; for example if you are in the football field and an offer is made to someone else, you can’t turn around and accept the offer, simply because you are not the offeree.
The offeror must not merely negotiating
▲ Gibson v Manchester City Council: a letter stating “may be prepared to sell”
➔ Not clear willingness to be contractually bound
An offer is effective only when it is communicated to the offeree. The offeree must know of the offer. If there is acceptance without any knowledge of the offer ➔ there is no contract (See ▲ R v Clarke)
s.4 (1) CAP 149: communication of an offer is effective only when it comes to the knowledge of the offeree
An Invitation to treat is not an offer. This is an indication that a person is ready to accept offers with a view to contract. This is not an offer but only an invitation to others to make an offer. In contrast an offer is a statement that if accepted there will be a contract without further negotiations. Invitation to treat takes place usually at the starting point of negotiations.
The following are some examples recognised by the law:
General rule: an advertisement is an invitation to treat, not an offer, as shown in:
▲ Partridge v Crittenden (1968)
Exception to an advertisement not being an offer :
Note, however, that it would be an offer if no further negotiations were intended or expected. This is the position in ▲ Carlill v Carbolic Smoke Ball Co (1893), where the advertisers made it clear that they would pay money to anyone complying with the terms of the advertisement.
▲ Carlill v Carbolic Smoke Ball Co (1893)
General rule: an advertisement is an invitation to treat, not an offer, as shown in:
▲ Fisher v Bell (1961)
▲ Pharmaceutical Society of Great Britain v Boots Cash Chemists (1953)
▲ Harris v Nickerson (1873)
A statement of the price
An offer must be distinguished from a mere supplying of info. The statement of a price in answer to an enquiry is not necessarily an offer to sell at that price.
Auction Sales
No offer is made by putting the goods up for bidding. The offer is made by the bidder and accepted by the auctioneer by the fall of the auctioneer’s hammer (the opposite takes place when there is a reserve price).
Inviting Tenders
Usually is not an offer except if accompanied by words indicating that the highest or the lowest tender will be accepted.
Once an offer has been terminated, it cannot be accepted. An offer can be terminated by:
▲ Routledge v Grant (1828)
The revocation must be communicated to the offeree, i.e. it must be brought to his actual notice.
○ Open Offer
When the offeree chooses to pay the offeror (provide consideration) to keep the offer open, s/he is said to have bought an option. Option contracts are separate binding contracts, breach of which (i.e revocation before the time has elapsed) will give a claim to damages.
▲ Hyde v Wrench (1840)
Note that a mere request for further details does not constitute a counteroffer.
Note: as long as the offer is valid (subject to the rules above) acceptance will create an agreement.
Example: Einstein, as a joke, tells Leonardo, “I ‘ll sell you my chemistry set for €5”. Leonardo, who has no idea that the plutonium alone in the set worth a fortune says, “I accept”. Could this be a valid contract?
➔ Yes. Leonardo could reasonable have assumed that Einstein’s statement created an immediate power of acceptance in him. The fact that Einstein was joking is irrelevant what counts is the acceptance of a valid offer. (However, if Leonardo knew that Einstein had a very dry sense of humour and realized that he was joking on the first place – there wouldn’t be an offer).
Section 4:
(1) Communication of an offer is effective when it comes to the knowledge of the offeree.
(2) Communication of acceptance of an offer is effective:
(a) In respect to the offeror, when acceptance has left the authority of the offeree and is in transit to the offeror
(b) In respect to the offeree, when acceptance is received by the offeror
(3) Communication of revocation of offer or acceptance is effective:
(a) In respect to the revoking party when revocation has left his/her authority and is in transit to the receiver
(b) In respect to the receiver, when revocation is received by him/her
Section 5:
An offer may be revoked at any time before communication of acceptance is effective in respect to the offeror and not later, whereas acceptance may be revoked at any time before its communication in respect to the offeree, but not later.
All contracts are agreements, but not all agreements are contracts since some agreements are not intended to be legally enforceable (i.e invitation to a lunch). In the cases where there is no intention to create legal relations the parties cannot sue and enforce rights acquired by the agreement.
Where there is no express statement as to intention to create legal relations, the courts apply two rebuttable presumptions:
GR: In agreements between members of the family and friends there is a rebuttable presumption that there is no intention that the agreement was to be legally binding upon the parties.
▲ Balfour v Balfour (1919)
➔ “In domestic and social arrangements there is a presumption that there is no intention to create legal relations”. This case covers spouses living together. (Not when separated/divorced > ▲ Merritt v Merritt)
PRESUMPTION CAN BE REBUTTED by the party who argues that there is such an intention. So… the party challenging this, has to prove that even if the arrangement was a domestic one, there was always an intention that the parties were legally bound.
Examples where the presumption is rebutted:
▲ Simpkins v Pays (1955)
GR: Parties involved in ordinary commercial dealings ➔ Presumption that there is intention to be legally bound.
➔ Courts are reluctant to rebut the presumption, so there is always a need for clear evidence to the contrary ➔ for the PRESUMPTION TO BE REBUTTED there must be a statement in the contract saying “the agreement is not legally binding”
▲ Jones v Vernon’s Pools Ltd (1938)
GR: Contract not supported by consideration is void (S.25 CAP 149)
“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)
Executory consideration is given where there is an exchange of promises to do something in the future.
Executed consideration means that the consideration is in the form of an act carried out at the time the contract is made.
Sufficient means that:
The words ‘need not be adequate’ mean that there is no need for each party’s consideration to be equal in value.
▲ Chappell v Nestle Co Ltd (1959)
▲ Thomas v Thomas (1842)
▲ White v Bluett (1853)
Past consideration is sufficient and therefore good consideration
Consideration is past if the consideration is an act which has been wholly performed before the other party gives his promise.
As a general rule, performance of an existing statutory duty is not sufficient consideration.
▲ Collins v Godefroy (1831)
Not in:
▲ Glasbrook Bros Ltd v Glamorgan County Council (1925)
➔ Similarly, performance of an existing contractual duty is not consideration:
▲ Stilk v Myrick (1809)
▲ Hartley v Ponsonby (1857)
The performance of an existing contractual duty may be sufficient if it confers some benefit of a practical nature on the other party.
▲ Williams v Roffey Bros (1990)
⇨ The performance of an existing contractual obligation is sufficient consideration to support a promise from a third party.
▲ Shadwell v Shadwell (1860)
General rule – rule in ▲ Pinnel’s case (1602) states that payment of a smaller sum does not discharge a debt of a greater amount. So… part payment cannot satisfy a debt, and therefore the creditor can sue for the balance.
If a new element is introduced = That gives sufficient satisfaction to support the creditor’s promise not to claim the balance of the unpaid debt >Examples:
The doctrine of promissory estoppel is based on the principles of fairness and justice. It prevents a person going back on his promise to accept a lesser amount.
▲ Central London Property Trust v High Trees House (1947)
The principle is subject to the following conditions:
The Rule: Only the parties to a contract can sue and be sued under the contract.
Accordingly, only the parties to a contract:
▲ Beswick v Beswick – widow suing as an administrator of her husband’s estate
Contractual terms are the contents of a contract. These can include the agreed price, the date of delivery, method of payment etc.
The terms of a contract are introduced during the initial negotiations. However a statement, written or oral, made during negotiations leading to a contract may become a term of the contract or merely a representation inducing to the formation of the contract.
GR: Whether a statement becomes a term of the contract or not will depend outmost on the intention of the parties.
Objective test ➔ Depends on what was said and the circumstances in which the statement was made.
So… of vital importance are the following:
(i) Whether the statement was reduced in writing after it was made
Written agreements are more likely to become contractual terms ➔ Writing reveals an intention that the parties wish to be bound by the statements.
(ii) When the statement was made
The greater the interval of time between making the statement and concluding the contract, the more likely that it will be a mere representation.
(iii) The importance of the statement to the recipient
If the statement is a very important part of the contract / a statement that the other party is likely to rely on ➔ Most probably will be constructed as a Term
▲ Bannerman v White: When the buyer makes it clear to the seller that he is only interested in a particular quality of goods, the specific quality of the goods becomes a term of the contract.
(iv) The Strength of the Statement
A suggestion during negotiations ➔ representation
However, forceful or emphatic assertions during the negotiation will most probably be classified as a term.
(v) Whether the person making the statement had any special knowledge or skill
If a person is expert in the relevant field or has certain info which is critical to the decision of the other party in making the contract ➔ Statements made from this person are more likely to become Terms of the contract
▲ Dick Bentley v Harold Smith [Statement made by an expert]
Compare:
▲ Oscar Chess v Williams [Statement made by a layman]
Oral or Written which are specifically inserted into the contract by the parties.
Express terms must be clear & certain, so that the court is able to find the true intention of the parties. If the terms are not clear ➔ Contract is void (S.29 CAP 149)
▲ King’s Motors v Lax ➔ “Such rent as may be agreed”
Matters that are not expressly included in the contract by the parties but which nevertheless are still part of the contract.
The courts may imply terms when the parties have failed to cover a particular matter, and without such terms the agreement remains unworkable / ineffective. The courts in doing so will be guided by the presumed intention of the parties and therefore including or not an implied term will depend on the facts of each case.
• Sale of Goods L10(1)/94 (Terms automatically included in the contract which can only be excluded in certain circumstances):
• Employment Acts: Health and Safety at work Act / Sex Discrimination Act / Equal Pay Act
GR: Express terms supersede implied terms (However, some statutory implied terms cannot be excluded even by express provisions or they can be excluded to a limited extend)
A vital term of the contract, basic to the performance of the contract.
Breach of a condition ➔ 2 options:
A less important term, incidental to the main purpose of the contract.
Breach of a warranty ➔ Does not cause the whole agreement to collapse. The innocent party can only claim damages but not repudiate the contract
1. Statute may declare the category of the term
The statutory wording will clearly categorise > i.e Sale of Goods Law: There is always a condition that the seller has a right to sell.
2. Standard form contracts
Usually in this kind of contracts the various terms are described either as “conditions” or “warranties”
3. The parties expressly declare that a term is to be a condition
i.e time is declared to be of essence in the contract
4. In the light of the circumstances
Where the contract gives no express guidance it is a question of fact in each case whether the parties regard the term as an important/vital one and so going to the root of the contract (condition) or whether it provides a term of lesser importance, collateral to the main purpose of the contract (warranty)
▲ Poussard v Spiers [Condition: An opera singer to appear on the opening night]
Compare
▲ Bettini v Gye [Warranty: An opera singer to appear for rehearsals]
This is an intermediate category of terms which are neither conditions nor warranties. The Courts depending on the nature and effect of the breach will award damages.
▲ Hong Kong Fir Shipping v Kawasaki
Definition & Effect: Terms which are included in written contracts (particularly standard from contracts) intending to exclude or limit the liability of one or more parties.
The party who wants to avoid the exclusion clause can challenge its validity through the courts. The courts, in deciding whether the clause is valid or void will examine two tests:
In order to be valid an exclusion clause must satisfy two conditions:
(i) An exclusion clause can be incorporated into a contract by:
The case of ▲ L’Estrange v Graucob (1934) established that a clause is incorporated by signature even if the signatory did not read or understand the document.
However, the situation in ▲ L’Estrange v Graucob (1934) can be contrasted with ▲ Curtis v Chemical Cleaning (1951) in which it was held that a signature does not incorporate the clause if the effect of the term was misrepresented.
▲ Curtis v Chemical Cleaning (1951): Liability for damage to a wedding dress was not excluded due to misrepresentation of the clause.
For an exclusion clause to be incorporated by notice, reasonable steps must have been taken to bring it to the attention of the other party at the time the contract was made. What are ‘reasonable steps’ depend on the circumstances.
▲ Thompson v LMS Railway (1930)
▲ Olley v Marlborough Court (1949): A clause can be incorporated by notice, provided it was given before making the contract. A notice in a hotel room did not exclude liability as the contract was made at the reception desk.
For an exclusion clause to be incorporated by previous dealings, there must have been a consistent course of dealings between the parties.
▲ Spurling v Bradshaw (1956)
(ii) The wording must cover the loss:
▲ Photo Productions Ltd v Securicor (1980)
The clause must be clear and precise: Any vagueness will be constructed against the party who rely on it.
➔ When the clause is properly constructed, it will cover the loss/damage suffered by the other party (see ▲ Photo productions Ltd v Securicor & ▲ Kokkalos v Karayiannis)
➔ Contra proferentem Rule: If there is any ambiguity as to the clause’s meaning and scope ➔ The interpretation will always be against the party who is seeking to rely on it (▲ Holiday Tours Ltd v Γεωργίου Α. Κόστα).
Consumer contracts are now principally governed by the Consumer Protection Law 112(I)/2021, as amended. It consolidates rules concerning unfair contract terms, unfair commercial practices, consumer information and distance and off-premises contracts.
Severance: The Blue Pencil Test
The “blue pencil” test, allows the court to delete offending portions of restrains only if the remainder can be enforced without being rewritten. (Severance is applicable most of the times when there is a restriction to a series of activities and the court can sever void restraints from valid ones) ➔ If severance is not possible, then the whole covenant is void.
GR: A Contract is discharged when both parties fully and exactly perform their contractual duties (➔ The party who does not perform his/her duties under the contract will be held liable for breach of contract).
❖ Partial Performance: GR ➔ Is not treated as performance and does not allow any party to claim losses suffered as a result of the part performed under the contract (▲ Cutter v Powell)
Exceptions:
The parties to the contract agree to abandon or discharge the contract they formed, provided that such discharge is supported by consideration (i.e form a new agreement to abandon).
Frustration ➔ Where performance is impossible through the happening of an unexpected event, which is the fault of neither party, occurring after the formation of the contract (S. 56 CAP 149).
Examples:
When one of the parties without lawful excuse refuses to fulfil his/her contractual obligations. The courts acknowledge two kinds of performances that lead to breach.
This takes place when there is a breach of condition or a fundamental innominate term and the innocent party acquires the right to terminate the contract and sue for damages or elect to treat the contract as continuing and merely claim damages for any loss suffered.
Occurs before the due date for performance, when one of the parties indicates (by words or actions) that will not perform his/her contractual obligations (S. 39 CAP 149).
➔ Express Anticipatory Breach: One of the parties declares before the due date of performance, that s/he has no intention of carrying out his/her contractual duties:
▲ Hochster v De La Tour (1853)
➔ Implied Anticipatory Breach: One of the parties does something which makes subsequent performance of the contractual obligations impossible:
▲ Omnium D’ Enterprises v Sutherland (1919)
When there is an Anticipatory Breach of contract the innocent party can:
S. 74(1) CAP 149: If a contract includes a term which quantifies the amount of damages in case breach of contract occurs then the innocent party without having to proof any damage will be awarded that amount as damages.
This clause will survive and taken into account in awarding damages only when there is a genuine attempt to estimate the loss in advance of the breach.
▲ Dunlop Pneumatic Tyre Co v New Garage and Motor Co (1915)
⇨ A penalty Clause (i.e. excess estimate of loss aiming to put pressure to the parties) ➔ this is not enforceable [Of interest S. 74(1) CAP 149]
See also ▲ Ανόρθωσης ν Απόλλων (2002) 1 ΑΑΔ518
In these situations the court will have to assess the correct amount of award on the basis of the principles that will be outlined in the next heading.
There are two factors to consider in determining the amount of unliquidated damages:
Damages cannot be recovered for all losses suffered. Some losses are too remote.
A loss is not too remote:
▲ Hadley v Baxendale (1854)
▲ Victoria Laundry v Newman Industries (1949)
▲ Jarvis v Swans Tours (1973)
The above have been incorporated into Cyprus Contract Law as follows:
S. 73(1) CAP 149: In case of breach of contract, the innocent party who suffers any loss or damages as a result of the breach, has a right to claim from the other party, for any damage or loss that arose naturally in the ordinary course of things, provided that such damage or loss has been into the contemplation of the parties upon the conclusion of the contract as a probable result of the breach.
(A) Expectation loss:
To put the Claimant, so far as money can, in the position in which s/he would have been had the contract been properly performed (loss expected from the contract).
The Available Market Rule: Applies to contracts for the sale of goods where the buyer wrongfully refuses to accept the goods or the seller wrongfully refuses to deliver.
➔ Contract price - Current market price = Damages
(B) Reliance loss:
If it is difficult to put the claimant in a position s/he would have been if the contract had been performed (restitution) then the claimant may be able to recover compensation for expenses incurred in performing his/her part of the contract, in reliance upon it, before the breach.
▲ Anglia TV Ltd v Reed (1972)
Damages may be awarded for Mental Distress / Loss of enjoyment:
▲ Jarvis v Swan Tours Ltd (1973)
➔ If there is no actual loss / difficulty in assessing damages, the claimant can recover only nominal damages.
Damages may be awarded for Loss of Chance:
▲ Chaplin v Hicks (1911)
The Claimant may be denied the remedy of curing a defect if it is disproportionate:
▲ Ruxley Electronics v Forsyth (1995)
The Claimant is under a duty to mitigate (reduce) any loss caused by the Defendant’s breach of Contract.
So: (a) The Innocent party must take all reasonable steps to minimize his loss and (b) must not unreasonably incur expenses subsequent to the breach of contract.
▲ Photiades v Director of Ports
Equity: Legal principles that follow English common law, that supplement strict rules of law where their application would operate harshly. There are no fixed rules and equitable remedies are always discretionary (Must be just & Equitable).
Courts are more willing to order equitable remedies where:
An order of the court directing a person to carry out/perform his/her obligations under the contract.
Section 76(1) CAP 149 ➔ Specific Performance will only be awarded when:
Usually not available for contracts of employment or personal service (▲ Ryan v Mutual Tontine)
Only granted when just and convenient – if it is inappropriate the courts can award damages in lieu (instead/in place) of the injunction.
2 types:
▲ Warner Brothers Pictures Inc v Nelson (1936)
Definition: Is the body of laws, administrative rulings, and precedents which address the legal rights of, and restrictions, on working people and their organizations.
| Factor | Employee | Independent Contractor |
|---|---|---|
| Tax/Social Security | Deductions From Salary | Accounts for tax |
| Legal Protection | Substantial Employment Law | Less Protection (normal contract law) |
| Contractual Rights | A number of rights and duties are implied into contracts of employment | Rights and duties do not extend to a contract for services |
| VAT | Irrelevant to employees | May need to register for VAT |
| Bankruptcy | Employee has preferential rights as a creditor | IC would be a standard creditor and therefore be paid later. |
| Health and Safety | There is significant common law and statutory protection | In practice the protection extends to IC’s and employees |
| Liability of Employer for Torts | Employer has vicarious liability for torts committed by his Employees (provided the tort is committed in the course of the Employees employment) | The person who request the service of an independent Contractor will not be vicariously liable. |
Has the employer control over the way in which the employee performs his/her duties?
▲ Walker v Crystal Palace FootballClub (1910) ➔ a professional football player was held to be an employee of his club.
If the employee is so skilled that s/he cannot be controlled, s/he may be integrated into the organization.
▲ Whittaker v Minister of Pensions & National Insurance (1967) ➔ a circus trapeze artist who was required to do other general tasks in relation to the operation of the circus was held to be an employee.
Look at the economic reality behind the relationship i.e.:
See ▲ Ready Mixed Concrete v Minister of Pensions
The modern trend is that courts aim not to focus on a single test but rather they examine a range of factors to make the distinction.
Of significant guidance are the factors laid by The Supreme Court in the case of ▲ Cleanthis Christofides Ltd:
Under the Transparent and Predictable Working Conditions Laws 25(I)/2023 and 85(I)/2024, an employer must provide core written information on the employment relationship no later than seven days after commencement and specified additional information no later than one month. The legislation also regulates probation, parallel employment, mandatory training and minimum predictability safeguards.
Telework is additionally governed by the 2023 statutory framework. Any telework arrangement should address equipment and costs, working-time and availability rules, occupational safety, monitoring, data protection and the employee’s right to disconnect in accordance with the applicable law and written terms.
Usually questions with regards to Terms arise when an employee claims unfair dismissal alleging that the employer is in breach of contract. In these cases the Industrial Dispute Tribunal must decide what the Terms are and whether the employer is in breach.
(i) Duty to obey lawful and reasonable orders
▲ Pepper v Webb (1968)
(ii) Duty of Mutual co-operation (to perform work in a reasonable manner)
Duty to obey lawful and reasonable orders as a duty not to frustrate the commercial objectives of the employer.
▲ Secretary of State for Employment v ASLEF (1972)
(iii) Duty to exercise reasonable Skill & Care
▲ Lister v Romford Ice & Cold Storage Ltd (1972)
(iv) Duty of Good Faith (to give honest and faithful services)
(v) Duty to render personal service
Not to delegate the performance of his/her work to others, unless there is an express or implied permission by the employer.
(a) Duty to pay reasonable remuneration
(b) Duty to indemnify the employee if s/he has incurred liability acting on the employers behalf
(c) Duty to provide a safe system of work
What is reasonable will depend on the circumstances of each case i.e. the likelihood of injury due to the nature of the work and the cost in preventing any danger. According to the case law, the danger must be predicted by the exercise of due diligence on behalf of the employer, and faced by taking such measures that their application is practical and the cost of taking these measures is not disproportionate to the danger that they seek to eliminate.
(d) Duty of mutual co-operation / mutual trust / confidence and Respect
The employer has a duty not to behave in a manner calculated to damage the relationship of trust and confidence.
The statutory provisions limit the ability of the employer and employee to set their own terms. The reason for this is to provide some protection to employees from the employers’ superior bargaining powers. These statutory provisions “penetrate” the employment contract and render void any inconsistent clauses or terms which are below the “statutory minima” (i.e. below the minimum length of notice provided under the Termination of Employment Law)
(i) The Termination of Employment Law 24/1967 as amended
Provides for the right of the employees to a notice in cases of dismissal / compensation / redundancy payment.
(ii) The annual Holiday with Payment Law 8/1967 as amended
Provides the statutory minima for annual holidays which will depend in the duration of employment.
(iii) The Equal Pay of Men and Women for Equal Work or Work of Equal Value Law 177(I)/2002 as amended
Equal pay with regards to overtime / bonuses / holidays and sick leave. It implies an “equality clause” into all employment contracts that persons of the same conditions of employment irrespective of sex or marital status provided their work is alike or rated as equivalent.
(iv) The Safety and Health at work Law 89(I) of 1996 as amended
Section 13: Every employer must safeguard the safety, health and prosperity at work of his employees. The employer is relieved from liability in cases of abnormal and anomalous circumstances or events which could not have been avoided despite any diligence.
(v) Working time Law, CAP 182 as amended
Provides that the council of ministers may fix the daily or weekly or monthly hours of work of persons employed in any specific occupation or area.
(vi) Minimum Wages Law, CAP 183 as amended
Provides that the council of ministers may fix minimum wages if are unreasonably low.
(vii) Protection of Maternity Law 100(I)/1997 as amended
The Law aims to protect pregnant women against arbitrary dismissal by their employees. The period of maternity leave a pregnant woman is entitled to, is currently 18 weeks. The law permits dismissal of a pregnant woman when (a) she is guilty of serious misconduct which justifies the breach of employment relationship (b) when the business has ceased to function or (c) when the employment contract has expired.
(viii) Social Insurance Law 41/1980 as amended
Provides for the mandatory insurance of all workers in the Social Insurance Scheme, for the contribution that employees and self-employees must make and the benefits of all insured persons.
(ix) Law 3/1968 ratifying Convention no 111 concerning discrimination (Employment and Occupation) of 1958
The Convention prohibits discrimination (Direct and indirect)
(x) Constitutional Provisions relating to Employment
Section 9 of Termination of Employment Law 24/1967 as amended, provides for the length of notice of termination of employment given by employer which depends on the length of their continuous employment.
Section 10:
Notice required from employee when terminating the contract:
Is a common law concept arising in specific circumstances, giving an employee an action for breach of contract. An example is when the employer terminates the contract without giving notice or inadequate notice (Notice if not expressed into the contract will be implied by statute).
Dismissal will be wrongful where the employee is dismissed:
➔ It is dismissal without notice (i.e. it is a ground for wrongful dismissal).
It is usually wrongful dismissal unless the Employee:
Part II of Law 24/1967 (Section 3): Provides that a dismissal is unfair if the employer terminates the employment for any reason other than the exceptions included in Section 5 of the Law.
➔ Only available to employees working under a contract of service
➔ Claim not dependent on breach of contract ➔ so remedy is not damages.
For an employee to be qualified for unfair dismissal compensation:
Under the law an employee is dismissed if:
An employee is entitled to treat himself as constructively dismissed if the employer is guilty of conduct which is a significant breach going to the root of the contract of the employment, or which shows that the employment no longer intends to be bound by one or more of the essential elements of the contract.
The conduct must be sufficiently serious to entitle the employee to leave at once; however, he must act quickly. When such a repudiatory breach occurs the employee resigns and will have an action against the employer for unfair dismissal.
▲ Donovan v Invicta Airways
Examples of Constructive Dismissal:
Burden of Proof ➔ On the Employee
Statutory Fair Reasons for Dismissal (employer can rely on):
Section 5 Part II of Law 24/1967 as amended ➔ The dismissal is fair if:
According to Section 5 para (f) of Law 24/1967 as amended, the following may form a ground for dismissal without notice (Dismissal for misconduct / summary dismissal):
Burden of Proof ➔ On Employer (The employer has to prove in order to avoid liability that the reason of dismissal was a statutory fair one).
Inadmissible reasons:
Successful complaints of Unfair Dismissal ➔ The court has discretion to:
Section 18 of Law 24/1967 as amended: It is a justified reason of dismissal by reason of Redundancy when:
Burden of Proof ➔ On employer, to prove one of the above reasons. If s/he succeeds, the court will order the Redundancy Fund to pay the employee. Otherwise will be unfair and the employer is liable to pay compensation.
Available when:
Procedure: (Notification to Ministry of Labour)
According to Section 30 of Law 24/1967 as amended: the Industrial Dispute Court has exclusive jurisdiction to decide over disputes arising out of the operation of the law, but it allows the right to initiate proceedings in the civil courts for breach of contract under the common law.
Definition: Section 142 CAP 149 ➔ An agent is a person employed to do any act for another, the principal, or to represent the principal in dealings with 3rd parties.
A relationship which exists between two legal persons (principal and agent) in which the function of the agent is to form a contract between the principal and a third party
The principal can ratify (express or implied) actions of someone that are not binding on him and adopt them as binding upon him/her (after the event).
➔ Effects of Ratification:
➔ Conditions for Ratification:
Agency relationship is formed when, the principal hold out another person as having authority to act/make contract on his behalf but in fact he does not have such authority. If this happens, the principal is prevented / estopped from subsequently denying that the agent has this authority.
➔ This will take place when:
➔ Requirements for this relationship: (all needed)
▲ Freeman & Lockyer v Buckhurst Park Properties Ltd (1964)
Where the situation is such, as to allow a Courts to prescribe so. ➔ Requirements: (all needed)
▲ Great Northern Railway v Swaffield (1874)
The Authority of an Agent is a central issue in the concept of agency law. It determines:
| Authority Type | Scope, Conditions & Precedents |
|---|---|
| Express | This is the authority that P has explicitly given to A to perform particular tasks, along with powers to perform those tasks. |
| Implied |
Authority implied from the nature of A activities, or from what is usual under the circumstances. A has implied authority to do things which:
▲ Watteau v Fenwick |
| Apparent |
Is the authority as it appears to others, based on representations made by the principal to 3rd parties with whom the agent deals (It is not a prerequisite that there is a pre-existing agency relationship between the parties) ➔ Arises when:
The extent of apparent authority: The principal will be bound by this agent who does not have actual authority, as much as his authority appears to be. |
The duties of an agent: May be set out in the contract of agency / With reference to the general law of agency / trade custom or usage as long as there is no conflict with express contractual provisions.
(A) Fiduciary Duty: Agency relationship based on trust
▲ Boston Deep Sea Fishing v Ansell
(B) Duty of Care & Skill
Exercise of reasonable care and skill when carrying out his/her obligations (Whether agent is paid or unpaid)
(C) Duty to perform what the agent was contracted to perform
Strictly carry out the principal’s instructions so long as they are lawful and within the scope of the agency relationship
▲ Turpin v Bilton
(D) Duty of an Agent to perform his/her duties in person
Delegation of duties is not allowed (due to the confidential relationship of agency)
➔ Exceptions: Principal agrees so
(E) Duty to account to the principal for all money and property received
Agent must provide full information to his principal of all transactions entered and account for all moneys arising from them
The agent has the right to:
A principal is disclosed where the existence of the principal has been made known to the 3rd party. The 3rd party is aware of the principal’s existence ➔ it is necessary for the principal to be identified to the 3rd party.
GR: The contract is between the principal and the 3rd party. The agent is neither liable nor entitled under the contract.
Exceptions: The agent is personally liable:
Undisclosed Principal: Principal’s existence has not been known to the 3rd party.
When the 3rd party discovers the true position, s/he can elect to treat:
Tort law is a body of law that addresses, and provides remedies for, civil wrongs not arising out of contractual obligations. A person who suffers legal damages will be able to use the law of tort to claim compensation from someone who is legally responsible, or liable, for those damages. Therefore no previous legal relationship needs to exist between the parties who may be complete strangers.
Generally speaking, tort law defines what constitutes a legal damage and establishes the circumstances under which one person may be held liable for another’s damage.
The applicable law in the Republic of Cyprus is CAP 148 as amended which establishes several torts in conjunction with the Common Law which is binding according to Section 29(1)(c) Law 14/1960.
Consider the following:
| Criminal Law | Law of Torts |
|---|---|
| The offence is against the state and the state is the Plaintiff in the procedure. | The offence is against a person and this person is the plaintiff. |
| Aims in protecting the State. | Aims in providing a remedy to those who suffer damage/loss. |
| There must be a criminal offence for someone to attach criminal liability (i.e. Penal Code). | Not all torts are codified. |
| The remedy aims to punish the offender. | The remedy aims to compensate the Plaintiff. |
| Burden of Proof: Beyond reasonable doubt. | Burden of Proof: On the balance of probabilities. |
| Contract Law | Law of Torts |
|---|---|
| The breach has to do with an obligation that arises out of the contract. | The breach has to do with someone’s duty towards another (Neighbour principle). |
| The obligation is always owed to the other party of the contract. | The duty may be owed to anyone. |
In order for an action in negligence to succeed, the claimant must prove the following:
Questions: Is there a Duty of Care? If yes, To whom this Duty is owed?
The ‘neighbour principle’
The case of Donoghue v Stevenson (below) was the first to establish that a duty of care may be owed to a person, even where no contractual relationship exists.
Prior to this case, the belief was that to allow an action to be taken where there was no contractual relationship would undermine the principles of contract law. The doctrine of privity states that only parties to a contract can sue or be sued.
▲ Donoghue v Stevenson (1932)
Lord Atkin defined those to whom we owe a duty of care in the ‘neighbour principle’:
“You must take reasonable care to avoid acts or omissions which you ought reasonably foresee would be likely to injure your neighbour.”
He defined neighbours as:
“...persons who are so directly affected by my act that I ought reasonably to have them in contemplation”.
So ➔ A person owes a duty of care to another person whenever s/he is in a position to foresee that an act or omission of his/her is reasonably likely to injure that other person.
▲ Anns v Merton London Borough Council (1978)
So ➔ Reasonable foresight of a particular damage will give rise to a prima facie duty of care.
▲ Caparo Industries Plc v Dickman and Others (1990)
The House of Lords put down a 3 stage test for establishing a duty of Care:
Section 51(2) of CAP 148 provides that a duty of care (not to be negligent) exists in the following cases:
However CAP 148 is not exhaustive and therefore the Common law applies whose categories are never exhausted. Examples where duty of care arises:
Question: What is the standard of Care? / Have the Defendants actions fallen below this standard?
▲ Blyth v Birmingham Waterworks Co (1856)
A breach of duty of care exists when the defendant:
“...fails to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs would do; or does something which a prudent and reasonable man would not do”.
According to Section 51(1) CAP 148, negligence consists of:
1st Step
2nd Step
Compensation will be recovered only if the negligent person fails to exercise that care that the circumstances demand (standard of care).
So... the courts will impose different standards for different situations, with the highest to be justified by the seriousness of the activity and the risks attached. For a better illustration consider the cases below:
▲ Glasgow Corporation v Taylor (1992)
▲ Latimer v AEC Ltd (1952)
Question: whether damage/loss was caused by the breach of the defendant’s duty
The plaintiff must prove that the actions or omissions of the defendant materially contributed to the damage suffered (not that it was the only cause of damage)
To decide whether the negligence of the defendant materially contributed to the plaintiff’s damages, the courts apply the:
If factual causation is satisfied a legal causation must be established ➔ whether the defendant should be legally responsible for the damage the claimant has suffered (effect of intervening acts)
NOT When:
Novus Actus Interveniens: When the chain of causation is broken the defendant will cease to be liable i.e. A causes light damages to B by running over him with his car. B is taken to the hospital and dies because doctors given him a wrong injection. In this case the chain of causation is broken and A is not liable.
In practice there is no difference between liability arising from negligent misstatement and liability arising from negligent acts. A party can suffer damage by reliance on incorrect advice just as he can be injured by any other negligent conduct.
While at the beginning the courts were reluctant to impose a duty of care for negligent misstatement a 1964’s case marked a new approach to the law of negligence.
▲ Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964)
The above case created a new duty situation by recognizing liability for negligent misstatement causing economic loss in circumstances where there exists a special relationship between the parties. Cases involving negligent misstatement are usually concerned with establishing whether or not a duty arises and it is difficult to establish clear principles to apply as the law has evolved on a case by case basis.
▲ Caparo Industries Plc v Dickman and Others (1990)
➔ The auditors owed no duty of care in respect of the accuracy of the accounts either to members of the public who relied on the accounts to invest in the company or to any individual existing shareholder who similarly relied on those accounts to increase his/her shareholding. Auditors prepare accounts not to promote the interests of potential investors, but to assist the shareholders collectively to exercise their right to control over the company.
Four conditions must be met for a defendant to be liable for economic loss resulting from negligent advice or information:
So ➔ When during the ordinary course of business someone asks for information or advice from another person under circumstances where a reasonable person should have reasonably realized that s/he is entrusted and that there is intention to act upon that information or advice, the person who provides them has a duty of care. If the person acts on such information or advice and suffers economic loss then the person who provided them is liable for the loss suffered.
Verbal assurance given by an audit partner created a duty of care to a company who relied on it for a takeover.
▲ ADT Ltd v BDO Binder Hamlyn (1995)
Auditors owe a duty of care to parent companies when they audit their subsidiaries. This is because the report will be relied upon at group level.
▲ Barings plc v Coopers & Lybrand
Accountants owe a high duty of care when advising on takeovers due to the scale of potential losses.
▲ NRG v Bacon and Woodrow and Ernst & Young
Auditors do not owe a duty of care to subsidiaries when auditing the parent company’s accounts as this information is not normally channeled down to them.
▲ BCCI Ltd v Ernst & Whinney (1997)
Aim: To put the innocent party in the position would have been if the tort was not committed.
The damage suffered by the plaintiff must not be too remote.
The test in deciding whether the damage is remote or not was developed in the case of “The Wagon Mound” where it was held that liability is limited to damage that a reasonable man could have foreseen.
▲ The Wagon Mound (1961)
The Exception to the rule ➔ “thin skull” or “Eggshell Skull” Rule:
When a Claimant suffers foreseeable injury as a result of the Defendant’s negligence and this triggers off an unforeseeable reaction due to the Claimant’s pre-existing vulnerability, then the Claimant can recover both foreseeable and unforeseeable consequences of negligence.
If the plaintiff contributes to his/her damages when s/he fails to minimize the damage caused (i.e. failure to fasten the seat belt in a road accident) which does not break the chain of causation the court may then reduce any damages it awards to the claimant depending on the degree to which s/he is judged responsible for his loss.
▲ Sayers v Harlow UDC (1958)
Usually are pleaded by the defendant after the plaintiff has established a cause of action.
Definition: Section 5 CAP 116 ➔ A relationship between two or more persons carrying on a business in common with a view to profit.
So...
(a) “Partnership is a relation”: The parties are bound by a contractual relationship which they have agreed. The terms of this contractual relationship is binding, as long as they do not conflict with CAP 116.
(b) “Between two or more persons”: At least two partners. If while two, one of them dies ➔ The remaining partner remains as a sole trader:
(c) “Persons”: This includes companies as well as individuals
(d) “Carrying on a Business”: Business includes any trade / profession / occupation
(i) Business is a form of activity: The mere fact that individuals jointly own property (i.e. a block of flats) does not make them partners. The partners must pursue some related activity (i.e. letting out the flats to individuals)
(ii) Business can consist of 1 transaction: This is known as “joint venture” ➔ the partners associate together for the purpose of completing a single deal.
(iii) A partnership begins when the partners begin their business activity: Even if the actual agreement has been made earlier or later on.
(e) “View of profit”: Charitable Schemes ➔ Not partnerships
Share expenses ➔ No intention of making profits / no Partnership
| Partner Type | Characteristics & Liability |
|---|---|
| General Partners |
Actively involved in the day-to-day business. ➔ The rights of a General Partner are agreed between the partners / in the absence of an agreement the rights & obligations are set out in the statue (unlimited liability with regards to partnership’s debts) |
| Sleeping Partners | Takes no active part in the running of the business. However, is jointly and severally liable for the debts and contracts of the business. |
| Limited Liability Partners [s.47 CAP 116] |
Contributes a specific amount of capital. Liability limited to that amount. Cannot take part in the management of the firm (If he does so, will no longer be a partner of limited status) |
| Salaried Partners | Will receive a fixed amount of income. Not a real partner unless he also receives a share of the profit. |
Name: Freedom to use whatever name it wishes ➔ Provided that the name chosen is not similar to another name in a way to mislead / and the name is registered to the Registrar.
If a partnership is a party to a legal action, the partnership’s name can be used which is treated as being the same as a list of the partners’ names.
No Legal requirement ➔ Can be orally / in writing / implied from the circumstances
However: There are advantages in constructing a written agreement (Known as “articles of partnership”)
➔ It is an internal document and is not generally available for inspection by outsiders. This is because it does not affect the rights of 3rd parties.
The most usual terms of a partnership agreement are as follows:
| Duty | Legal Content & Case Precedents |
|---|---|
| General fiduciary Duty | Every partner has a duty to act in good faith, in the best interest of the firm. |
| Duty of Disclosure (from CAP 116) |
All partners must render true accounts and full information relating to all things affecting the partnership to the other partner or to their legal representatives. ▲ Law v Law |
| Duty to account (From CAP 116) |
According to CAP 116, when a partner has made any profit by using the firm’s property, name or business, without the consent of the other partners s/he has to account for that profit. ▲ Bentley v Craven |
| Duty not to Compete (s.32) |
Where a partner carries on his own business in competition with the partnership or is involved in a competing business, without the consent of the partnership, he is liable to account to the partnership for all the profit made in the course of that business. |
Rights of partners under CAP 116 subject to express provision to the contrary in the partnership agreement:
| Right | Statutory Scope & Conditions |
|---|---|
| To share equally in the capital / profits / losses | The partnership agreement will usually state that profits are to be shared in the same proportion as the capital contribution. |
| To be indemnified by the firm for any liability | If a partner pays for goods which are to be used in the course of the partnership’s business from his own funds, s/he is entitled to recover the money from the business. |
| To take part in the management of the business | Every partner has the right to participate in the management of the business. This is because as partners have unlimited liability, they must be able to protect their interests by taking an active part in the business in order to control and assess their level of risk. (Note: the partnership agreement may specify which partners will have the right to manage specific aspects of the business). |
| To have access to the firm’s books | All firm’s records and accounts must be kept at the principal place of business and all partners have the right to access these books. |
| To prevent the admission of a new partner or prevent any change in the nature of the partnership business |
Any decision about changing the nature of the business must be unanimous:
|
Section 23: Partnership property consists of all property brought into the partnership or acquired on account for the purposes of the firm.
Section 24: Any property bought with money belonging to the firm is deemed to have been bought on account of the firm.
➔ So... Partnership property is owned beneficially by all partners BUT it is possible for property which is used by the partnership to remain personal property of one of the partners.
Whether or not particular items belong to the firm is a question of fact to be determined in the particular circumstances.
▲ Miles v Clarke
2 principles:
Principal source of law determining the relationship between partners and outsiders is the law of agency.
Partners’ Powers:
According to CAP 116 every partner is presumed to have the implied or apparent authority to enter into the following transactions, to:
Trading + Non-trading:
Additional powers to partners in trading partnerships:
For an individual partner to act within his implied authority, s/he must be acting within the usual scope of a partner’s powers in the particular business.
➔ The test of what is the firm’s business is not what the partners have agreed to be, but what it appears to the outside world to be.
The following transactions are not within the apparent authority of a single partner in any kind of partnership:
Partners in general are jointly liable on any contractual liabilities and for the debts of the business (Note: in Limited liability partners ➔ the general partner has unlimited liability for the partnership’s debts).
Where a tort is committed during the ordinary course of partnership’s business the partners are jointly and severally liable to the person who has suffered loss.
| Category | Rules of Liability & Notice |
|---|---|
| General Rule | Every partner is jointly and severally liable for the debts and contracts of the business. Outsiders can sue one partner alone or the firm. |
| New Partner | A person who is admitted as a partner in an existing firm is not personally liable to the creditors of the firm for anything done before he becomes a partner. |
| Retiring Partner / Change in Partnership [s.38(2) CAP 116] |
Remains liable for any debts due at the time of retirement. Where a 3rd party deals with a Partnership after a change in partners, all of the Partners of the old firm are still treated as partners, until the third party receives notice of the change:
Note:
Notification must take place prior to retirement if the retiring partner is to avoid liability for contracts entered into after his retirement.
|
A Partnership may be terminated by:
According to s. 37 CAP 116: Court can order dissolution in the following circumstances:
(i) By the expiry of a fixed term or the completion of a specific enterprise
If partnership was created for a fixed term and that time came to an end ➔ the partnership will be dissolved.
ALSO if the partnership was created to achieve a specific objective and this objective has been carried out then the partnership will be dissolved.
(ii) The giving of notice [s.34 CAP 116]
If the partnership has no fixed duration, it can be brought to an end by any partner who gives notice to dissolve the partnership.
(iii) The death or bankruptcy of any partner [s.35 CAP 116]
Usually the partnership agreement provides for the continuation of the business under the control of the remaining or solvent partners. The dead/bankrupt partner’s interest will be valued and paid to his/her estate or to the trustee in bankruptcy.
(iv) Illegality [s.36 CAP 116]
The occurrence of events making the object of the partnership illegal will bring it to an end.
▲ Hudgell, Yeates and Co v Watson
When the partnership is dissolved, the assets once released, are distributed in accordance with the partnership agreement and in the absence of an agreement to the contrary, the rules of CAP 116 are followed.
The following order in paying debts is followed according to the law:
Any surplus is to be divided among the partners in the same proportion in which they shared in profits.
➔ If the assets are insufficient to meet the debts, partners’ advances and capital payments, then the deficiency has to be made good out of:
Companies Law of the Republic = CAP 113
➔ This is based on UK Companies Act 1948 and therefore the English case law provides guidance as to the meaning and interpretation of CAP 113.
| Limited by shares S.5(2)(a) | Limited by guarantee S.5(2)(b) |
|---|---|
|
The liability of a member to contribute to the company’s assets is limited to the amount, if any, unpaid on the nominal value of his shares. Once the shares are fully paid there is no further liability: i.e. if the company becomes insolvent the members cannot be requested to make any further contribution to discharge the company’s debts. ➔ Companies of this type suitable for commercial business operations where there is a real risk of commercial loss. |
The liability of members is limited to such amount, as they undertake to contribute to the assets in the event of its being wound up. That amount is specified in the memorandum of association which is a nominal amount. ➔ These companies are formed for non-profit making purposes such as cases where the ability to raise capital is not important / general advantages of corporate structure / to act as a reserve fund (to be called on in case of loss). |
| Private Company [S. 29(1)] |
Public Company [S. 2] |
|---|---|
|
S. 29(1) ➔ A Private company is a company which by its articles:
S. 2(1) ➔ Single member private limited companies (Law 2(I)/2000) (no amendments to the memorandum is needed) |
S. 2 ➔ A Public company is any company which is not a private company:
|
1. Name Approval
Application to the Registrar of Companies
2 Deliver Documentation:
3. Certificate of Incorporation:
If the Registrar is satisfied that all the requirements were met, they issues a Certificate of Incorporation, which is conclusive evidence that the company has been validly incorporated on the date stated on the certificate.
Note: In the Case of a Public Company:
| Private ➔ Public | Public ➔ Private |
|---|---|
|
A special resolution is passed (75% of those present & entitled to vote & altering the articles to that effect).
|
A special resolution is passed (75% to that effect & altering the articles).
|
PROMOTERS ➔ a person who undertakes to form company (not in a professional capacity)
Promoter’s Duties:
Under a Fiduciary Duty (to those people who will in the future become the company) for:
➔ IF Secret profit made ➔ The Company may:
The promoter can escape liability for his breach of fiduciary position of trust and confidence:
➔ By making a full disclosure of the promoter’s profit through its shareholders or an independent board of directors ➔ implication that the company agreed that the promoter can obtain his/her profit (full and proper disclosure ➔ promoter can keep his/her profit)
PRE-INCORPORATION CONTRACTS ➔ is a contract made by a person on behalf of or purporting to be the company at a date prior to that on the company’s certificate of incorporation.
Any contract signed before the company has been incorporated is:
➔ A pre-incorporation contract cannot be ratified by the company after its incorporation. On incorporation such contracts are binding on the company (Section 33A Cap 113).
BUT if the company is not finally incorporated, the contract will be binding on the persons who signed it.
Possible solutions:
(a) Delay making contracts until the company is formed
The promoter and vendor agree for a promoter to bring the negotiations to the point of agreement but to delay making binding contract until the company is formed and can enter into the contract for it self.
b) Buy an ‘off the shelf company’
Fully registered dormant companies can be purchased on a ‘ready-made’ basis. This is the easiest solution.
c) Purchase an option
An option is a contract to keep an offer open to a specified person. Thus if, for example, the promoter wished to buy a factory land to form the company which cost £1million he would not want to commit himself to paying this amount. However, he could ask the owner to grant him an option, i.e. a promise that he will offer the factory to the company at the stated price as soon as it is formed.
To bind the seller the promoter will have to pay something for the option but the price he pays will be considerably less than the full purchase price of the factory.
d) Agree that either party may rescind
Agree a term of the contract that either party may rescind if the company is not formed within a specified period of time. On rescission the parties will be restored to their pre-contractual positions.
e) Formula of assignment
When the parties cannot agree to commit the other party before the company exists, the promoter can enter into contract in his own name. He can then agree with the other party that as soon as the company is formed he can assign the rights and obligations to the new company and if it does not within a specified time, he is then to be released.
Doctrine of Incorporation ➔ A company is a legal person (i.e. separate from its members, the shareholders, and its directors, the managers).
▲ Salomon v Salomon & Co Ltd (1897)
▲ Lee v Lee’s Air Farming Ltd (1960)
The legal doctrine of incorporation = a company is a separate legal entity from its members (a veil of incorporation is drawn between the company and its members).
a) Perpetual succession
A company is not dependent for its legal existence on the existence of members or directors (although there are obvious practical problems with no humans to do the work).
Changes in membership (whether through death or otherwise) do not affect the legal existence of the company.
b) Ownership of property
The company itself owns its own property. It is not owned by the members (shareholders) or directors, who can be convicted of theft from the company.
▲ Macaura v Northern Life Assurance (1925)
c) Limitation of Liability
The company enters into contracts in its own name and therefore it is the party to the contracts it makes. If the company commits a tort the company can be sued or sue for breach of contract. The shareholders and directors are not liable to creditors for the company’s debts.
d) The company can sue and be sued in its own name
The company as a legal person will sue if there is an infringement of its rights. The decision as to whether the company will sue or not rests on the members collectively in general meeting or on the board of directors.
The rule that only the company can sue is known as the rule in Foss v Harbottle (with its exceptions).
e) Separation of ownership and management
The company = a commercial enterprise distinct from its members as proprietors ➔ must have its own management in the form of a board of directors.
f) Transfer of ownership
Where a company has transferable shares: ownership of the company can be split or transferred without affecting the company. However many private companies restrict the transferability of shares.
The phrase ‘lifting the veil of incorporation’ means that in certain circumstances the courts are look through the company to the identity of the shareholder. The legal effect of lifting the veil is that the members or directors becomes personally liable for the company’s debts.
These exceptions are described as lifting the veil of incorporation / or Exceptions to the Salomon Principle:
1. Minimum number of members – Section 32 Cap113
Statutory minimum: (2 private / 7 public company). If the number falls below 7 and this continues for more than six months, the remaining members, if aware of the situation are liable (jointly and severally with the company) for company’s debts contracted for that period.
2. Directors with limited liability – Section 194 Cap113
The memorandum of the company may provide that the liability of any director is unlimited.
In addition, the Memorandum may be altered by special resolution to render the liability of any director unlimited and the alterations may take retrospective effect.
3. Trading Certificate – Section 104 Cap113
Public companies must obtain a ‘trading certificate’ before they trade or exercise borrowing powers. Failure to obtain the certificate ➔ directors = subject to a daily fine of up to €45.00.
Contracts with third parties = Not valid until such certificate is issued.
4. Group Accounts
A parent company must prepare group accounts consolidating the Balance Sheets and Profit and Loss accounts of it and its subsidiary undertakings. Lifting the veil between the associated entities within the group occurs so that investors and others can judge the financial position of the group as a whole.
It will be considered further at later chapter.
5. Provisions as to liabilities of officers and auditors
Act of such persons constituting negligence, default breach of duty or breach of trust in relation to the company cannot be ratified by the company, irrespective of any provisions in the articles.
6. Company Name
If any officer of the company or any person on its behalf does not use the name of the company properly, he shall be personally liable to the holder of a bill of exchange, promissory note, cheque order for money or goods unless these liabilities are fully paid by the company.
▲ Penrose v Martyr (1858)
7. Fraud
This may be discovered in a winding-up process. In this case, directors, managers or other persons knowingly party to the business being carried on with intent to defraud creditors or for any fraudulent purpose are personally liable without limitation for all or any debts of the company.
8. Maintenance of proper accounting books
The Directors must take steps to maintain proper books of account. If they default, they commit a criminal offence carrying imprisonment sentence and/or fine.
a) Nationality
In times of war it is illegal to trade with the enemy ➔ possible to lift the veil of incorporation so as to impute to a company the same nationality as its members.
▲ Daimler Co Ltd v Continental Tyre & Rubber Co (1916) (UK)
b) Company liability (crime and tort)
Whether the company can be made liable for torts and crimes committed by directors, employees or agents of the company
For torts ➔ vicarious liability: a company is liable for torts committed by directors and employees in the course of their employment or directorship.
For crimes ➔ question of law whether, after the facts have been ascertained, a person in doing particular things is to be regarded as the company (company’s mind and will / ‘directing mind and will’). If the individual is the company’s servant or agent: if he is guilty of that crime then the company is also guilty. If he cannot be regarded as the company ➔ the company will not be guilty and only the individual who committed the offence will be punished.
Crime of strict liability: no mental element is required – the state of mind of the company’s servants or its agents = irrelevant ➔ defence of ‘due diligence’ (all reasonable precautions were taken).
c) Mere Façade (sham or puppet companies)
If the company was incorporated in order to conceal the true facts and to enable the individuals to avoid their legal or contractual duties ➔ the veil will be lifted.
▲ Gilford Motor Co v Horne (1933) (UK)
▲ Jones v Lipman (1962) (UK)
d) Enterprise
There is a veil of incorporation between a holding company and its subsidiary and between co-subsidiaries. As the decision in Salomon shows that courts do not treat a company as an agent of its members, so a holding company is not liable for the debts of its subsidiary, nor can it claim rights of the subsidiary.
Two main legal arguments on the basis of which the veil might be lifted:
➔ Agency
The subsidiary = merely acting as an agent of its principal (the holding company)
▲ Smith, Stone & Knight Ltd v Birmingham Corporation (1939) (UK)
➔ Doctrine of economic reality
The argument here is that the group, albeit each company being autonomous within the group, form a single economic unit (treating the group as a single economic unit the law ought to follow the economic reality).
▲ DHN Food Distributors v London Borough of Tower Hamlets (1976)
But now the courts are very reluctant to lift the veil of incorporation on this ground.
▲ Adams v Cape Industries (1990) (UK)
Companies are required by law to keep at the company’s registered office the following registers:
| Section | Book | Contents |
|---|---|---|
| Section 102 | Register of Members | Name, address, date of becoming/ceasing to be member, number/amount of shares paid up |
| Section 192 | Register of Directors & secretaries | Name, address, date of birth, occupation, nationality, nationalities, other directorships |
| Section 91 | Register of Charges | Details of Deed of Creating Charges created over the company’s property |
| Section 81 | Register of Debenture Holders | Name, address, date, number/amount |
The above documents must be open for public inspection by a member free of charge or by any other person for a fee.
The Directors must for each accounting period:
The company must send a return to the Registrar annually giving details of directors, secretary and shareholders.
Defines the external requirements of the structure of the company and sets its relationship to outsiders who do business with it (the various clauses of the memorandum cannot be altered except as specified by the Companies Law CAP113)
(or Table A, adopted in place of self-prepared articles) are code of internal regulations (working bye-laws) applicable to the company and its members in their dealings with each other. It is generally alterable by the members by special resolution but this general power is subject to some restrictions.
The mandatory clauses of the memorandum of a company limited by shares:
1. Name clause:
The name stated in this clause= the legal corporate name of the company. The name must be approved by the Registrar.
2. Registered office clause:
The location of the company’s registered office.
This clause fixes the domicile and nationality of the company. It gives the country of registration not the exact address. This clause cannot be altered.
3. Objects Clause:
The objects clause must set out expressly the business (or businesses of the company.) Purpose: to provide a measure of protection for investors ➔ to be aware of what type of business they are investing in.
4. Liability Clause:
The memorandum of companies limited by shares states that the liability of members is limited to the unpaid part of their shares
5. Capital Clause
The clause of the memorandum of a company limited by shares must state:
➔ The authorized capital may be divided into more than 1 class of shares.
6. Association clause
After the main text of the memorandum comes a declaration of association which must be signed by a minimum number of subscribers which must each agree to take one or more shares.
Their signatures must be witnessed by a witness and the date of signature must also be inserted.
According to Section 8 the Company may not alter the clauses of its memorandum unless in the cases and by following the procedure defined in CAP113.
Clauses which cannot be altered:
1. Alteration of Company’s Name
The Registrar will refuse to register a name if:
➔ The name is the same as or similar to another
The Registrar keeps an index of the names of existing companies, incorporates and unincorporated bodies and limited partnerships. The promoters of a company which has failed to ensure that the proposed name of the company they intend to form is not too like as that of an existing company.
➔ The name consists of undesirable words:
A company must not be registered by a name if, in the opinion of the Registrar, the usage by the company would be a criminal offence. Certain statutes have prohibited the use of certain words which are recognized as being associated with nationality or other organizations.
A private company must have as the final word in its name Limited or Ltd.
A public company must have as final words in its name Public Limited or Plc.
Changing the name ➔
a. By the Registrar of Companies
Where a company has been registered by a name which is:
• In the opinion of the Registrar too similar to a name appearing or which should have appeared at the time of the registration in the index of names kept by the Registrar; or
• Misleading in relation to its objects
➔ The Registrar may within 6 months of that time, in writing, direct the company to change its name within 6 weeks of the direction (after the expiration of the 6 months the registrar is unable to do anything).
b. By the Company
A company, of its own initiative, decides to change its existing name to some other.
The procedure:
The directors meet
- Call an Extraordinary General Meeting (EGM)
- Give those members who are entitled to attend and vote at the meeting a minimum of 21 days’ notice that the special resolution to change the name is to be served at the meeting.
The shareholders meet
- pass the special resolution (with a minimum of 75% of the votes)
The Secretary must
- Send the special resolution and the new memorandum of association (containing the new name clause) to the Registrar of Companies within 15 days of the resolution.
Changing of name by a company under CAP 113 does not affect any rights or obligations of the company, or render defective any legal proceedings by or against the company, and any legal proceedings that might have been continued or commenced against it under its former name.
2. Alteration of the Object Clause
Alteration of the object clause can take place only in line with the seven conditions of Section 7(1) ➔
Procedure:
The objects clause sets out the capacity of the Company: defines and limits the activities which the company is permitted to undertake.
➔ It defines the contractual parameters within which the company can contract.
If a company acts in contravention of any restriction placed on the objects ➔ The Company is acting ultra vires ‘beyond the powers’
Objects clause:
Effect of an ultra vires transaction
The doctrine of ultra vires ➔ if a company acts beyond the scope of its objects stated in its memorandum of association, such acts = void at common law as beyond the company’s capacity even if ratified by all the members.
According to the old case law (▲ Ashbury case) of a contract entered by a company was ultra vires (not authorized by its objects) it was void and not binding on the company.
Under S.33A of Cap113 a company is bound by acts or transactions entered into by its officials (company directors) who are duly authorized to act on the company’s behalf or by the company (through general meeting of shareholders); and that the other party was acting in good faith.
The law: whether the other party was acting in good faith, at the time of signing such a contract with the company ➔ if the 3rd party was acting in good faith s/he will be able to enforce the transaction against the company.
If the company proves that the 3rd person knew or ought to have known that the acts or transactions were outside the objects of the company, then the company will not be bound by such acts or transactions; the third party is not considered as acting in good faith.
Note: The publication of the company’s memorandum and articles of association does not itself constitute sufficient proof of knowledge of any 3rd party.
So...
(a) All transactions of a Company made by its officials are binding provided the 3rd party dealing with the company was acting in good faith.
(b) A 3rd party dealing with the company does not have actual knowledge or constructive knowledge (ought to know – s.4 if the 3rd party is also a director of the company, s/he ought to know the provision of the company’s memorandum that a specific transaction is ultra vires).
(c) The fact that the register of companies maintains all the information concerning a company which is open to public inspection, this does not amount to Constructive knowledge of any 3rd party.
Every company must have a memorandum and articles.
Table A is a model or standard set of articles laid down in the Companies Law; applies to all companies limited by shares unless it is expressly excluded.
A company limited by shares may either:
a. have its own articles and expressly exclude Table A
b. expressly adopt Table A with or without alterations and exclusions
c. do not have registered articles: where a company does not adopte Table A, then Table A applies to the extent that any articles of the company fail to provide for matters covered by Table A.
The articles operate as a contract (Section 21 CAP 113)
The memorandum and articles, when registered, bind the company and its members. CAP113 states that the articles of association form contract between the company and its members. This means that the articles have effect as if each member had signed and sealed the articles. They are contractually binding and the individual articles are terms of the contract.
➔ The articles are in all respects enforceable by the company against its members.
▲ Hickman v Kent or Romney Marsh Sheep Breeders Association (1920) (UK)
➔ The articles are enforceable by the shareholders against the company.
➔ The articles creates a contract relating only to matters arising between the company and its members as members. The articles have no effect as a contract between the company and a person who is not a member even if they are named in them and given apparent rights against the company.
▲ Eley v Positive Government Security Life Assurance (1876) (UK)
▲ New British Iron Co, without notice Beckwith (1898) (UK)
A company has a general power to alter its articles by passing a special resolution (75%) (Specially defined powers to alter the memorandum): Section 12 CAP 113.
This general power, however, is subject to the following restrictions:
Alteration for benefit of the company (common law):
When there is a conflict between members over a proposed alteration ➔ a question may arise as to whether the majority are seeking an unfair advantage for themselves (or prejudice the minority) or through the alteration is for the benefit of the company, even if a minority thereby loses some advantage.
➔ The general test of validity = whether the alteration is proposed in good faith for the benefit of the company as a whole
“benefit to the company” ➔ a benefit which any individual hypothetical member of the company could enjoy directly or through the company and not merely a benefit to the majority of members only.
“good faith” ➔ It does not require proof of actual benefit but merely the honest belief on reasonable grounds that benefit could follow from the alteration.
The court stated that actual and foreseen detriment to a minority affected by the alteration was not in itself a sufficient ground of objection if the benefit to the company test was satisfied.
➔ An alteration to remove a fraudulent director has been upheld
▲ Shuttleworth v Cox (1927) (UK)
▲ Brown v British Abrasive Wheel Co
▲ Sidebottom v Kershaw Leese & Co
➔ Alteration to remove members by enforcing a transfer of their shares will not be upheld unless restricted to cases where there is clear benefit to the company and compensation is payable.
The ultimate control of the company rests in its members in general meeting ➔ therefore rules exist to ensure that there is at least 1 meeting in every year and that additional meetings be called when required.
The AGM usually considers:
Table A does not prescribe the business to be conducted at an AGM
The articles (e.g. Article 49 Table A) usually authorize the directors to call an EGM whenever they think fit.
If no AGM is held on the application of any member ➔ the Council of Ministers may call such a meeting and give such ancillary or consequential directions as it thinks expedient: S.125(2) CAP113.
Members have a statutory right to require the directors to convene an EGM [S.126 CAP113].
To be valid the requisition must be signed by:
The court has a general power to order a meeting to be held, either on:
The Court may give directions and fix the quorum as low as one member present in person or by proxy: S.129 CAP 113:➔ Rarely used but it can resolve a deadlock e.g. where a company has two members only and one, by refusing to attend, denies to the other their right to have a general meeting.
The statutory minima (S. 127) are:
AGM: 21 days of written notice.
EGM: 14 days for ordinary or extraordinary resolution.
When a special Resolution: 21 days.
The articles can impose a requirement of longer but not shorter notice.
Many articles provide that in calculating the period notice is deemed to be given 48 hours after posting; that day and the meeting itself are excluded from the period.
The notice requirements can, however, be waived [S.127(3)]:
AGM: If so agreed by all the members entitled to attend and vote.
EGM: By a majority of members holding not less than 95% of the voting shares (or if there is no share capital) by 95% of the members having the right to attend and vote: S.127 (3) CAP 113.
The articles will usually state who is entitled to receive a copy of the notice.
If they do not, Article 131 Table A applies, and the persons entitled to notice are:
The general law is that failure to give notice even to one member entitled to it invalidates the meeting. But is usual (e.g. Article 51 Table A) to provide that accidental failure to give, or non-receipt of, notice shall not invalidate the proceedings.
It is also usual to provide (e.g. Article 131 Table A) that notices may be sent by ordinary (i.e. unregistered) post and are deemed to arrive (be served), 24 hours after posting.
The date, time and place of the meeting must be given.
If the meeting is an AGM➔ general description of the topics is sufficient notice e.g. ‘to elect a director’
If the meeting is an EGM ➔ sufficient detail must be given in the notice to enable a member to be aware of what is proposed, i.e. a proposal on directors’ fees must disclose the exact amount involved.
Usually the notice sets out the full and exact text of the resolution to be moved.
If the notice includes a special or extraordinary resolution the text of the resolution must be set out in full- not required for ordinary resolutions.
In every case the notice must state that a member entitled to attend and vote may appoint a proxy or proxies to attend and vote on his behalf s.130 CAP 113.
An AGM and a special or extraordinary resolution must be specified as such.
Members have a statutory right to require the company to:
➔ In order for these rights to become operative, the members must submit to the registered office of the company a copy of the requisition signed by them not less than 6 weeks before the meeting in the case of (1) above, and a week before the meeting in the case of (2).
DO NOT confuse special notice with special resolution!!!
Special notice, when required, is given to the company by a member at least 28 days before the meeting. It’s a notice that the member intends to move a resolution at the meeting: S.136 CAP113.
Special notice is only required for resolutions:
In the above cases (where the special notice of an intended removal is received by the company) a copy of it must be sent to the director or auditor concerned. (S.154&178 CAP113)
It must be properly convened by notice
A quorum must be present
There should be a chairman who should discharge his or her duties in a proper manner
There are subsidiary rules on such matters as adjournment, proxies to resolutions, etc.
↓ If the meeting is to reach decisions, resolutions and any amendments, should be proposed for discussion and then to put to the vote in a proper manner
A quorum = the minimum number of persons whose presence is requisite in order that a meeting may validly conduct business.
➤ If the articles do not make special rules for a quorum (e.g. Article 52 Table A) then:
One member can constitute a quorum only if:
One member who attends in his own right and as proxy for another does not constitute a quorum of two members present in person or by proxy: he is still one member and that is insufficient.
Where the articles provide that a quorum shall be present when the meeting proceeds to business it has been held that the meeting can validly continue even after part of the quorum originally present has withdrawn but most companies’ articles require a quorum throughout (Table A)
For the business of the meeting to be properly conducted each resolution must
| Type | % required | Service to Registrar | Purpose of Resolution |
|---|---|---|---|
| Special | 75% | Yes – within 15 days |
|
| Extra Ordinary | 75% | Yes – within 15 days |
|
| Ordinary | 50 +1% | Only if statute prescribes so | Used whenever the law or the articles do not require a special resolution |
The expression proxy denotes:
So…
The chairman’s role is a crucial one ➔ therefore it is essential that there should be chairman to preside over the meeting.
The articles usually (e.g. Articles 55 & 56 Table A) provide that:
The chairman has a general duty to act in good faith for the interests of the company as a whole. If the chairman fails to conduct the meeting properly➔ the meeting and any purported resolution passed will be void.
The resolutions are generally the private concern of the company and its members. But certain resolutions which may affect third parties must be registered➔ a signed copy of certain resolutions must be filed at the Companies Registry.
Resolutions to be filed include:
A company needs to fund its activities to make profits – it needs money to make money.
A company may buy on credit, hire-purchase or obtain an overdraft from the bank.
The share capital of a company shows the value of the assets contributed to the company by those who subscribe for its shares
The term denotes debentures (long term loans) and debenture stock issued by the company as a means of raising money. The holder of that securities are creditors of the company.
The amount of share capital, which the company is authorized to issue by its memorandum.
The normal amount of share capital actually issued (or allotted).
The total amount called up by the company on the shares allotted.
The part of the called up capital, which has been paid up by the shareholders.
The amount which the company is entitled to call the shareholders to contribute.
The share capital of a company is divided into shares which are units defining the shareholder’s proportionate interest in the company
The interest of the shareholder in a company measured by moneys worth. This is a right of a specified amount in relation to the share capital.
It gives a right to receive dividends out of distributable profits declared on that class of shares.
It carries a right to vote at general meetings unless it is a non-voting share: such rights are usually defined in relation to shares, (e.g. one vote for each share or ten shares): the voting rights are specified in the articles- Table A provides for 1 vote per share.
On liquidation or reduction of capital, a share defines the right to receive any remaining assets distributed to shareholders of that class.
Defines where there is liability; e.g. to subscribe capital, it is measured by reference to shares.
CAP113, the memorandum and articles of association give the shareholders various rights in terms of shares, e.g. the right to ask for a general meeting or to receive notices.
A share is transferable by its nature subject to any restrictions of the articles of association, especially in private companies which through their articles restrict the right of existing shareholders to sell their shares to outsiders.
In the absence of provision to the contrary in the memorandum or articles of association, it is presumed that the rights of all shareholders are equal.
In many cases a company has only one class of shares. But if the company has more than one class, the shares will be differentiated by reference to each special rights of each class of share.
➔ These are determined by the company and its members.
The shares which confer on their holders the residue (remaining) of rights of the company. If a company has only 1 class of shares.
➔Financial reward since after the distribution of profits to other classes of shares, the rest of the profit distributable as dividend is available to this share.
Rank after ordinary shares or dividends and sometimes return of capital. They may have additional voting rights (Usually such shares are taken by promoters in recognition of their special position. Now found very often).
Shares which carry some preferential rights (i.e. with respect to dividends or on winding up) in relation to other classes of shares, particularly in relation to the ordinary shares.
Carry a right by the company to redeem or buy the shares ➔ there are strict rules about the issue of such shares, since there are strict rules with regards to reduction of capital.
The term explains itself; they can be of any class. The first employee shares tended to be of this type.
Preference Shares: shares which carry rights in preference to other shares.
They usual preferences given are:
Preference shares generally confer the right to receive a dividend up to a specified amount, e.g. 6% of its paid up value, before any dividend is paid on the ordinary shares.
The rights of preference shares depend essentially on what is expressly stated on them at their term of issue.
The preferential dividend is deemed to be cumulative unless expressly described as non-cumulative. Cumulative means that the preference shareholders will be entitled to arrears in dividend if not paid out in 1 year before any payment can be made to the ordinary shareholders by way of dividend.
The right to a preference dividend is exhaustive. Thus, if the preference dividend is paid in full there is no further right to dividend unless there is an express right, i.e. to participate equally with ordinary shares as soon as the preference shareholders have received a dividend of a specified amount. Such shares are called participating preference shares.
If a company goes into liquidation with arrears outstanding of preference dividends, the right to receive arrears lapses unless the articles provide that the arrears shall be paid out of the assets available in winding up.
Preference shares do not have any priority over ordinary shares in return of capital unless expressly so provided in winding up (or return of capital on reduction).
They then rank pari passu (equally) with ordinary shares in bearing their proportion of any deficiency of paid up capital.
Usually the preference shares are given priority in any return on capital (equal to the nominal value of their shares) - this priority right is exhaustive, i.e. they are entitled to be repaid capital as so provided but to participate in any surplus assets.
Installments where the capital in companies is gradually paid up by the shareholders in a public company.
A public company may issue partly paid up shares and the shareholders are legally bound to pay the nominal amount of their shares when called by the company to do so.
According to Section 47 ➔ the shareholders of a public company are bound to pay the minimum subscription as determined by the directors or 25% of the nominal value of each share on application for allotment. With regards to the remaining amount, the company may make calls and recover the unpaid part and therefore raise capital.
Rights enjoyed by shareholders of a class of shares, distinguished from rights enjoyed by all shareholders (i.e Dividends / Distribution of capital on winding up / Voting)
The special class rights of any class of shares are defined either by the articles or less commonly by the memorandum
The memorandum must provide for such alteration.
Usually the Articles of association contain provisions similar to that of Table A, stating that class rights cannot be altered, unless there is a written consent of 75% of the members of the particular class or by an extraordinary resolution.
In either case ➔ Section 70 of CAP 113 applies
SO ➔ Holders of the 15% of shares of that particular class of issued shares that disagree or have not vote in favour of the alteration
Have the right to petition to the Court within 21 days, and the alteration does not take place until the court decides so.
Only Public Companies can raise capital by public subscription.
↳ A private company is prohibited from advertising securities (shares or debenture) as being available for public subscription
The regulation of public subscriptions of issues of securities which are to be the subject of dealing on the stock market has been delegated to the Stock Exchange. If no application is to be made for the securities to be dealt on the stock market, regulation remains with the Register of Companies.
A company can only issue available unissued shares:
If there is available authorized capital
The decision to issue shares is taken by the directors.
If there is NO available authorized capital
It is necessary to create additional shares by an increase of share capital➔ alteration of the capital clause
For an increase of Authorized Share Capital a Company there must be:
Definition: The formal act of the company distributing either to existing or to new shareholders new shares out of its share capital provided that the requirements of Cap 113 are fulfilled.
Transfer of Shares: The manner of transfer is regulated by the Articles of each Company. According to Cap 114, the right of transfer of shares of a private company must be restricted by the Articles.
Transmission of Shares: Transfer that occurs in case of death or bankruptcy of any member if the Company.
In both of the above cases the Directors have the right without giving any reasons to decline to register any transfer or transmission of shares, is fully paid whether or not (Table A).
Problem: the allotting of additional shares of the same class may lead to a reduction in the value of the existing shares ➔ it is not a variation of class rights therefore no special rules relating to variation and objection apply.
The Companies Law CAP113 attempts to deal with this problem by providing that ➔ no company can allot shares for cash (ordinary shares) without first offering them to existing shareholders on the same or more favourable terms than it is proposing to offer them to other people.
The shareholders must be given 14 days in which to decide whether to accept or reject the offer.
The powers exercised by directors must be exercised for the purpose for which they were conferred ➔ the proper purposes rule.
The prime purpose for issuing shares will be that the company is in need of further finance. Any other purpose is questionable.
It would be an improper purpose:
▲ Bamford v Bamford (1970) (UK)
Facts: In order to fight off a take-over bid the directors of X Ltd issued 5 million shares to B Ltd for cash. The shareholders who supported the take-over complained and the directors called an extraordinary general meeting of company which approved and ratified the directors’ action. B Ltd did not vote.
Held: Although the issue of shares by directors to defeat a take-over bid was an improper exercise of their powers, the issue would remain valid because it had been ratified by the company in general meeting.
The issue of shares creates a debt owing by the allottee to the company but it is not essential that it should be paid (either cash or kind) at once.
However a public company must not allot shares, unless at least 25% of the nominal value and the whole if any of the premium is paid up (or any other minimum as determined by the company directors (s.47 CAP113).
Shares may be issued on the basis of payment either:
A company may by special resolution decide that part of the amount payable on its shares shall only be called up for payment when the company is wound up.
➔ this creates reserve capital result similar to a company limited by guarantee. Reserve capital must be distinguished from capital reserves s.59 CAP113.
A private company can issue at a discount shares in the company of a class already issued provided that:
A company is always free to issue shares at a premium i.e. to obtain £2 each for £1 shares.
No special power in the articles is required nor in any other sanction required.
If it is possible to issue shares at a premium the directors should do so (to secure a benefit to the company) and unless the shares are offered entirely to existing shareholders as a rights issue, failure to obtain the best price may be evidence of a breach of duty by the directors.
Any premium obtained must be treated as equivalent to capital and safeguarded accordingly; s.55 CAP113.
The premium must be credited to a share premium account which can only be distributed to members under the same procedure as in a reduction of share capital.
The share premium account can also be applied for certain capital purposes:
A bonus or capitalisation issue of shares is effected by appropriating some part of the company’s reserves (including share premium account or capital redemption reserve fund) to paying-up unissued shares in full and then distributing those shares as a bonus to shareholders.
e.g. if a company has an authorised share capital of 200,000 it can capitalise £100,000 from its reserves to issue the remaining 100,000 shares as fully paid on the basis of one new share for each share already held.
Power under the articles is required to make issue of this kind.
The shares are offered to existing shareholders (in proportion to their shareholding) usually at somewhat less than the current market value of the shares.
| Bonus Issue | Rights Issue |
|---|---|
|
|
Once capital has been raised it must be maintained. The notion is that Capital must be applied for the company and not returned to the Shareholders.
The Capital that has to be maintained is the:
In principle a Company cannot purchase its own shares since such action amounts to a violation of the rule of capital maintenance.
Exceptionally, a Company may redeem preference shares (see below) or a Public Company may purchase its own shares as provided by Section 57A CAP 113
According to Section 57A CAP 113 :
According to Section 64 CAP 113 reduction of the issued Capital is only permitted in 5 cases:
Example: Company having nominal value €1 shares 75c paid up. The company may (a) reduce nominal value to 75c or (b) reduce nominal value to figure between 75c and £1.
➔Company gives up claim for amount not paid up
Example: Company reduces nominal value of fully paid up shares from €1 to 75c and repays this amount to shareholders.
➔The assets of the company are reduced (by 25c in €)
Example: Company has €1 nominal fully paid shares but net assets only worth 50c per share. If then the company has debit balance on reserves, it can reduce nominal value to 50c and applies amount to write off debit balance.
➔ The company can resume payment out of future profits without having to make good past losses.
To cancel share capital that has been paid in order to extinguish past losses.
To cancel share capital that has been paid and establish a “reduction capital reserve” that will be governed with the same rules as s.55 CAP 113.
The court is then required to consider the position of creditors of the company ➔ it has a general discretion as to whether to confirm the reduction or not.
If possible the position of creditors will be safeguarded in advance:
(The order will show the amount of share capital, the number of shares, the amount of each shares and the amount paid up on each share and of a minute approved by the court setting out the reduced share capital)
A Company may if authorized by its Articles cancel part of its Authorized capital which has not been taken or agreed to be taken.
This is not a reduction of Share Capital. According to Table A – Ordinary Resolution is needed for this procedure.
Redeemable preference shares are those which, under their contractual terms of issue, must be bought back by the company at certain time.
According to Section 57 CAP 113 company limited by shares and having a share capital may, if authorized by its articles, issue shares, which are or at the option of the company are to be liable to be redeemed.
Conditions:
According to Section 53. CAP113, it is unlawful for a company to give:
Financial assistance includes:
Consequences: Section 53(2) CAP 113
Exceptions:
Lending is part of ordinary business of the company (s.53 (I)(a) CAP113)
Where the lending of money is part of the ordinary business of the company, the loan will be lawful. In order for the loan to be in the ordinary course it must be at the free disposition of the borrower.
In good faith under an employee share scheme (s.53 (1)(B) CAP113)
It is lawful to provide in good faith and for the interest of the company, money for the purchasing of shares under an employee share scheme which may include salaried directors.
Loans made to employees (other than directors) (53(1)(c) CAP113)
Where loans are made to employees (other than directors) to enable them to purchase fully paid shares.
2009 Amendment ➔ Private companies can provide financial assistance when:
Basic principle of company law that a company with limited liability may not return capital to members: to safeguard the rights of the creditors to be paid what is owing to them before capital is returned to members.
A company may only make distribution (pay dividends) out of profits available for the purpose (e.g. Art.114 Table A), not capital.
An amount payable to shareholders from profits or other distributable reserves (Art. 169A)
Are the accumulated realized profits (so far as not previously utilized by distribution or capitalization) less the accumulated realized losses (so far as not previously written off in reduction of capital)
Accumulated ➔ means that the balance of profit or loss from previous years must be brought into account in the current period.
Realized➔ prohibits the inclusion of unrealized profits arising from the revaluation of fixed assets retained by the company.
If the dividends are not paid in accordance with the rules on distribution, then the company can recover the distribution from:
In addition to capital raised by the issue of shares, companies may need to borrow.
Usually the Memorandum of a company provides for the company’s express power to borrow money and to secure its loan, while the Articles of Association determine the manner and extend to which this authority can be exercised (Table A).
A trading company is likely to include in the objects clause of the memorandum an express power to borrow. In any case it has an implied power to borrow for purposes incidental to the business.
Borrowing may be done in several ways such as:
Is an instrument creating or acknowledging a debt – a document issued by a company setting out the terms of a loan (usually medium or long term borrowings).
| Debentures | Share |
|---|---|
|
1. Debenture holders = a creditor. |
Shareholder = a member of the company |
|
2. A company can freely purchase its own debentures ➔ repay its debt. |
There are restrictions upon purchase of shares. |
|
3. Interest: |
Dividend: |
|
4. On liquidation ➔ debentures must be paid back before shareholders are paid. |
On liquidation➔ Shareholders are the last people to be paid in winding up. |
CAP 113 provides some rules applicable to debentures but on a number of points the lender and the company are free to make their bargain as they see fit subject to general rules of contract and, where security is given, of mortgages.
A company, unlike other borrowers, can create a perpetual mortgage (continuous) i.e. payable only in cases of winding up of the company or in cases of any other serious default (no fixed date for payment arrears).
No security is provided to the creditor, they only provide for the promise of the company to pay the sum to the creditor with interest.
The Loan is secured either by a:
One debenture issued to a Creditor (i.e Bank).
This is a series of debentures in identical form to secure a loan by a number of individuals all ranking for repayment equally.
A loan raised from a large number of lenders through an offer to the public (through a prospectus), i.e. a single debt in which each lender has a holding of specified value ➔ for public companies only: there must be a trust deed setting out the terms of the loan and the safeguards to the lenders.
A debenture, is an instrument that incorporates the loan agreement and it is issued by a company to a particular creditor. It includes mainly the following:
A lender to a company may obtain security:
A fixed charge has the essential features of a normal mortgage and is created by the procedure appropriate for mortgaging property of any particular type; e.g. a mortgage of land by deed, a mortgage of shares of another company by transfer to the mortgagee.
The essential feature of a fixed charge: when it is properly created➔ immediately attaches to the property in question (the company cannot deal with the property without the lender’s consent) and subject to registration gives the holder of the charge an immediate security over the property in priority to subsequent claimants.
A floating charge = a charge which ‘floats’ over designated assets. The company is free to dispose of these assets in the ordinary course of business without the creditor’s consent – the person to whom the assets are transferred takes them free of the charge.
A company can, while still owning the assets subject to the floating charge, create fixed charges over them in priority to the floating charge, (not when there is a ‘negative pledge clause’ which prohibits the creation of a fixed charge with priority over the floating charge).
A floating charge is not attached to the property until it is crystallized (i.e. in the company’s liquidation) ➔ it is converted into a normal fixed charge on the designated assets.
Crystallization means that the floating charge becomes attached to the assets over which it is created and the company loses the right to deal freely with those assets.
A floating charge crystallizes in any of the following circumstances:
A charge on immovable property (i.e. land and buildings). The company cannot dispose the mortgaged property without the consent of the creditor. Needs to be registered with the Land Registry.
The act of providing something as security for a debt or obligation (i.e shares). No necessity for registration and thus no fees paid to the government.
All the charges must be delivered to the Registrar within 21 days from the creation (i.e. when the document creating the charge is executed not from the date of the loan thereby secured).
If the charge is not registered within the time constrain it will be void against the liquidator or any creditor of the company BUT ➔ The underlying debt remains valid and only the charge is void against the liquidator and the loan becomes immediately payable.
Duty of the company to register ➔ failure is a committal of an offence by the company or any officer at fault.
Late registration is allowed if the omission to register a change within 21 days was accidental or due to some sufficient cause➔ with the court’s permission and does not affect the validity of the charge. But until registration the loan is secured.
The Registrar of Companies shall keep a register of charges and mortgages which is open to the public for inspection on payment of a fee.
A charge over the company’s property may be released:
| Equal Charges | First created has priority |
| Fixed Charge | Has priority over a floating Charges |
| An unregistered charge | Has no priority over a registered |
A debenture holder is in a contractual relationship with the company (terms of the contract and obligations = fixed when the debenture is issued and only variable under normal contractual principles).
So ➔ The debenture holder is entitled to seek a remedy against the company for breach of contract.
If it is unsecured any action to enforce payment of capital or interest is limited to:
As a last resort apply to the court for an order of:
A receiver appointed out of court = Not an officer of the court, he is an agent of the debenture holders who appointed him and will act according to their instructions. However: if he has doubts as to any particular matter, he may apply to the Court for directions.
If the company is being wound up by the court ➔ the court may appoint the official receiver (the Registrar of Companies) to act. A receiver appointed by the Court will be an officer of the Court and will act according to the Court’s directions.
The appointment in no way terminates any existing contracts, i.e. employment contracts for purchase of materials. The receiver has no personal liability on these contracts since he did not make them.
According to Section 2(1) of CAP 113: the term director includes any person occupying the position of director by whatever name called (the test is one of function not of title)
➤ A director need not necessarily be a person – thus a company can be a director of another company
There is a distinction in practice between executive directors and non-executive directors – not by the law.
The first directors must be appointed before the incorporation ➔ Form HE3
First Director:
Table A, art 75 provides that the names and number of the first directors are appointed by the subscribers (unanimously or by majority).
Subsequent Director:
The appointment of subsequent directors is regulated by the articles. Usually, the system is one of rotation (First in first out).
There is no rule of law that a director must also be a member (shareholder) of the company.
But the articles may impose such a requirement, i.e. a share qualification clause:
However, even if disqualified under s.176 their act will be valid (s.174 CAP113), i.e. if a director remains in office without buying at least one share in a company, a contract made by him will not be invalid on that ground.
The articles often provide that directors shall cease to hold office if they:
Under s.179 (1) CAP113 an undercharged bankruptcy may not act as director, or take part in the management of the company except with the leave of the court by which he was adjudged bankrupt.
If a person is in breach➔ liable to a fine and imprisonment sentence (up to 2 years) or both.
Under S.180 the court may make an order that a person shall not, without its leave be a director or in any other way directly or indirectly be concerned or take part in the management of a company for a period of up to 5 years, where a person is convicted of any offence in connection with promotion formation or management of a company, or in the course of a company’s winding-up it appears that a person has been guilty of any offence for which he is liable, whether convicted or not under S.311 CAP 113 (involvement in fraudulent trading) has otherwise been guilty while an officer of the company, for any fraud in relation to the company, or of any breach of duty to the company.
A person who acts as a director may be 1 of the following:
An officer of the company only
A director = an officer of the company s.2 CAP113.
A director may serve in an office other than that of director although they cannot be an auditor.
If they are sole directors they cannot be the company secretary (s.172 CAP113), unless the company is single member private company, in which case a sole director may also be company secretary (S.117 (1) CAP 113)
An officer and an employee of the company under a contract of service.
A person who is a director (an officer) may also be the managing director (an employee)
An officer and an independent contractor under a contract for services.
A person who is a director (an officer) may also be the finance director who merely provides occasional services.
Whether or not a director has a contract for services or a contract of service (i.e. is an employee) is important in liquidation where money due under a contract of service is a preferential debt but money due under a contract for services in an ordinary debt.
What is important for company law = whether or not the director has a contract
Who negotiates directors’ service contracts➔ this is dealt with by the company’s Articles.
At common law a director has no entitlement for his services as director except as provided by the articles
Table A provides:
Although directors may lose office in various ways, they may be able to obtain compensation for the loss. Thus they may obtain:
A director may cease to hold office in various ways:
Section 178 CAP113 lays down a statutory rule where a director can be removed by the passing of an ordinary resolution, as long as the procedure laid down in the s.178 is followed ➔ it confers on the director certain safeguards of natural justice – Director can protest his/her removal (this is the purpose of the special notice provision).
The company [BOD] should then give notice to all members who are entitled to attend and vote at the general meeting. This notice is:
If a director is deprived of the rights to protest his removal, his removal is not valid. The statutory rule in s.178 CAP 113 cannot be excluded by provisions in the articles.
The articles of association may not provide a percentage vote for removing a director exceeding ordinary resolution (50% + 1)
S.178 does not deprive a director of compensation for dismissal to which they are otherwise entitled ➔ depends on whether they have a right to compensation arising from a contract of employment with the company, distinct from any right solely as a member under the Articles (Assuming the director is a shareholder).
➔Removal of a director may result in a claim by that director for breach of a service contract.
Dismissal of a director of a small private company may give rise to the compulsory winding up of the company.
Facts: Mr. Ebrahimi had been in business with a colleague for 25 years, the last ten as a company. He agreed to transfer some of his shares to his colleague’s son, who then combined with his father to dismiss Mr. Ebrahimi from the board.
Held: The Company would be compulsory wound up on the ground that it was just and equitable.
A secretary cannot be the sole director too, except in a single member private company where a sole director may also be the company secretary: ss. 171- 172 CAP113.
The post may be held by another company or by joint secretaries; any formal act of a secretary may in their absence be performed by a deputy or assistant.
In a public company the secretary is required to be a person with the requisite knowledge and experience to discharge the function of a secretary.
The articles usually provide for the appointment of a company secretary by the directors.
Art.110 Table A provides the secretary shall be appointed by the directors for such term, at such remuneration and upon such conditions as they may think fit; and any secretary so appointed may be removed by them.
There are no specific duties imposed on the company secretary by CAP 113 (although various documents, such as the Annual Return, require the signature of a director or secretary). Their duties therefore are whatever the board chooses to entrust to them.
These duties might include:
The secretary is an officer and often is also an employee of the company. A company secretary may be a director, but is not automatically a director. The statutory register of directors must also include the secretary’s particulars: s.192 CAP 113. The first appointment of the secretary and any subsequent change must be notified to the Companies Registry.
Like all of the company’s agents he will bind the company to third parties in contract where he acts within his authority, actual or apparent (by the board).
Facts: Bayne was company secretary of the defendant. Without authority from directors he ordered from the claimants, a car hire firm, self-drive limousines stating that they were for the business purposes of the company. In fact, he used the cars for his personal purposes. The company refused to pay for the cars.
Held: The contract was binding on the company since hiring of cars was usual to the office of company secretary.
If no such auditor is so appointed or re-appointed the Registrar may appoint a person to fill the vacancy and the company shall, within one week of such power becoming operative, give the Registrar notice of that fact.
Auditors are obliged to exercise reasonable skill and care. In the absence of anything suspicious, they are only bound to be reasonably cautious. The standard of this duty of care has increased over time.
➤ If auditors have failed to exercise reasonable care and skill they may be liable:
The requirements of the law for the removal of auditors are similar to the removal of the directors (s.154) - ordinary resolution (with special notice):
An auditor of a company may resign from his office at any time by depositing at the company’s registered office a notice in writing to that effect.
The resignation may include:
Or
To the shareholders as a collective body (present and future shareholders)
The directors owe no general duty to individual members – but in particular circumstances may give rise to a duty to particular shareholders, i.e. where they are authorized to act as agents for particular shareholders in relation to sale of their shares.
The directors are members of the board and they exercise their power collectively as a board but their duties are not owed to the board.
The law does not recognize a duty to others, i.e. creditors, customers or to the community, but there are numerous provisions designed to protect such persons.
Directors are bound to carry out their duties (to exercise the powers and discretion given to them) but the means by which they do so will not generally be specified.
Two main duties of directors at common law:
The directors must act in what they honestly believe to be the best interests of the company: subjective test, i.e. did the directors themselves honestly believe that they were acting in the best interest of the company? If yes, they are not in breach of their duty even if the outcome shows or the opinion of the court is that they showed bad judgment.
They must take into account of all relevant interests (whether of shareholders, creditors, employees, etc.) in deciding what is in the overall interests of the company ➔ in practice they will give priority to the rights of shareholders as the employees and creditors rarely have the ability to sue the directors.
The directors have discretion on how to exercise their powers but they must use their powers only for the purpose (i.e. the proper purpose) for which they are given (even though actions taken by them outside their powers may be ratifies by the company in GM).
Example:
Issue of Shares ➔ The power to issue shares is given to directors by the articles for the purpose only of raising additional capital or acquiring assets which the company needs for its business. The issue of shares for any other purpose (i.e to resist a takeover bid or otherwise to affect voting control) even if the directors honestly believe that to do so is in the interests of the company, is a breach of their duty.
Facts: The directors preferred one take-over bid as opposed to another, which was supported by the majority shareholding. In order to defeat the bid they disliked, the directors issued new shares, effectively reducing the existing majority to a minority holding in the company, incapable of blocking their preferred take-over bid. This was clearly an abuse of the directors’ powers and a breach of their duty to act bona fide in the interests of the company.
The directors occupy a fiduciary position in relation to the company and the company’s property ➔ they are prohibited from personally benefiting from their position as directors and thus cannot put themselves in a position where their personal interest conflict with their duties to the company.
Facts: Mr. Cooley was an architect and the managing director of IDC. The Eastern Gas Board has a lucrative contract going, to design a depot in Letchworth, but they told Mr. Cooley that they did not want to give it to a firm. Mr. Cooley told IDC that he felt a bit poorly and could resign from his job on early notice. They let him go. He went off and got handsomely compensated. IDC found out. They sued him for breach of his duty of loyalty.
Held: He was held accountable for the benefits he received because he received this benefit while managing director.
➤ An individual may still be subject to the duties even after he ceases to be a director.
Facts: The claimant company owed one cinema and wished to buy two others with the object of selling all three together. They formed a subsidiary to buy the cinemas but could not provide all the capital needed to finance the purchase. The directors bought some of the shares in the subsidiary to enable the purchases to be made and later sold their shares at a profit.
Held: The directors must account to the claimant company for the profit on the ground that it was only through the knowledge and opportunity they gained as directors of the company that they were able to obtain the shares and consequently to make profit.
➤ An individual may still be subject to the duties even in cases where the benefit is one that the Company may not have obtained.
A director should not engage in any competing business, i.e. be director of another competing company.
Facts: A company bought some chairs from a firm. At the time of the contract one of the company’s directors, unknown to the company was a partner in the firm.
Held: The company could avoid the contract because of this undisclosed interest in the transaction.
A director should not disclose any confidential info/trade secret or use it for his/her own purposes.
➤ Disclosure of a directors interests in shares- S.187 CAP113 ➔ failure to do so is an offence.
➤ Insider dealing – Law 116 (I)/2005 – does not apply only to directors
Criminal offence of insider dealing we will discuss this in detail later on!
The law will not allow directors to keep profits which they would not have made if they were not a director: strict rule➔ depends on the mere making of a profit from their position as director, regardless of their motives or the consequences to the company.
The director is accountable for the profit made even though the company suffers no loss, unless the transaction is ratified by the company.
Examples:
Facts: Ansell was managing director of the claimant company. He accepted a ‘commission’ (Bribe) from a supplier to order goods from that supplier, on behalf of the company. When the company found out, he was dismissed.
Held: The director was in breach of his fiduciary duty as the agent of the company. Therefore the company could recover the commission paid to him.
Facts: The shares of a railway company, T, were held in equal shares by four people who also constituted the board. The company carried out several large construction contracts for the Canadian Pacific Railway Co. Three of the directors, hearing that there was a new contract coming up, obtained it in their own names to the exclusion of the company and formed another company, D, to carry out the work. They then passed resolution by virtue of their shareholding approving the sale of plant by T to D and declaring that T had no interest in the new contract with the Canadian Pacific. The fourth director, Cook, brought an action against the others claiming that the benefit of the contract properly belonged to T and the directors could not use their voting power as shareholders to vest it in themselves.
Held: The opportunity to obtain the new contract came to the directors whilst acting as directors of T, the contracts belonged in equity to the company and the directors could not retain the benefit of it for themselves. Moreover, the directors could not use their voting control to appropriate the interest and property of the company.
Facts: Regal owned a cinema. The directors wished to acquire the leases of two other cinemas with a view to selling the whole as a going concern. Regal had insufficient funds to purchase the leases and the directors were unwilling to purchase in their own names, thereby making themselves personally liable without limit. So they formed a company, Amalgamated, with a capital of 5,000 £1 shares. Regal subscribed for 2,000 shares and the directors and their friends subscribed for the rest. Eventually the three cinemas were sold as a going concern by a sale of the shares in both companies. The directors received £2.16s.1d profit per share on the sale of their shares in Amalgamated. The company that purchased the two cinemas sued for the recovery of this profit.
Held: The directors used their opportunities and special knowledge as directors to make a secret profit for themselves. They were accountable to the company for the profits made. The House of Lords recognized that the directors as controlling shareholders, could have passed a resolution in general meeting to approve the retention of their profit. But they had not done so.
➔ Thus the (potential or actual) breach of duty may be authorized or ratified by the general meeting provided the effect of this is not to permit fraud on the minority shareholders as in Cook v Deeks (1916)
The law does not totally prohibit a director from contracting with the company ➔ after full and complete disclosure of the director’s interest: the company in GM can approve the contract.
Disclosure must be made to the members of the board (full board) who must approve the contract but the directors will not act as a member of the board for that particular transaction.
According to s.191 CAP 113.
Even where the company only has one director, he must declare his interest to himself and ensure this is recorded in the minutes of the board meeting.
A director who fails to comply with the section is liable to a fine and the contract may be voidable.
The company can take action against the director who did not disclose his/her interest in the contract and to recover all benefits that he has obtained as a result of the breach of this fiduciary duty.
The purpose = to enable the board to comply with their statutory duty of disclosing in the annual accounts detailed particulars of transactions or arrangements with the company in which a director had directly or indirectly a material interest: S.156 CAP 113.
S.182 CAP 113: Prohibits a company from making loans to persons who are its directors or directors of its holding company. However this prohibition does Not apply:
The director is under a duty to exercise skill and care in the performance of his/her duties but the level of the skill and care to be exercised is not as high➔ generally and especially for private companies: the skill and care can be satisfied by a regular attendance at board meetings:
The standard of care and skill required of a director has been described in ▲City Equitable Fire Insurance Co (1925)
But: Complete inactivity may amount to breach of duty of care & skill in certain circumstances:
Facts: The Company was a money-lending company and had 3 directors. Parsons, Hamilton and Stebbing. All three had considerable accountancy and business experience (Parsons and Hamilton were chartered accountants). No board meetings were ever held and Parsons and Hamilton left all the affairs to Stebbing. Parsons and Hamilton did however turn up from time to time and sign blank cheques on the company’s account which they left Stebbing to deal with. Stebbing loaned the company’s money without complying with statutory regulation applying to money lending such that the loans were unenforceable.
Held: All three were liable in negligence.
The common law duty of care and skill is supplemented by statute. Remember that directors adjudged ‘unfit to be concerned in the management of a company’ are liable to be disqualified by court order – s180 CAP 113.
According to S311 CAP113 ➔ If in a winding up it appears that the company’s business has been carried on with intent to defraud creditors or for any fraudulent purpose ➔ an application can be made by the liquidator, official receiver, creditor or any contributory to the court: the court may declare that any person who were knowingly parties to the fraudulent trading shall make such contribution to the company’s assets as the court thinks proper.
❖ It is necessary to establish dishonest intent – A person is not liable for fraudulent trading where he has no dishonest intention
i.e. when the directors caused the company to incur further debts at a time when they know that there is no reasonable prospect of those debts being paid.
Examples:
Facts: The directors ordered a consignment of potatoes on a month’s credit at a time when they knew that payment would not be forthcoming at the end of the month when it was due (the company was hopelessly undercapitalized so there was no suggestion that the goods would eventually be paid for.
Held: The directors were convicted for fraudulent trading.
Facts: The directors caused the company to incur debts at a time when they would not be paid on the due date. They however showed that they thought the company would survive and the debts eventually paid.
Held: The directors’ honest belief (although unrealistic) negated the intention to defraud: they were not liable.
❖ The person concerned must be a party to the fraudulent trading: a person is not ‘party’ merely by reason of knowledge, they must take some active step, such as the ordering of goods.
The possible consequences of fraudulent trading:
The court may order the person liable to make such contribution so the company’s assets as it thinks fit
In addition, such person may incur:
Under S.312(I) CAP113 if in the course of a winding up of company, it appears that any person who was involved in the formation, or promotion of the company, or any past or present director manager or liquidator, or any officer of the company, has:
The Court may, on application of the official receiver, the liquidator, a creditor or a contributory, compel such a person to reply or restore the money or property or any part thereof with interest at a rate which the Court think just, even if the offence is one for which the offender may be criminally liable.
S.301 CAP113: The liquidator (or administrator) may apply to the court to set aside company transactions where the company gives a preference.
A company gives a preference if it does anything to put a creditor, surety or guarantor in a better position in the event of the company’s insolvent liquidation, than they would otherwise be.
The transaction or preference will only be set aside by the court if the company is insolvent and the transaction or preference was made within the relevant period which is within 6 months of the onset of insolvency.
The onset of insolvency is the commencement of the liquidation or presentation of the petition for an administration order.
The transaction or preference will not be set aside unless at the time it was made the company was not able to pay its debts or the company became unable to pay its debts as result. The burden of proving this is on the person seeking to have it set aside.
S.303 CAP113: The liquidator (or administrator) may invalidate any floating charge created by insolvent company within 12 months before liquidation, except if it is proved that the company was solvent immediately after the creation of the charge.
Even if the directors committed a breach of their duties➔ the shareholders can release them from liability by approving what the directors have done or intend to do by a resolution to that effect passed in general meeting.
If the directors are also shareholders they may vote in favor of a resolution to approve their action (and the retention of benefit obtained from it):
Facts: The Company purchased a boat from one of its directors for a reasonable price. The purchase was ratified by a general meeting, including the votes of the director.
Held: Every shareholder has a right to vote upon any question; the fact that the shareholder had a controlling shareholding and had an interest in the contract made no difference.
There are however 2 limitations:
In the ▲City Equitable Case (1925) (UK), the innocent directors were relieved of any possible liability by an exemption given to them by the articles. But an articles which provides that the directors will not be sued if they are in breach of duty = void
The court may exercise its discretion to relieve the directors from breach of duty under S.383 CAP113 if they have acted honestly and reasonably and ought fairly to be excused.
General Principle: the Board of Directors is vested with the power to manage the affairs of the company and the shareholders cannot interfere in the conduct of the management of the company (i.e The board may exercise all such powers which are not required by the law or the Articles to be exercised by the company in general meeting)
The delegation of a power to carry on the business and affairs of the company is delegated to the board as a whole and not to directors as individuals.
Article 80 Table A does not vest every power of the company in the board and subjects the powers of the directors to manage the company as follows:
Provisions of Law: Certain powers are expressly reserved to members in general meeting by the Law itself. These powers include:
Provisions of the memorandum and Articles: The memorandum or articles may expressly reserve powers to the members in general meeting. Thus, under Table A:
Directions given by special resolution (except that no such direction shall invalidate any prior act of the directors).The shareholders may direct the board as to their actions.
➔ Thus, the members are not solely without powers to control directors whose actions are not in accord with members’ wishes.
The General Meeting may:
Neither of these will invalidate authorized acts already done by the directors but will ensure (hopefully) more unity in the future.
Usually an act will be done on behalf of the company not by an organ but by a servant or agent. Whether or not such an act will make the company liable depends on:
The power of the company to act in such a situation (the ultra vires rules and its exceptions) and
➤ On whether or not the person acting is capable of binding the company
➔ law of agency: a principal (the company) will be liable for the acts of its agent if the agent has:
Facts: One of the directors of the defendant entered into a contract with the plaintiff on behalf of the company. The company refused to endorse the agreement.
Held: The general rule is that, unless, expressly restricted, a director has the usual authority to enter into contracts on behalf of the company and if he does so, the company will be bound.
Facts: The new owners of a hotel continued to employ previous owner as its manager. They expressly forbade him to buy certain articles including cigars. The manager however bought cigars from a 3rd party who later sued the owners for payment as the manager’s principal.
Held: The purchase of cigars was within the usual authority of a manager of such an establishment.
➔ The company is stopped from denying to the 3rd party that the person has authority to bound the company into contracts; company is bound.
Facts: Kapoor, a property developer, and Hoon, formed a private company which purchased Buckhurst Park Estate. The board of directors consisted of Kapoor and Hoon and a nominee of each. The company’s articles gave the company power to appoint a managing director but none was appointed. Kapoor, however, acted as such. He instructed the claimants, a firm of architects, to do work for the company which was completed. The company refused to pay, claiming that Kapoor had no authority to bind the company to this type of transaction.
Held: Kapoor had been held out as having apparent authority to enter into this transaction by those having actual authority to commit the company in this way, i.e. the board. The company is, therefore, stopped from denying to anyone who has entered into a contract with an agent in reliance upon such apparent authority that the agent has authority to contract on behalf of the company.
Examinership is an alternative to the liquidation of a Company. The purpose of Examinership is to place the company under the protection of the Court for certain period of time during which no proceedings may commerce, in view of reaching a compromise plan with the Creditors.
The company is placed under the court’s protection for an initial period of four (calendar) months from the date of the presentation of a petition. The examiner may apply for an extension of a further 60 days to finish the report (maximum protection period is only for six months).
s. 202 B CAP 113 - The court petition may be initiated by:
The petitioner has a duty to exercise utmost good faith in the preparation and presentation of the petition.
The petition must be accompanied by an independent expert’s report. Such an expert may be the auditor of the company or an “insolvency practitioner.” The expert also has a duty of utmost good faith in the preparation of the report.
s. 202 A CAP 113 – Preconditions for Examiner’s appointment:
The first precondition to the examiner’s appointment (Precondition 1) is met if:
The court has the power to appoint an examiner where there is a reasonable prospect of survival of (both):
A proposal to sell off the company’s business and assets does not meet the above test as there is no prospect of survival of the whole or part of the company’s undertaking as going concern: the whole or part of the undertaking of the company must remain with the company.
Once appointed, the examiner is vested with the following powers:
The court may give the examiner additional powers including all or any of the directors’ powers (management and borrowing) and/or the liquidator’s powers.
The examiner is not (unless vested with the powers of directors) an agent of the company.
The examiner will nevertheless be personally liable on any contract entered into by him/her (in the name of the company or as an examiner) in the performance of his/her functions. S/he is also entitled to an indemnity out of the assets of the company. The examiner (as in the case of any company officer) may be sued for breach of duty.
The examiner’s primary duty is to the court and to comply with the statutory obligation to examine the company and, if appropriate, formulate and bring forward proposals for a scheme of arrangement.
Winding Up: The process by which the company’s assets are released and distributed to its creditors or if surplus to its members.
By Court
s.203(1)(a)
Subject to the supervision of the Court
s.203(1)(c)
Voluntary
s.203(1)(b)
Section 211: A company may be wound up by the Court if:
the company is unable to pay its debts
The Company is unable to pay its debts subject to s. 212 when:
the Court is of opinion that it is just and equitable that the company should be wound up.
This is a remedy available to Minority Shareholders:
See ▲Re Westbourne Galleries Ltd [1973]
Locus Standi (who has the right to initiate the petition):
Publication of Petition:
Powers of the Court: s.214
Disposition of Company property / Transfer of shares / Alteration in the status of members
➔ Will be void unless the court otherwise orders – s.216 / s.217
After winding Up:
➔ The liquidator takes into his custody and control all the company property and things in action of the company – s.231 (Note: On the winding up, the Official Receiver becomes, ipso facto and ex officio provisional liquidator until a new liquidator is appointed)
Statement of Companies Affairs
➔ Has to be made by the directors and submitted to the Official Receiver within 14 days as from the winding up order.
The Official Receiver shall summon separate meetings of creditors and contributories for determining whether:
Liquidators’ Powers (Subject to the sanction of the Court or the inspection Committee):
Liquidators’ Powers (In a Court Winding up only)
Challenging the performance of a Liquidator:
The Liquidator’s performance and powers are subject to the control of the Court.
Locus Standi: - Creditors / Contributory – s.233(3)
- Any aggrieved party – s.234(5)
Consequence: The Court can sanction / reverse / modify any act or decision of a Liquidator.
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Court’s discretion will be exercised only when:
Dissolution
When the Liquidator has fully would up all the affairs of the company s/he has to make an application to the Court for an order that the company be dissolved - s.260(1)
The order shall within 14 days from the above date be forwarded by the liquidator to the Registrar of Companies – s.260
Section 261: A company may be wound up voluntarily:
| Member’s Voluntary winding Up | Creditor’s Voluntary winding Up |
|---|---|
| It is a type of voluntary winding up when a “declaration of solvency” has been made. | Any voluntary winding up other than members winding up is considered as a creditors winding up (no “declaration of solvency”) |
When there is a proposal for a voluntarily winding up, the majority of directors (or all in a 2 directors company) in a meeting make a statutory declaration to the effect that they have made a full inquiry into the affairs of the company and have formed the opinion that the company will be able to pay its debts in full within a period not exceeding 12 months from the commencement of the winding up.
At General Meeting
The company shall appoint 1 or more liquidators for the purpose of winding up the affairs and distributing the assets of the company.
On the appointment of the liquidator all the powers of the directors shall cease, unless the company in the GM or the liquidator approves the continuance of their powers.
Publication of the Last Meeting
Notifying the Registrar of Companies
Creditors meeting
Liquidator
➔ The Liquidator may:
Aim: is to pay all the debts of the company and adjust the rights of the contributories among themselves.
– Also shall within 14 days after his appointment, publish in the Gazette and deliver to the registrar of companies for registration a notice of his appointment.
Section 293 CAP113: When a company has passed a resolution for voluntary winding up, the Court may make an order that the voluntary winding up shall continue but subject to such supervision of the Court, and with such liberty for creditors, contributories, or others to apply to the Court, and generally on such terms and conditions as the Court thinks just.
Outcome of such order the court may:
Law 116(I) 2005 as amended regulates the behavior of persons, who take advantage of unpublished price-sensitive information in order to make profit or avoid loss.
Dealing in securities while in possession of precise inside information as an insider, with the securities being price-affected if made public.
“Dealing” in this context includes (s. 9):
“Inside information” (s. 5) Price-sensitive specific or precise info for a particular company, likely to have a significant effect on price if made public.
“Insider” can be Director, shareholder, or obtained through employment, office or profession, or obtained from one of the above.
It is forbidden to any natural or legal person to perform any act, which aims to manipulate the market. Market Manipulations is (Sections 20):
The business of a Company in liquidation is found to have been carried on:
➔ With the intent to defraud creditors
➔ For any fraudulent purpose
Directors liable for Company Debts (Civil Penalty)
To establish the offence, you need to prove:
(1) Dishonest Intent
The directors ordered a consignment of potatoes on a month’s credit at a time when they knew that payment would not be forthcoming at the end of the month when it was due. Held: the directors were convicted of fraudulent trading.
(2) Person concerned shall be knowingly a party to the fraudulent trading
It was established that a person is not “party” merely by reason of knowledge. They must take some active step, such as the ordering of goods.
If in the course of the winding up of a company it appears that any person who has taken part in the formation or promotion of the company or any present director, manager or liquidator, or any officer of the company has:
According to Russel, On Crimes bribery is ‘...the receiving or offering any undue reward by or to any person whatsoever, in a public office in order to influence his behaviour in office and induce him to act contrary to the known rules of honesty and integrity.’
Main Domestic Law over Bribery and Corruption in Cyprus:
Section 3:
It is a criminal offence punishable by an imprisonment sentence of up to 7 years or to a fine not exceeding €100,000 or to both for an agent who directly or indirectly who accepts or receives or accepts to receive or requests or attempts to receive by any person in a manner which shows corruption any gift or consideration as an incentive or reward for the performance or in order to abstain from the performance of any act which relates to his principal’s affairs; or for any person directly or indirectly to give or to offer or to agree or to promise or to attempt to give a gift or consideration in a manner which shows corruption to any agent as an incentive or reward for the performance or in order to abstain from the performance of any act which relates to his principal’s affairs; or for any person who knowingly gives to any agent or if any agent knowingly uses with the intention to deceive his principal any receipt, account or other documents which contains any information which is false or misleading in relation to any substantial detail.
Section 2:
An agent is any person who is employed or acting for another person or person who serves the Republic or any Public Organisation (including local or public Authorities of any description) or any other foreign public servant or servant of an International Organisation.
Sections 103 and 105 of the Criminal Code provide for criminal offences for abuses by public officials entrusted with special duties and for abuses of power by public officials.
According to section 118 anyone who gives, offers or promises reward to a witness or a person who is about to be called as a witness in a court procedure on the basis of any agreement or arrangement that his statement may because of that be affected is punishable by a sentence in prison of three years.
No public servant is entitled to give or receive either directly or indirectly any gifts which may comprise of money, other goods, free trips or other personal benefits except for presents by or to personal friends; such rule can be relaxed by the Council of Ministers in particular circumstances or when the Council of Ministers considers that it would not be for the benefit of the public interest to reject the gift. In the latter case, the public servant must report the matter to his/her Department Supervisor.
If a gift is given in breach of the above rules, the public servant reports the matter to his/her Department Supervisor and the gift is treated in the proper manner.
If a monetary or other gift is offered or given to a public servant for services provided or to be provided under his official capacity, the public servant must inform immediately the Supervisor of his Department (section 69).
According to section 69A a public servant is under a duty to report in writing, providing all necessary evidence, to his/her relevant Competent Authority any knowledge or reasonable suspicion that another servant has committed corruption or bribery in the performance of his duties.
Subject to any other criminal legislation, breach of the abovementioned provisions renders the public servant liable to a disciplinary action.
This Law provides that any active or passive bribery of domestic public officials or in the private sector, bribery of foreign public officials, of members of foreign public assemblies, or officials or international organizations, or members of international parliamentary assemblies etc is a criminal offence punishable by imprisonment up to 7 years or a fine up to EUR 17,000,000 or to both penalties.
Active bribery: intentionally “......promising, offering or giving by any person, directly or indirectly, of any undue advantage to any of its public officials, for himself or herself or for anyone else, for him or her to act or refrain from acting in the exercise of his or her functions”. (article 2 of the Convention on Corruption adopted by Law 23(III)/2000).
Passive bribery: intentionally, “the request or receipt by any of its public officials, directly or indirectly, of any undue advantage, for himself or herself or for anyone else, or the acceptance of an offer or a promise of such an advantage, to act or refrain from acting in the exercise of his or her functions.” (article 3 of the Convention on Corruption adopted by Law 23(III)/2000).
