Business Law and Practice

“Sole trader” — definition

Someone who runs an unincorporated business on their own as a self-employed person

What is the difference between incorporated and unincorporated businesses?

Incorporated businesses have a separate legal entity, and its owners generally have no liability for business debts. Unincorporated businesses are run by individuals with no separate legal entity and have full personal liability for business debts.

What does the concept of unlimited liability entail?

Refers to unincorporated businesses, wherein business owners are personally liable for debts and their business and personal assets are treated the same for legal purposes.

What is the definition of a “partnership” under the PA1890?

Two or more people carrying on a business with a view to profit.

What are the consequences if partners do not enter into a partnership agreement?

The default provisions of the PA 1890 will apply.

How is income tax paid by partners of a partnership?

If an individual is a partner, they will pay income tax as a self-employed individual.

If a company is a partner, they will pay corporation tax on their share of the profits.

What is the liability of a limited partnership?

LPs must have at least one partner with unlimited liability. They can also have a limited partner whose liability is limited to the amount they initially invested, subject to conditions.

A limited partnership can have a limited partner whose liability is limited to the amount initially invested. This is conditional. What are the conditions? What are the consequences if one of these conditions is breached?

The limited partner must not:

• Control or manage the LP,

• Have the power to take binding decisions on the L’s behalf or

• Remove their contribution for as long as it is in business.

If the limited partner breaches one of these conditions, they will be treated as having unlimited liability.

What are the requirements for a company to be a public company?

1. Its constitution must state that it is a public company.

2. The words “public limited company” or the abbreviation “plc” must appear at the end of the company’s name.

3. The company’s owners must invest a specific minimum amount of money for use by the company; the allotted share capital of the company must be at least the “authorised minimum”. Each allotted share must be paid up to at least a quarter of its nominal value plus the whole of any premium on it.

“Floating charge” — definition

A charge over all of the business’ assets. Not available to partnerships or sole traders.

What must be submitted to incorporate a new company?

• Completed Form IN10,

• Memorandum of association,

• Possibly, the company’s articles of association and

• The applicable fee.

When does a company come into existence?

Upon the issue of the certificate of incorporation (ss 15(4) and 16(2), CA 2006).

What information does a certificate of incorporation include?

• The name and registered number of the company,

• The date of its incorporation,

• Whether it is a limited or unlimited company (if limited, whether it is limited by shares or by guarantee),

• Whether it is a private or public company and

• Whether the company’s registered office is in England, Wales, Scotland or Northern Ireland.

What is required to change a company’s registered address?

Board resolution (s 87, CA 2006) and Form AD01.

What are the requirements for directors of companies?

Every company must have at least one director who is a natural person (s 155(1), CA 2006). Public companies must have at least two directors (s 154, CA 2006).

Directors must be at least 16 years of age (s 157, CA 2006).

How many shareholders are required when incorporating a company?

Companies can be incorporated with one shareholder. There is no maximum number of shareholders.

When an applicant registers a company, they must provide information about the shares (known as a statement of capital). What does this include?

• The number of shares of each type the company has and their nominal value — known as the company’s share value and

• The names and addresses of all shareholders — known as subscribers.

• What rights each type of share gives the shareholder (known as “prescribed particulars”), including:

  • What share of dividends they receive,

  • Whether they can exchange (“redeem”) their shares for money,

  • Whether they can vote on certain company matters and

  • How many votes their shares entitle them to.

Under ss 17 and 29, CA 2006, what comprises a company’s constitution?

• Its memorandum of association,

• Its articles of association,

• Certificate of incorporation,

• Current statement of capital,

• Copies of any court orders and legislation altering the company’s constitution,

• Shareholders’ resolutions affecting the constitution and

• Certain agreements involving shareholders.

What does a memorandum of association consist of?

A statement that the subscribers wish to form a company and agree to become a shareholder and take at least one share each. Must be signed by the subscribers.

How can a company’s articles be amended?

By shareholders’ special resolution.

Voting requirement for a shareholders’ special resolution?

At least 75% majority of the shareholders (s 283(1), CA 2006).

When registering a company with CH, there are three options regarding the company’s proposed articles. What are these three options?

1. Adopt the MAs entirely.

2. Adopt the MAs with some amendments.

3. Supply entirely bespoke articles.

What is a person with significant control?

An individual, corporate body or a firm that is a legal person under its governing law (s 790C, CA 2006).

Control is significant if the person:

• Holds more than 25% of the shares in the company or

• Holds more than 25% of the voting rights in the company or

• Holds the right to appoint or remove a majority of the board of directors of the company.

What must be submitted at CH to re-register a private company as a public company?

• The SR,

• Application for re-registration on Form RR01, which includes a statement of compliance,

• The fee for re-registration,

• The revised articles (s 94(2)(b), CA 2006),

• A balance sheet and a written statement from the company’s auditors and a valuation report on any shares which have been allotted for non-cash consideration between the date of the balance sheet and the passing of the special resolution.

“Shelf company” — definition

Shelf company: a company that has already been set up, usually with two directors and two shareholders, each of whom owns one ordinary £1 share, which is formed and then left “on the shelf” until the client needs a company quickly.

How does a company change its name?

By shareholders’ SR or by other means provided for in the company’s articles (s 77, CA 2006).

“Accounting reference date” — definition

The date up to which a company must prepare its annual accounts.

When a company is incorporated, what will be its accounting reference date?

The last day of the month in which the company was incorporated (s 391(4), CA 2006).

What is the necessary procedure for a company to change its accounting reference date?

Board resolution and complete and file Form AA01 (s 392, CA 2006).

The 3 essential elements for a binding contract

1. Agreement

2. Consideration

3. Intention to create leal relations

“Offer” — definition

An expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted.

Do the courts decide objectively or subjectively whether there was an agreement between the parties?

Objectively.

Are goods on display in a supermarket an invitation to treat or an offer?

An invitation to treat.

Are advertisements invitations to treat or offers?

Generally invitations to treat, with the exception of advertisements for rewards, which are offers, as well as circumstances where there is a willingness to be bound, e.g. an offer of a unilateral contract.

At an auction, at what point is a sale concluded?

On the fall of the auctioneer’s hammer (s 57(2), SGA 1979).

The auctioneer inviting bids is simply an invitation to treat.

Are tenders invitations to treat or offers?

The request for tenders is an invitation to treat whereas the tenders themselves are offers.

2 elements to an agreement

1. Offer

2. Acceptance

“Acceptance” — definition

An unqualified expression of assent to the terms of an offer.

Can silence amount to acceptance?

Generally, no, unless conduct shows otherwise.

The postal rule

A letter of acceptance will be deemed communicated when posted, even if it is lost in the post.3

3 conditions for the postal rule to apply

1. Reasonable in all the circumstances to use the post.

2. The letter was properly stamped, addressed and posted.

3. The postal rule had not been excluded by the offeror.

General rule re acceptance of an offer

Must be communicated.

Ways to terminate an offer

• Counter-offer

• Withdrawal

• Lapse of time

• Express rejection

“Limited liability” — definition

A person cannot lose more than the amount they invest.

Who owns assets in an LLP

The LLP

Does an LLP have a separate legal personality?

Yes

What types of security can sole traders and general partnerships obtain?

Fixed securities onlyW

What types of security can LLPs, private companies and public companies obtain?

Both fixed and floating securities

How is a general partnership terminated?

Terminated immediately by a partner giving the other partners notice, which can be oral.

Also dissolved by bankruptcy, death, charge or illegality.

Dissolved by a single undertaking when that undertaking ends.

How is an LLP terminated?

Application to CH for voluntary striking off, subject to various conditions, e.g. the majority of members signing the application.

How is are LTDs and PLCs terminated?

Application to CH for striking off if the company has not acted in three months.

Also voluntary or compulsory liquidation.

Incorporation formalities for an LTD

• Form IN01

• Fee

• Memorandum of association

• Articles required (unless using default articles)

Incorporation formalities for a PLC

• Form IN01

• Fee

• Memorandum of association

• Articles required (unless using default articles)

• £50k minimum allotted share capital

If a company were incorporated before the Companies Act 2006 came into force, which legislation will it be governed by? 

The Companies Act 2006

Bilateral contracts vs unilateral contracts

Bilateral contracts, by their nature, involve an exchange of promises, whereas unilateral contracts comprise a promise in return for an act

Exception to “past consideration is not good consideration”

• The past act/promise was done at the promisor’s request

• There was a mutual understanding between the parties that the act/promise would be compensated for in some way and

• Had the promise been made in advance, it would have been legally enforceable (consider intention to create legal relations)

General rule re promises to perform an existing contractual duty

Simply performing an existing contractual duty owed to the other party will not be consideration in exchange for a promise by the other party to pay more money

If the promisee exceeded their contractual duty, there is good consideration and the contractual variation is binding

Performance of an existing contractual duty owed to the other party will be consideration for a promise of extra payment if it confers a practical benefit; however, if the promise to pay more was made under duress, the promise may be set aside

The rule from Pinnel’s Case

Where there is an undisputed debt, at common law, an agreement between a creditor and debtor that the credit will simply accept part payment in full and final settlement of the full amount is not binding on the creditor

Common law exception to the rule from Pinnel’s Case

Provided the debtor gives the creditor something (besides part payment) in return for the creditor’s promise to forgo the balance of the debt, then that something different will be consideration

The doctrine of promissory estoppel

• If you have made a promise not to enforce your legal rights and

• Someone has relied on that promise, even though they have not provided anything in return, then

• If you try to enforce your legal rights, you will be “estopped” if it would be inequitable in all the circumstances to do so

Limitations to the doctrine of promissory estoppel

• Only as a defence

• Must have a promise to waive strict legal rights

• The promisee (usually a debtor) must have acted on the promise but not necessarily to their detriment

• Re ongoing payments, the doctrine suspends the strict legal right, so the creditor can resume their right to full payment by giving reasonable notice (NB can’t claim back payments for the concessionary period)

• A party must have “clean hands”

When does a partnership commence?

When it satisfies 1 of the PA 1890, not when the parties decide that it has commenced

With three exceptions, all decisions in a partnership must be taken my a majority (s 24, PA 1890). The three exceptions are …

• Changing the nature of the business (s 24, PA 1890)

• Introducing a new partner (s 24, PA 1890)

• Changing the terms of the partnership agreement (s 19, PA 1890) and the general contractual principle that contracts can only be varied with the consent of all the parties)

Implied provision by the PA 1890 re a partnership’s capital and profits and losses

Under the PA 1890, the partners share equally in the capital and profits and losses of the business

“Drawings” (in the context of a partnership — definition

The income profits that partners receive

Effect of the default provisions of the PA 1890 re expulsion of a partner

Under the default provisions of the PA 1890, no majority of partners may expel another partner unless the partners have expressly agreed to this (usually in a written partnership agreement) (s 25), i.e. effectively, it is impossible to expel a partner without an express agreement allowing the other partners to do so

“Dissolution” of a partnership — definition and effect

The partnership ends. Does not necessarily mean that the partners stop trading but rather, the contractual relationship between the partners will end,

NB even if all but the outgoing partners carry on in business together on the same terms, the original partnership is technically dissolved

Default provision of the PA 1890 re ending a general partnership

Under the default provisions of the PA 1890, a partner can end the partnership at any time by giving notice of their intention to do so to all of the other parties.

“Partnership at will” — definition

A partnership that continues indefinitely until notice is given under the PA 1890 (no requirement for the notice to be of a particular period or to be in writing)

“Retirement of a partner” (in a general partnership) — definition

The partner leaves the partnership

Under the PA 1890, a general partnership is dissolved when …

• A partner retires (NB the partnership agreement can provide that the other partners continue business) (s 26)

• An expiry of a fixed term (s 32)

• By the death or bankruptcy of any of the partners (s 33)

• If the partners give notice of dissolution to a partner who has (by order of the court) granted a charge over their share of the partnership property, for a debt owed by them alone and not the partnership as a whole (s 33)

• Automatically if something happens that makes it unlawful for the business of the firm to be carried on (s 34)

NB ss 32 and 33 can be disapplied.

Under s 35, PA 1890, the partners can apply to the court for a dissolution of the general partnership if …

• A partner becomes permanently incapable of performing their part of the partnership contract,

• A partner’s conduct is calculated to e prejudicial to the business,

• A partner willfully or persistently breaches the partnership agreement,

• The partnership can only be carried on at a loss or

• The court thinks that, for other reasons, it is just an equitable to order that the partnership be dissolved.

Effect of dissolution of a general partnership

Unless all the partners agree otherwise, the partnership must end, all the assets must be sold (or the partnership sold as a going concern) and the outgoing partner must receive their share.

NB an outgoing partner can insist on the business being sold under s 39, PA 1890.

“Partial dissolution of a general partnership” — definition

The partnership is technically dissolved but will continue seamlessly with one less partner.

Amount payable to a partner upon leaving a general partnership if the partnership agreement does not address the issue of payment for the outgoing partner’s share

The outgoing partner is entitled to either:

• Interest at a rate of 5% pa on the value of their partnership share until they receive their share from the other partners or

• Such sum as the court may order representing the share of profits attributable to the share of their value

“Goodwill” — definition

The business’ reputation and the value of its clients and contacts.

How is goodwill valued?

Hard to value but generally, two years’ profit is taken as the value for goodwill.

If the partnership’s assets are sold individually to be used elsewhere, goodwill will not be part of the equation.

Under s 44, PA 1890, when a partnership business is sold, the proceeds of the sale of the business or its as are applied as follows … (unless said otherwise by the partnership agreement)

• Creditors of the firm must be paid in full. If there is a shortfall, the partners must pay the balance from their private assets. They will share the losses in accordance with their partnership agreement.

• Partners who have lent money to the firm must be repaid the amount outstanding on the loan, including interest.

• Partners must be paid the share of the partnership’s capital to which they are entitled.

• Any surplus is shared between the partners in accordance with the terms of their partnership agreement.

In the winding up of a partnership, which partners can act in the winding up?

All of the partners, unless they are bankrupt (s 38, PA 1890). If any of the partners are bankrupt or deceased, the trustee in bankruptcy or PR can make such an application.

Does the PA 1890 imply a restraint of trade clause?

No.

A restraint of trade clause is only enforceable if …

It protects a legitimate business interest, e.g. business contracts, goodwill or confidential information, and is no wider than is reasonable to protect that interest, in term of duration, geographical area and scope.

Non-compete clauses vs non-solicitation clauses vs non-dealing clauses

Non-compete clauses seek to prevent former partners from competing with the partnership business.

Non-solicitation clauses prevent former partners from soliciting business from the partnership’s clients. It does not stop customers or employees from approaching the former partner and entering into a contract as a result.

Non-dealing clauses are more restrictive and prevent the outgoing partner from entering into contracts with clients, former clients or employees of the partnership, whether as a result of the former partner approaching the employee or client or the other way around.

Duties of partners of a general partnership under ss 24 and 28-30, PA 1890

Under s 24, partners:

• Must bear a share of any loss by the business, in accordance with the terms of the partnership agreement and

• Indemnify fellow partners who have borne more than their share of any liability or expense connected with the partnership.

Under ss 28-30, partners:

• Must be completely open with each other re any relevant info re the partnership,

• Must account to the firm for any private profits they have earned without the other partners’ consent from any transaction concerning the partnership and

• Must not compete with the firm. If the partner does so without the other partners consent, that partner must account for and pay over to the firm all profits made by them in that competing business.

Duties of partners of a general partnership under the common law

Partners owe a duty of the utmost fairness and good faith towards one another.

“Express actual authority” — definition

The partners may have expressly given one of the partners permission to enter into a particular transaction or type or transaction or instructed them to enter into a particular contract on behalf of the firm.

That partner is then acting with actual authority and the firm is bound by any contract that the partner makes within the scope of their authority.

“Implied actual authority” — definition

The partners may have impliedly accepted that one or more partners have the authority to represent the firm in a particular type of transaction.

If all the partners are involved in running the business without limitations, it will be implied that each partner has authority.

Alternatively, authority may be implied by a regular course of dealing by one of the partners to which the other partners have not objected.

“Apparent authority” — definition

The firm may be liable for actions which were not actually authorised but which may have appeared to an outsider to be authorised.

Even if between the partners there is an express or implied limitation on the partner’s authority, the firm will be liable to third parties under s 5, PA 1890 when …

• The transaction is one which relates to business of the kind carried on by the firm, (objective)

• The transaction is one for which a partner in such a firm would usually be expected to have the authority to act, (objective)

• The other party to the transaction did not know that the partner did not have authority to act and (subjective)

• The other party deals with a person whom they know or believe to be a partner (subjective).

Effect of a partner (of a general partnership) acting with apparent authority

Where a partner has acted with apparent authority, the firm will be liable to the third party under the contract.

The partner who made the firm liable is liable to indemnify their fellow partners for any liability or loss which they incur.

How are partners liable for partnership debts while in the partnership?

Jointly and severally → the claimant can sue any or all of the partners and collect the total damages awarded by a court from any or all of them, leaving the defendant(s) to seek a contribution from any of the other partner(s).

What is a novation agreement and its effect?

In a novation agreement, a retiring partner will be released from an existing debt by entering into a contract with a credit and the other partners, and possibly an incoming partner.

The creditor releases the original partners from their liability under the contract and instead, the firm as newly constituted will take over the liability.

If no new partner joins, to ensure the novation is contractually binding, either there must be consideration for the creditor’s promise to release the retiring partner from the liability or the contract must be executed as a deed.

Requirements and effect of s 36, PA 1890

A partner leaving a partnership will escape liability for any debts entered into after leaving the partnership, provided they have complied with s 36, PA 1890, which requires:

• Actual notice of the partner in question leaving (i.e. must be informed directly) for those the firm has had dealings with.

Anyone who has not had dealings with the firm before the partner left must be notified of the partner’s retirement by a notice in The London Gazette.

If the reason for ceasing to be a partner is death or bankruptcy, no notice of the event is required. The estate of the deceased or bankrupt partner is not liable for partnership liabilities incurred after the death or bankruptcy.

“Holding out” — definition

A representation that a particular person was a partner in the form, e.g. by leaving the partner’s name on the firm’s letterhead, by referring to them on the firm’s website or that person representing the firm in a previous course of dealings.

Effect of holding out

Can hold the person misrepresented liable (s 14, PA 1890), even if that person had never been a partner or had retired before the contract was made.

Liability if the remaining partners and the outgoing partner are sued by a creditor in respect of a debt incurred before the partner left the partnership

The outgoing partner may have to pay the third party because they always remain liable to third parties. However, they may have a contractual right to be reimbursed by the remaining partners, if such a right is included in the agreement.

Alternatively, they could seek an indemnity under s 24(2), PA 1890 on the basis that they have incurred liabilities in the ordinary and proper conduct of the business of the firm.

Effect if a partner cannot pay a judgment debt owed to a third party

The third party can enforce the debt in the usual way, e.g. obtaining a charge over the partner’s property/properties and then applying for an order for the sale of those properties to satisfy the outstanding debt. Alternatively, the third party may seize assets belonging to the partner.

Same for the fellow partners.

Member requirements for LLPs on incorporation

Must have at least two members.

Must also have two designated members, who are responsible for filing docs at CH.

Default position under the LLP Regulations 2001 re sharing of capital and profits

Members of the LLP share equally in the capital and profits of the LLP.

2 kinds of profits businesses can make

Income and capital

• Income — those recurring in nature, e.g. rental income

• Capital — one-off profits, e.g. an office building increasing in value.

From 2024/25, the default method by which most unincorporated businesses calculate their trading income for income tax purposes is the “cash basis”. What does this mean?

Taxes the difference between the money received and money paid during the accounting period.