Texts for Translation 2007:
  Derek MacKay

Basic Company Law Terminology

The following is a list of some of the common terminology and jargon used in relation to companies.

Going Concern - accounting concept that a business should be valued on the basis that it will be continuing in business and able to use its assets for their intended purpose.
Alternative would be a break up basis which sets values according to what the assets could be sold for immediately often much less than their value if they were kept in use.

Guarantee – Secondary agreement by which a person promises to honour the debt of another person if that debtor fails to pay. The directors of small companies are of often called on by creditors to give their personal guarantees for company debts. A guarantee must be in writing and the guarantor can only be sued if the actual debtor can’t pay (in contrast to indemnity below).

Guarantee company – a company which has no share in the capital but the members have agreed, by way of guarantee, to pay a specified sum if the company is wound up. Commonly used for non-trading companies such as charities.

I

Implied terms – terms and clauses which are implied into a contract by law or custom and practice without actually being mentioned by any party. Terms implied by custom and practice can always be overridden by express terms but some terms implied by law cannot be overridden particularly those relating to consumers.

Incorporate – in contract law means inclusion in or adoption of some term of condition as part of the contract. Differs from company law definition which means the legal act of creating a company.

Indemnity – a promise by a third party to a pay a debt owned, or repay a loss caused by another party. Unlike a guarantee the person owned can get the money direct from the indemnifier without having to chase the debtor first. Insurance contracts are contracts of indemnity as the insurance company pays up then tries to recover the loss from whoever caused it.

Injunction – A remedy sometimes awarded by the court that stops some action being taken. In relation to contract it can be used to stop another party doing something which is against the terms of the contract. Interim injunctions are given by a court in an emergency against the terms of the contract. Interim injunctions are given by a court in an emergency before the case comes to court. But if the person who applied for it then loses the case they may have to pay damages for losses caused by the interim injunction. Injunctions are at the court’s discretion and a judge may refuse to give one and award damages instead.

Insolvency – the situation where a person or business cannot pay its debts as they fall due.

Institutional investors – organisations that hold large amounts of shares as investments on behalf of others. The main ones are unit trusts, insurance companies and investment banks.

Intention to create legal relations – a necessary requirement to form a contract is that both parties must intend to be bound by the agreement. A causal promise or a simple exchange of gifts does not create a contract.

Issue of shares – when all or part o the authorised capital is allotted (allocated) to persons who are then registered as the owners of the shares. Registration may be in paper certificate form or electronic (dematerialised form)

Joint and several liability - where parties act together in a contract as partners they have a joint liability which means they are each responsible for their share of any debt of loss. A creditor must sue all of them together to get the full amount back. If they have joint and several liability they are each liable for the entire contract and the creditor can recover the whole debt from any one of them and leave that person to recover the shares of the rest of them.

Joint venture – an agreement between two or more independent businesses to create a project or business vehicle in which they will share the costs and management as well as the profits or benefits arising from the venture. The exact shares and responsibilities will be set out in a joint venture agreement.

Jurisdiction – in relation to contracts a jurisdiction clause sets out the county or state whose laws will govern the contract and where any legal action must take place. Not usually relevant where the entire transaction and all the parties are within one country.

L

Limited liability – usually refers to limited companies where the owners’ liability to pay the debts of the company is limited to the value of their shares of the amount of their guarantee (guarantee company). But it can also apply to contracts where a valid limitation clause has been included in the terms – not all limitation clauses are valid.

Liquidation – the formal breaking up of a company or partnership by realising (selling or transferring to pay a debt) the assets of the business. This usually happens when the business is insolvent. But a solvent business can be liquidated if it no longer has any useful business to peruse or its owners no longer wish to work together.

Liquidator – person appointed to liquidate a business. Must be a licensed insolvency practitioner.

M

Memorandum of association – statement of the name, purpose (objects), and liability of a company, signed by the first members as subscribers. For a limited company the type of limitation (shares or guarantee) and extent will also be stated. Other clauses can be placed in the memorandum if it is intended to make them permanent (articles are much easier to change) so the non-profit clause must be in the memorandum.

Misrepresentation – where one party to a contract makes a false statement of fact to the other which that other person relies on. Where there has been a misrepresentation then the party who received the false statement can get damages for their loss.

Mistake – a fundamental mistake can void the whole contract. The mistake can be common to both parties eg they think they are buying and selling a car, which has been destroyed and neither of them is yet aware of this. Alternatively the mistake can be mutual eg where they are in fact thinking of entirely different cars by don’t realise it Lastly there can be a unilateral mistake where one party is mistake and the other party knows they are but this can cross over in to misrepresentation or even fraud.

N

Non-executive director – a director who does not work full time for a company but advises the other directors. Non-executive directors have the full powers and authority of any other director and can bind the company to any contract. However it might be suspicious if a non-executive is signing contracts for trading goods and stock as they would not normally be involved. Although they might well be a signatory in large strategic contracts.

O

Obligations and confidentiality – terms in a confidentiality agreement (see above).

Offer – an offer to contract must be made with the intention to create legal relations if accepted. It must be capable to be accepted i.e. not contain any condition which is impossible. It must also be complete (not requiring more information to define what is being offered) and not merely advertising or an invitation to treat.

Ordinary resolution – a simple resolution passed by a company by more than half of those who vote on it. Usually all of that is needed to authorise the directors to enter into a major contract or to ratify one they have already agreed. However, directors are usually assumed to have general authority to enter into any contract in the course of business and the other party to a contract is not required to check their authority.

P

Parent company – where one company owns more than 50 per cent of the voting rights of another company it is the parent of that company which becomes its subsidiary. This can also occur where the parent has less than 50 per cent but can control the board of directors of the subsidiary i.e. it has the power to appoint and remove directors without referring to other shareholders.

Partnership – two or more persons or organisations joining together to carry on a business

Passing off – the tort of passing off covers a person or organisation pretending to be, or fraudulently allowing someone else to believe, they are someone else. A tort is a type of civil law which has grown up through cases as opposed to a statute law passed by parliament.

Patent – a formal right that allows you to stop people from making, using, importing or selling your invention without your permission. It also allows you to license others to use your invention. Must be registered with the Patent Office.

Pre-emption right – a right to be offered something before it is offered to anyone else. Usually applies to companies where shareholders have the right to be offered any new shares being issued before they are offered to outsiders. Large companies sometimes also include pre-emption rights so that the buyer of a large batch of goods gets a right to be offered any further batches first. Also known as right of first refusal.

Prima facie - "at first sight" (Latin). A prima facie fact is one that seems obvious but might be proved wrong by other evidence.

Private companies - have no minimum or maximum capital. Can be limited by shares or guarantee. They cannot offer to sell shares to the public and so cannot be listed on the stock exchange. Private companies have 'Ltd' after the company name.

Privity of contract - the principle that a contract is private to the parties that agreed to it. Historically this meant that if the contract affected or even named persons who should benefit from it they could not sue to enforce it if they were not actual parties to the agreement. This principle has now been greatly undermined by statute and .third parties can now sue to enforce contracts that affect them.

Pro rata - "for the rate" (Latin). Divided in proportion to some existing rate or split eg a pro rata share issue is offered in proportion to the number of shares each shareholder already has.

Proxy - a person who acts on behalf of another for a specific purpose. In a company a proxy is appointed to attend a meeting and vote on behalf of the shareholder that appointed the proxy. Can refer to both the form making the appointment and the person appointed.

Public Limited Companies (PLCs) - must issue at least £50,000 worth of shares.
Before the company can start trading the company must hold 25p for each £1 share. A public company must have at least two directors and a company secretary. Public companies can be listed on the stock exchange but they do not have to be listed.
Quid pro quo - "something for something" (Latin). The usual definition of consideration in a contract on the basis that both parties must give something.

Quorum - a minimum number of people needed at a meeting for the meeting to proceed and make any decisions.

Ratification - giving authority to an act already done. A resolution of a company in general meeting can ratify an act previously carried out by the directors and a principal can choose to ratify an act of an agent that was beyond the power of the agent.

Receivership - the appointment of a licensed insolvency practitioner to take over the running of a company. The receiver is appointed by a creditor with a secured debt and the job of the receiver is to recover the debt either by taking the security and selling it or by running the business until the debt is paid off.

Rectification - the correction of a document by court order. The court can rectify a document that could not be legally altered even by the parties who created it. This includes company records and signed contracts.

Redemption of shares - where a company issues shares on the terms that they can be bought back by the company. Not all shares can be redeemed, only those stated to be redeemable when they were issued. The payment for the shares must generally come from reserves of profit so that the capital of the company is preserved.

Registered office - the official address of the company as stated on the register at Companies House. Any documents delivered to this address are legally served on the company.

Remedies - payments or actions ordered by the court as settlement of a dispute. The most common is damages (a payment of money). Others include specific performance, injunction and rescission.

Repudiation - has two meanings in contract. The first is where a party refuses to comply with a contract and this amounts to a breach of contract. The second is where a contract was made by a minor (person under the age of 18) who then repudiates it at or shortly after the age of 18. For this reason it is unwise to make anyone under 18 a director of a company as they could later repudiate a contract they signed.

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