Texts for Translation 2006:
  Derek McKay

Basic company law terminology

Your solicitor and accountant may use technical expressions when discussing your company with you. It is important that you understand what they are saying and how it affects your business.

This guide provides descriptions of common words and phrases you may come across which describe the operation of companies. If your advisers use terminology you do not understand you must ask them to explain what they mean.
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The following is a list of some of the common terminology and jargon used in relation to companies.

A

Acceptance - an unconditional agreement to an offer. This creates the contract. There is no contract before acceptance and the offer can be withdrawn, but once accepted the contract is binding on both sides. If there are conditions then these have the effect of a counter offer that must be accepted by the other party.

Allotment of shares - the process of allocating shares between shareholders usually pro rata or according to some prior agreement. The allotment may have conditions, which must be satisfied before the shares are issued eg payment for them. This precedes the actual issue of shares.

Agency agreement - an agreement that defines the power of the agent to act on behalf of the principal. This is normally kept private between them.

Annual accounts - must be submitted to Companies House with the auditor's report. The accounts consist of a directors' report, a profit and loss account, and a balance sheet. They must be laid before a general meeting of all members of the company.

Arbitration - using an independent third party to settle disputes without going to court. The third party acting as arbitrator must be agreed by both sides. Contracts often include arbitration clauses nominating an arbitrator in advance.

Arbitrator - an independent person appointed to settle disputes by both sides. Acas can act as arbitrator in employment-related matters.

Articles of Association - set out the main rules for the way a company is to be run. There are statutory tables (Tables A to G), which are the basis of what articles should cover. Table A acts as the default for all companies limited by shares.

Audit report - is the result of the review of the annual accounts by the auditors. It must accompany the accounts when filed at Companies House. An unqualified report means that the auditors found nothing wrong with the accounts. If the auditors are concerned that the accounts are not a true reflection of the state of the company the report will be qualified by their comments on what they have found.

Auditors - accountants appointed to review and report upon the annual accounts of a company. Only accountants qualified as members of one of the professional bodies recognised by legislation can act as auditors.

B

Bankruptcy - formal recognition that a person cannot pay their debts as they fall due. Note that this only applies to real persons, companies and partnerships that become insolvent and are "wound up".

Bona Fide - "in good faith" (Latin). Usually implies an amount of trust that the parties are acting without any hidden or ulterior motive.

Breach of contract - failure by a party to a contract to uphold their part of the deal. A breach of contract will make the contract void or voidable (see below).

C

Capacity to contract - the ability in law to be a party to a contract. Some persons have limited capacity specifically minors under 18, the mentally disabled and someone drunk or affected by drugs. Companies have capacity only as far as the objects clause of the company allows. Most other organisations (eg unincorporated clubs) do not have capacity and their members must take personal responsibility for the contract.

Collateral contracts - secondary or minor contracts that support a main contract. Usually a collateral contract will be created where a promise is made or guarantee given to persuade a party to enter into the main contract. Agreeing to the main contract will be the consideration for one party and the promise or guarantee will be the consideration given by the other. Otherwise there would be no consideration to equal the guarantee or promise and it would not be enforceable.

Collective agreement - term used for agreements made between employees and employers, usually involving trade unions that often cover more than one organisation. Although these can be seen as contracts they are governed by employment law rather than contract law.

Community Interest Company (CIC) - a new kind of limited liability company designed for social enterprises, or organisations that operate for the benefit of the community and not solely for private profit. CICs are registered with Companies House in the same way as a normal limited company, but they must also be approved by an independent regulator. The regulator will apply a "community interest test" to ensure that the company is a social enterprise and an "asset lock test" to ensure that assets and profits of the enterprise are used principally for the benefit of the community.

Company seal - an embossing press used to indicate the official signature of a company when accompanied by the signatures of two officers of the company. Since 1989 it has been possible for a company to indicate its agreement by two signatures (directors or secretary) accompanied by a formal declaration without use of the seal but some companies still prefer the use of a seal and the articles of a company can override the law and require a seal to be used.

Company secretary - appointed by the director/s. Responsible for ensuring that the legal obligations of the company are met. In a public company they must be suitably qualified so will usually be a solicitor or an accountant. Can be a director and their general responsibilities are set by the directors though they have specific responsibilities laid down in legislation on filing documents.

Comfort letters - documents issued to back up an agreement but which do not have any contractual standing. Often issued by a parent or associate company to state that the group will back up the position of a small company in order to induce another party to trade with it. They always state within them that they are not intended to be legally binding and this prevents them from being treated as collateral contracts.

Conditions - major terms in the contract. Conditions are at the basis of the contract and if one of them fails or is broken the contract is breached. This contrasts with warranties, the other type of contract term, which are less important and will not usually lead to the breach of the contract but just an adjustment in price or a payment of damages.

Confidentiality agreement - an agreement made during negotiations for a larger contract covering confidential information belonging to the parties. During negotiations the parties may need to divulge information about their operations to each other and the confidentiality agreement forms a binding contract not to pass on that information whether or not the actual contract is ever agreed.

Consideration - in a contract each side must give some consideration to the other. Often referred to as the quid pro quo (Latin: something for something). Usually this is the price paid by one party and the goods supplied by the other. But it can be anything of value to the other party and can even be negative.

Consumer - any person who buys goods or services but not as part of their business. A company can be a consumer for contracts not related to its business especially for goods or services it buys for its employees. Charities are also treated as consumers.

Contracted-out - businesses may choose to stop dealing with some types of work within their own organisation and instead have that work supplied by another business by contracting-out that work. Note that this has a different meaning in relation to pensions where it relates to giving up rights to the state second pension in return for a rebate paid into a personal or occupational pension.

Custom and practice - in some industries there may be trading terms or practices, which have become established as normal and these would be implied into a contract as custom and practice unless the contract actually states otherwise.

D

Damages - the normal remedy in the law is a payment of money called damages as compensation for the person's loss. If another type of remedy is wanted (such as an injunction - see below) but cannot or is not given by the court then damages will be awarded instead but the damages may not be as valuable as the other remedy.

De facto - "in fact" (Latin). Having a practical effect different from the legally accepted or expected situation. For example a person who deliberately, or negligently, gives the impression of being a director of a company to the other party can be treated as a de facto director. So the company will be bound by any agreement or statements that person makes as if they were made by a properly appointed director.

De jure - "in law" (Latin). Legally correct, the opposite of de facto above.

Deadlock - a situation where two sides cannot reach an agreement. Some contracts and agreements contain deadlock clauses, which deal with changes of circumstances where the parties cannot agree and stop one side from imposing its will on the other. Usually accompanied by an arbitration (see above) clause.

Debenture - a formal debt agreement (refers to both the agreement and the document evidencing it), which is generally supported by security over some property of the debtor. If the debtor defaults on the debenture the creditor can take and sell the property. Usually issued by companies. Debentures are often transferable so the creditor can sell them and there are markets on formal stock exchanges that deal in types of debenture. Can be referred to as debenture stock. A mortgage is a type of debenture but is always secured, usually against land.

Deed - a document that is formally signed, sealed and delivered. Contract under seal and specialty contracts are other names for deeds. Unlike normal contracts they are enforceable even though they are one sided ie the person making the deed does not get any consideration in return. A promise or gift that is not given under a deed and not for any return consideration is not enforceable in law.

Directors - legal executives of a company. They take management decisions in board meetings. Directors are personally responsible for delivering accounts and the annual return on time. They also ensure that the registered office address is current and attended.

Due diligence - the formal process of investigating the background of a business being bought or of another party in a major long-term contract. Used to ensure that there are no hidden details that could affect the deal.

E

Estoppel - legal concept that a person can be stopped from denying something that they allowed another person to believe. In contract this may apply where a person enters into agreement based on statements they have made which are in fact not true. If the other party has acted on those statements and would lose because of them then the person is estopped from denying them and must make good on the statement.

Exclusion clauses - a clause in a contract that is intended to exclude one party from liability if some circumstance happens. It is a type of exemption clause (see below). The courts tend to interpret them strictly and in favour of the party that did not write them where possible. Exclusion clauses are governed by regulations in consumer dealings that make most ineffective - but note that these regulations do not cover you when dealing in the course of your business.

Exempli gratia (eg) - "for example" (Latin). One or more examples from a greater list of possibilities. Compares with id est (ie) which indicates a full, definitive list of all possibilities.

Exemption clauses - clauses in a contract that try to restrict the liability of the party that writes them. They are split into exclusion clauses that try to exclude liability for specified outcomes completely and limitation clauses that try to set a maximum on the amount of damages the party may have to pay if there is a failure of some part of the contract. Exemption clauses are regulated very strictly in consumer dealings but these do not apply for those who deal in the course of their business.

Ex gratia - out of grace (Latin), a gift made without any obligation from the giver or for any return from the receiver.

Ex parte - on behalf of (Latin), some action (usually a legal action) taken by a party on someone else's behalf.

Express terms - terms actually stated in the contract either verbally before or at the time agreement is made or in the written terms agreed to.

F

Floating charge - a form of security for a debt. Instead of naming a specific property, which can be taken by the creditor if the debtor defaults (as in a fixed charge like a mortgage) a class of goods or assets is named such as the debtor's stock. This allows the debtor to trade in the assets freely. But if the debtor fails to make repayments then the floating charge becomes a fixed charge (known as crystallisation) over all the stock at that time and the creditor can take and sell it to recover the debt.

Formation of the contract - the point at which negotiations end and a binding agreement is made. Occurs when there is unconditional acceptance of the last offer or counter offer.

Formation of a company - the process of finding the person to subscribe to take shares in a new company, appointing the directors and secretary and agreeing the name, capital and memorandum and articles.

Franchising - commercial agreements allowing one business to deal in a system or product controlled by another, eg most car manufacturers give franchises to sell their cars to local garages who then operate using the manufacturer's name and corporate brands.

Frustration of contract - where a contract cannot be performed or completed because of circumstances outside of the control of the parties. This could be a natural event such as a fire that destroys the goods or a change in the law that makes the performance of the contract illegal. For example a contract for the hire of pistols to a gun club would have been frustrated by the introduction of the law which banned handguns in the UK. A frustrated contract terminates at the point of frustration but is not void from the start so any goods or services already supplied must be paid for.

Derek McKay: Murry White Credit Management Glasgow

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