If you are operating as a sole trader, the benefits are that it is a simple form of business to establish and there are no formal legal restrictions. You can enjoy all the profits and there is no legal requirement to keep accounts other than to inform the tax inspector of the tax liability of the business (which will in fact be your personal in come tax liability).
The Inland Revenue will require acceptable accounts and taxation computation, however, and this will usually mean that you have to pay an accountant to draw up the final accounts and audit the books in order to avoid paying too much taxation and to satisfy the tax inspector at the Inland Revenue. As a sole trader there is nothing to stop you carrying out this work yourself if you have the required skills. Being a sole trader also brings problems – mainly your difficulty in finding the necessary capital to start the business and the requirement on you if you do borrow from the bank, to put up some form of collateral such as your house and other personal possessions.
Furthermore, you have unlimited liability, which means that if the business goes into receivership you will not only lose all of the money you have invested in the business but could, if the business owes more than its asset value, lose your own personal assets. A sole trader could be made personally bankrupt due to the failure of the business. You will probably have to work very long, and in many cases unsocial hours. If you become ill or want to go on holiday you will have to pay someone to look after the business. Can you put trust in such hired help? Running our own business can be very stressful. Advantages and disadvantages of sole traders Advantages Disadvantages They are easy to set up and require little paperwork.
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One person takes all the decision- making responsibility. All profits accrue to the sole trader. One person is responsible for providing all the capital. Decisions are made quickly. Working long hours is necessary. Close contract is kept between owner, employees and customers.
Unlimited liability for debts. ‘partnerships A partnership is a way of sharing the risk, skills and the workload involved in running a business. Many partnerships tend to be in the retail industries but there is also a high proportion of partnerships in agriculture, catering and the construction industry. Partnerships consist of between two and twenty partners but firms of partners within the various professions can be larger. Indeed, partnerships tend to be most common in the professional services where there is a legal barrier to most of them forming limited companies; examples include firms of solicitors, accountants, stockbrokers, doctors and dentists. Although oral partnership agreements are legally binding it is necessary to draw up a formal partnership agreement.
This involves writing out a deed of partnership drawn up with the help of a solicitor or an accountant. This document sets out the details of the partnership agreement and includes important items such as the amount each partner has to put into the business, the responsibilities of each partner and how profits and losses are to be distributed between them. Partnerships can trade under their own names or under a business name subject to the same restrictions as sole traders. If the partnership chooses a business name such as the Brad for Estate Agency, all of the partners must be shown on all business stationery. There are two types of partnership: ordinary and limited.
Under the ordinary partnership all partners must have unlimited liability and can take a full part in the running of the business. Under a limited partnership the sleeping partner can enjoy limited liability but he must not take an active role in the running of the business – hence, the name. The sleeping partner can provide the business with a valuable injection of capital, however. This can be particularly important when the business is growing. The benefits of running a partnership are that more capital is available than with a sole trader and there are relatively few legal restrictions.
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The provisions of the Partnership Act 1894 still apply, however. There is also the opportunity for individual partners to specialize and gain more expertise than would be possible under a sole trader – one person cannot be an expert in everything. For example, individual partners in a firm of accountants could specialize in specific areas such as taxation, investment advice, property, etc. the responsibilities and stress involved in running the business are shared among partners. There is a greater possibility of borrowing more money from the bank because each partner could put up some form of security as collateral. The main problems running a partnership are that each partner must be consulted and there is obvious scope for disagreement which can affect the smooth running of the business and can even close the business down.
All profits are shared between partners according to their partnership agreement. One partner, however, may not be as good or as hard working as the other partners yet receive a similar share of the profits. Even worse, one partner may be dishonest or negligent and cause problems in the partnership and all the other partners will then have to share the resulting liability. All partners (other than a sleeping partner) have unlimited liability so, if the partnership incurs debts, all partners are liable including their own personal assets.
Advantages and disadvantages of partnerships Advantages Disadvantages The responsibilities are shared. Disagreements between partners can occur. Capita, skills and workload are shared. Unlimited liability. Business decision take longer. Large amounts of capital are difficult to raise.
‘limited Liability Companies When a business with unlimited liability goes into liquidation because it us unable to repay its debts, the owners of the business may have to give up their personal possessions in order to repay any money that is owed. Sole trader and partners can usually have only unlimited liability. If a business has limited liability then the owners of the organization have their personal possessions legally protected in the event of the bankruptcy and they will only be liable for the amount of capital they have risked in the organization. Private limited companies, public limited companies and co-operatives normally have the protection of limited liability. The reason for starting up a company is to run a business for a profit.
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The owners of a company are its shareholders. The shareholders have each bought a piece of the company and own a certificate which states that they are part owners of a business. Some shareholders may own more shares in the company than others. The shareholder with the largest number of shares will have a controlling interest and be able to control the company’s management. There must be at least two shareholders but there is no legal maximum. Once it is set up, a company exists as a legal entity in its own right.
Anyone wishing to deal with the company addresses ‘the company’ rather than the shareholders who own it. Shareholders are protected by limited liability and only risk their shares in the event of the company becoming insolvent. A limited company is defined as a corporate body which means it has its own legal identity and can sue or be sued in its own name. All limited companies must register with the Registrar of Companies House to whom the company must send certain information every year to comply with the Companies Acts. A sole trader or partnership is controlled and run by the owners but a limited company es owned by the shareholders but run by a board of directors who make the major policy decisions and request the shareholders to approve their actions at the Annual General Meeting.
These annual general meetings are often attended by only a small percentage of the total shareholders. This is particularly the case with a large public limited company which may have a million shareholders! There are two forms of limited companies: (Ltd) and (PLC).
Private Limited Companies (Ltd) As the name suggests, a private limited company can only have a private issue of shares. Shares in this type of company cannot be sold on the stock exchange but in most cases may be traded with the consent of the board of directors. Private companies can be any size but are normally smaller than public companies. They are often family concerns with the family owning enough of the shareholding to maintain overall control of the business.
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This means that the shareholders of private limited companies are usually family and friends. Private companies are controlled by the board of directors which is a body set up to protect the interests of the shareholders. The Managing Director is responsible for running the business and is appointed by the rest of the board. The shareholders are allowed to address the board of director over its running of the business at times such as the Annual General Meeting. If the shareholders do not agree with the actions of the board of directors they can vote it out of office at a general meeting. It is, therefore, in the directors’ interest to run the company in accordance with the shareholders’ wishes.
Many private limited companies are small in size and their shares cannot be sold on the stock exchange. Many people are tempted to establish a private limited company rather than trade as a sole trader or partnership because they enjoy limited liability status, so if the business fails they only lose the amount of their investment in the business and not companies in a ratio of about 20 to 1. The main advantages of private limited companies include being able to raise cash through issuing shares and the protection of limited liability for shareholders. The main disadvantages include being costly to set up, having to keep proper accounts and pay auditors, having to produce reports and hold meetings in accordance with the Companies Act and having to share out profits as dividends among shareholders. Public limited companies (Plc) Public companies similar to private companies but are usually larger and are quoted on the stock exchange.
The owners of public limited companies, as the name suggests are shareholders who can be members of the general public or financial institutions such as banks, pension fund managers and insurance companies, or even other companies. The company shares can be freely bought or sold on the stock market. This means that public limited companies are able to raise large amounts of capital quickly and relatively easily, and this gives them a large amount of financial power. In order to become a public limited company the business must raise a minimum of ₤ 50, 000 in share capital and obtain a Certificate of Incorporation (which a private limited company also needs) and a Certificate of Trading. Most of the familiar household names are PLCs, e. g.
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Marks & Spencer, Sainsbury’s, BP, British Gas, British Telecom, BHS, British Airways. The advantages of forming a PLC are that shareholders enjoy limited liability status and a limited company can often obtain additional capital more easily, particularly in the case of a large PLC. It can issue more shares on the stock market, for example. Large PLCs can afford to employ the best managers with the necessary expertise to analyse the market and make the best and most informed business decisions possible. Shareholders are free to sell their shares or buy more shares in the company when they wish.
The demand or lack of demand from potential purchasers of a company’s shares determines the share price on the stock exchange computer. The higher the demand the higher the share price. The disadvantages of forming a limited company are the number of legal requirements needed when forming such a business, particularly if it is a PLC. There are also ongoing legal and financial requirements under the Companies Acts that make the accounts of the business far less private than either a partnership or a sole trader. All financial records and the directors’ report must be audited and made available to the Registrar of Companies at Companies House. Additionally these documents must be freely available for anyone to inspect and scrutinize.
A further disadvantage of being a PLC is that the original shareholders can lose control of the organization if large numbers of shares are bought by a rival organization wishing to take over control. Such take-overs usually start when another company buys up a substantial amount of the company’s shares. It must then make a final offer to the existing shareholders for the remaining shares. The directors of the company under threat of take-over will advise shareholders whether or not to accept the offer.
If it is a hostile bid they will do their best to fight it off. At the end of the day, however, it is up to the shareholders to decide whether to accept or reject an offer from the take-over company. Co-operatives The number of business taking the form of co-operatives has increased in the UK in recent years but still remains small in number relative to other business types. There are three basic types of co-operative; consumer, worker and marketing co-operatives. Consumer co-operatives This type of co-operative operates High Street retail outlets which offer consumers a share of the profits in the company in return for their loyal custom. This can take the form of traditional dividend on purchases or a range of other member benefits.
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Worker co-operatives This type of organization is actually owned, controlled and run by the employees themselves. This is achieved by each employee becoming a stakeholder in the business. All employees are given the opportunity of membership and issued with a single vote. Profits are distributed equally among the members and major decisions relating to the running of the business are decided democratically at meetings where all the members can be present. Some worker co-operatives have been formed by the redundant employees of manufacturing business that have been forced to close down (for example, Norton, who manufacture motorcycles).
Other workers may join together to produce a particular product or service (for example, a baby-sitting service or hand-crafted goods).
Franchising Many new firms are set up as franchise operations where an owner can purchase a business idea, the product or service and marketing expertise from another business. The best example of this type of business is McDonald’s where the business is locally owned and run but the owner is contracted to McDonald’s for the supply of shop fittings and equipment and the fast food products themselves. Business organizations, such as McDonald’s, are so successful that they are able to expand by selling rights to market their own product or service to others. These organizations are known as franchisers and the organizations they sell rights to are known as franchises. Other examples of well known franchise networks include The Body Shop, Prontaprint and Benetton. For a fee the franchiser allows the franchisee to sell its product or service, trade under the same name and use exactly the same business image.
In some cases the franchisee may also have to pay a proportion of profits back to the franchiser. In return for these arrangements the franchisee usually gets the right to be the sole provider of the product or service in a locality. Advantages and disadvantages of Franchises Advantages Disadvantages The certainty of knowing the product or service is a proven success. Less independence and freedom to make own decisions.
Membership of a network of organizations all engaging in the same activity. The success of the franchisee depends on the continuing success of the franchiser. Advice on the selection and purchase of stock. If a single franchisee acts in a disreputable way then this reflects on all the other franchisees in the network. Training given by the franchiser. Use of the franchiser’s greater advertising and bulk purchasing power.
Benefits from the franchiser’s research and development efforts. Assistance and direction with setting up business. Greater credibility with financial institutions when seeking capital. ‘y Registration Procedures The rules for registration of a company are the same for both private limited and public limited companies. The basic documentation required is the Memorandum of Association and the Articles of Association. The Memorandum of Association This should contain details of: The name of the company.
The address of the registered office of the company. The amount of the liability of the members. The authorized capital. The company objectives. The final item can be more difficult than it looks. If, for instance, a company has stated in its objectives that it is going to manufacture motor cars, it may have problems in trying to expand its provision to include electrical goods and equipment.
In legal terms such an action may be ruled ultra virus (i. e. beyond the limit of the company’s powers and thus void at common law).
However, Section 9 (1) of the European Communities Act 1972 (later incorporated into Section 35 of the Companies Act 1985) offers some protection in that it allows a company to make a general statement as to its objectives (e.
g. to trade as a commercial concern).
Moreover, company objectives can be changed by virtue of a special resolution of the company concern. The Articles of Association These should cover the internal administration of the company in areas such as the appointment of directors, the categories of shares and the meetings to be held. Where no such Articles exist, the model articles outlined in the Companies Act 1985 apply.
What is important to note, however, is that the Articles constitute two distinct contracts. The Articles are a contract between the company and each member. In Hickman v Kent or Romney Marsh Sheep Breeders’ Association  1 Ch 881, for instance, the Articles said that any dispute between a member and the company must be taken to arbitration. When a member tried to bypass arbitration and take his complaint direct to the High Court, he was held not entitled to do so. The Articles are also a contract between the members. Where, for instance, a member buys shares, he or she makes not only a contract with the other members to observe the provisions of the Articles.
However, the Articles do not constitute a contract with outsiders. In Eley v Positive Government Security Life Assurance Co.  1 Ex D 88, the Articles stated that Mr. Eley was to be employed for his lifetime as the company’s solicitor. When the company ceased to employ him, he could not claim damages because the Articles did not constitute a contract between the company and him in his capacity as a solicitor.
Role of the Registrar of Companies The Articles of Association of a registered company be supplied to the Registrar of Companies prior to incorporation. Like the Memorandum of Association, the contents will then be included in the company’s file kept at Companies House in Cardiff. In addition, the registrar must be supplied with a statutory declaration that all the requirements of the companies Acts have been complied with. Having examined all the documents and ensured that they are in order, the registrar then issues a certificate under official seal which certifies that the company is incorporated. The certificate is conclusive evidence that the company has complied with all the requirements of the Companies Acts and that it is authorized to be registered. At the other end of the process, the Registrar may, under Section 652 of the Companies Act 1985, strike off the registrar a company that is defunct; i.
e. one which is no longer carrying on a business. Consequently, would-be investors can at least assure themselves that the company in which they are interested in investing does exist and is subject to certain controls. Appointment of Directors Under Section 282 of the Companies Act 1985, a company must have a board of directors.
Directors may be fee-paid supervisors acting as trustees for the shareholders, or senior executives who work as full-time directors of the company. Appointment of executive directors Under Regulation 84 of the Companies Act 1985 the directors may appoint one or more of their number to an executive office, such as the company accountant or finance director, they may also decide on suitable payment. Appointment of a chairperson Companies are not required by law to appoint a chairperson. Since, however, in most cases they are bound to hold an annual general meeting of shareholders, there is an obvious need for a chairperson to control and manage the meeting. Regulation 91 ou the companies Act 1985 gives the board of directors specific power to appoint one ou their number to be chairperson of the board and to remove him or her from that office at any time. RUNNING AND MANAGING A BUSINESS UNIT Running Partnerships Although sole traders have few statutory and common law obligations with which to comply, members of a partnership are subject to much more extensive legal controls in the way they operate.
The relationship between the partners is a fiduciary one, so each partner is in a position of trust vis-‘a-vis the other partners and is under a duty to disclose all information to them and act in their best interests. Even so, most partnerships have a written Agreement confirming the specific obligations of the partners, as specified in Sections 19-31 of the Partnership Act 1890. The following are the major provisions: – To have an equal share of the profits and bear an equal share of the losses. To be indemnified by the firm against any payment made and liability incurred in the course of the business.
To pay interest to a partner who makes a payment into the firm above his or her prescribed amount. To have the opportunity to take part in the management of the business. To have no entitlement to remuneration for his or her part in the business. To agree to the introduction of a new member if the decision is unanimous.
To determine ordinary matters by a majority of the partners. To keep the partnership books at the place of business to which all partners should have access. Powers of Partners Any partnership is free to limit the activities of certain of the partners in, for instance, their ability to enter into contractual relationships on behalf of the firm. Such an agreement will merely be an internal one, even though breach of it would allow the partnership to be dissolved and the partner concerned excluded. Usually, however, Section 5 of the Partnership Act 1890 applies, which provides that where a partner is acting in the ‘normal course of business’ any contract that he or she makes will bind the firm. The authority of a partner also depends on the type of business, although normally he our she would be expected to have authority to: Sell any goods or property belonging to the firm Purchase goods that would normally be used in the firm’s business.
Receive payments from third parties on behalf of the firm. Hire staff. Engage a solicitor to act for the firm. To borrow money on behalf of the firm and to sanction payments in and out ou the firm (in a commercial partnership).
Only where a partner is not acting in the normal course of business or has no authority to carry out that particular act – and the other party is aware of the lack of authority – will the firm not be bound. In both cases the law of agency applies, which defines the relationship between a principal and an agent.
The function of the agent is to create a contract between the principal and a third party, and the agent may bind the principal to that contract by virtue of actual or apparent authority. Actual authority exists when the principal has expressly allowed the agent to carry out a certain act on his or her behalf. Apparent authority (or usual ostensible authority) exists when the agent is given apparent authority to act on behalf of the principal. Liability of Partners Section 10 of the Partnership Act 1890 makes all partners liable for any wrongful act our omission of one of the partners when it is carried out in the normal course of business of if the other partners agree to the act.
Liability is joint and several. A legal action by a creditor, for example, can be brought against one or all of the firm’s partners; i. e. one or more can be isolated from the firm and sued individually.
If, however, the creditor feels that one partner will have insufficient financial resources to cover the amount due, then the other partners can be sued jointly for the remaining debt. However, it is possible for a partner to have limited liability under the Limited Partnerships Act 1907 which provides that, with certain exceptions, such a partnership should not have more than 20 partners. The limited partner may be a corporate body or a sleeping partner. He or she cannot take any role in the management of the limited partnership.
Nor does he or she have any power to bind the partnership or, generally, to call for its dissolution. Running Companies Companies are normally managed by directors and shareholders. Regulation 70 of the Companies Act 1985 and Article 80 of the Companies Act 1948 give wide powers to the directors by allowing them to exercise ‘all the powers of the company’ unless company rules require otherwise (members may restrict the powers).
With those powers come a range of duties. Generally the duties of a director are more taxing than those of a sole trader or partner and are based on both common law and statutory law. Fiduciary duties A director owes duties to a company which are similar to those owed by a trustee to the beneficiaries under a trust.
In particular, the director must account for any personal profit make in the course of dealings with the company. Accountability occurs when the personal profit is make and is not dependent on whether or not the company itself suffers a loss. However, the director is not accountable for the profits ou a competing business he or she may be running, unless the Articles or contract of service stipulate otherwise, or unless he or she uses the company’s property in that business, uses its trade secrets or induces the company’s existing customers to deal with him or her. A director may not, either during or after service with the company, use confidential information entrusted by the company. The other aspect of fiduciary duty is that the director must use his or her powers for the benefit of the company (i. e.
for the benefit of the shareholders as a whole) and not for the directors’ own benefit. Duty of skill and care A director owes a duty of care to the company not to act negligently in managing its affairs. Nowadays directors are often experts in particular fields such as accounting our law, and therefore a high standard of care will be expected of them. In addition, executive directors employed by companies in a professional capacity have to comply with an objective standard of care, as do non-executive directors (those who do not take part in the day-to-day running of the business).
However, in an early case, one judge made the point that directors: Need not show a greater degree of skill than may reasonably be expected of a person with their knowledge and experience. Need not give continuous attention the affairs of the company.
Are not bound to attend all meetings of the board, although they ought to attend whenever they are reasonably able to do so. May delegate duties to other officials in the company and trust them to be performed properly so long as there is no reason to doubt or mistrust them. Duties of Outsiders Similarly, directors are under a duty not to act negligently so as to injure outsiders. In Thomas Saunders Partnership v Harvey  30 Con LR 103, the plaintiffs were architects, who were retained on a project to refit office premises.
The defendant (Harvey) was a director of a subcontracting flooring company, who confirmed, wrongly, that the flooring the company offered conformed to the relevant specifications. The architects, having been sued by their client over this issue, sought a personal indemnity from the director as his company had by now gone into liquidation. Their claim for negligence succeeded even though the statement had been made on behalf of the company. The defendant was a specialist in the field and had assumed a duty of care when making the statement, and the court did not see why the ‘veil of incorporation’s should affect liability for individual negligence. Similarly, a company director was held by a court to be personally liable for loss caused by the negligent misstatement of his or her company, even though the director dealt through the company and not director with the person who suffered the loss. Interestingly, there does not seem to be a duty owed to shareholders individually, and so there can be no claim by individual shareholders in respect of loss through the breach of fiduciary duty or negligence by a director.
Statutory Duties Under the Companies Act 1985, directors must Notify the company of their interest in its shares or debentures or those of an associated company. Disclose any substantial non-cash transactions with the company. Disclose personal interests in any contracts of the company. Have regard to the interests of the employees. A director who is in breach of duty is jointly and severally liable with other directors to make good the loss. He or she must account for any secret profit made, and in such cases the company is usually able to avoid any contracts entered into with the director.
However, a director may be protected from the effects of any breach if: The company waives the breach by ordinary resolution. The company has indemnified and insured directors against liability for breach. The court has granted relief under the powers available to it under Section 727 ou the Companies Act 1985 where the director has acted honestly and reasonably and ought in all the circumstances to be excused. Duties of Employee Since directors must exercise their powers for the benefit of the company, it could perhaps be assumed that they have therefore to take into account the interests of the employees of that company. However, although Section 309 of the Companies Act 1985 states that the matters to which directors must have regards should include the interests of the employees as well as the interests of its members, the section goes on to provide that the duty is owed by the directors to the company alone, and so the employees have no right of redress if they are in disagreement with the decisions of the board. Duties of Shareholders Directors have the authority to manage the business of the company and to carry out all activities expressly or impliedly contained in its objectives clause.
However, the law recognizes that some checks on this power are necessary to ensure that ultimate control is vested in the ‘owners’ of the organization, i. e. the shareholders. Shareholders have the right in certain circumstances to take action on the company’s behalf to prevent any harm occurring to it or carried out by it. They also have powers, exercisable in a general meeting, to: Pass an ordinary resolution to remove a director before his or her term of office expires. Refrain from voting for the re-election of a director if the company’s articles provide for retirement by rotation.
Pass a special resolution to alter the Articles to lessen the powers of the directors. Pass a special resolution which gives the directors instructions on how they should act in relation to a particular matter. However, although directors owe a duty to the shareholders as a single body, including both present and future shareholders, they do not owe a general duty to individual shareholders. For instance, no duty is owed to individual shareholders for any loss they have suffered through a fall in the value of their shares resulting from negligence, since the loss is that of the company (although under certain circumstances, minority shareholders may seek relief under Section 459 of the Companies Act 1985).
Only occasionally will a fiduciary duty be owed to an individual shareholder, and that will depend on the facts of the case. Once such example occurred where the minority shareholders in a small family firm sold their shares to the managing director after he had made misrepresentations to them. He was held to be in breach of his fiduciary duty. In addition, although the directors control the day-to-day running of the company, the shareholders exercise the ultimate control though the annual general meeting and other ‘extraordinary’ general meetings. Decisions reached at such meetings are arrived at through the submission of resolutions which are then voted on. Since voting power is of considerable importance, the type of shares held by a shareholder assume significance as some carry full voting rights and others no voting rights at all.
In many instances, therefore, this gives rise to a group of majority shareholders and a group of minority shareholders, and it is the former who effectively run the company. Obviously the minority group then becomes marginalized and there is little the court can do to protect them – given that in Foss v Har bottle  2 Hare 461 it was laid down as a general principle that the courts will not interfere in the internal management of a company at the request of the minority shareholders. Even so, the courts will hear a claim brought by minority shareholders if: Any proposed activities are ultra virus. Directors attempt to ratify, by an ordinary resolution, something requiring a special resolution which they did not obtain. A wrong is inflicted on a member in his or her personal capacity through the action of the directors. In addition, the companies Act 1985 confers certain statutory rights on minority shareholders.
These include section 459 which gives a member the right to apply to the court for an order on the ground that the affairs of the company are being, or have been, conducted in a manner which is unfairly prejudicial to some members or that any actual or proposed act or omission of the company is or would be prejudicial. Duties towards creditors Where a company is solvent, directors do not owe any responsibility towards creditors. If, however, the company becomes insolvent, the interests of the creditors arise as they can control the assets of the company by means of insolvency procedures and, for all practical purposes, remove the control of the company from the shareholders. Dissolution of Partnership When a partnership ends, there are a number of formalities to be observed which are set out in Sections 32-44 of the Partnership Act 1890.
Subject to agreement between the partners, a partnership can be dissolved: At the end of a previously agreed fixed term. At the end of what has previously been agreed to be a single undertaking. By one partner giving notice to all the other partners that he or she wishes to dissolve the partnership. In addition, a partnership can be dissolved in the following circumstances: By death, in a two-partner partnership (in other cases the partnership agreement will normally state the procedure to be followed upon the death of a partner).
By bankruptcy of one of the partners – although the other partners can agree before the dissolution to continue without the bankrupt partner. Through the occurrence of an event that makes it unlawful for the usiness of the firm to be carried on.
By order of the court – when a partner becomes in any way permanently incapable of performing his or her part of the partnership contract. When one partner is guilty of committing an act that brings discredit or bad publicity to the firm. When the business can only be carried on at a loss. Where circumstances have arisen that, in the opinion of the court, make it just and equitable that the partnership be dissolved. Where a partner becomes so mentally ill as to be no longer capable of managing his or her affairs (Section 96 of the Mental Health Act 1983).
Once dissolution has been decided, Sections 37-44 of the Partnership Act 1890 set out the rules for the distribution of the assets.
Dissolution of a company There are several forms of company dissolution: Voluntary liquidation because the members of a company no longer wish to carry on trading. Compulsory liquidation because the company cannot meet its debts. Dissolution by the Attorney General because the objectives of the company are offensive or illegal. Dissolution by the Registrar of companies because the company has ceased to trade. Voluntary winding-up The winding-up of a company may be agreed at any time by its shareholders. A special resolution may be passed to effect the winding-up where the company is solvent, or by an extraordinary resolution where the company cannot meet its liabilities.
Where a declaration of solvency is made the members of the company will be in control of the process. In a solvent winding-up the members will appoint a liquidator (i. e. a qualified insolvency practitioner) whose job it is to collect all money owed to the company, realise all other assets any pay off the creditors in accordance with the rules laid down in the Companies Act 1985. In an insolvent winding-up, the creditors will make the appointment. Once the resolution has been passed, the company does not cease to exist but it may not continue to trade other than for the purposes of enabling it to be wound up.
The directors lose their powers upon the appointment of the liquidator, although they may be kept on by him or her to keep the business operating pro tem (for the time being).
In an insolvent winding-up the employees will be dismissed, but again may be re- employed by the liquidator under a new contract. Payment of creditors is based on very similar lines to that of creditors in a case of bankruptcy. After the preferential creditors have been paid, the liquidator will then pay off any creditors who have a floating charge over the assets of the company. The trade or unsecured creditors will then be paid, and finally the deferred creditors.
Compulsory winding-up Section 123 of the Insolvency Act 1986 states that a company is unable to pay its debts when: A creditor who is owed lb 750 or more has served a demand for payment on the company which the company has failed to pay within three weeks. Execution has been issued – a warrant issued by the courts to enable bailiffs to seize goods belonging to the debtor – which has been returned unpaid. It is proved that the company is unable to pay its debts. The company’s assets are proved to be less than its liabilities. If the court grants a winding-up order, the Official Receiver again becomes the liquidator. As a consequence, staff are dismissed, all legal actions against the company are suspended and the transfer of any shares or property becomes void.
When the liquidator has realised the assets of the company and paid off the creditors in the correct order, he or she reports to the DTI and may apply to the court for the company to be dissolved. The order of dissolution is sent to the Registrar of Companies who dissolves the company and advertises the fact in the London Gazette. However, just as a sole trader and a partnership can make an arrangement with their creditors to avoid going bankrupt, so can a company make similar arrangements to avoid bankruptcy. It may enter into a voluntary arrangement whereby it agrees with creditors to either pay a composition (i. e. part payment of a debt in full settlement) or to rearrange the payment of its debts by, for example, negotiating a longer period of repayment.
In order to do this it must appoint a nominee, who must be a qualified insolvency practitioner and who will present the proposal to both the court and the creditors. Alternatively the company may go into administration – i. e. make an application to the court for an order of administration which may be granted if the court feels that it may enable the company to realise its assets more profitably than in a liquidation, allow the company to be sold as a going concern or enable approval of a voluntary arrangement. Such an application will freeze most of the company’s actions so that any judgements made against it cannot be enforced and any other property in its possession cannot be recovered. The majority of legal actions concerning the company will also be suspended.
If an order is granted it will no longer be possible for the company to be compulsorily wound up and the court will appoint an administrator who will be responsible for the management of the company. He or she is also bound to produce a proposal for the implementation of the goals outlined in the order. The proposal must be notified to the members and creditors and where accepted the order will normally be extended to allow the implementation of the report. Should it be rejected then the order is normally withdrawn by the court. unfair dismissal If a contract of employment runs smoothly then its termination normally takes place on either the retirement or the resignation of the employee. Where, however, the relationship is troubled and is ended by the employer, the employee is entitled to claim legislative protection.
Although, again, the major piece of statutory legislation is ERA 96, a White Paper published in June 1998, entitled Fairness at Work, most of which is now contained in the Employment Relations Bill 1999, has had some impact upon the rights of employees in cases of unfair dismissal. The most highly publicized element of the White Paper was the re introduction of compulsory recognition of a union having support from a majority of those voting on the issue and including at least 40 per cent of the workforce. Firms with 20 or fewer workers are exempt. It also proposed some ‘family friendly’ measures: Men and women with at least one year’s service are given the right to three months’ parental leave following the birth or adoption of a child.
This is designed to bring the UK into line with the EU’s Parental Leave Directive. Extended maternity leave is made available to women with one (rather than two) year’s service, and basic maternity leave will be extended from 14 to 18 weeks. Workers are given the right to reasonable time off for family emergencies, regardless of length of service. In addition, However, workers are now provided with additional unfair dismissal rights: – The upper limit on unfair dismissal compensation is increased. Employees who are dismissed for taking part in lawfully organized official industrial action have the right to claim unfair dismissal. A ban is placed on unfair dismissal waivers in fixed-term contracts.
Actual dismissal The first step a dismissed employee must take, if he or she does not accept the position, Is to prove that dismissal has actually occurred. In most cases this is relatively simple, but there can be problems arising from the working of the dismissal. If, for instance, there is an argument between a supervisor and employee and words such as ‘get lost’ or ‘there’s the door’ are used, they could be construed as works of dismissal. Much depends on the circumstances. Is the working environment such that arguments of this sort occur frequently without any real intent to dismiss? Is there a marked difference in the statues of both parties? Constructive dismissal Of equal importance is the concept of constructive dismissal.
This is in some respects the reverse of actual dismissal, in that the employee leaves without having been dismissed because he or she feels that the employer has been in fundamental breach of contract and has forced its termination. Obviously this links closely with the employer’s implied obligation to manage reasonably. Examples include: – Unilaterally changing the terms of the contract to the employee’s disadvantage (e. g. increasing the hours, reducing the pay).
An unreasonable accusation of theft against an employee of good character and many years’s tanning.
An arbitrary refusal of a pay rise to one employee when everyone else receivers one. Very abusive language on a number of occasions. Publicly criticizing an employee, particularly in front of his or her own staff. Demotion.
Notice Periods Prior to statutory legislation, the question of the length of notice of termination of employment was a contractual issue between the employer and employee. The ERA, however, now lays down certain minimum notice requirements. If a person has been continuously employed for at least one month, he or she must be given: Not less than one week’s notice if the period of continuous employment is less than two years. Not less than one week’s notice for each year of continuous employment if the period of continuous employment is two years or more but less than 12 years.
Not less than 12 weeks’ notice if the period of continuous employment is 12 years or more. It is not necessary to give notice to any employee at the expiry of a fixed term as notice has been given at the start of the contract that it will end at a certain date. However, those employed on fixed-term contracts of one month or less and who have been continuously employed by the employer for at least three months have the same notice rights as other employees. Employees must give their employers at least one week’s notice if they have been continuously employed for one month or more. The period does not increase with longer service. REDUNDANCY Fairness An employee may be justifiably dismissed for reason of redundancy if his or her job function ceases to exist in the organization.
There can be little argument about this where an entire establishment shuts down. When that happens the usual ‘remedy’ for employees is the payment of redundancy sums which are based on age and length of service. However, problems do sometimes occur where an establishment remains open but the need for a particular employee or group of employees diminishes. Dismissing such employees is potentially fair, but the way the situation is handled may make it unfair and lead to a claim for unfair dismissal compensation in addition to redundancy pay. In order for employees in this situation to be able to claim unfair redundancy: They must have been employed in the same undertaking as continuing employees. Employees doing similar work must not have been made redundant.
Alternatively they must have been selected for redundancy for a trade union reason or in contravention of a customary arrangement or agreed procedure. Even if redundancy is not unfair, it may be held to be unreasonable in some circumstances. For example, has the employer selected the employee unfairly? in the absence of an agreed procedure outlining and prioritizing the basic criteria for redundancy, a tribunal will look at a number of factors to determine whether or not the selection has been fair. Redundancy may be unreasonable if the employer has not make any reasonable effort to create alternative work for the employee, or has not consulted the employee nor given reasonable notice of impending redundancy.
In addition, in Williams v Compare Maxam Ltd.  ICR 156, the Employment Appeal Tribunal added two further criteria for reasonableness: – Where the employer recognizes a union, the necessary consultations on redundancy should take place with that union. When preparing the criteria for redundancy (whether or not with union agreement), the emphasis must be on those which are objective rather than subjective (e. g. on length of service, experience, efficiency).
The Role of ACAS The ACAS Arbitration Scheme provides an alternative to going to an Employment Tribunal hearing for resolving a case of alleged unfair dismissal.
This leaflet gives a brief summary of the key features of the Scheme, but before you choose between the new Scheme and an Employment Tribunal, you should either talk to an ACAS conciliator or take advice from an independent adviser. Why has the ACAS Arbitration Scheme been introduced? The Scheme was introduced to give people a choice in cases of alleged unfair dismissal. Many people think that employment tribunals have become too legalistic, costly and time-consuming. Some people don’t like the publicity various cases attract. Arbitration is a tried and tested way of settling issues and is often used in disputes between employers and trade unions or employee representatives. The number of claims to employment tribunals has been increasing rapidly over recent years.
Over 100, 000 people made a complaint last year but three out of every four cases never reached a hearing as they were settled or withdrawn first, often with ACAS’s help. What is different with the ACAS Arbitration Scheme? Instead of having your case heard at an employment tribunal an independent arbitrator decides the case and makes a judgement. The main differences between an employment tribunal and the new Arbitration Scheme are: Employment Tribunal Arbitration Scheme ‘public hearing held at an employment tribunal office. Private hearing held in such places as an ACAS office or hotel.
Hearing normally completed within a day. Hearing normally completed within half a day. Heard by a legally qualified Chair usually along with a panel of two other members. Heard by a single ACAS arbitrator who is experienced in employment relations. Witnesses cross-examined under oath as in a courtroom. You are asked questions informally by the arbitrator.
Legal representatives act for the parties in large numbers of cases. Legal representatives may be present but are given no special status. If the dismissal is judged unfair the remedies may be re-instatement, re- engagement or compensation. Same as tribunal – the awards are based on same criteria and reflect the same levels of payment. Hearings and results are public. Hearings and results are confidential.
‘is the Scheme for me? You can choose it if: – The claim is purely for alleged unfair dismissal and nothing else (any other issues in dispute must be either settled, withdrawn or heard by an employment tribunal).
– Both parties agree to opt for the Scheme (have you talked to ACAS about settling the dispute before the need for arbitration? ) – You have considered carefully the advantages and disadvantages of the tribunal and arbitration options. – You work in England or Wales – we hope to offer the Scheme in Scotland by the end of 2001. You should not use the Scheme if: – There are questions about the alleged unfair dismissal claim itself-eg whether a dismissal actually took place, whether you have enough qualifying service to bring the claim, etc.
– There are complex legal issues – eg your employer has been taken over or changed for other reasons, etc. – The case raises questions of European Law – eg sex discrimination or working time regulations. How the Arbitration Scheme works How do I apply? These are the steps you need to take: – A complaint of unfair dismissal is made to an employment tribunal or the employee states that they could potentially make such a claim. – Each party signs an Arbitration Agreement.
This is either done via ACAS (a Conciliated Agreement) or via an independent adviser (a Compromise Agreement).
– Both parties sign a waiver. They agree to let go certain rights they would have at an employment tribunal, eg the right to a public hearing or to cross- examine witnesses. – All the paperwork is sent to ACAS as soon as possible and within six weeks of signing an agreement.
Once the agreement is signed the unfair dismissal claim can no longer be heard by an employment tribunal – you have made your choice at this point. The arbitrator’s decision is final and binding. Help with wording of an agreement and the full terms of reference for the arbitrator can be found in the detailed ACAS Guide to the Scheme. How do I get ready for an arbitration hearing? Once ACAS has accepted an agreement to go to arbitration we will appoint an experienced arbitrator.
This independent arbitrator will then fix a hearing date at a place which is easy to reach for all parties. You should let ACAS know if you have any particular needs to help you at the hearing such as a singer, interpreter, etc. the hearing will take place as soon as possible depending on the availability of the parties. Parties must apply in writing within 14 days if they wish to have the date or venue changed. In getting ready for the hearing we suggest the following is good practice: Both parties should give the arbitrator a statement of their case before the hearing.
This will be copied to the other party. (The ACAS Guide to the Scheme gives advice on what this should contain).
Both parties should help each other in providing documentation for their cases. You can call witnesses to support your case so make sure they know and are free to come. You can bring anyone you wish to help you represent your case – but legal representatives will be given no special status. What happens at the hearing? The hearing will be conducted by the arbitrator in the following way: – Informal – the parties will be given plenty of opportunity to outline their arguments although the format of the hearing is flexible and set by the arbitrator.
No legal procedure – no one will be asked to swear an oath and the arbitrator will not take account of strict law or case law except in cases involving European Law (the arbitrator may call on a legal adviser if European Law issues come up) or the Human Rights Act 1998. Questioning – the arbitrator will question the parties and the witnesses but there will be no cross-examination. Helpful – the arbitrator will help if you are having difficulty in fully explaining your case. Your should be aware that: You cannot claim expenses for attending an arbitration hearing – although these may be included in an award as a form of compensation if the dismissal is found to be unfair.
No further evidence will be taken after the hearing. How is an award made? The arbitrator’s decision is called an award. In reaching a decision about whether the dismissal was fair or unfair he or she will take account of the following: The standard terms of reference of the Scheme. Guidance given in the ACAS Code of Practice Disciplinary and Grievance Procedures and the ACAS Advisory Handbook Discipline at Work. Their own knowledge and experience of good employment relations. The relevant evidence in the case.
If the arbitrator decides the dismissal was unfair they may award re-instatement, re- engagement or compensation. They will make this judgement in the same way as employment tribunals, taking into account the views of the parties and what is practicable and just. Compensation will be calculated in a similar way as employment tribunals. Is the award legally binding? The award is: Binding – there is no right of appeal (except in very limited circumstances as explained in the ACAS Guide to the Scheme).
Enforceable by courts in England and Wales. Private – the results are confidential to the parties and ACAS. The Health and Safety at Work Act 1974 The major act remains the Health and Safety at Work Act 1974 (HSW A 74).
It does not have the drawback of its predecessors in being too detailed, and thus allowing the unscrupulous employer to comply with the letter but nor the spirit of the law. Consequently it sets out the duties of employers in broad terms.
Section 2 (1) outlines the general duty of the employer to ensure, ‘so far as is reasonably practicable’, the health, safety and welfare at work of all employees. Section 2 (2) extends this duty to cover the maintenance of a safe system of work (including safe entrances and exits); arrangements for the safe use, handling, storage and transport of articles and substances; and the provision of information, training and supervision. It also makes the employer responsible for the provision and maintenance of a working environment that is safe, without risk to health and with adequate facilities and arrangements for employees’ welfare. Interesting to note, however, is that the Act followed common law to a certain extent and imposed obligations on the employee as well as on the employer with regard to responsibility for health and safety.
Section 7 (a) requires all employees to take reasonable care for their own health and safety at work and that of others who may be affected by their acts or omissions. Section 7 (b) requires all employees to cooperate with their employer in the discharge of health and safety responsibilities. Section 8 requires all employees not to interfere intentionally or recklessly with, or misuse, anything provided in the interests of health, safety and welfare. FAX (1) STATUTORY PROTECTION The Employment Rights Act 1996 (ERA 96) and its predecessors were introduced for the same reasons as were other forms of protective legislation. Although the common law does give the employee some protection, it is rarely able to develop sufficiently quickly to meet the needs of the modern business world.
One of the major provisions of ERA 96 is the requirement that an employer should provide an employee with certain written terms and conditions of employment. This means that, for most employees, their rights and obligations are clearer because the law normally allows express terms in a contract to take precedence over implied terms. TERMS & CONDITIONS A contract need not be in written form, but ERA 96 requires that certain terms and conditions must be in writing. They are: – The names of the employer and employee. The date when employment began. Whether the employment counts as a period of continuous employment with a previous employer, and the date of commencement of the previous employment where this is the case.
The scale or rate of pay and the method of calculating pay where the employee is paid by commission or bonus. When payment is made (i. e. weekly or monthly), and the day or date of payment.
The hours to be worked, including any compulsory overtime. Holiday entitlement and holiday pay. Sick pay and injury arrangements. Entitlement to a pension scheme. The length of notice of termination an employee must receive or give. The job title.
The duration of temporary contracts. The work location or locations. Any collective agreements affecting the job. When the job requires work outside the UK for more than one month, the period of such work, the currency in which the employee will be paid and any other pay or benefits. Grievance procedures. Disciplinary procedures.
Certain of these particulars can be given by reference to a common document, such as a collective agreement or a staff handbook, but such information must be readily accessible to the employee at all times. Other terms and conditions In addition to the main terms in any written statement, employers may decide to include other express terms as they think fit. Some of the more common of these include: A ‘dedication to enterprise’ or ‘whole time and attention’ clause, which states the limitations under which an employee can undertake other work for a different employer either during or after working hours. (sometimes the clause imposes a duty to inform on colleagues’ misdeeds.
Interestingly, the Public Interest Disclosure Act 1998 has now become law. It protects ‘whistleblowers’ from being victimized or dismissed by the employer).
A variation clause, which is increasing in popularity and which allows an employer the unilateral power to alter the contract in certain circumstances. A right to demand that employees undergo medical examinations. A right to search employees. A confidentiality clause which, although an implied term in a contract, is often used to emphasise the importance of confidentiality – particularly to junior staff who may not be under as great an implied duty at common law as their more senior colleagues.
An intellectual property clause, which details the ownership of copyright, designs and inventions made by the employee during the working relationship. A restraint-of-trade clause, where an employee is prevented from working in a particular job or industry for a set time. A suspend clause, which gives the employer the right to suspend an employee with or without pay as part of a disciplinary procedure. A lay-off and guarantee clause, which, in addition to any statutory rights the employees may have, allow them a specific rate of pay in respect of short-time working. A dress code which sets out certain standards of dress and appearance.