Business Law Flashcards
(19 cards)
What are the Two Main Sources of Capital for a Company
- Loan Capital:
Capital obtained through borrowing.
Methods: Overdrafts, bank loans, mortgages. - Share Capital:
Capital raised by issuing shares.
Investors become shareholders in exchange for their capital.
What is a Fixed Charge
A security interest over a specific asset (e.g., building, equipment).
Impact:
Company cannot dispose of the asset without lender consent.
Comparable to a mortgage.
Creditor can seize/sell the asset on default.
Priority: Fixed charges have priority over floating charges in insolvency.
Multiple fixed charges may exist; earlier ones have priority, unless contract says otherwise.
What is a Floating Charge
A security over a class of fluctuating assets, like stock or raw materials.
Impact:
Company can freely use/sell the assets until charge crystallizes.
Crystallization events:
Insolvency
Ceasing business
Administrator appointment
Notice given by creditor
After crystallization, charge becomes fixed on the assets at that moment.
Priority: Ranks after fixed charges and preferential debts on winding up.
Only binds assets the company still owns at crystallization.
Re Yorkshire Woolcombers Association (Floating Charge)
Legal Principle (Romer LJ): Three key features of a floating charge:
It covers a class of assets, not a specific one.
The class is constantly changing (e.g., stock).
The company can deal freely with the assets until crystallization.
Differences Between Fixed and Floating Charge
Asset Type
Fixed - Specific, identifiable assets e.g. land and machinery
Floating - Class of fluctuating Assets e.g. inventory, stock, raw materials
Company Use
Fixed - Companies can’t deal freely with the asset RESTRICTED
Floating - Company can use and sell assets in ordinary business FLEXIBLE
Crystalisation
Fixed - Not applicable
Floating - It becomes a fixed asset in trigger events like liquidation
Priority
Fixed - It’s HIGHER, ranks ahead of floating
Floating - LOWER, ranks after fixed and preferential creditors
Enforcement
Fixed - Creditors can seize or sell asset on default
Floating - Secured only when crystalised
Priority of Charges
Fixed charges > Floating charges > Unsecured creditors
Earlier charges (fixed or floating) take priority over later ones.
Registration matters: Unregistered charges may lose priority.
Notice matters: A later charge may take priority only if it had no notice of earlier charge restrictions.
Registration of Charges
Must be registered:
With Registrar of Companies within 21 days of creation.
And, if relevant, at the Land Registry for land charges.
Company must keep a register of charges at its registered office.
Failure to register:
Makes the charge void against a liquidator or administrator.
The debt remains payable, but becomes unsecured.
An offence is committed; fines may be issued.
Shares
A chose in action – a bundle of rights (not direct ownership of assets).
Carries rights: voting, dividends, return on winding up.
Nominal (par) value: minimum issue price and liability cap.
Cannot be issued at a discount.
Limited liability: Shareholders are liable only up to unpaid amount on shares.
Classes of shares: Ordinary, Preference, etc.
Shareholders
Members of the company; not creditors by virtue of holding shares.
May become creditors separately (e.g., through loans).
Limited liability: risk is limited to investment in shares.
Influence company decisions via resolutions.
Have rights of pre-emption unless excluded (private companies).
Can petition for:
Unfair prejudice (s994 CA 2006)
Winding up (s122(1)(g) IA 1986)
On winding up: Shareholders rank after all debts are settled (deferred claims).
Winding Up (Liquidation) of a Company
Winding up refers to the process of dissolving a company by ceasing operations, realising its assets, repaying debts, and distributing any surplus to members. It ends the legal existence of the company.
Types of Winding Up:
Compulsory Liquidation – Initiated by court order under Insolvency Act 1986 (IA 1986), s.122.
Voluntary Liquidation – Initiated by members via special resolution.
What is Compulsory Liquidation
Procedure:
Begins with a petition (often by a creditor).
Governed by IA 1986, s.122-s.124.
A liquidator (initially the Official Receiver) is appointed to realise assets and repay creditors.
Directors lose management powers upon the winding-up order.
Grounds for Petition (s.122):
Inability to pay debts (proved by:
-Failure to pay a statutory demand over £750 within 21 days,
-Non-compliance with a court order, or
-Balance sheet or cash flow insolvency).
Other grounds: special resolution, inactivity, less than two members, or “just and equitable” grounds.
Legal Effects (s.127):
Post-commencement asset dispositions, share transfers, and changes in membership are void unless approved by the court.
What is Voluntary Winding Up
Types:
Members’ Voluntary Liquidation (MVL):
Only if the company is solvent.
Directors must swear a Declaration of Solvency (false declarations = criminal offence).
Creditors’ Voluntary Liquidation (CVL):
When the company is insolvent.
Shareholders pass a special resolution.
Creditors may not be paid in full.
What are the Alternatives to Liquidation
While liquidation leads to the winding-up of a company and its eventual dissolution, there are several statutory and informal alternatives designed to preserve business operations or enhance returns to creditors:
Trading Through Difficulties
Attempt to recover through improved performance or external funding.
Risky if insolvent—directors may incur personal liability for wrongful trading (s.214 IA 1986).
Voluntary Arrangements (under the Insolvency Act 1986)
Enable companies to restructure debt through an agreement with creditors.
Once approved by 75% of voting creditors, it binds all.
Includes Company Voluntary Arrangements (CVAs):
-Without Moratorium: Available to all companies, but no protection from legal action.
-With Moratorium: Limited to small companies. Offers temporary protection from creditor enforcement.
Administration (Part II IA 1986, amended by the Enterprise Act 2002)
Statutory alternative to liquidation with the aim of business rescue or better creditor outcome.
What is the Purpose of Administration
The administrator’s objectives are ranked in priority, as per paragraph 3, Schedule B1 of the IA 1986:
1) Rescue the company as a going concern (primary goal).
2) Achieve a better result for creditors than in a liquidation.
3) Realise property to pay secured or preferential creditors, only if (1) and (2) are not reasonably practicable.
A statutory moratorium is imposed upon entering administration, halting legal and enforcement actions.
Administration is a collective process, protecting all creditors equally (unlike enforcement by individual secured creditors).
The administrator is an officer of the court and must act in the interests of the whole body of creditors.
What is an Individual Voluntary Arrangement?
An IVA is a formal agreement between an individual and their creditors to pay back a portion of debts over time, usually five years. It is designed as a less severe alternative to bankruptcy, helping debtors retain control over assets.
What is the IVA Procedure
IVA Procedure:
1) Statement of Affairs
Lists all assets, liabilities, income, and expenditure.
2) Drafting the Proposal
Prepared by an Insolvency Practitioner (IP).
Sets out what the debtor can afford and how much of the debt will be repaid or written off.
3) Creditor Approval
Proposal is presented to creditors at a meeting.
Approval requires 75% in value of voting creditors.
Once approved, binding on all creditors, including dissenters.
4) Supervision
The IP becomes the Supervisor.
Oversees the implementation and compliance with the IVA.
5) Insolvency Register
The IVA is listed publicly for the duration.
What is Wrongful Trading (Insolvency Act 1986)
Wrongful trading occurs when:
A company goes into insolvent liquidation, and
Before the commencement of winding up, a director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation, and
The director failed to take every reasonable step to minimise the potential loss to creditors.
❗ No need to prove fraud or dishonesty.
What is the Standard of Care and Consequences of Wrongful Trading
Set out in s.214(4):
Objective test: What a reasonably diligent person with the general knowledge, skill and experience expected of a director in that role would have concluded.
Subjective element: Takes into account the director’s actual skill and experience (i.e. higher standards for more experienced directors).
✅ Consequences
Civil liability only: Not a criminal offence.
The court may order the director to contribute to the company’s assets (compensatory, not punitive).
May also face disqualification for up to 15 years under the Company Directors Disqualification Act 1986.
📝 According to a government report (2014), there were only “around 30” reported wrongful trading cases since 1986, highlighting its rare enforcement.
What is Fraudulent Trading (Liability and Consequences)
Fraudulent trading involves:
Knowingly carrying on business with intent to defraud creditors or for a fraudulent purpose.
Requires actual dishonesty and intent to deceive.
✅ Liability
Civil liability under IA 1986 s.213: Arises only if the company is in winding up.
Criminal liability under CA 2006 s.993: Can be committed at any time, regardless of winding up status.
✅ Consequences
Civil: The court may order compensation to the company’s assets.
Criminal: Up to 10 years imprisonment and/or a fine.
Directors may also face disqualification and reputational damage.
📚 Criminal enforcement is rare, but taken very seriously due to the need for intent and fraud.
