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I wrote this summary but I have to say that I know very little about business law, in fact, I am an Argentinean physician who decided to help his wife while she was preparing an exam as part of her Human Resources studies. When I was a student I always needed to study with a notebook and a pen; It was the only way to remember the main ideas and definitions from the book. Together with my wife we began reading the book and underlying the important ideas or concepts, afterwards we put it on writing and then as a way to remember what we had studied we decided to do the typing in a Word document. We got very excited when we realized that the job we were doing was a great help when she wanted to do a review of the chapter, and it came to our minds that if we put the summary available on the web many students could find a material that could make their studies easier, hence the decision to make this summary. Our only purpose is to create a tool for a better understanding of the wonderful Keenan & Riche´s Business Law book. We have no commercial interests (at all).

A summary does not replace a book, therefore we recommend you to read it together with

the book; first of all because this summary does not include the cases for discussion that

you can find in the book, secondly because the summary could have spelling mistakes, since my mother tongue is Spanish and my wife´s first language is Siswati from Swaziland in Southern Africa, and thirdly and mainly because we are not expert in the area of business law; since I am a physician and my wife is a Human Resources student. However we believe that this paper will help you a lot in your studies.

Dr Francisco Moròn Maldonado

If you want to contact us for suggestions or comments you can write to khumalobaylor@yahoo.com.ar




The law is a set of rules enforceable by the courts which regulate the government of the state and govern the relationship between the state and its citizens and between one citizen and another. A”rule” is merely a reflection of what a community regards to be appropriate behaviour; for example, the rules of a club, the rules in a meeting, sport rules, etc. We don’t expect that a rule to have force of a law and to be enforced by the courts. The Business world has many rules that a person must consider and observe before to start a business venture: The rights and duties which arise from business transactions and the consequences of business failure.


There are many ways to classify law. The most important are as follows:

1. Public and Private law

2. Criminal and Civil law

3. Common law and Equity

I. Public and Private law

LAW PUBLIC PRIVATE LAW or CIVIL LAW Constitu- Administra- Criminal Contract Tort Property Trust Family
Public Law

It is concerned with the relationship between the state and its citizens. This includes several specialist

areas such as:

a) Constitutional law: Concerned with the workings of the British Constitution. It covers such matters as the position of the Crown, the composition and procedures of Parliament, the functioning of central and local government, citizenship and the civil liberties and individual citizens.

b) Administrative law: Government agencies are involved, for example, in the provision of a state retirement pension, income support and child benefit. A large number of disputes arise from the administration of these schemes and a body of law, (the administrative law) has developed to deal with the complaints of individual against the decisions of the administering government agency.

c) Criminal law: The Criminal law makes certain antisocial behaviour, which can threat the good order of society. An offence against the state and the offenders are liable of punishment. The

states accept responsibility for the detection, prosecution and punishment of the offenders.


Private Law

It is primarily concerned with the rights and duties of individuals towards each other. The states will provide a civilized method of resolving the dispute. Private Law is also called Civil Law.


Criminal and Civil Law Criminal Law

It is concerned with forbidding certain forms of wrongful conduct and punishes those involved. Criminal proceedings are normally brought in the name of the Crown and are called Prosecutions. In criminal cases there is a Prosecutor who prosecutes a Defendant in the Criminal Courts The allegations of criminal conduct are so serious that they must be proved beyond a reasonable doubt. If the prosecution is successful the defendant is found guilty (convicted) and may be punished by the courts. Punishment includes: Imprisonment, fines or community orders such as unpaid work requirement. If the prosecution is unsuccessful, the defendant is found not guilty (acquitted).

The difference between criminal and civil law


Criminal law

Civil law



Offences against the state

Disputes between private individuals

Purpose of the action

To preserve order in the community by punishing








been suffered


The parties

prosecutor prosecutes a defendant









A claimant sues a defendant


are Crown, signified by (Queen)


for Rex

(king) or Regina






The criminal court, i.e. magistrate’s court or Crown

The civil courts, i.e. county court or High Court






The prosecutor must prove his case beyond a reasonable doubt

The claimant must establish his case on the balance of probabilities

of proof



defendant may be convicted if he is guilty and

A defendant may be found liable or not liable

acquitted if he is innocent


Imprisonment, fine, community order






performance, rescission


Murder, theft, driving with excess alcohol, engaging in an unfair commercial practice

Contract, tort, trust, property law


The distinction between the criminal and civil law does not depend on the nature of the wrongful act; because the same action may be give both: Civil and Criminal proceedings. For instance; if a person who is driving under the effects of alcohol has an accident which produced injuries to another person; he or she may be liable by the Civil court because of the drink and driving, and also by the Criminal court, due to the severe injuries given to he other person.

III. Common Law and Equity

To understand the distinction between these two systems we need to examine the origins of English law in history. In 1606 William of Normandy gained the Crown of England by defeating King Harold Before the Normans arrived in power, there was no such thing of English law. the legal system was based on the local community which each had its own local rules. The Normans were great administrators and they soon started the creation of a uniform system of law for the whole country.


The common Law

The Norman kings ruled with the help of the Curia Regis (King’s Council). The Curia Regis had meetings of two types:

- Occasional assemblies

- Meetings of royal officials

Later they started the development of courts to hear different kind of cases The first court to appear was the Court of Exchequers, this court dealt with taxation disputes. The second court was the Court of Common Pleas, which heard civil disputes between one citizen and another. The court of King’s Bench had jurisdiction over civil and criminal cases and also supervision to the inferior courts. The King use to send representatives to supervise and control the rest of the county. These royal commissioners performed different types of tasks, like make records of lands, collect taxes, resolve disputes, etc. Their judicial powers become more important and a body of rules started to be implemented to the whole country. The representatives returned to discuss the cases and customs that they had encountered and then a uniform pattern of law was created throughout England. This was the beginning of the Common Law. They used a writ or a court order, which is an official document that orders someone to do something.


Over a period of time the common law become a very rigid and strict system of law. Some of the mains defects or flaws of the common law were as follows:


The system was too slow


The wrist system was very complicated


The only remedy available was an award of damages. This was not always a suitable or adequate remedy


Men of wealth and power could bribe and intimidate jurors

Many citizens felt aggrieved or angry and seek for king assistance. The number of petitions increased and the king passed them to the Curia Regis; then the Chancellor started to hear petitions on his own and the Court of Chancery was established. The body of rules applied by the Court was called Equity. Equity is not a complete system of law. Equitable principles were formulated to correct the defects in the Common law. They were designed to complement the Common law rules but not to replace them. Equity has made an important contribution to the development of English law, particularly in the following areas:

- Recognition of new rights

- Introduction of new remedies or solutions

Recognition of new rights: The Common law didn’t recognize the concept of the trust. A trust is an arrangement in which a person or an organization manages someone else’s money or property. The trustee is someone who is responsible for looking after money or property that belongs to another person. Introduction of new remedies: The new equitable rights were enforced by means of new equitable remedies.


Differences between Common law and Equity




Developed by circuit judges from English customary law

Developed by Chancellors in dealing with petitions addressed to the king from citizens complaining about the rigidity of the Common law

Is a complete system of law


Complements the Common law but could not replace it
















alternative solutions


Upholds rights irrespective of the motives or intentions or the parties

Originally a court of conscience which ordered the parties to do what was just and fair. These principles are contained in equitable maxims, e.g. “He who seeks equity must do equity” and “Delays defeat equity”

Remedies available as of right











Legal liability describes a situation where a person is legally responsible for breaking a law or a rule (breaching an obligation imposed by the law). Such obligations may arise from the Civil or Criminal law Civil Liability

- Contractual liability

- Tortious liability Criminal Liability

Civil liability

The civil law is concerned with the rights and duties which arise between private individuals. The aim of taking legal action is to put right or wrong which has occurred, often by means of an award of


o Contractual liability

It arises when two or more persons enter into a legally enforceable agreement with each other. The law of contract is concerned with determining which agreements are binding, the nature and extent of the obligations taken by the parties and the legal consequences of breaking the contractual promises. Every type of business transactions, from buying and selling goods and services to employing staff, is governed by the law of contract.

o Tortious liability

A tort consists of the breach of a duty imposed by the law. The law of tort seeks to compensate the victims of certain forms of harmful conduct by an award of damages or to prevent harm occurring by granting an injunction. Examples of torts include:

- Negligence

- Nuisance

- Trespass

- Defamation (libel and slander)

- Conversion


Criminal liability

A crime is an offence against the state. The sanctions are so severe that the criminal law normally requires an element of moral fault on the part of the offender. Thus the prosecution must establish two essential requirements:

- Actus Reus (prohibited act)

- Mens rea (guilty mind)

For most criminal offences, both elements must be present to create criminal liability. If you pick someone’s umbrella up thinking that it is your won, you cannot be guilty of theft, because of the absence

of a guilty mind.

LAW OF PROPERTY The law of property is concerned with the rights which may arise in relation to anything that can be owned. Thus, property covers land, goods and intangible rights such as debts, patents or the goodwill of a business.

Rights of ownership and possession

Ownership: Ownership describes the greatest rights that a person can have in relation to property. An owner enjoys the fullest powers of use and disposal over the property allowed by law. However, an owner does not enjoy absolute rights; restrictions may be imposed to protect the right of other members of the community. Possession: The ownership, control, or occupancy of a thing, most frequently land or Personal Property, by a person.

Possession consists of two elements: Physical control and the intention to exclude others.

Although the two terms are often confused, possession is not the same as ownership. No legal rule states that "possession is nine-tenths of the law," but this phrase is often used to suggest that someone who possesses an object is most likely its owner. Likewise, people often speak of the things they own, such as clothes and dishes, as their possessions. However, the owner of an object may not always possess the object. For example, an owner of a car could lend it to someone else to drive. That driver would then possess the car. However, the owner does not give up ownership simply by lending the car to someone else.




The law is a living creation that reflects the need of the society it serves, each generation leaving its mark on the law. Ideally business requires a stable environment within which to operate. The business person will need to keep himself informed of general legal changes which will affect his day- to-day running of the business. Almost every aspect of his business will be subject to legal regulation and the law could always change. In this chapter we will explore why the law changes and the mechanism by which takes place.

CAUSES OF LEGAL CHANGE Legal changes can be divided into two categories according to their causes:


In response to the changes taking place in society: Political, social and economic changes, technological advancements and changing moral beliefs.


In response to the need to keep the law in good working order

Legal change and the changing world

The scientific and technological achievements of the past century –motor vehicles, aircraft, the telephone,

radio and TV, computers and genetic engineering. Each new development creates its own demand for legal change. The role and functions or the elected government, the changes in the law relating to trade union rights, the creation of the European Community (EC) in 1973, the changes in moral beliefs and social attitudes are potent causes of legal changes.


Ideas for changing the law can come from many sources:


Official law reform agencies


Government departments


Political parties and pressure groups

Official law reform agencies

The main agent of law reform in England and Wales is the Law Commission, which was established to keep the law as a whole under review, with a view to its systematic development and reform. Its statutory duties include;

- codification of the law

- elimination of anomalies

- repeal of obsolete and unnecessary enactments

- securing a reduction in the number of separate enactments

- simplification and modernization of the law

Another law reform agency is the Civil Justice Council. The council has a duty to keep the civil system

under review; to consider how to make the civil justice system more accessible, fair and efficient.

Government departments Each government department is responsible for keeping the law in its own field of interest under constant review. Where issues involving policy consideration rather than technical law reform arise, ministers may


prefer to set up a departmental committee to investigate the subject, rather than leave it to the Law Commission. Particularly important or controversial matters may lead to the setting up of a Royal Commission by the Crown on the advice of a minister.

Political parties and pressure groups

At election time, the political parties compete for our votes on the basis of package of social and economic reforms which they promise to carry out if elected. One of the most significant extra-parliamentary policies is pressure-group activity. Pressures groups are

organized groups of people seeking to influence or change government policy without wishing to form a government. Pressure groups use a variety of techniques to promote their causes, from holding public demonstrations to more direct attempts to gain the support of MPs (known as “lobbying”).


The main sources of law today are:

1. Legislation

2. Case Law (Judicial precedent)

3. European Union Law

LEGISLATION Legislation is law enacted by the Queen in Parliament in the form of Acts of Parliament of statutes. Parliament is made up of two chambers:


House of Commons (elected by people)


House of Lords (It’s not an elected body – Subject to reform)

Parliament sovereignty

The supremacy of Parliament in the legislative sphere is known as the doctrine of parliamentary sovereignty. Parliament can make any type of law but this law should not be in conflict with the European

Commission law.

o The making of an Act of Parliament

The procedure for making a law is long and complicated.

The first stage in the process is called a BILL

Types of Bills

1. Public Bills: The law affect the whole country

2. Private Bills: Affecting only communities (local)

3. Government Bills: To implement government policies fast

4. Private member’s Bill: Through Parliament (long process)

A bill must pass through several stages receiving the consent of the Commons and Lords before it is presented for the Royal Assent.




House of Commons


First Reading

The title of the Bill is formally read out. It is then printed and published.

Second Reading

The minister (or MP) in charge explains the purpose of the Bill and debate on its general principles follows. Provided the Bill survives any vote, it passes to the Committee stage

Committee stage

The bill is discussed in detail by a Standing Committee or the whole House sitting as a Committee. The bill is examined clause by clause and any amendments are voted on.

Report stage

The Bill is formally reported to the House and amendments made in Committee are considered

Third Reading

The Bill is debated again in general terms. Only minor verbal amendments can be made. If there is a majority in favour, the Bill proceeds to the other House

House of Lords

The Bill passes through a similar procedure in the Lords. As a non-elected body, it does not have an absolute right to veto buy it may delay the progress of a Bill.

Royal Assent

This is something of a formality as the Queen’s approval es never refused these days. The bill is now an Act of Parliament

o Delegated Legislation

The parliament gives a basic structure to other bodies or people to draw up the detailed rules necessary. The main forms of delegated legislation are as follows:


Orders in council: these are rules made under the authority of an Act by the Queen.


Rules and regulations: These are made by a minister in respect of the area of government for which he is responsible.


Byelaws: These are made by local authorities and certain other public and nationalized bodies to regulate their area of activity.

Legislation and the judiciary

The court will interpret how the law is applied into practical problems. Every Act of Parliament will be analyzed by the judges in the course of cases which appear before them. The judges will interpret the meaning of the words used by parliament in the law. The judges will follow rules of interpretation which are classified according to their origin in:


Statutory rules


Common law rules


Statutory rules – Interpretation section contained in the Modern Acts


Interpretation Act 1978


Internal or Intrinsic aids



Common law rules (are tools for the judges on how to interpret legislation)


Literal rule: The court gives to the words the plain meaning regardless of the result


Golden rule: If the words of law are capable of two meaning, the judges must use the meaning with the more common sense


Mischief rule: If the law has a defect or “mischief”, the judge must interpret the in the light of his knowledge


Ejusdem generic rule: The words must be interpreted as person or thing of the same class or genus



Expressio unius est exclusion alterius rule: When the rule mentions particularly one or more things, the other are excluded


Oscitus a soccis rule: a word should take its meaning from the context which it is found


The presumptions: Unless there are clear words to the contrary, the court will make a number of assumptions. They include:


The Act is not retrospective


The Act does not:

1. bind the Crown

2. alter the Common law

3. restrict personal liberty

4. create criminal liability


Use of extrinsic material: They are sources of information about a piece of legislation apart from the Act itself.

a) International Conventions and treaties

b) Reports of the law Commission

c) The previously strict rule that Hansard must not be consulted as an aid to statutory interpretation has now been relaxed.

CASE LAW (Judicial Precedent) In common law legal systems, a precedent or authority is a principle or rule established in a previous legal case that is either binding on or persuasive for a court or other tribunal when deciding subsequent cases with similar issues or facts. The general principle in common law legal systems is that similar cases should be decided so as to give similar and predictable outcomes, and the principle of precedent is the

mechanism by which that goal is attained. The principal underlying of this doctrine is that a decision made by a court in a case involving a particular set of circumstances is binding on other courts in later cases, where the relevant facts are the same or similar.

o Precedent in action

Based on the speech of the judge in his or her judgment

o European Court of Justice

Since 1973, all English courts are bound by the European Court of Justice in matters of European law. Definitions: BIND. To limit what someone is allowed to do by making obey the rule or agreement.

o The Supreme Court (Formerly the House of Lords)

The judicial authority previously exercised by the House of Lords, acting as the highest domestic court of appeal, has been now transferred to the Supreme Court.

o Court of Appeal

Their decisions is bound by the decision to the Supreme Court The court of Appeal decisions are binding on High Court

Decisions of the Criminal Division of the Court of Appeal are binding on lower criminal courts. E.g. The Crown court or to the Magistrate court


Divisional Courts


is bound by the decisions of the Supreme Court and Court of Appeal


High Court


High Court judge is bound by the decision of the Supreme Court, the court of Appeal and Divisional

court, but it is not bound by another High Court judge.



Historical background

The first step towards the creation of the EU (European Community) started in 1951 Treaty of Paris. Then the Treaty of Rome in 1957 created the European Economic Community and the European Atomic Energy Community. Many treaties and agreements were signed between European countries in order to unify Europe in many matters like, economic, health policy, unemployment, external policy, etc. The treaty of Amsterdam (1997) covers the following areas:

- Freedom, Security and Justice

- Union Policies to benefit citizens

- External Policy

- Union’s institution and legislation procedures

1- Freedom, Security and Justice: It states agreement on visas, asylum and immigration policies. Cooperation between polices forces and security agencies. 2- Union Policies to benefit citizens: Developing a coordinated strategy for employment.

- Achievement of sustainable development in relation with environmental matters

- Achievement of high level of human health protection

- Protection of consumers

- Principles of Subsidiarity and Proportionality

a) Subsidiarity: Principle or allowing the individual members of a large organization to

make decisions on issues that affect them, rather than leaving those decisions to be made by the whole group.

b) Proportionality: An action should not be more severe than necessary

3- External Policy: Measures to improve the coherence and effectiveness of the Common Foreign and security policy 4- Union’s institutions and legislative procedures



The Council of the European Union


The Commission


The European Parliament


The European Court of Justice


The Council of the European Commission

A council is a group of people elected to govern a local area. The EU council is made up by the head of state of each member state, sitting together with the ministers of the areas involved in the discussion; for instance, the minister of transport if a common transport policy is under discussion. The Council is the Supreme law maker for the European Community but the approval of the law must come from a proposal put forward by the Commission Although the decision can be taken by the vote of the majority, the tendency is to adopt unanimity for decisions of vital interest.


The Commission

It is formed by 27 commissioners, one from each country member of the EU. Each commissioner is assisted or advised by a Cabinet (6 or more people advising the Commissioner).

The Cabinet members make proposals to be approved by the commission.


The Commission is divided by departments known as Directorates – General. Roles of the Commission:


Formulate Community policy


To propose drafts of the legislation to be approved by Council\


Implement Community legislation


Ensure that treaty obligations are respected by the countries members of the EU


The Parliament (EP)

Since 1979, members of European Parliament have been directly elected by citizens of the countries. There are currently 736 members of the EP Despite its name, the European Parliament is an advisory or consultative body rather than a legislative one. The Parliament has important powers for supervision of the activities of the Council and the Commission. The EP can dismiss the full Commission, they can also reject budgets, and also they have the power of Veto to some proposals from the Commissions.

4) The European Court of Justice (ECJ)

Composed by 27 judges (one from each country member) The judges are assisted by several Advocates – General. Its right or power to make legal decisions covers the following areas.

- Preliminary rulings

- Actions against member states

- Actions against community institutions

- Community employment cases

a) Preliminary rulings: A ruling is an official decision. Any tribunal in a member state may ask the court to give a preliminary ruling concerning the interpretation of the treaties or community legislation ratified or enacted under the treaties.

b) Action against member states: In the case that a member state makes a violation of a treaty of to the European community legislation, the European Commission or another country can take the case to the European Court of Justice which will decide the necessary measures including financial sanctions.

c) Actions against community institutions: The ECJ can also consider that an Act approved by the Council or Commission are against European treaties and also can proceed defining the compensation that a country or individuals will obtain because of that unlawful Act.

Court of First Instance (CFI) Court of First Instance was established in 1989 to help and to relieve the ECJ of some of its workload.

Other Institutions


Court of Auditors: Its job is to scrutinize and report on the Community’s financial management and

oversee the implementation of the budget.


The Economic and Social Committee (ECS): It is an advisory body whose opinion is sought by the Council and Commission proposed legislation and other matters.


The Committee of the Regions: The committee is consulted on proposed legislation in such areas as education; culture and public health to ensure that regional interest are considered.


The European Investment Bank (EIB): It lends money to finance capital investment projects



The EC Ombudsman: He has the task of receiving and dealing with complaints from citizens of member states concerning maladministration by any community institution of body, except the European Court of Justice. He or she must submit an annual report to the European Parliament.



The Treaties


The Secondary law


Decisions of the European Court of Justice (ECJ)


The Treaties

The treaties are the primary source of the EC law. Treaties are only binding on countries at government to government level and cannot normally be enforced by individuals in national courts. However, the European Court of Justice has developed the doctrine of “Direct Effect”, which enables an individual citizen to use European Community rights derived from the treaties in domestic courts.

2) The Secondary Law The treaties empower the European Council and the European Council and E. Commission to make three types of legislation.




Regulations: Are designed to achieve uniformity of law among the member states Directives: Seek to harmonize the law of member states. They are instructions to member states to bring their laws on time; the countries are free on the methods by which the changes are implemented. Decisions: May be addressed to a state a company or an individual and are binding on the addressee.


European Court of Justice

Judgments of the Court of Justice on matters of European are binding on Courts within the member states

The law-making process in the EC

The laws will come into effect by a number of different procedures; these changes had been changing over time.


Consultation procedure (It was the first procedure)


Cooperation procedure (It was introduced by the SEA)


Co-decision procedure (Introduced by the TEU)


Assent procedure


Consultation procedure: It is the one that involves the Commission, the Parliament and the


Council. Cooperation procedure: Involves the European parliament more fully in the decision making. Parliament has more opportunity to influence, although has not the right of Veto under this procedure.


Co-decision procedure: It is a complex procedure in which the Parliament can have the power of veto; even if the Council adopts a unilateral decision for the approval.



Assent procedure: The Council may only adopt a Commission proposal under this procedure by obtaining the formal approval of Parliament.

Impact of the community membership on English law

In 1972 UK signed a treaty accepting the European Community law as part of the English law. Treaty obligations in UK became a law after passing through the British parliament. The European law has supremacy over the English law

The future of the European Union – the European Constitution

In December 2000 the heads of state held a meeting to create a Constitutional reform for the European Commission. In 2004 they agreed on the Constitutional treaty.

The Constitutional treaty aimed to create a single text for a European Constitution and replace all existing treaties; but France and Netherlands voted “NO” for this new constitution. This new situation led to a new treaty: The Treaty of Lisbon in December 2007; which after discussion was finally agreed in 2009. The main changes of the treaty of Lisbon include:

- Appointment of a permanent President of the Council, which his or her mandate will last for two and a half years instead of 6 months.

- The creation of a new post of European Minister of Foreign Affairs

- Qualified Majority Voting (QMV) system of voting in the Council

HUMAN RIGHTS European Convention of Human Rights and the Human Rights Act 1998

In 1950 the Council of Europe adopted a European Convention on Human Rights (ECHR) which is based on the United Nations’ Universal Declaration on Human Rights.

Rights under the Convention are not all the same. There are three types of convention rights:

- Absolute rights

- Limited rights

- Qualified rights

a) Absolute rights: Cannot be restricted in any circumstances including times of war

b) Limited rights: Are rights limited under certain circumstances like for instance, times of war or other public emergency

c) Qualified rights: Which are those rights that may be limited or restricted provided the interference with rights is prescribed by law, is done to pursue a legitimate aim set out in the relevant Article (e.g. prevention of crime, interest of national security), the interference is necessary in democratic society by fulfilling a pressing social need, pursuing a legitimate aim and is proportionate to the achievement of the aim.

The European convention of human Rights (ECHR) established institutions and procedures for protecting the rights included in the convention.

- European Court of Human Rights

- European Commission on Human Rights

The court of human Rights has no power to force states to apply their judgments. Some countries have adopted the ECHR into their domestic legislation in issues related to Human rights;

whereas other countries for example UK put their own legislation above the ECHR


Victims are those individuals who are affected by an unlawful act. Public authorities such as police forces, governments, immigration and prison officer’s army cannot be considered victims. The European Court of Human rights can define the compensation to be given to a victim. The court can quash (to say officially that a decision taken by another court was wrong) the conviction.

European Union Charter of Fundamental Rights

It was agreed by the European Council, Commission and Parliament on behalf of their respective

institution in December 2000 in Nice.

The Charter extends beyond the scope of the Convention covering for example, economic and social rights. Contents of the Charter

- Dignity

- Freedoms

- Equality

- Solidarity

- Citizen’s rights

- Justice

The Lisbon treaty says that freedoms and principles officially accepted in the Charter of Fundamental rights will have binding force in respect of the European Union law.




In all type of business there is law application.

A business person needs to understand the basics of the principles of law; but at same stage, however

they will need legal advice.

Legal services

is important to define who is allowed to provide a particular service The legal profession


is divided in two branches:


- Barristers

- Solicitors

They both have different functions but sometimes there are overlaps in their activities

o Solicitors

They are general Practitioners of all legal services. They are usually the first call port for everyone with legal problems, therefore the area of work if very varied: Claims of accidents, Legal formalities of buying / selling a house, Matrimonial problems, Forming companies, Employees legal problems, etc. The solicitors appeal in court on behalf of this client; this right was used to be limited to the magistrate court or county court, but in 1996, the changes introduced in Advocacy rights allow the solicitors to

appear in a higher court in limited circumstances. The Court and legal service Act also opened the way for solicitors to obtain higher judicial office, e.g.: To be able to occupy a position as a high Court judge.

o Barristers

If solicitors are the GP (the General Practitioner) of the legal world; Barristers are the consultant specialists.

The have the right to appear in any court or tribunal such as a House of Lords (now the Supreme Court). There are two types of barristers:

- Queens’ counsel barrister (after 15 – 20 years practice)

- Junior barrister

Queen’s Counsel barrister enjoy higher status, higher fees and they don’t do the “paper work” which in general is done by the junior barrister. But in 2004, changes were introduced in the selection process of a QC barrister. Those changes include a fair assessment of competences, interviews; references form other judges, etc.

The relationship between solicitors and barristers

The first person that a client with a legal problem will consult is the solicitor, who will deal with the issue until he reaches the point where will need the assistance of a barrister.

There are agreements between solicitors and barristers for the payment (called honorarium) of these

services; However the General Council makes rules to prohibit the barristers from entering in these contracts.

In the past the client only could go to the barrister if they were referred by the solicitors; but nowadays

the system is more flexible allowing certain organizations and individuals to contact a barrister directly under the agreement of the Bar Council (They must send an application first in order to have this



Legal Service Act 2007

- Establishment of a Legal System Board (LSB)

- Reserved Legal Activities: There are some activities that are reserved only for lawyers; if a person carries on a reserved legal activity and he is not an advocate, the action is considered an offence.

Duties of the Legal System Board (LSB)

- Promote and protect the Public Interest

- Improve access to justice

- Protect interest of consumers

- Increase public understanding of their legal rights and duties The LSB has a number of powers and sanctions available The LSB is required to establish a Consumer Panel

OTHER LEGAL PERSONNEL Public Notaries: A Notary public is an officer of the law who is authorized, among other things, to draw up attest and certify deeds and other documents to prepare wills and probate documents, to administer oaths and take statements of truth. Most notaries are also solicitors. Legal Executives: Staff who are not qualified as lawyers but are employed by companies to deal with routine work for example conveyance. They received official recognition in 1963 Licensed Conveyancer: It is the person who prepares documents relating to the transfer of title of property for gain. The licenced conveyancers are trained, licenced and admitted into the Council of Licenced Conveyancers Lawyers in Industry, commerce and public service: There are lawyers contracted by private firms or government to perform “in house” functions. They are specialized in fulfilling specialist legal requirements, for instance: Drawing up contracts, advice on employment matters, administration, etc.

OTHER SOURCE OF INFORMATION AND ADVICE Information and advice for business Lawyers are not the only source of information and advice for a business person.

- Accountants are very well aware about tax laws

- Government department also can provide useful information

- Government sponsored organizations

A business person can also benefit from joining a trade association which periodically can inform their members about changes in the law Information and advices for citizens and consumers Many people are discouraged from seeking legal advice and taking legal action because of fear of the cost that this action will bring. However, there are plans developed by a government or large organizations in order to provide low-cost legal help.


o Community Legal Service Fund (Legal Aid)

Established for private individuals with the aim to obtain financial help in legal matters The help includes:

- Civil Legal Aid

- Criminal defence service



Civil Legal Aid

Available for individuals requiring help in relation to civil matters, for example, housing problems, contract disputes, divorce, etc. To receive the legal aid the person must apply and then the solicitor must assess if the person is eligible for that benefit. The help is limited on the number of hours that the solicitor will work in the case, which is 2 hours (3 hours for divorce work)


Criminal defence service

Advice, assistance and representation in criminal matters are available for people who are unable to afford a lawyer and are involved in a criminal case. The solicitor must be registered in the Legal Service Commission if they want to provide this service.


Conditional fees

Advocates can sign agreements with clients whereby the lawyer receives a normal fee plus uplift in the event of success (known as success fee) but nothing if unsuccessful. The maximum uplift permitted is


Conditional fee arrangements are now an important method of funding civil actions.

o The Coroners and Justice Act 2009

The Act is a regulation of damages-based agreement in employment matters, whereby a person representing a client receives a percentage of any compensation received by the client.

The amount of payment must not exceed 35% of any damages recovered by the client.

o Other organizations providing legal advice

There is a range of voluntary organizations which provide legal advice to individuals. Examples:

- Citizens advice Bureaux

- Law Centers, specialized on Social Welfare matters, e.g. Women Centers

- Advice Centers, for housing and consumers problems

- Trade Unions, providing assistance to the members on for example, employment issues

METHODS OF DISPUTE SETTLEMENTS: THE COURT The Courts are the focal point of the legal system. They provide final settlement in disputes Functions of the Court:

- Establish the fact of a case

- Identify legal rules to be applied

- Formulate solutions

Its decision also affects similar cases which may arise in the future (Judicial precedent)

o Classification of the system of the courts


Civil and Criminal Courts


First instance and Appeals Courts


Courts and Tribunals


- Civil and Criminal Courts: They deal in the majority of the cases, with both civil and criminal cases.

- First Instance and Appeal Court: The First Instance Court is a court which hears a case for the first time, also called Court of Original Jurisdiction. If this court makes a mistake the case will be re-heard by an Appeal Court.

- Courts and Tribunals: The Parliament has created special courts, specialized to deal with specific topics, for example social and Welfare legislation.

Alternatives to going to Court: Other means of resolving disputes:









Classification of Criminal offences

There are 3 types, according to the seriousness of the offence.

- Summary offences: Minor offences tried in the Magistrate’s Court

- Indictable offences: More serious offences, tried in the Crown Court. E.g. Murder and robbery

- Either way offences: Offences which may be tried either in the Crown Court or in the Magistrate’s Court. Examples: Theft and engaging in an unfair commercial practice.



Magistrate Court


Crown Court


High Court


Court of Appeal


Supreme Court

Criminal Court review

In 1999 Sir Robin Auld was appointed to undertake a review of the criminal court His report includes the following recommendations

- The Criminal Court should be codified for offences, evidence, procedure and sentencing

- Establishment an overall direction of the Criminal Justice system

- Creation of a Unified Criminal Court organized into three divisions:

The Crown division District division Magistrate division

- The defendant should not have the right to elect which division will be tried

- An executive agency should take over administrative arrangements

- Juries should be more representatives of national and local communities

- Changes on the eligibility and right to be excused to become a member of a jury

- More flexibility in the deployment of judges

- Greater use of fixed penalty noticed

- Complete review of the law of criminal evidence

- The routes of appeal should be simplified and limited

The Government response to that review was the set out in a White paper “Justice for All” (In July 2002. Important definition: Jurisdiction: Is the right or power to make legal decisions


Magistrate Court

Magistrate is a judge in a court for minor crimes.

Magistrate courts handle over 95% of all criminal cases. There are two kinds of Magistrates (also known as Justice of Peace).

- Unpaid amateurs judges (Lay Magistrates)

- District Judges (Magistrate’s court)

The lay magistrates are people trained in basic legal matters but are not lawyers The District Judges are persons with seven years qualification in general advocacy. They are lawyers.

o Jurisdiction of the Magistrate Court

It is the right or power to make legal decisions of the Magistrate Court. Magistrates deal with the following criminal matters:


Trial of Minor offences


Sending for trial and committal proceeding


Youth Court


Criminal administration

- Trial of Minor offences: The magistrate’s courts can give both verdicts and sentences; but if the sentence of the offence is for more than 6 months of imprisonment or a fine more than £ 5000 (Pounds); the case will be referred to the Crown Court.

- Sending for trial and committal proceedings: In 1998 it was introduced the “Sending for trial procedure”; this document explains the steps that the accused will take before going for trail to the Crown Court.

- Youth Court: When a child (10 to 13 years old) or a young person (14 to 17 years old) commits a criminal offence he or she is brought to a Magistrate Court.

- Criminal Administration: Magistrates will issue the summons (an official document that orders someone to appear in a court) and warrants of arrest. The Magistrates can grant a bail to people waiting for trial.

Crown Court

Normally is led by a judge assisted by a Jury of 12 jurors. The most serious cases such as murder must be heard by a High Court In 2003 it was defined when the judge will take decision without a jury. Those cases are stated as follows:

- In presence of trial of serious complex fraud cases

- When danger of jury tampering

Also in 2003 the Criminal Justice Act made some clarifications on the eligibility for being a member of a jury and limiting the excuses for being disqualified from a jury service.


Functions of the judge of the Crown Court

- Responsible for the conduct of the trial

- Summarizes the case to be presented to the jury

- Play the final part of the proceeding passing sentence


Functions of the Jury of the Crown Court It considers all the evidences to decide whether the accused is guilty or innocent (Dictates the Verdict of the case)

o Jurisdiction of the Crown Court The Crown Court has the power to deal with the following criminal matters:


Trial of serious offences


Committals for sentencing from the Magistrate’s court


Appeals from Magistrate’s court


High court

The High Court is split into three divisions


Queen’s Bench





A single judge of the High Court is able to hear judicial review applications, appeals and applications for habeas corpus in criminal cases.

o Jurisdiction of the Crown Court

1) Appeals from Magistrate’s courts: An appeal may be made by way of “case stated” by either the prosecution or the defence; which it is a sort of summary of the case to be analyzed in the High Court. The High Court can confirm, reverse or amend the decision of the Magistrate’s court. The High Court can also send the case back to the Magistrate’s court with an opinion on the case


3) Judicial review: Not all the cases sent by the magistrates will be reviewed in the High Court. The

High Court will monitor if there is an abuse of the right of appeal from the Magistrate court.

Appeals from Crown Court

Court of Appeal (Criminal division)

It is composed by the Lord Chief of Justice and approx. 37 Lords or Ladies of Justice. When a case is under discussion, 3 of them will be appointed to deal with it.

o Jurisdiction of the Court of Appeal


Receive appeals from trials of the Crown Court


The defence (but no the prosecution) may appeal the decision of the Crown Court. The defence can appeal the conviction (verdict) or the sentence. The Court of Appeal deals with serious offences Reference by the Attorney General

The attorney-general is the main legal advisor to the government, and in some jurisdictions he or she may also have executive responsibility for law enforcement or responsibility for public prosecutions. The Attorney General can present the case to the Court of Appeal for review The Court of Appeal can proceed in the following way:

- Review the case when a person was declared not guilty and the Genera Attorney asks the Court of Appeal for its opinion on that verdict. The opinion of the Court of Appeal cannot modify the outcome of the trial.

- Review the Sentence given by the Crown Court: In that case the Court of Appeal can give a more severe sentence if the Crown court sentence was not severe enough (unduly lenient) Basically the prosecutor can present the case to the Court of Appeal; but this court cannot modify the verdict. However in 2003, they make a modification which consists in the following principle:

- To avoid the “double jeopardy”, a person cannot be declared not guilty by the Crown Court and then be sent again for a new trial; but there are some severe situations in which the accused could have been sentenced for life in case the verdict confirm his culpability, like for example, murder or rape; in this case, and if there are new evidences that came out after the verdict where the Attorney General can request to the Court of Appeal for a new trial.

3) References by the Criminal Cases Review Commission The Commission is an independent body to investigate some cases involving a possible wrong decision made by the Crown Court in its conviction or sentence.


The case will be referred to the Court of Appeal when there is “real possibility” that the conviction, verdict or sentence will not be considered correct.

Supreme Court

The Supreme Court was created in 2005, replacing the Appellate Committee of the House of Lords. It is formed by 12 judges. The Supreme Court is the final court of appeal; normally 5 judges sit together to hear an appeal. Decisions are made by majority judgment.

o Jurisdiction of the Supreme Court

- Appeals from the Court of Appeal

- Appeals from the Divisional Court of the High Court

CIVIL COURTS Reform of civil legislation

In 1995 Lord Wolf reviewed the procedure of the Civil Court and he found some problems, like for

poor people, the system was too slow and

instance, the lack of equality between wealthy and complicated, the system was too expensive, etc.

Following his recommendations some changes were made:


Development of a new terminology


Encouraging settlements to solve disputes



single jurisdiction


Case management

1. New terminology: The new rules are expressed in more modern language

2. Encouraging settlement: This includes a number of features which are designed to encourage the two

parts of a dispute to end an argument (to settle their dispute).

- Alternative Dispute Resolution (ADR): The two sides are actively encouraged to use ADR

- Pre-Action protocols: Which operates like codes of practice; for example: Both parties agree on

having a simple expert witness rather than each side bringing their own expert witness, which can make the process more expensive and complicated.

- Cost of payments into court: The judge now has more powers to decide about the award, which is

a sum of money that a court decides should be given to someone.

With the new reform, it is possible to make an offer to settle on the matter of costs

3. A single jurisdiction: the High Court and county courts become a single jurisdiction operating to a

common set of procedural rules.

4. Case Management: Cases are allocated to one of the three tracks, depending on their value and


- Fast Track: For claimants between £ 5000 and £ 25000. The cases are going to be hearing within 30 weeks.

- Small case track: For claims up to £ 5000

- A Multi track: For all cases over £ 15000 A High Court deals with multi track cases

Appeals – Access to Justice Act 1999 Reforms of the system of Appeals

- To appeal it is necessary to get a permission in all civil cases

- For a second appeal there are limits

- The Lord Chancellor defines the route of appeal



1) County Courts It was established in 1846 to provide a cheap and fast method of settlement of small civil disputes. The county courts are staffed by circuit judges. They usually sit alone to hear a case, but a jury may be called where, for example fraud has been alleged.

o Jurisdiction of the County court

The type of action which the court can deal with is as follows:

1. Action in contract and tort: A tort is something that somebody does or fail to do which harms somebody else.

2. Action for the recovery of land

3. Actions in equity. This category includes proceeding involving: Mortgages and trusts (A trust is an arrangement in which a person or an organisation manages someone else’s money or property)

4. Bankruptcies

5. Company winding-ups: When the company has an unplanned or unexpected situation that affects its capital

6. Contested probate proceedings

7. Family matters: For example a divorce; but the jurisdiction of the court regarding financial maintenance of children whose parents are divorce is a responsibility of the Child Support Agency

8. Consumer Credit: Issues between Landlords and tenants. Also racial discrimination cases.

9. Patents: Following the recommendation of the Oulton Committee, the Copyright, Designs and Patents Act 1988

Actions which exceed the limits of the county court are normally heard by the High Court. However, the parties may agree to such an action being dealt with by the lower court.

Small claims Small claims are usually heard by a district judge who will follow any procedure he or she considers fair. The parties are encouraged to do without legal representation. The hearing can be held in private in an informal atmosphere and there are strict rules for the procedure.

Magistrate’s Court The majority of cases heard by the magistrates are criminal, but in some special situations the Magistrate’s court can have jurisdiction on civil matters.

o Jurisdiction of Magistrate’s Court in civil matters

1. Family proceedings

2. Recovery of certain civil debts

3. Licensing


- Family proceedings include:


Matrimonial proceedings.


Separation orders, when the parties to a marriage are not seeking for divorce, the Magistrate court can intervene if the situation is risky for any of them.


Orders for financial maintenance: The jurisdiction of the Magistrate court in this issue has been transferred to the Child Support Agency


Child Care proceedings: For contact orders and residency orders, which defines the place where the child should stay


Care proceeding orders, whereby a child can be taken into the care of a local authority

- Recovery of certain civil debts: E.g. income taxes, electricity and water charges

- Licensing: magistrates used to have a role in liquor licensing. This responsibility has been transferred to local authorities.


Each division of the High Court is presided by a senior judge: The Lord Chief Justice The head of the Chancery division is the Chancellor of the High Court There is a president of the Family division They are assisted by approx. 106 High Court judges, who are distributed between the divisions. When the High Court operates as a court of First Instance, the trial is usually done by a judge alone; however a jury of 12 may be called in special cases.

High Court

o Jurisdiction of the High Court on civil matters The High Court is divided in three divisions:

- Queen’s Bench division

- Chancery division

- Family division

Queen’s Bench division: The jurisdiction of this division covers:

- Civil and Criminal matters

- Cases at First Instance

- Cases on appeal

When sitting as an ordinary court, it hears the following cases:

a) Actions in contract and tort

b) Judicial review

c) A commercial court: For interpretation of commercial documents

d) An admiralty court: The admiralty is the government department that is in charge of the navy

e) A Technology and Construction court: Dealing with cases involving technical issues such as construction and engineering disputes

The Queen’s Bench hears the following matters

a) Civil appeals: By way of case stated from the Magistrate’s court and from the Crown court.

b) Judicial review of the actions of inferior courts, tribunals and administrative bodies



Chancery division

It hears the following actions:

a) Equity matters: Actions involving trust, mortgages, partnership, contracts, deeds (official documents that gives the details about who owns a building or piece of land), taxation, etc.

b) Court of Protection: Involving management of the Property and affairs of mental patients

c) Companies court: Applications relating to companies

d) Patents Court: Matters outside the jurisdiction of the patents county court

e) Appeals from the commissioners of Taxes matters


Family Division


Matrimonial matters, e.g. defended divorces


Action involving children: for instance, adoption and legitimacy

Crown court

The Crown court is mainly a Criminal court, but it also has civil jurisdiction, hearing appeals from the Magistrate’s court

Court of Appeal (Civil division)

The civil division of the Court of appeal is headed by the Master of Rolls. Normally three judges sit to hear an appeal. The decisions are made by a simple majority.

The Court of Appeals now has more flexibility to decide the number of judges being able to operate in court of appeal.

o Jurisdiction of Civil division of Court of Appeal

It hears appeals from the High Court, county courts and various tribunals. It may uphold (sustain) or reverse the decision of the lower court or change the award of damages; or even it may order a new trial.

Supreme Court

The Supreme Court is the final court of appeal in civil matters. The Supreme Court is formed by 12 members and decisions are made by majority judgment.

o Jurisdiction of the Supreme Court

It hears appeals from the following sources:


2) The high Court: Normally the appeals from the High Court go to the Court of Appeal, but

some cases are suitable to appeal straight to the Supreme Court under the “leap-frog” procedure, “leapfrogging” the Court of Appeal. Theses cases are those involving point of law or general public importance.

The Court of appeal


1. Court of Justice of the European Community

2. Judicial Committee of the Privy Council

3. European Court of Human Rights

Court of Justice of the European Community The Supreme Court is the final court of appeal for domestic matters, but when the dispute has issues related to European treaties or European Legislation, any English Court may seek the opinion of the European Court


Judicial Committee of the Privy Council

The Committee advises the Queen on criminal and civil appeals from British colonies and some of the Commonwealth countries. The Committee also deals with domestic matters, for instance Church of England.

The cases may be brought by individuals or by one state against another. The court is formed by 47 judges, one from each country. Although the UK Court is not bound to the European Court of Human Rights, they can take into account

their judgements when deciding a case in relation with Human Rights.

European Court of human Rights

TRIBUNALS The work of the ordinary courts is supplemented by a large number of tribunals to hear and decide upon disputes in specialized areas. In 2000, Sir Andrew Legatt was called to make a review of the tribunal system. Tribunals deal with a wide range of subjects such as social security, employment, immigration and mental health. The Tribunals should operate cheaply and quickly without excessive formalities. The Chairman is usually a lawyer but other members of the tribunal are drawn from non-legal experts. The work of the tribunal is supervised by the Courts. An appeal to the decision of a tribunal can normally be made to the ordinary court. - Employment tribunals: Established in 1964; it hears complains by employees about contracts, dismissals, discrimination and equal pay. The tribunal normally consist of a legal qualified chairman who will hear the case.

Reforms of the tribunal system

Sir Andrew Legatt noted that in the tribunal system there was a waste of resources, old fashioned procedures, the system was not user friendly and there was a lack of independence since the tribunals are

established and supported by the government. Recommendations of Sir Legatt:

- To establish a common, unified administrative service known as Tribunal Service

- To establish a single Tribunal system, operating in divisions according to subject matter

- The tribunal system should be headed by a Senior President who should be a High Court judge

- The right of appeal is made by previous permission. The appeal is presented to an appellate tribunal and from there to the Court of Appeal

- The members of the tribunal are appointed by the Lord Chancellor

- Tribunals should work with user groups to improve the accessibility of tribunals.

The government established in 2006 the tribunal service which introduces a simplified framework for tribunals. All the previous tribunals will be unified in two new tribunals; which are organized into chambers. First Tier Tribunal:

- Social entitlement,

- General Regulatory

- Health

- Education and Social Care

- Taxation and Land

- Property and Housing


Upper Tier

- Administrative appeals

- Finance and Tax

- Lands

ALTERNATIVE DISPUTE RESOLUTION (ADR) The vast majority of disputes are settled by other means outside the formal court system. Some reasons why people prefer to resolve a dispute seeking for ADR

- Fear of spoiling a satisfactory relationship with the opponent

- The cost of a legal action

- The difficulty of predicting the outcome of the case

- The likelihood of bad publicity

The role of the court is to encourage resolution of cases through ADRs

Disadvantages of Litigation

Benefits of ADR

- It’s adversial and more confrontational (promotes conflict between the two parts)

- Need of a lawyer to represent and pay their services

- Simpler procedures and more user friendly

- They have special techniques that make the process more relaxed

- Wider range of remedies or solutions

- Slow process

- The case may be dealt with privacy

- Can be daunting (intimidating) for lay persons. The person may feel worried

- It is more flexible and the time and location can be defined by mutual agreement

- Limited remedies. Limited solutions

- Public process which can make the information available to the general public affecting confidentiality

- It takes place at a fixed time and location

Main types of ADR




Early neutral evaluation


Expert determination








Neutral fact finding


Arbitration allows the parties to present their argument to an independent arbitrator of their choice, in private and at their own convenience. The arbitrator may be legally qualified (a lawyer) or he/she has special knowledge or experience of the subject matter. Nowadays in many contracts for partnership or insurance they include a clause that arbitration should be

the first step to take in case of dispute

Early Neutral evaluation

This is a person who may be a lawyer or an expert in the field in conflict. To look in each side of the given

case and then will give a neutral opinion.


His opinion doesn’t bind the parties but it can be used for further agreement.

Expert determination

The parties appoint an expert in the field to decide the dispute. The parties agree to be bound by the



This form consists of using a neutral third party (mediator) to help to reach an agreement.

Suitable for the following types of disputes:

- Divorce, separation and other family problems

- Neighbouring disagreements for example, about noise or boundaries

- Work issues, for ex: discrimination

- Education. E.g. exclusion from schools

If mediation is successful, the parties may record their agreement in the form of binding contract.


A third party helps the parties to reach a resolution, like in Mediation, but in conciliation the third party plays a more active role in bringing the parties together and suggesting solutions. An agency can also act as a third part; for example, the Advisory Conciliation and Arbitrations Service (ACAS) tries to resolve disputes between employers and employees by mean of conciliation.


This is a combination between mediation and arbitration. An independent person will try first mediation but if it fails, the parties agree to refer the dispute to arbitration which it can be done by the same person, who from being a mediator becomes an arbitrator.

OMBUDSMEN The Swedish term ombudsmen describe an official or commissioner who acts as an independent referee between a citizen and his government. In UK it was also called the PCA (Parliament Commissioner for Administration) The PCA does not deal with cases which could be resolved through a court or tribunal The PCA or Ombudsmen cannot receive complains directly from an individual. They receive the cases that are referred from a MP The PCA can conduct on investigation on a specific matter and transform it into complain and if the complain is justified recommend a remedy.

REGULATORS When some companies which provide a public service like gas, electricity, water or communication are under private management; the government will supervise them through the oversee done by the regulators.




A Business can by run in what is called the private sector of commerce and industry through one of three

of business organisations.

- The sole trader

- The partnership

- The company

Business law, as policy area, falls under the remit of Department of Business, Innovation and Skill (BIS). The key role of BIS is to “build Britain’s capabilities to compete in the global economy”

It is important to introduce the concept of Liability before commencing with the explanation of the different types of business organisations.

In Financial accounting Liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. A liability is defined by the following characteristics:

Any type of borrowing from persons or banks for improving a business or personal income that is

payable during short or long time; 2) A duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services, or other transaction yielding an economic benefit, at a specified or determinable date, on occurrence of a specified event, or on demand;


3) A duty or responsibility that obligates the entity to another, leaving it little or no discretion to avoid settlement; and,


A transaction or event obligating the entity that has already occurred.


- The Private Sector

- The Public Sector

The Private Sector

The Private sector includes:

- The sole trader

- The partnership

- The company

o The Sole trader

It is a one person business. A sole trader owns all the assets and takes all the profits out of the business.

However, a sole trader is liable for the debts of the business to the extent of everything he owns; even his private possessions may be ordered to be sold to pay the debts of the business. There is no such thing called Limited Liability for the sole trader.

o The partnership – generally

There are three types of Partnership

- An unlimited partnership

- A limited partnership

- A limited liability partnership



An unlimited partnership

Partnership Act 1890 sets out the rules which apply to partnership.

The partners share the losses (if any), the problems and the worries. The profits must also be shared. This

is the case called full or equity partners.

The partners are joined by the debts and other liability of the firm. The liability extends to the private assets of the partners. While it is not legally required, it is normally sensible for the partners to make a contract called a partnership agreement. However writing is not necessary, a verbal agreement will do and a partnership can in some cases by inferred from conduct.

The liability of the partners is unlimited, so if the firm cannot pay its debts, each general or equity partner


liable to pay them with a right to ask later for compensation from the other partners.


A limited partnership


this type of partnership some of the partners have fully liability, whereas others have limited liability to

the investment that they have made. One or more of the partners has only limited liability for the firm’s debts. They are used for collective investment such as unit trusts. As explained before, one of the partners has full liability when the firm cannot pay a debt, but the others may have limited liability; this means that if the business falls on hard times, they may loose the capital that they have invested in but those with limited liability will not have further liability to his private properties. The limited partners cannot take part in the management of the firm.

3. A Limited Liability Partnership (LLP)

The LLP is fully liable for its debts but there is no personal liability in the members.

If the LLP becomes insolvent (Insolvency is the inability of a debtor to pay their debts in other words, not having enough money to pay its amount overdue), the members may well lose the capital that they had contributed but beyond this they have no duty to contribute to the assets of the LLP if because of an unexpected situation (winding-up) there is a shortage.

o The Company

A company is a business organization. It is an association or collection of individual real persons and/or

other companies, who each provide some form of capital. This group has a common purpose or focus and

an aim of gaining profits. This collection, group or association of persons can be made to exist in law and then a company is itself considered a "Legal person".

A registered company is commonly formed by one or more people who become its shareholders.

A shareholder or stockholder is an individual or institution (including a corporation) that legally owns any

part of a Share (finance) of stock in a public or private corporation. Directors must be appointed to manage the company and they act as its agents helping the company to deal with the business. To become a company there is a need of registration procedure to follow in the Registrar of Companies. The process for a company to get a Charter is by sending a petition to the Privy Council. The petition asks for the grant of a charter and sets out the powers required. If the Privy Council considers that it is appropriate to grant a charter, the Crown will be advised to do so.

The Public Sector

At the end of the Second World War certain organizations providing good or services to the public were

brought to the public sector for their management.


Public corporations were formed to manage these organizations; nowadays these services have been returned to the private sector.


- Natural persons

- Juristic persons

Natural persons

These are human beings who are known to the law as Natural persons. An adult human being has legal right and legal duties. The law gives different status to the human beings, which means that they have different rights and duties than the other people. Examples are minors (persons under the age of 18) and persons who lack mental capacity. Animals may also be protected by the law for certain purposes such as conservation.

Juristic persons

Legal personality is not given only to human beings. Persons can form a corporation and that corporation will have a legal personality with similar rights and duties to human beings. For example, if person A and person B form a registered company A-B Ltd. The separate legal personality of AB Ltd is created; A and B can now, as directors of the company make contracts on behalf of AB Ltd as its agents. The rights and duties under those contracts will belong to AB Ltd and not to A and B as individuals.

o Looking behind the corporate personality; Lifting the corporate veil

The idea of corporate personality can lead to abuse and it has been used to avoid legal obligations. The court will not hesitate to ignore the separate personality of the company (or draw aside the corporate veil) if the company had been used for fraudulent purposes.

o Corporation sole

English law also recognises the idea of the corporation having only one member. Church lands needed to be under the name of the bishop or vicar, but it was a problem it this person died; because the land had no legal owner until a successor was appointed. To deal with this particular problem the law allows the creation of a company with one member, and in the case of the example mentioned, the land will belong to the Bishop’s company, and if the bishops dies another person will take his position as director of that sole company.

COMMENCEMENT OR INITIATION OF THE BUSINESS Sole traders, Ordinary partnerships and Limited partnerships

They can initiate their business merely by opening the door of the premises. It is usual to register for value added tax, though this is not compulsory unless the turnover of the business is at registration level.

The organization must comply with the requirement of the Companies Act 2006, which contains restrictions about the choice of the business name.

Limited Liability Partnership (LLP)

To become an LLP they have to send an application to the Registrar of Companies. If the Registrar is satisfied with the application because fulfils the requirements the Registrar will give a certificate that the LLP is incorporated. Before the LLP receives that certificate, the partnership can operate as an ordinary partnership.



A Private company cannot trade until its application for registration has been discussed by the Registrar of

Companies and a certificate of incorporation has been given to the company.

It is essential for the company to begin trading to have an authorized and issued share capital of at least £

50.000 in nominal value.

o Community Interest Companies

They are designed for use by social enterprises wishing to operate under a corporate structure. Organisations working in areas such a childcare, social housing, leisure and community transport may wish to make use of the corporate structure of a Community Interest Company (CIC). CICs are also registered with the Registrar of Companies.


Small businesses need money for the beginning of the trading. Most people use their own savings to start

a business. They can also loan from the banks. The bank will normally want some security for its money, using for example a mortgage on the house of a sole trader or houses of the partner’s members of a partnership. Interest rates can differ according to the deal given by the bank.

Sole Traders and All Partnerships


partnership can attract more capital by admitting new partners.



companies the capital structure is more complicated. If two people from a company and be its directors

can contribute for instance, £ 10.000 each to form the company; each of these two members taking

20.000 shares of £ 1 each, then:


All the company’s current capital is official available


The £ 20.000 cash received by the company is its paid-up capital (the amount of money that has been received by shareholders who have completely paid for their purchased shares)

A company may also raise money by borrowing from the bank

A lending bank will take security, (called debenture) over the company’s assets and will usually ask the

directors to give another security over personal properties to guarantee the devolution of the loan. There is no limit on the number of shareholders that a company may have; and so it can raise as much

capital as it wishes.


The advantage of a company is the ability to issue share capital. The share capital can be organized in a different ways, for example, giving more number of votes to a member who has more share capital or giving to him more dividends .

A dividend is a part of the profits of a company that is paid to the people who own share in the company. For the sole trader and partnerships it is important to consider the method of repay the loan capital. Floating charge: Is the charge that is not fixed or permanent and therefore likely to change.

The company has the advantage of being able to receive a floating charge. Partnership and sole trader cannot do this; but Limited Liability Partnerships (LLP) can be given this floating charge. Sole traders and partners can mortgage its business premises and also their own private property. In the companies, Directors are asked to give their own private properties to secure a bank loan to a company.



A charge is a type of security by which a person who borrows money gives the lender rights over his (the

borrower’s) assets to support the duty of the borrower to repay what is owed under the contract of loan. The lender thus has two rights:

- To sue the borrower on the contract of loan

- To sell the assets which the borrower has charged in order to recover what is owed to him but no more Mortgage: If you mortgage property, you borrow money from a bank and agree to give the property to the bank if you do not pay the money back

Fixed charges

A fixed legal charge can be given over identify property belonging to the borrower. This property may be

either real property, (ex: land and buildings), or personal property, (e.g. machinery and equipment.) The lender can sell this property being used as a charge. He can sell it without the assistance or agreement of the borrower in the case that the borrower doesn’t pay the loan.

Floating charges

It’s a form of security granted to a creditor over general assets of a company which may change from time to time in the normal course of business. The company can continue to use the assets in its business until an event of default occurs and the charge crystallises. Only Companies and LLPs are allowed to receive floating charges.

The legislation doesn’t allow the sale trader or other partnerships to use a floating charge


If a bank lends money to a business it will normally want, in addition to a charge over the assets, a

guarantee from the sole trader or partner, or the directors of the company. These persons promise to meet the business debt from their personal resources if the business cannot.

Independent advice

To understand the meaning of Independent advice we need to know the ruling of the House of Lords in a

case Royal Bank vs. Etridge Undue influence When the influence of one person over another is abused. In everyday life people constantly seek to influence the decisions of others. They seek to persuade those with whom they are dealing to enter into transactions, whether great or small. Mrs Etridge plead that her husband was an undue influence towards her.

The facts of Etridge case is that a wife called Mrs Etridge, had not fully understood legal advice that she had received when her spouse’s business had gone broke and the house where the family was living was taken back. She stated that the agreement with her husband was done under Undue influence. The wife had agreed to put the family home in favour of the bank as security for the debts of her husband without really knowing the consequences that it would produce to her. The House of Lords dismissed Mrs Etridge’s argument. However, they were forced to develop a guideline for lenders and legal advisers. The most important point of this guideline is that the lender must ensure that the wife (or partner) receives independent legal advice and will provide that adviser with all the financial information needed


to give appropriate advice. The wife ensures that is has the husband’s authority to give the necessary information.

Where the legal adviser has failed in his or her duties in terms pf giving proper advice, the wife may make

a claim against the adviser.



A Mortgage is a type of loan. It is special because the borrower (called a mortgagor) has not just promised

to repay the loan to the lender (called the mortgagee) but has given him also a charge on his own property. If the borrower fails to pay the lender can sell the property and pay himself from the sale price.

Legal Mortgages of Land

If someone wants to borrow money from a bank by giving the bank a legal mortgage of his property or

private house, the borrower (mortgagor) will normally create a charge by way of legal mortgage over the house. This is done by means of a short deed (mortgage deed), which states that a charge on the lan is created.

A deed is an official document that gives the details about who owns a building or piece of land.

The mortgage deed usually provides that the money is to be repaid six months after the date of the deed. However, the borrower is not expected to repay the loan by this date; it is only put in so that the lender has all his remedies from that date since he can consider himself as being owed the principal sum.

Equitable mortgages of land

In the past the lender and borrower could make an agreement of mortgages without following the formal procedure of the mortgage deed; where the borrower could just leave at the bank the title deed of his house. This was on equitable mortgage, but law has changed, and nowadays a contract for the sale or other disposition of an interest in land can only be made in writing in one document and this document must be attached to the title deeds.

If the borrower does not pay the loan, the lender is able to sell the property but must first apply to the

court for an order of sale. Another option is that the lender can be the receiver of the rents coming from that property.

The borrower right of redemption In the common law, the land used as a security became the property of the lender as soon as the date for repayment has passed, unless the loan had been repaid by then, even if only a small amount was still owed. However, equity allows a borrower the right to redeem the land and free it from the situation of being the security of the loan even if the date for repayment has passed.

Consumer Credit Act 2006

The Court must regulate agreements between the creditor and the debtor; coming out from a relationship considered “unfair”. In that case the court can reduce the sum to be paid by the debtor. This intervention can be applied for sole traders or individuals but not in agreements that involve companies or partnerships of more than four members.

MORTGAGES OF PERSONAL PROPERTY Not only land can be used as a mean of security debts. The person who borrows the money can use the business assets like equipment and machinery to secure the loan.


MORTGAGES OF CHOSES IN ACTION The term “Choses’ derives from the French language which means “things”. Personal property (property other than the land) is divided into two types:

- Choses in Possession

- Choses in Action

A chose in possession is an item of tangible (touchable) personal property that can be physical possessed by the owner and can be transferred by delivery. Choses in possession are goods such as jewerly and

furniture which can be physically tangible.

A chose in action is essentially a right to sue. It is an intangible personal property right recognized and

protected by the law, which has no existence apart from the recognition given by the law.

Choses in Action are intangible form of property that is not really capable of physical use or enjoyment

It is possible to use a chose in action as security for a loan.

Shares in Companies are perhaps the commonest chose in action to be used as security. Shares can be subject to a legal mortgage but the shares must be transferred to the lender.

PUBLICITY AND EXTERNAL CONTROL OF THE UNDERTAKING To undertake is to promise to do something Sole traders and ordinary partnerships: These organisations don’t have a lot of obligations attached by the law regarding publicity and external control. They can keep their account for their own administration but there are no legal formalities and no filling of documents or account for the public to see. Limited Liability Partnership (LLP): Regulations impose a disclosure and filing requirements in terms of accounts and reports. LLPs will have to fill forms and send reports to the Registrar for public disclosure of profits and the distribution among the partners. Companies: The Company must present its account and reports to the Registrar. The Registrar can send an auditor with the aim to do an audit of these reports. An audit is an official examination of company financial records. Some companies are exempted (excluded) to be audited, meaning that they can present the records to the Registrar but they will not be audited for verification. Other companies are not able to receive the benefits of being exempted for an audit. These companies are:

a) Public Companies

b) Group of companies that include a public company among them

c) A bank

d) An Insurance company

The companies excluded for an audit are those whose directors acknowledge their responsibility

to ensure that the company keeps accounting record which gives a true and fair view of the affairs of the company.

o Types of companies:

- Big companies

- Medium companies

- Small companies

The small and medium companies are allowed to send to the Registrar and abbreviated or summarized version of its balance instead of the full report.


Small Companies: To be considered a small company it has to satisfy the following requirements:

1) Turnover: (The value of goods and services that the company sells in a particular period of time). Not exceeding £ 6.5 millions


Total assets, not exceeding £ 3.2 millions


Employees, not exceeding 50 employees

Medium Companies: To be considered a medium company it has to satisfy the following requirements:


Turnover: Not exceeding £ 26 millions


Balance sheet total: Not exceeding £ 16 millions


Employees: Not exceeding 250

In conclusion, those who run companies and LLPs will have to spend some time ensuring that the business is carried on in such a way as to comply with relevant legislation. The sole trader and ordinary partnerships have a much less complicated legal environment which can be to their advantage.

TAXATION AND NATIONAL INSURANCE Income Tax – Generally Income tax is the main tax which is paid by people who have earnings either from an occupation or from investment alone. Employees pay income taxes under Schedule E. Self-employed pay income tax under Schedule D, and are responsible for making the relevant payments.

Taxation and the self-employed sole trader

Account can be made up to the end of the trading year (5 April) or to the end of the Calendar year (31 December).

The method of taxation Assessment of income tax is made for tax years which run from 6 April in each year. Thus, for example, the tax year 2009/2010 runs from 5 April 2009 to 5 April 2010.

Payment of tax – Method of assessment

This is based upon a tax return. The return requires the trader to give all the information required to calculate income tax and capital gain tax due for the year. The Calculation can be done by the HRMC (Her Majesty Revenue and Custom) or by a private accountant.

Where accounts are prepared

An accountant should normally be employed to draw up the business accounts. However, it should be taken into consideration that HMRC can ask t see the business records in order to check the figures to verify if these numbers presented by the sole trader are true and accurate. HMRC can make a random selection of the traders that are going to be verified.

Employing labour

If the trader employs someone the HMRC must be informed. The trader will receive a new Employer’s Starter Pack with the necessary instructions, tables and forms. The trader will be responsible for deducting income tax in accordance with the “Pay as You Earn” (PAYA).


National Insurance

Most people who are working pay national insurance contributions. The class of contributions paid depends upon whether the person concerned is employed (Class 1) or Self employed (Class 2). Class 1: The contributions are paid by the employee and by the employer Class 2: The contributions must be paid by self-employed traders

Schedule D – advantages

A major advantage is that the trader can deduct expenses from the amount of taxes to be paid, for

example, in his office he can deduct (to take an amount from the total) some payments, for instance, electricity, over the total amount of taxes to be paid.

Partnership Partnerships are charged to tax under Schedule D

The tax that each partner should pay is calculated separately taking into account personal circumstances, e.g. whether they are married or single or if they are entitled in mortgage, etc

Companies Companies pay what is called Corporation taxes The taxes are charged on the profits of the company and this includes income from all sources. Large companies pay their corporation tax every three months (quarterly payments)

PLANNING For the development of the business it may be necessary to obtain at one point a planning permission. To obtain this permission it is necessary to apply to the relevant local planning authority. Before giving the permission the authority will consider the following points:

- The planning is in accordance with the authority development plan for that area

- Matters such as road safety and congestion were considered

- Water supply and sewage disposal

- The planning respects building regulations Extension to premises may require planning permission

Outline planning permission

It means to give the main ideas of the plan.

The aim of this outline is to see if the permission will be given in principle; this can be followed with an

application for full planning permission. Statements of Development principles (SDP)

Councils will be required to indicate whether they agree or disagree with the principles of the proposed



If the permission is refused, an appeal can be made to the Secretary of State for the environment The appeal can be made also to the conditions imposed by the Council for the approval and the applicant does not wish to accept

If the authority thinks the development is unacceptable it may make enforcement notice to put matters

right. This may even involve the demolition of any building work carried out. Planning and environmental considerations The applicant must submit an Environmental Impact Assessment setting out likely environmental effects of the proposed development. Examples of environmental offences are the noise produced by some machinery in some factories which can affect the people if this factory is settled in a residential part of the town.


Going ahead without permission






Actus Reus


- Partial assumption of rights

- Authorised appropriation

- Property received of behalf of another

- Receiving property under a mistake



Means rea


- Dishonesty

- Intention permanently to deprive


Fraud and Malpractice

- Fraud by false representation

- Fraud by failing to disclose information

- Fraud by abuse of position


Market Abuse




A person is guilty of theft is he/she dishonestly appropriates property belonging to another with the intention of permanently depriving the owner of it.

o Actus reus

Appropriation occurs when a person other than the owner assumes the rights of that owner over the property.


Partial assumption of rights Example: someone takes a label of from a product in a supermarket and put it in another product that is more expensive, so when he is in the cash he will be charged less than the real price of the product that the product that he is taking.


Authorised appropriation:

Example: A person persuaded a man of limited intelligence to withdraw and give her a sum of £60.000; the court considered that she could be charged for theft. There was an appropriation although the transfer was in nature a gift.


Receiving property under a mistake Example: An employee was paid in his bank account an extra salary for overwork that he knew

that he didn’t do but he did not report the mistake. The Court of Appeal decided that there had been an appropriation


Mens rea




Intention permanently to deprive


- Dishonesty There are some situations in which as a matter of law an individual is not dishonest:

a. Where the defendant believes that he has the right to deprive the owner of the property

b. Where the defendant believes that the victim could have consent or agreed if the victim

had known the circumstances

c. Where the defendant finds property that the owner could have not found under normal circumstances by taking reasonable steps The test for deciding dishonesty was laid down in R v. Ghosh case. The defendant was a surgeon who

claimed fees from a hospital for operations he had not performed.

- Intention permanent to deprive

Its main purpose is to prevent most unauthorized borrowings from being considered a theft action. An intention to return the property sooner of later is not an intention permanently to deprive at the time of taking, giving the property back will not change the fact of theft and the charge of theft will be made out.

Fraud and Malpractice

Fraud is the crime of obtaining money from someone by tricking them or by lying. The Fraud Act 2006 aims to protect consumers and business against fraud by giving prosecutors power to cope with fraud.


Fraud by false representation: The e-mails requesting people’s bank account number are good examples of this type of fraud


Fraud by failing to disclose information: An example is when a person applies for a life insurance but the person did not disclose an existing terminal illness


Fraud by abuse of position: For instance, an employee working in certain company, dishonestly copies customer’s details or software containing information and use them for sale or may be giving to a competing business


Insider dealing Persons may indulge in what is called insider dealing or trading. E.g. buying or selling shares of a company on the basis of inside knowledge not available to others about matters likely to influence the price of the shares


Meaning of dealing The person can be liable if using some private information from the company uses it for personal benefit in terms of buying or selling shares, even if he advises someone else to make some transactions with those shares.


Insider information: Is information which relates to the securities or to the state of the company. It may be specific and precise. The information must not have been made public and should have a significant effect on the price of the securities, e.g. falling or rising profits, decisions to pay a higher dividend that expected, etc.

Insider When the person has information considered from an “inside source” is called an Insider The person can access this information through being a director, employee with some privileges or shareholder of the company or by having access to it by reason of his employment, like in the case of an auditor.


o Necessity for intent

It means to pay a great attention to what the insiders are doing.

Since insider dealing is a crime, it requires a determination and concentration to see that dealing can secure profit or prevent loss

o Penalty for insider dealing

The sanctions are criminal; the maximum sentence can be up to seven years imprisonment and/or a fine of unlimited amount

o Exemptions

Persons operating as dealers, for example, those who are buying or selling shares of companies are

exempted because could be difficult for them to operate if they are not allowed to use inside information.


means that the dealer can use the insider information and he is not committing an offence because he


not considered as an “insider”.

They commit an offence if they encourage the insiders to proceed illegally passing in the inside information.

Market Abuse - The civil powers of the Financial Service Authority (FSA)

The Financial Service Authority (FSA) is the regulator of the UK financial sector. They provide guidance in determining whether certain behaviour can be considered Market Abuse according to FSA. Detailed rules can be found in the FSA’s market abuse sourcebook and in particular in the Code of Market

Conduct. To be included as market abuse the behaviour must be included in at least one of the following tests:

The misleading impression test: Giving to those participating in the Stock Exchange Market (buying or

selling company’s shares) a wrong or mistaken information about the real situation of the company The distortion test: Distortion means to change the way that something looks, sounds or behaves so that

it becomes strange or difficult to recognize. This concept can also be applied to the markets and if so it

can be considered market abuse The privileged information test: When information is not available to the participants in the market and

this information can be used when deciding whether or not to trade

A person will not be found to have engaged in abuse if he has complied with rules made by the FSA

The penalty to be imposed must consider and take into account whether the behaviour has had an

adverse effect on the market.





FORMATION of the BUSINESS Name of the organisation

o Business name

1. Generally

Every company must display its registered name:

- at its registered office and its inspection place

- at any place where the company carries on business, unless that place is mainly used as a home, e.g. the director's address

2. Restriction on choice of business name

The business cannot select the name if:

- If the name leads people to believe that it is connected with a local or control government authority. This is to prevent to false sense of security in the public who deal with them

- Names that imply a National or International connection when this link does not exist; for example: “The International Metal Co.” , when the business operates only in the local market

- Using names like “Society” or “Institute” when they are not officially recognized as such type of institution

- The use of the word “Charity” requires the permission of the Charity Commissioners

- Under obscene names or misleading names

3. Disclosure of true owner’s name: What must be disclosed?

A sole trader must disclose his or her name together with the address of the business. The address should be the address where any kind of document will be sent from those dealing with the trader

4. Where the information must be disclosed?

All the information regarding the name of the trader and the address must be written in letter, orders for supply, receipts and invoices issued by the business In a visible place in the premises where the business operates In business cards if the sole trader uses

5. What happens if an owner does not comply with the law in regarding with the name?

The sole trader commits a criminal offence and is liable to a fine. On the Civil side he can lose some rights

and not be able to proceed with claims, for instance, it the trader doesn’t write the address of the business the other party can say that he was unable to contact him because of the lack of knowledge of the name and address of the owner.

o Protection of business name

The Registrar of Companies keeps and index of companies name and a company cannot be registered in a

name that is the “same” name as another name already registered in the index.


In addition, the secretary of state can direct a company to change its name within 12 months of registration if it is too likely or similar to another name already registered in the index.

o Passing off

The legal definition of Passing off is to make some false representation likely to induce a person to believe that the goods or services are those of another.

If this does happen, the sole trader will be liable to a civil action for the tort of passing off and the court can request to stop the use of its name. But if the sole trader uses his own name as the name of the business, even if this could cause confusion, he can continue using that name. For example a sole trader called “Giorgio Armani”, for example, could continue using this name for business purposes, however in this case the sole trader should not advertise the goods in a way that promotes confusion or to deceive people and customers.

DISSOLUTION The business can be sold and all the assets of the business will be transferred to the new trader. To be able to sell the business the trader should pay first his debts generated by the business. If he cannot pay his debts the business may be dissolved by his creditors under a process called bankruptcy.


is important to know the previous steps that the system provides prior to declare the insolvency and bankruptcy. Interest on debt – generally



will be necessary to look first at the contract to see if there is any provision for interest

Late payment of commercial debts legislation (Act 2002)


gives to creditors the right to claim interest from the debts relating to commercial contracts


Application of the Act: The act applies to contracts for the supply of goods or services where the purchaser and the supplier are acting in the course of a business


What is the rate of interest? Interest is calculated al 8% above the Bank of England base rate. The Act gives suppliers an entitlement to simple interest only and not to a worse interest, for example, charging interest of interests

When the customers still don’t pay

If the debtor does not pay despite of all the previous warnings given; the creditor will try to get the money by asking the county court for any of the following:

- A warrant of execution

- A third-part debt claim

- Charging order

1- Warrant of execution

A bailiff is an official whose job is to take away the possessions of someone who has not paid money that

they owe. The bailiff has the authority to visit the debtor’s home or business The bailiff will try either:

- To collect the money owed, or

- To take goods to sell at auction to pay the debt An auction is a public event when things are sold to the people who offer the most money for them


2- Third party debt claims

If a creditor knows that the debtor is owed money by a third party, the creditor may wish to divert the

payment away from the debtor to himself. This can be done by the creditor applying to the court for an order for enforcement of a third party debt claim. 3- Charging order This order prevents the debtor from selling property over which it is made, e.g. a house, land, business premises and any shares the debtor may have, until the creditor is paid.

Debt enforcement reform

The reform of the Act 2007 is to improve the working of the system of tribunal by providing a new

statutory framework, offices and bodies that will deliver improvements in services to those who use


BANKRUPTCY PROCEDURE – Generally Bankrupt: A person or business that is bankrupt has officially admitted that they have no money and cannot pay what they owe. Bankruptcy procedures must be taken against the debtors by the creditors The business affairs of the debtor will be taken over by an Insolvency practitioner who is usually an accountant. On bankruptcy the creditors will have to press the insolvency practitioner to pay.


A petition to the court for a bankruptcy order may be presented by the creditor only if:

a) The creditor who presents the petition is owed £ 750 or more (called the bankruptcy level) Two creditors may present a joint petition to reach the bankruptcy level

b) The debt is defined as a debt due and the debtor appears unable to pay

c) The creditors send to the debtor a demand asking for payment. If the demand is not complied within three weeks, the court accepts that the debtor cannot pay the debt

d) The debtor does not show evidence that will be able to pay a future debt

e) The debt is not secured, as for example a debtor’s property. A secured cannot present a petition. A secured creditor is the one who has taken a property of the debtor to secure the payment, for example when the bank secures the loan with a deed title.


This is an alternative procedure for the debtor to avoid being declared bankrupt.

A deed of arrangement is an agreement between an insolvent debtor and consenting creditors as a more

advantageous alternative to the debtor’s bankruptcy. There are different scenarios of the way this agreement would take place:

o The debtor can propose to the creditors that his business will be hand over to a trustee for the benefit of his creditors.

o The debtor can propose a scheme of arrangement, for example, proposing to pay 50% of the total amount owed. For some creditors this alternative can be acceptable taking into account the costs that the bankruptcy process will involve The scheme proposed by the debtor must need consent of a majority of the creditors. This majority could be in regard of the number of creditors or according to the value claimed by each creditor.


THE INTERIM ORDER AND VOLUNTARY ARRANGEMENT UNDER THE INSOLVENCY Act 1986 An interim order is an order passed by a court during the trial where the final order is not yet passed.

Such order is temporary. When the creditors present the petition for bankruptcy, the debtor can apply to the court to make what is called the interim order. The interim order can protect his property and stops the proceedings for a bankruptcy. As part of the process to obtain the interim order the debtor must propose a qualified Insolvency practitioner (called the Nominee). The court must be satisfied that:


The Nominee is qualified and considers that the arrangement has a reasonable chances of success


The Nominee will report to the court on the proposals of the debtor and if the court think that they are reasonable it will direct the holding of a meeting of creditors

Voluntary Arrangements (IVAs) – Fast Track

The fast track IVAs is only available for undischarged bankrupts. It will be used most often by consumers’ bankrupts who have not properly considered the option to avoid the bankruptcy or can also be used by professionals who discovered that a bankruptcy will affect their professional status. If a post-bankruptcy IVA is accepted, the bankruptcy will be annulled or cancelled. The fast track procedure is as follows:

- The Official Receiver, who is a servant from the Official Receiver’s Department, act as the Nominee

- He puts the proposal to the creditors on the way of “Take it or leave it”

- Over this proposal there is no chance for the creditors to propose changes of this proposal

- The Official Receiver will inform by correspondence the reasons of the IVA

- If the IVA is approved the Official Receiver will report to the Court and the bankruptcy will be declared annulled or cancelled

- The Official Receiver will act as the supervisor of the arrangement.

THE EFFECT OF BANKRUPTCY ORDER - Generally If a scheme is not accepted the court will proceed with the bankruptcy order. Once the order is made and the debtor becomes bankrupt, his property is automatically transferred to the control of the Official Receiver The transfer of the debtor properties to the Official Receiver does not apply to: tools, books, vehicles or other equipment used for job purposes; neither all the necessary for the basic domestic needs, such as clothes, furniture, house equipment; but very expensive tools and/or household items may be sold and be replaced by cheaper ones. The debtor must submit a statement of affairs within 21 days of becoming bankrupt Contents of the statement of affairs

- Particulars of the debtor’s assets and liabilities

- Names, residences and occupations of his creditors

- The securities held by the creditors

The debtor’s income

The debtor can continue receiving income from his trading or from his profession. However the trustee may apply to the court for an income payments order under which a specified sum of money will be paid to the trustee. If the petition is accepted the court can assure that a certain amount of the income will be transferred to the trustee to be used to pay part of the amount owed to the creditors; the court will keep other part of the income for the debtors to meet his reasonable needs and also for his family.


Income payment agreement

It is a written agreement made between the bankrupt and the trustee about the earning of the trustee for

the job that he is doing in relation to the administration of the debtor’s affairs, without obtaining a court order

Credit and other disabilities An undischarged bankrupt is guilty if the bankrupt obtain credit to the extent of £ 500 or more without disclosing to the new creditors about his bankrupt status. He is also guilty if he engages in new business without disclosing the name in which he was made bankrupt. An undischarged bankrupt commits a criminal offence if he acts as a company director or takes part in the management of a company unless the court gives the permission for that. In the past undischarged bankrupts were automatically disqualified from sitting in Parliament, but now this restriction is applied only to those bankrupts who are subject to a BRO (Bankruptcy Restriction Order) as we will see later. The BRO is an order made by the court for the “culpable” bankrupts (those who are considered guilty for acting purposely to mislead or deceive the public or people who traded with him).


A bankrupt order made against a person should not include for the bankruptcy proceedings the rights that

this person has in a Revenue pension.

COMMITTEE OF CREDITORS The creditors may set up a committee of at least three creditors who will observe closely the way the debtor deals with the assets. The trustee is not bound to set up a committee of creditors; however, they can be a good help for the trustee because those creditors may advice the trustee in regards of matters related to the debtor’s activities that the trustee could not be aware of.

THE PUBLIC EXPLANATION The Official Receiver may apply to the court for a public examination of the debtor activities. At the public examination the debtor can be questioned on the subject of his business affairs and dealing. The purpose of the public examination is to help the Official Receiver to find out why his business failed and if he did some type of fraud


If the family home is on the debtor’s name, the right of the house is given to the trustee for the administration.

The property can be sold to pay the creditors, but there are some rights for the debtor to continue in occupation. Some or these rights are:

- If minors (under 18 yrs old) are living in the house from the commencement of the bankruptcy process

- The debtor can request to postpone the selling of the property up to 12 months in order to find another place to live


The family home. Act 2002

It deals with a problem of the price of the family’s house and the increasing of the house prices.

PROOF OF DEBTS The creditors will send to the trustee the details of the debts. The claims can be sworn (done by a promises to tell the truth) or unsworn. Both are called Proof of debts.

MUTUAL DEALINGS - Set off Sometimes between the creditor and the debtor there are special situations, for example, the debtor owes to the creditor certain amount, but at the same time the creditor also owes money to the debtor in relation to another deal; to solve this situation they have agree on the bet deal to sort out the way of payment.

CARRYING ON THE BUSINESS AND DISCLAIMER The trustee will request to carry on the debtor’s business aiming to bring more money for the creditors. The debtor will transfer to the trustee the properties for the benefit of his creditors, however the trustee will request for a disclaiming the property, and then the trustee will not have personal liability that the debtor is doing wrongly, for example, if the debtor is renting a house and produces damages in the property, the trustee cannot be liable for those damages.

TRANSACTIONS AT UNDERVALUE AND PREFERENCES Undervalued is when something is worth less money than it really value is.

Transactions at undervalue is when someone transfers a property to other person receiving little or nothing in return. For example, a debtor transfers some properties to his wife Transactions under preference: When the debtor pays to some of the creditors the full amount of the debt but nothing to other creditors. The trustee can recover property or money that was passed in transaction at undervalue or as a preference.

In order to achieve that the trustee must act as follows:

- He must prove that the transactions at undervalue was done in the five years before the presentation of the petition of bankruptcy. If the court accepts that the debtor was insolvent at the time of the transaction, the court can set aside (keep it aside in order to use it later) the transaction.

- The trustee must prove that the debtor was insolvent at the time of the preference or became insolvent as a result of that preferential operation

Transactions defrauding creditors The section 423 of the Insolvency Act 1986 is designed to operate regarding transactions at undervalue and preferences

Enterprise Act amendments

A trustee in bankruptcy needs a permission of the court or a Creditors committee before proceeding in

regard to transactions at undervalue, at preferences and transactions defrauding creditors. The creditors committee would like to know in advance if it is worthy to embark in some procedures, taking into account the costs of the court action.


Protection of innocent third parties For instance, if the debtor makes a transaction at undervalue to his wife; and then she sold the property to someone who is not aware of the legal situation and buy the property in good faith; the law protects the buyer and he can retain the property.

PAYMENT OF THE CREDITORS – PREFERENTIAL PAYMENTS As the trustee gets some money from the debtor’s business, he can start making payments to the creditors. Insolvency Act 1986 sets the order of priority to receive the payment. Salaries and pensions of the employees are the first priority in the list.

PROTECTION OF EMPLOYEES An employee who loses his job when his employer becomes bankrupt can claim through the Department for Business, Innovation and Skills (BIS). Any payment must be authorized by the BIS, and the right to recover the money for payments must be transferred to the BIS.

Type of creditors

As we have seen there are:

a) preferential creditors (with first priority for payment),

b) trade creditors

c) deferred creditors

Deferred creditors: these are, for example, the wife of the debtor. They are not paid until all other creditors have been paid.


- “Culpable” bankrupt: Responsible for doing something wrong or illegal which caused the bankruptcy.

- “Non-culpable bankrupt”: Are those who for reasons beyond his or her control and despite best efforts have suffered business failure that led to bankruptcy. For non-culpable bankrupts there is an automatic discharge from bankruptcy after 1 year of the bankruptcy order. For the culpable bankrupt there will be normally a BRO which is a Bankruptcy Restriction Order, with a list of restrictions that will affect the bankrupt in the present and in the future.

Bankruptcy Restriction Orders (BRO)

The restriction can affect the bankrupt for a period between 2 to 15 years. The Official Receiver has to show to the court that the conduct of the bankrupt has been reprehensible for the public interest.

o Effects of the BRO

For example: For a period between 2 to 15 years the person subject to the BRO cannot:

- Act as a company director

- Obtain credit above a specified amount without disclosing the existence of the BRO

- Trade in a name other than the name under which he or she was made bankrupt


o Bankruptcy restriction undertaking (BRU) Undertaking is a promise to do something Under this procedure the bankrupt person accepts the terms of the Bankrupt Restriction Order

o The 12 months rule

If the bankrupt is not culpable bankrupt he can be discharged even sooner than 12 months, after the Official Receiver conducted a small investigation regarding the bankrupt financial behaviour


All the previous previsions discussed in this chapter were related to the Sole trader. We now turn to the legal environment of the ordinary partnership.

DEFINITION AND NATURE OF A PARTNERSHIP The partnership Act 1890 sets out the basic rules which apply to this type of business organisations. The legal environment of the ordinary partnership is much more complex than that of the sole trader. There are much wider rules to consider in partnership; for example, the ability of a sole trader to contract on behalf of the business but in partnership the partner cannot make contract in representation of the business if he is not authorized by the other partners.


An informal partnership is defined as “The relation that subsists between persons carrying on a business

in common with a view of profits”. This definition is not saying that must be an agreement between partners to be partners, meaning that just having a business in common with the aim to make profits make them partners even if they have not expressly agreed to be. This is the “informal partnership”.

Explanation and consequences of the definition 1) The relation which subsists is one of contract. A partnership is a contract based on being in business together with the intention to a joint venture, new business or activity as partners. It is essential that the partners have taken some steps to give evidence that the joint venture has began.


A partnership is “between persons”, but as we have seen there are natural and juristic persons,


and a company being legal person can be a partner with a human person (natural person). Two or more limited companies can be in partnership, forming a Consortium Partners must be carrying on a joint business venture, and for this reason a group of people who


run a social club would not be an informal partnership Partners must act in common: Every partner must be allowed to have a say in management and


decisions of the business There must be a view of profit: Although in connection with this point, the Court of Appeal has

ruled that it is not necessary a profit sharing to become a partnership, because some partners can be paid a salary instead of sharing the profits and they are still forming a partnership. 6) The sharing of gross return: Sharing of gross returns does not, (by itself), provide evidence of partnership 7) Joint ownership does not itself make the co-owners partners. If two persons share a property which is rented and they share the monthly payment, this situation does not make them partners.

English law does not recognize joint ownership of property as business.


8) Formalities: Writing document is not required for a partnership agreement. In fact there is not need to be a contract at all. However it is recommended to have a written agreement to set down rules in case one of the partners wants to change thins that were agreed verbally. IS THE SHARING OF PROFITS AN EVIDENCE OF PARTNERSHIP? In the past sharing of profits was almost conclusive evidence of informal partnership; but legal cases presented to the court led to review this concept. Let’s see examples of such situations:


Creditors who become part of the management of the firm in order to supervise the business and take share of profits: In this case a person (the creditor) is sharing the profits of the firm but his


intentions are not to be a partner of the persons that owe him money. The creditor will not be considered a partner Sharing profits with the employees: Some organizations use to pay the employees as part of their


salaries by some profit sharing scheme. This is possible without putting the employees at risk of being considered partners and liable for the debts of the firm. Lenders or creditors receiving a percentage of the profits as part of payment of money borrowed by the firm: Some creditors can agree with the firm that for the payment of a loan they can take a percentage (e.g. 8%) of the profits. As we can see the creditor is sharing profit but it does not make him a partner.

Deferred creditors

Lenders of money are not given a priority at the moment of the payment of a bankruptcy process. As we could see, employees are put in preferential order for the payment, meaning that at the time of payments they will be first in the list. The deferred creditors, in this case, the lender of money, will not get any of the money owed until all the other creditors have been fully paid.


- The general partner

- The dormant partner

- The salaried partner

- The partner by holding out (by estoppels)

The general partner This type of partner has the right to take part in the management of the business; unless there is an agreement between himself and the other partners that he should not; however if this partner ignores the agreement and starts, for example, to order goods to a supplier or signing checks on behalf of the firm, the law gives him the right to do so despite of the previous arrangement he has done with the other partners; This could be a source of internal conflict which could lead to the dissolution of the partnership. The dormant partner He is a partner who puts money (capital) into the firm but does not take active part in the management. If he does take part in the management of the business he changes his status from dormant partner to general partner. The salaried partner These are partners who usually do not put money (capital) into the firm as the general partners do. They are just paid a salary as an employee. In case they want to leave the firm it is not necessary to request for dissolution of the firm. They are not liable as the other general partners except on the following situation:


If the salaried partner is a very recognized person and the fact that his name appears on the firm’s letter-heading can make some customers rely or trust to deal with that firm because the presence of this partner; in this case the salaried partner could be liable. An alternative that this recognized partner can take to avoid liability is describing publicly and visible himself as “salaried partner” or “consultant” on the firm’s letter-heads; however the court will analyze each particular case to define the liability of the salaried partner. The partner by holding out (or by estoppels) It occurs when a person allows his or her name to appear on the firm’s letter-heading whether that person is or is not a full partner. An example of partner by holding out is when the partner has retired of the partnership but his name continues appearing on the firm’s letter-headings. If the partner is aware about that his name is on the letter-headings and consents with that and the client has relied on his name as partner; the holding out partner will be liable.

MEMBERSHIP OF THE FIRM There is no limit on the number of persons who may be partners in a partnership.

There is no space for discrimination of membership regarding sex, race, sexual orientation, religion and belief, disability or age.

A minor may become a partner but may become out of contracts while he or she is less than 18 years old.

Regarding mental capacity, a person is assumed to have capacity unless it is established that he or she lacks it. The Court will make an assessment of the mental capacity of the person through professional’s consultancy.


The name of the firm is a way to shorten the full list of the names of all the partners, hence the judgement against the firm can also be enforced in the same way against the private property of any


partner if the assets of the firm are not enough.

Choice of name


Passing of at Common law

Partners can trade under any name that suits them so long the name does not suggest that their business

is the same as the competitor. The name must not deceive or confuse the customer.

People can use their own names even if there is some confusion with another person’s business, but the selection should not be make purposely to deceive the public. In that case the court can give an injunction (official order to stop someone from doing something) to stop using this name.

o Business name and company legislation

The names of all partners and their addresses must be stated in a noticeable way so that can be easily read at the firm’s business premises. Also the names must be stated in all forms, documents and business letters. However this requirement is not so strict in firms with more than 20 partners. Under the Companies Act 2006 the use of descriptions like “company” or “and company” are allowed for

partnerships even though they suggest that they are companies when in fact they are not Registered Companies. However they cannot use expressions like “Public Limited Company” or its abbreviation plc., or “Limited” and Ltd.


THE RELATIONSHIP BETWEEN PARTNERS AND OUTSIDE The power of a partner to make him liable for transactions made on behalf of the firm is based on the laws of agency. Each partner is an agent of his co-partners.

PARTNER’S POWERS Actual authority The firm can be liable for the acts of the partners done on behalf of the firm and also of employees of the firm. Actual authority inferred Sometimes if some partners take a decision but the other partners are not aware of that, the firm is bound to the decision taken if there are reasonable circumstances for that transaction. The Court in one case, which can be used as an example for inferred authority, stated that the there was an inferred consent from the other partners who did not participate in the transaction because the transaction made sense with the business


Apparent or “ostensible” authority

a partner enters into a transaction on behalf of the firm without authority, the person he deals with may bind the firm to the transaction if he didn’t know that the partner had no authority (meaning internal authority according to agreement between partners) to make such operation. The transaction must be connected with the business and must be clearly assumed that it was not



personal deal of the unauthorized partner.

The business deal must be something usual for this type of business. Finally, the outsider must know or believe that he is dealing with an active partner with management powers in the firm. Even dormant partners can perform unauthorized operations which will bind the firm if the outsider believed that he was a general partner, for instance, if the dormant partner’s name was written in the letter-heads of the firm but without explaining his status as dormant partner, salaried partner or consultant.


Examples of apparent authority as laid down by case law: The Court has decided that there are some areas in which the partner has apparent authority:


All partners in all business: Here there is apparent authority to sell the goods (but no the land) of the firm and to buy goods (but no land) on behalf of the firm; to receive money in payment of debts due to the firm and give valid receipts


All partners in trading partnership: It was important to define the world “trader”, and one important element in the definition of trading could be that trading implies buying or selling. This point is important because a partner of a partnership that is not trading has not implied power to borrow on behalf of the firm.


the firm is engaged in trade, the main additional implied powers of the partner are:


- To borrow money on the credit of the firm

- To secure the loan


Situations of no apparent authority The partner has no authority to do:

- He cannot make the firm liable on a deed. He needs the authorization of the other partners. This authority must be given by deed.

- He cannot give a guarantee, e.g. of another person’s debt on which the firm will be liable


- He cannot accept payment of a debt from a debtor to the firm by accepting a discount proposed by the debtor, e.g., the debtor proposes to pay 75% of the total amount owed. A partner cannot accept this deal without being authorized by his partners

- He cannot bind the firm by agreeing to go to arbitration in a dispute when it can make loose the right of the firm to go to the court of law and have the case heard by a judge. A partner cannot compromise the legal rights of the firm A partner’s liability for debt and breach of contract by the firm

If because of actual or apparent authority, a partner makes the firm liable to pay a debt of carry out a

contract, the usual procedure of the creditor is to sue the firm; if the court decides that the claimant is right but the firm has no sufficient assets for the payment, the partners are liable to pay it from their private assets of properties.

A partner can be, therefore, required to pay the firm’s debts from his private assets. From this we can

see that only if all the partners are unable to pay the firm’s debts will the firm be considered fully insolvent.


A tort is something that you do or fail to do which harms someone else for which you can be sued

The firm is liable for the torts of partners which they commit in the ordinary course of business, but no

where the partner acts outside the scope of the firm’s usual activities. At common law the firm is also liable for the torts of its employees committed in the course of their employment. Misappropriation of property Partners are liable to make a good loss incurred if partners misapply or mismanage money or property received from a third person such as a client

LIABILITY OF INCOMING AND OUTGOING We need to define now the period of time in which the partner is liable for the firm’s debts There are four points to define:

- Admission as a partner

- Retirement as a partner

- Novation and indemnity

- Notifying retirement

1. Admission as a partner: A new partner does not take the liability for debts of torts incurred by the firm before the date he become a partner. If he wishes to take this liability he must do it by a process called novation.

2. Retirement as a partner: If a partner retires from a partnership, he will still be liable for the debts and obligations assumed by the firm during the time he was a member of the partnership, in other words, the law does not allow a partner to avoid his liabilities simply by retiring from the firm. On the other hand, a partner is not liable for future debts or liabilities taken by the firm after his retirement, unless the partner has not given proper notice of his retirement as we will see later.

3) Novation and indemnity: The use of novation is rare except the case of bank which may release a retiring partner from his liabilities if the partnership has enough assets to pay the debts from the other partners including the new ones who are now liable by the process called novation. Creditors are not forced to accept the new partner in novation and may continue to regard the retiring partner for debts incurred while ha was a partner. Indemnity, the meaning of indemnity is an amount of money paid to someone because of some damage or loss that he or she has suffered. The indemnity is often found in the partnership



agreement which may have a clause such as “In the event of retirement of one of the partners the remaining partners shall take over the liabilities of the firm”. Notifying retirement: The law requires a retiring partner to notify his retirement. Depending on the type of creditors this notification must be done accordingly, or rather, the

retiring partner’s obligations will depend on the type of creditor and the way they were notified of this retirement.

a) Creditors who have previously dealt with the firm and who knew about the retirement of the partner: This creditors may be notified by letter from the firm

b) Creditors who have not had previous dealing with the firm buy who knew that the retiring partner was a member of the firm: These creditors must be informed by publishing the retirement in a bulletin (The London Gazette, for example), which contains all sort of public announcements: bankruptcies, company liquidations and partnership dissolutions.

c) Creditors who have not had previous dealings with the firm and do not know that the retiring partner was a member of the firm: No legal obligations of give notice from the firm to them.

RELATIONSHIP OF PARTNERS WITHIN THE PARTNERSHIP We shall now deal with the relation of partners to one another

The ability to change the partnership agreement

Partners can change the business of the firm but all the partners must be in agreement about this; internally the partners can change the terms of agreement that they have signed. The relationship between the partners and the outsiders cannot be changed in that way. Internal restrictions on the authority of partners have no effect on an outsider unless he has actual notice of the restriction.

Partnership property

Whether property becomes partnership property or remains in the separate ownership of a particular partner depends upon the intention of the partners.

In the absence of an express agreement between partners, the property will be regarded as one of the firm property if:


It is purchased with partnership money


It is brought into the firm by a partner who has the value of the property credited to his capital account in the assets of the firm


It is treated as an essential part of the firm’s property by the partner


The commercial importance of identifying partnership property

To identify who is the owner of the properties of the firm is very important for the following reasons:

1) Important for the partners themselves: Because if the property increases its value, we need to know if the benefit of this increase is advantageous for the firm (if the property belong to the firm) or if the partner is the sole owner, is him who gets the benefit. The opposite situation happens when the property losses its value.


To the creditors of the firm and to the creditors of the individual partner: The ownership of the


properties is important for the creditors to know whether this property is available or not to pay the debts that the firm or one of the partners have with the creditor If the property is owned personally by a partner: He can do what he likes with it unless the firm has some contractual rights over it in a written agreement


Implied financial terms

We will describe the relationship between partners in regards to financial matters


Profits and losses: Unless there is other agreement between the partners; all the partners are going to share equally in the capital and profits of the business. If some partners have contributed more capital will receive more profits at the moment of the distribution of the profits generated by the firm; but this clause must clearly define it in the partnership agreement


Interest on capital: Unless the other partners agree, no partner is to get interest on the capital he puts into the firm. The interest on capital belongs to the firm


Interest on advances (loan): If the firm borrows money to one of the partners and he decides to loan the money from his personal funds, giving it as an advance; he cannot receive an interest more than 5% per annum.


Indemnity: The firm must pay the money back to a partner who made payments with his own money, that should have been done by the firm

Implied management powers

The way the firm will distribute or delegate the powers for the management of the business is usually explained in the partnership agreement. If there is nothing written in the agreement, the following rules will be applied:


Every partner may take part in the management of the business: Partnership is defined as the

carrying on of business “in common”; and taking into account that a partner is liable for the firm’s debts, he should have at least the chance to manage part of the business. Any unjustified exclusion of a partner from be part of management will enable him to request the dissolution of the partnership. 2) A partner is not entitled to a salary. Here we talk about the general partners and we do not

include the salaried partner who receives a salary but does not share profits. General partners share profits, but in some firms there is one or more partners who are more active in the business and invest more of his time than the others; for these cases, it is possible that this partner can receive a salary which will boost his income in addition to the share of profits. Everything must be proper and clearly explained in the agreement. No new partners can be brought into the firm and no changes can be made in the direction of the business without the consent agreement of all the partners: This is a fair provision. If some partners refuse that a new member is included as partner in the firm the other members cannot push or thrust for the incorporation of this new member. Mutual confidence is essential. The same concept regarding changes on the direction of the business. If there are some special clauses for these two situations they must be well addressed in the partnership agreement.

4) Every partner is entitled to access to the firm’s books: Including the right to inspect and copy them: The court will make an order (an injunction) preventing the partner of this right if he is, for example, taking the names of customers from the books to try to get them to use for a separate and personal business that he is doing out of the firm.



Every partner shall attend at and work in the business: If he does not, the other partners have a ground to dissolve the firm.

Expulsion of a partner The partners have no power to expel another partner even if the majority of them want to do so, unless it is written in the agreement that partners can be expelled under certain circumstances.


If a partner does not want to leave the firm and the majority of the other partners want the expulsion the

case will be taken to the Court which will consider if there are enough reasons to justify the expulsion or not. The Court will assess the following:



the complaint justifies the expulsion: For example, if one member has personal behaviour in his

private life but although the other partners don’t like his way, but this behaviour does not affect the development of the business of the firm; the Court would say that the request of the other partners for expulsion is not justified


Even if the partner agreement allows the expulsion by the majority of the others, there should be

a good reason for that expulsion. The court can say that unfair expulsion t a partner who had done nothing wrong to hurt the firm is not effective because was done in bad faith The expelled partner is entitled to the right of withdraw his part of the firm’s assets

Relationship of utmost good faith “Utmost” means the maximum degree possible Each partner must treat his co-partners with utmost fairness and good faith The Act 1890 sets out certain areas to which the good principle is applied. They are as follows:

1) Duty of Account: Every partner must give true accounts and full information regarding all things

that affect the firm to any partner; for example, if one partner knows that some of the assets of the firm have increased its value, he has the obligation to share this information with his partners. This is a positive duty to disclose fact. It is not merely a negative duty of not to mispresent facts. Duty of not to compete with the firm: Partners may have other business either personal (as a sole

trader) or being part of another partnership; however the business that he does out of the firm must not compete with the one that the firm does. If there is no consent of this situation by the other partners, he must share with them the profits of this business that he is doing as a sole trader, for example.


DISSOLUTION The dissolution of the partnership can be made by mutual agreement (non-judicial dissolution) or by the intervention of the court (judicial dissolution). One of the most important points of the dissolution is the distribution of the assets of the firm.

Non-judicial dissolution

Any of the following events will normally lead to the dissolution of a partnership;


The ending of the period for which the partnership was to exist