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Summary BUSINESS LAW AND PRACTICE
BUSINESS LAW AND PRACTICE - comprehensive notes for the SQE 1 FLK exams
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BUSINESS LAW AND PRACTICEIncorporated and unincorporated business
1. Incorporated – a separate legal entity from its owners and managers, owners
are not liable for business debts
2. Unincorporated business – run by individuals who have not set up a separate
legal entity to run the business and they have personal liability for debts of the
business
Sole Traders
1. Someone who runs an unincorporated business on their own as a self-
employed person
2. Sole trader is personally liable for all debts of the business
Partnerships
1. 2 or more people run and own a business together
2. Partnership Act 1890
a. A partnership is formed when 2 or more people are carrying on a
business in common with a view of profit
3. Unincorporated
4. Not a separate legal entity
5. Divide profits and losses of the business between them
Limited Partnerships
1. Limited Partnership Act 1907
2. At least 1 general partner who has unlimited liability for the partnership debts
3. Permitted to have 1 limited partner whose liability is limited to the amount they
initially invested in the business
a. The limited partner must not control or manage, have power to take
binding decisions or remove their contribution for as long as it is in
business.
b. If they breach these rules then they lose the protection of limited
liability and treated as a general partner with unlimited liability
4. Limited liability is conditional
5. Must register with Registrar of Companies
COMPANIES
1. Private Companies limited by shares
a. Separate legal personality
i. Salomon v a salomon and co ltd (1897) – confirming concept
of separate legal personality
ii. Prest v Petrodel Resources limited and others (2013) –
corporate veil can only be pierced when a person is under an
existing legal obligation which he deliberately evades by
interposing a company under his control.
b. Decision-making
i. That fact that the company is a legal person in its own right
means that it needs humans to make decisions on its behalf
, ii. Directors run the company
1. Board meetings
iii. The shareholders are the individuals who provide the money
1. General meetings
2. Adams v Cape Industries-
a. Cape Industries, a company registered in England, was
engaged in mining asbestos in South Africa. The company’s
products were marketed in the United States of America
through a complicated network of subsidiaries
b. series of class actions a number of factory workers who had
contracted disease after inhaling asbestos dust managed
to secured judgment in an American court against Cape
c. the Court of Appeal held that an English trading company
would only be treated as having been present and a
possible a party to an action abroad if it had established a
fixed place of business there at its own cost and either it or
its representative had carried on business there for more
than a minimal time.
- Single economic unit argument- contending that Cape and its
subsidiaries were in reality one economic unit which should be
treated by law as such
o Ruling: Economic unity between a holding company and its
subsidiary does not provide a reason for imposing the
liabilities of the subsidiary company upon the holding
company: in law, they are still separate entities with
separate liabilities
- Corporate veil argument- namely that the corporate form was nothing
more than a façade concealing the true facts of a situation and
which could be drawn aside if legally expediency dictated such a
move appropriate
o Ruling- Cape Industries plc was entitled to organise the
affairs of the group of companies so that it would have the
practical benefit of the group’s asbestos trade in the USA
without the risks of tortious liability
o Cape Industries plc was not using the corporate structure
to evade limitations imposed on its conduct by law
o The corporate veil will not be pierced unless the corporate
form has been used by a party to evade limitations imposed
on its conduct by law, or to evade rights of relief against it
which third parties already possessed.
o
- Agency - that the subsidiaries were merely agencies making
contracts for their principal, the holding company
, o RULING- The mere fact that that the parent company can
exercise control over the subsidiary as a shareholder, and
indirectly benefits from the subsidiary’s business, does not
render the subsidiary the parent company’s agent.
o
ALL FAILED - Court of Appeal dismissed the contention that a corporate
veil should be pierced merely because a group of companies operated as
a single economic entity in terms of business reality
Separate legal personality: the recognition by the law of an entity as
having a separate legal existence and therefore being an appropriate
subject of legal rights and responsibilities. Companies, Limited
Liability Partnerships and many other types of entity, fall within this
category.
Limited liability: means that a person (usually the owner or part
owner of the business) cannot lose more than the amount they invest,
even if the business racks up large debts. So, if a shareholder buys
£4,000 of shares and the company becomes insolvent, she will lose
the £4,000 she invested and no more. In this case, if she has agreed to
pay £4,000 for the shares but has only paid £3,000 then she can be
asked to contribute another £1,000. This is what section 74(2)(d) of
the Insolvency Act 1986 accomplishes.
S74 IA 1986
One Man Company Argument: Salomon v Salomon – one man had controlling interest in the
company (majority SH) but court held that as it’s a company it has a separate legal
personality and therefore the man is not personally liable. as the company was duly
incorporated, it is an independent person with its rights and liabilities
appropriate to itself. the legal fiction of “corporate veil” between the
company and its owners/controllers4 was firmly created by the Salomon
case.
3. Public companies limited by shares (plc)
a. For a company to be a public company:
i. Requires at least 1 SH
ii. The constitution must state that it is a public company
iii. The word public limited company or plc must be included at
the end of the company’s name
iv. Owners must invest a specified minimum amount of money
for use by the company ; the allotted share capital must be at
least the authorised minimum £50k (ss761 and 763 CA
, 2006). Each allotted share must also be paid up to at least of
its nominal value plus whole of any premium (s586)
b. Raise money by offering shares to the public
c. Apply to join stock marker in UK
4. Limited liability Partnerships
1. LLP
2. Formed under the limited liability partnerships act 2000
3. Separate legal personality
4. Partners taxed as if the business were a partnership rather than a
company
5. Formed by 2 or more members carrying on a lawful business with a
view of profit. They have to file series of doc’s with registrar of
companys at companies house and paying applicable fee
6. Registrar issues a certificate of incorporation.
5. Other Types of Business Medium
1. Companies limited by guarantee
a. Usually for organisations not seeking a profit
2. Unlimited Companies
3. Community Interest companies
a. Usually for llc wishing to use their profits for public good not
private profit
4. Charitable Incorporated organisations
5. Overseas companies
6. Companies established by Act of Parliament or Royal Charter
7. Joint Ventures
PRIVATE COMPANIES LIMITED BY SHARES
Forming a company
1. To incorporate a new company the applicant must complete Companies
House form IN01 and submit it with memorandum of association and
possibly articles of association to Companies house with applicable fee.
2. Who makes the application?
a. Can be made only, by post or through software provided by
Companies House
b. If requirements are met, companies house will incorporate the
company and issue a certificate of incorporation and the company
comes into existence upon this certificate being issued. The
certificate must state under s15:
i. Name and registered number
ii. Date of incorporation
iii. Where its limited or unlimited company and if limited where
by shares or by guarantee
iv. Whether its private or public
v. Where the company’s registered office is situated – England
& wales, Scotland or northern Ireland
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