Answers June 2010

Paper F4 (CYP) Corporate and Business Law (Cyprus)

1 In relation to the legal system of Cyprus, describe the main sources of law. (10 marks)
1 The main sources of law in the legal system of Cyprus are: (i) The law of the European Union, which, after accession of Cyprus to the European Union, has become part of the law of the country and inescapably has primacy over all national law, including the Constitution. (ii) The Constitution of Cyprus, which is the supreme law of the country (subject to Community law, which has supremacy over the Constitution in case of confl ict). (iii) International Conventions, which have been ratifi ed and adopted according to the provisions of the Constitution and as a result they have obtained the effect of national law of superior force. For example, the European Convention of Human Rights, which has been ratifi ed and adopted in Cyprus with Law 39/62. (iv) Statutes enacted through the legislative process prescribed in the Constitution; statutes which were in force before independence provided there is no other provision governing the matter and there is no confl ict with the Constitution; the laws of the Vakouf; and the laws of the United Kingdom, which applied in Cyprus before independence provided there is no other provision governing the matter and there is no confl ict with the Constitution. (v) The case law of the Supreme Court, which constitutes a source of law in Cyprus as a result of the application of the doctrine of precedent. (vi) The common law and the principles of equity apply in Cyprus, provided the conditions laid out in s.29 of the Courts of Justice Law are satisfi ed i.e. there is no provision governing the matter, and there is no confl ict with any of the provisions of the Constitution.

2 Explain the remedies available to the innocent party in the case of breach of contract. (10 marks)
2 The most common remedy available for breach of contract is the award of damages. The general principle for awarding damages in case of breach of contract is to place the innocent party, so far as can be done by money, in the same position as he would have been

in had the contract been performed. The Contract Law Cap. 149 contains provisions governing the matter of recoverable damages. Section 73 provides that in case a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for losses that may fairly and reasonably be considered either arising naturally i.e. according to the usual course of things, from the breach, or for losses that may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Apart from damages for breach of contract the two equitable remedies of specifi c performance and injunctions may also be available. Specifi c performance requires the party in breach to perform its primary obligations under the contract. Generally, specifi c performance is available only where damages would be an inadequate redress. It is clarifi ed that in accordance with s.76 of the Contract Law Cap. 149, specifi c performance may only be ordered by the courts in exercise of their equitable discretion, if the contract is in writing. Injunctions can either be mandatory or prohibitory in nature. A prohibitory injunction requires a party not to do something, whereas a mandatory injunction requires a party to do something. As specifi c performance and injunctions are equitable in nature, the courts can award or deny such remedies at their equitable discretion. Thus specifi c performance is generally unavailable where it would cause severe hardship to the defendant, or where the conduct of the claimant demonstrates that he does not deserve the remedy, or where the contract is too vague, or where the contract is over a period of time, where there would be no way of supervising performance. Similarly, a plaintiff who engages in bad behaviour (such as unclean hands, or laches) may be denied injunctive relief.

3 In relation to the law on partnerships: (a) explain and distinguish between the liabilities of general and limited partners; (3 marks)
3 (a) Every partner is liable jointly with the other partners for all debts of the partnership incurred while he is partner; provided that these debts relate to matters for which the partner, through the acts of whom the debts have arisen, is authorised to act for the partnership as he did. The general partners are liable for all debts and obligations of the fi rm, while the limited partners are responsible for the fi rms debts and obligations only up to the amount they have contributed to the partnership.

(b) explain the conditions that must be satisfi ed for a partnership to exist; (3 marks)
(b) A partnership is said to exist when three conditions are satisfi ed (s.1 Cap. 116). There must be:

(i) a business, under s.2 of Cap. 116 a business includes every trade, occupation or profession. (ii) which is carried on by two or more persons in common, these may be natural persons or corporate entities. Cap. 116 does not provide for a maximum number of parties, but such a limitation exists under s.370 of the Companies Law Cap. 113 (maximum = 20 persons). (iii) with a view to profi t. the intention to make a profi t lies at the heart of the partnership relationship. Profi t means the net amount remaining after paying out of the revenue of a business all the expenses incurred in obtaining such revenue.

8 (c) describe the ways by which a partnership may be wound up. (4 marks)
(c) The duration of a partnership depends on the express or implied agreement between the partners. A partnership is liable to be dissolved pursuant to the provisions of the partnership agreement. A partnership entered into for an indefi nite period may be dissolved (subject to any other provisions of the partnership agreement) at any time by any partner giving notice to the other partner/s, or by the death or bankruptcy of any partner. A partnership may also be dissolved by the court on the application of any partner. The court has, inter alia, jurisdiction to dissolve a partnership whenever it deems it just and equitable.

4 In the context of the Companies Law Cap. 113, explain the following: (a) ordinary shares; (2 marks)
4 (a) Ordinary shares are the shares which confer on their holders the residue of rights of the company, which have not been conferred to other classes of shares. In fi nancial terminology they are sometimes referred to as equity or risk capital. If a company has only one class of shares, then these are necessarily ordinary shares.

(b) preferences shares; (3 marks)

(b) Preference shares are shares which carry some preferential rights in relation to other classes of shares, particularly in relation to the ordinary shares. The preferential rights usually attached to the preference shares relate to dividends and repayment of capital, or both.

(c) redeemable preference shares; and (3 marks)

(c) Redeemable preference shares are the preference shares which may be repaid by the company without following the procedure for reduction of the companys capital.

(d) debentures. (2 marks)

(d) There is no precise legal defi nition of the term debenture. A debenture denotes, in commercial usage, an instrument evidencing

an indebtedness which is normally, but not necessarily, secured by a charge over property. The Companies Law provides that debentures includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.

5 With reference to the Companies Law Cap. 113, describe: (a) the procedure for appointment and removal of company auditors; (5 marks)
5 (a) According to s.153 of the Companies Law Cap. 113, the auditors of a company are appointed at each annual general meeting and they hold offi ce from the conclusion of that until the conclusion of the next annual general meeting. At any annual general meeting a retiring auditor, however appointed, is reappointed without any resolution being passed unless (i) he is not qualifi ed for reappointment; or (ii) a resolution has been passed at that meeting appointing somebody else instead of him or providing expressly that he shall not be reappointed; or (iii) he has given the company notice in writing of his unwillingness to be reappointed. The fi rst auditors of a company may be appointed by the directors at any time before the fi rst annual general meeting and auditors so appointed hold offi ce until the conclusion of that meeting. Otherwise the fi rst auditors are appointed by the company in a general meeting.

(b) the duties of company auditors. (5 marks)

(b) Auditors have a statutory duty to report to the shareholders whether in their opinion the annual accounts have been properly prepared in accordance with the Companies Law Cap. 113 and whether they give a true and fair view of the fi nancial performance of the company. The auditors report must be read before any general meeting at which the accounts are considered and must be open to inspection by members In order to prepare their report, the auditors must carry out investigations to enable them to form an opinion as to whether proper books of accounting records have been kept and the information given in the directors report is consistent with the companys accounts for the fi nancial year. Moreover, auditors must give particulars of directors emoluments, loans to directors and transactions with directors, if these are not adequately or correctly disclosed in the accounts, so far as they are reasonably able to do so. Company auditors have the right to receive notices of all general meetings and to attend general meetings and speak on any business that concerns them. Company auditors also have the right to have access to the books, accounts and vouchers of the company at all times and to obtain any information from company offi cers as they may deem necessary for the performance of their duties.

6 Explain the circumstances under which a company may enter into: (a) compulsory liquidation; (6 marks)
6 (a) According to s.211 of the Companies Law, a company may enter into compulsory liquidation in the following circumstances: (i) the company has by special resolution resolved that the company be wound up by the court; or (ii) default is made in delivering the statutory report to the registrar or in holding the statutory meeting; or (iii) the company does not commence its business within a year from its incorporation or suspends its business for a whole

year; or (iv) the number of members is reduced below seven in the case of a public company; or (v) the company is unable to pay its debts; or (vi) the court is of opinion that it is just and equitable that the company should be wound up.

(b) voluntary liquidation. (4 marks)

(b) According to s.261 of the Companies Law, a company may enter into voluntary liquidation in the following circumstances: (i) the period, if any, fi xed for the duration of the company by the articles expires, or the event, if any, occurs, on the occurrence of which the articles provide that the company is to be dissolved and the company passes an ordinary resolution requiring the voluntary winding up of the company; or (ii) the company resolves by special resolution that the company be wound up voluntarily; or (iii) the company resolves by extraordinary resolution to the effect that it cannot by reason of its liabilities continue its business, and that it is advisable to wind up.

7 In relation to the Termination of Employment Law of 1967: (a) explain the circumstances under which a person may be made redundant; and (6 marks)
7 (a) According to the Termination of Employment Law, employees are considered redundant when their services are no longer needed for their employer and their employment is terminated either: (i) because the employer ceased or intends to cease carrying out the business in which the employee was occupied or carrying out the business at the place where the employee was occupied; or (ii) because of certain specifi ed reasons which relate to the operation of the business, such as reduction in the number of employees required as a result of modernisation or other change in the method of production or organisation; a change in the products or production methods or the required expertise of the employees; the abolition of departments; diffi culties in the placement of products in the market or credit diffi culties; lack of orders or raw materials; means of production becoming rare; or limitation of the amount of work or business.

(b) state any remedies which may be available to those who have been made redundant. (4 marks)
(b) An employee whose employment has been terminated as a result of redundancy is entitled to recover compensation from the Redundancy Fund, provided that the employee has been employed continuously at the business where his employment was terminated for redundancy for at least 26 weeks. The amount of compensation to be paid to the employee will depend upon the number of years of service, on the basis of a scale set forth in the Termination of Employment Law. The employee is also entitled, on termination of their employment, to a notice or payment in lieu of notice from the employer. The length of notice, or payment in lieu, varies in accordance with the length of their services with the employer concerned. The minimum is one week and the maximum is eight weeks.

8 Alex, who has recently lost his two dogs, decides to stick a poster outside his offi ce describing the characteristics of the dogs and offering EUR5,000 as reward to anyone who returns the dogs to him. Beatrice, who has read the

advertisement, fi nds and returns one of the lost dogs to Alex. Catherine, who has not read the advertisement, fi nds and returns the other lost dog to Alex. Required: Advise Alex as to his liability, if any, to Beatrice and Catherine. (10 marks)
8 First of all we need to assess whether Alexs poster constitutes an offer to the public at large, or an invitation to treat. If the advertisement is simply an invitation to treat, then Alex has no liability in contract towards either Beatrice or Catherine. In Carlill v Carbolic Smoke Ball the advertisement offering to pay 100 to anyone who caught infl uenza after having used the smoke ball was held to be an offer to the whole world, and a contract was made with any one who performed the condition on the faith of the advertisement. It is likely that in this case the poster will also be held to be an offer to the public at large given that Alex posted the advertisement in order to induce people to return the dogs to him, so that anyone who reasonably acts on the faith of the advertisement should be able to rely on it and receive the reward. Catherine has not read the advertisement. The issue is therefore whether there can be acceptance in ignorance of the offer. According to the general common law principle, a person acting in ignorance of the existence of an offer of reward is not entitled to sue for the reward if he has fulfi lled the conditions. Therefore, Alex will have no contractual liability towards Catherine. On the other hand, Alex will be obliged to pay the reward to Beatrice, unless the poster clearly offered reward for the return of both dogs and there is no objective evidence of an intention to reward the return of one dog only, even for half the amount.

9 David has been a director in EFK Ltd for the past fi ve years. EFK Ltd is a private limited liability company which is involved in the business of land developing. David has been offered a job at Best Construction Ltd, which carries on business in the same industry. While still a director of EFK Ltd, Eric approaches David in order to negotiate a contract for the provision of services in relation to building a block of fl ats. After fi nalising the deal with Eric, David quits from the position of director of EFK Ltd and joins Best Construction Ltd. Best Construction Ltd provides the services under the deal negotiated with Eric and makes a profi t of EUR100,000. Required: Advise EFK Ltd as to the remedies, if any, available to them. (10 marks)

9 While David is a director in EFK Ltd, a fi duciary relationship exists between him and EFK Ltd. Upon general rules of equity, a person holding a fi duciary position as director cannot obtain for himself a benefi t derived from the employment of the companys funds, unless the company knows and assents. Therefore, if a director makes any profi t when he is acting for the company, he must account to the company. David negotiates a contract with Eric while still a director of EFK Ltd and obtains the job for Best Construction Ltd while he is director of EFK Ltd. The work for Eric is presumably within the realm of the activities of EFK Ltd. Therefore David has allowed his interest as future director of Best Construcion Ltd to come in direct confl ict with his pre-existing and continuing duty as director of EFK Ltd. If David has made a profi t for himself as a result of allowing his interests and his duty to confl ict, then EFK Ltd would be able to claim against David an account for breach of fi duciary duty. However, if David has made no personal profi t, and instead has enabled Best Construction Ltd to make a profi t, then EFK Ltds claim against David will be limited to a claim for breach of contract depending on the terms of Davids contract with EFK Ltd. Best Construction Ltd, being a distinct legal entity which itself owes no fi duciary or other duties to EFK Ltd, will not have to account to EFK Ltd for the profi t of EUR100,000. The issue of liability may arise if Best Construction Ltd was aware that the deal had been negotiated by Eric whilst director of EFK Ltd in the context of his capacity as such.

10 F&G Services Ltd is a private limited liability company. Fiona is a shareholder and director in F&G Services Ltd, holding 70% of its issued share capital. F&G Services Ltd is experiencing fi nancial diffi culties and Fiona believes that the company should issue shares at a discount in order to attract existing shareholders to subscribe for new shares. Fiona also contemplates the possibility of third parties investing in the company. Required: Advise Fiona as to how to proceed with her suggestions. (10 marks)
10 In relation to Fionas suggestion for issuing shares at a discount, the following should be noted. Issuing shares at a discount is in

principle prohibited by the law, unless the conditions set out in s.56 of the Companies Law, Cap. 113 are met. Thus F&G Services Ltd may issue at a discount shares in the company of a class already issued provided that: (i) the issue of the shares at a discount is authorised by resolution passed in general meeting of the company, and is sanctioned by the Court; (ii) the resolution specifi es the maximum rate of discount at which the shares are to be issued; (iii) the shares to be issued at a discount are issued within one month after the date on which the issue is sanctioned by the Court or within such extended time as the Court may allow. F&G Services Ltd is a private company and therefore making an invitation to the public for the subscription of shares or debentures in the company is prohibited (s.29 Cap. 113). Fiona may nonetheless consider the possibility of F&G Services Ltd issuing additional shares which may be allotted to a specifi c interested third party or even the possibility of an existing shareholder transferring any of its shares to such third party. However given that the company is a private company, the transfer of shares is restricted as provided in the companys articles of association and therefore any transfer or allotment of shares in F&G Services Ltd will be subject to the exercise or waiver of any existing pre-emption rights.