Business Law and Practice

Question 1

What are the three requirements for the formation of a general partnership under the Partnership Act 1890?

Answer 1

A: 1. Two or more persons.
2. Carrying on a business in common.
3. Intention to make a profit.

Question 2

What is “actual authority” in the context of partnerships?

Answer 2

It is authority expressly or impliedly given to a partner to act on behalf of the partnership, binding the firm to those acts.

Question 3

How does “apparent or ostensible authority” work in a partnership?

Answer 3

A: A partner’s act in the usual course of the business binds the firm unless the third party knew the partner lacked authority or did not recognize them as a partner.

Question 4

Are incoming partners liable for the debts and obligations of the partnership incurred before they joined?

Answer 4

No, incoming partners are not liable for any debts or obligations incurred before they became partners, unless a contractual agreement states otherwise.

Question 5

Are outgoing partners liable for debts incurred by the partnership after they retire?

Answer 5

No, outgoing partners are generally not liable for debts incurred after their retirement, provided they give proper notice of their retirement to creditors and the public.

Question 6

What is the liability of outgoing partners for debts incurred while they were still partners?

Answer 6

Outgoing partners remain liable for all debts and obligations incurred while they were partners unless a novation agreement releases them from liability

Question 7

How can an outgoing partner notify current and new customers of their retirement?

Answer 7

Current customers can be informed by giving notice and new customers can be made aware by publishing a notice in the London Gazette

Question 8

What is the statutory definition of partnership property under the Partnership Act 1890?

Answer 8

Partnership property is property originally brought into the partnership or acquired for partnership purposes and in the course of the partnership business.

Question 9

How is property purchased with partnership funds treated?

Answer 9

Unless otherwise agreed, property bought with partnership funds is considered partnership property.

Question 10

What happens if an individual partner brings in their property to the partnership?

Answer 10

The property will remain the partner’s even after dissolution, if the property is given to the partnership then it becomes partnership property which will constitute a capital contribution

Question 11

Can property used in the partnership business automatically be considered partnership property?

Answer 11

No, the mere use of property in the business does not make it partnership property. The intention of the partners determines its status.

Question 12

What is the primary fiduciary duty of partners in a general partnership?

Answer 12

Partners have a fiduciary duty to act in good faith and in the best interest of the partnership, placing the partnership’s interests above their own.

Question 13

What is the duty of disclosure in a partnership?

Answer 13

Partners must disclose all relevant information concerning the partnership to other partners, including any matters affecting the business.

Question 14

Are partners allowed to make secret profits from partnership activities?

Answer 14

No, partners must account for any secret profits or benefits obtained from partnership activities or the use of partnership property without the consent of the other partners.

Question 15

What is the duty to account for competing business profits?

Answer 15

If a partner engages in a competing business without the consent of the other partners, they must account to the partnership for any profits made from that business.

Question 16

What is the duty to avoid conflicts of interest?

Answer 16

Partners must avoid situations where their personal interests conflict with their duties to the partnership, ensuring impartiality in decision-making

Question 17

What ways can a general partnership be dissolved?

Answer 17

By certain term (Expiration)
By notice
By Bankruptcy, death, or charge
By illegality
By Court order (permanent incapacity, carry on at a loss, persistent breached of partnership duties

Question 18

what must an LLP file at companies house to be incorporated?

Answer 18

Name of LLP
Details of LLP’s registered office and address
Names and addresses of LLP members
Details of anyone with significant control (generally, someone who holds more than 25% of the assets or voting rights

Question 19

minimum amount of members for LLP?

Answer 19

2

Question 20

When can a LLP start trading?

Answer 20

once certificate of incorporation has been issued

Question 21

How can a new member be added to a LLP?

Answer 21

Only by unanimous decision

Question 22

Requirements of an outgoing member of an LLP?

Answer 22

Must give reasonable notice to the other members and notified companies house within 14 days

Question 23

What are LLPs responsible for filing with companies House?

Answer 23

Annual accounts
Annual confirmation statement
Details of appointment and removal of members
Details of any changes to member’s details
Details of any changes to LLP’s name or registered office

Question 24

How are debts managed in an LLP?

Answer 24

Members are not liable for any debts owed to the LLP’s creditors, their own liability is their capital contribution upon winding up

Question 25

Can members of an LLP be personably liable?

Answer 25

Yes, if the individual acted wrongfully or fraudulently in the event of insolvency

Question 26

Taxation of LLP?

Answer 26

An LLP does not pay corporation tax and each member is treated as they would be in general partnership i.e. taxed individually for income tax and their share of any gains in the LLP

Question 27

What is the difference between a company limited by shares and a company limited by guarantee?

Answer 27

Limited by Shares: Liability of members is limited to the unpaid amount on their shares. Limited by Guarantee: Members agree to pay a fixed amount (usually £1) if the company is wound up, commonly used for charities and non-profits

Question 28

What are the key characteristics of a private limited company (Ltd)?

Answer 28

Cannot issue shares to the public. Shares are sold privately. No minimum share capital requirement. A single director and no requirement for a company secretary

Question 29

What are the requirements for a public limited company (PLC)?

Answer 29

Must have a minimum nominal share capital of £50,000. Can issue shares to the public and trade them on a stock market. Requires a trading certificate before commencing business. Must have at least two directors and a company secretary.

Question 30

What is a pre-incorporation contract, and who is liable for it?

Answer 30

A pre-incorporation contract is made by promoters on behalf of a company before it is registered. The promoter is personally liable unless a novation agreement transfers liability to the company after incorporation.

Question 31

What is a shelf company, and why might a promoter use one?

Answer 31

A shelf company is a pre-incorporated company that has never traded. Promoters use it to save time when setting up a business quickly.

Question 32

hat documents must be filed with the Registrar of Companies to register a company?

Answer 32

Memorandum of Association Application for Registration (including company name, registered office, business activity, statement of capital, and initial shareholdings) Statement of Proposed Officers Statement of Compliance with the Companies Act 2006 Payment of the registration fee.

Question 33

What is the purpose of the Memorandum of Association?

Answer 33

It is a document signed by the initial subscribers (members) indicating their intention to form a company and agree to become its members.

Question 34

What information is included in the Statement of Capital and Initial Shareholdings?

Answer 34

Total number of shares. Aggregate nominal value of shares. Classes of shares and their rights (if any). Amount paid and unpaid on each share.

Question 35

What constitutes a company’s constitution under the Companies Act 2006?

Answer 35

Articles of Association Any resolutions or agreements adopted by members to amend the articles.

Question 36

What are the key contents typically covered in a company’s Articles of Association?

Answer 36

Directors’ meetings and decision-making. Appointment and removal of directors. Share capital and transfer of shares. Rights attached to shares (voting, dividends). Shareholder meeting procedures.

Question 37

What is the legal effect of the Articles of Association?

Answer 37

The articles form a contract between: The company and its members. The members with each other. However, the articles can only be enforced in relation to membership rights (e.g., voting or dividend rights).

Question 38

What is the concept of separate legal personality in company law?

Answer 38

A company is a separate legal entity from its members and directors, meaning it: Owns property in its own name. Enters contracts in its own name. Can sue and be sued. Is taxed separately from its members. Has perpetual succession

Question 39

In what circumstances can the veil of incorporation be lifted?

Answer 39

Fraudulent trading (intentional deception). Wrongful trading (continuing to trade while insolvent). Avoiding an existing legal obligation. Using the company as a sham or facade.

Question 40

What is the minimum number of directors required for private and public companies under the Companies Act 2006?

Answer 40

Private company: At least one director. Public company: At least two directors, with at least one being a natural person

Question 41

What are the different types of directors?

Answer 41

De jure directors – Formally appointed and registered with the Registrar of Companies. De facto directors – Not formally appointed but act as directors. Shadow directors – Influence the board's decisions but are not officially recognized as directors. Executive directors – Involved in the day-to-day management. Non-executive directors – Oversee and advise, without daily management involvement. Nominee directors – Represent specific stakeholders but must act in the company’s best interests.

Question 42

What are some key statutory duties of directors under the Companies Act 2006?

Answer 42

Duty to act within powers. Duty to promote the success of the company. Duty to exercise independent judgment. Duty to exercise reasonable care, skill, and diligence. Duty to avoid conflicts of interest. Duty not to accept benefits from third parties. Duty to declare interests in proposed transactions.

Question 43

What is the duty to promote the success of the company?

Answer 43

Directors must act in good faith to promote the success of the company for the benefit of its members as a whole, considering: Long-term consequences. Interests of employees. Relationships with stakeholders. Impact on the community and environment. Maintaining high standards of business conduct.

Question 44

How can directors be removed from office?

Answer 44

Directors can be removed by a simple majority vote of the shareholders through an ordinary resolution. However, this may trigger compensation for breach of the service contract.

Question 45

What does the duty to exercise independent judgment entail?

Answer 45

Directors must not subordinate their judgment to the will of others, but they can act according to: Agreements entered into by the company. The company's constitution. Independent expert advice, as long as the final decision remains theirs.

Question 46

How is the duty to exercise reasonable care, skill, and diligence assessed?

Answer 46

Objective test: The care, skill, and diligence expected of a reasonably diligent person with general knowledge and experience. Subjective test: The care, skill, and experience the specific director actually possesses, meaning more is expected from directors with specialized knowledge.

Question 47

What is the duty to avoid conflicts of interest?

Answer 47

Directors must avoid situations where they have a direct or indirect interest that conflicts with the interests of the company, particularly in exploiting: Company property. Information. Business opportunities. Exceptions: If the situation is authorized by the board. If it cannot reasonably be regarded as likely to cause a conflict.

Question 48

How are board meetings called?

Answer 48

Any director can call a board meeting by giving reasonable notice to the other directors. Does not required to be in writing but must indicate date, time, location, and how communication will be done if all members can be in the same place.

Question 49

What is the vote threshold and quorum for a board meeting?

Answer 49

Majority vote and at least two.

Question 50

Is a company secretary required for private and public companies?

Answer 50

Private companies: No legal requirement. Public companies: Must have a qualified company secretary.

Question 51

What are the qualifications required for a public company secretary?

Answer 51

Held office as a company secretary for at least 3 out of the last 5 years. Membership in a recognized professional body. A qualified barrister, advocate, or solicitor. Other relevant experience as deemed appropriate by the directors.

Question 52

How can directors be removed from office?

Answer 52

Directors can be removed by a simple majority vote of the shareholders through an ordinary resolution. However, this may trigger compensation for breach of the service contract.

Question 53

What are the key duties of a company secretary?

Answer 53

Maintaining statutory records and books. Filing annual returns and other documents with Companies House. Taking minutes at board and shareholder meetings. Ensuring the company complies with legal obligations.

Question 54

Which companies are required to appoint auditors?

Answer 54

Large companies are required to have their accounts audited by a qualified auditor. Small companies (turnover < £10 million and fewer than 50 employees) are exempt from auditing.

Question 55

When can a dividend be issued to shareholders?

Answer 55

This will depend on the type of share they hold however, generally, dividends are made from profits available for purpose.

Question 56

Difference in shares?

Answer 56

Preference shares - Profits are paid to these shareholders before ordinary shareholders, limited in voting rights to those of their class Ordinary shares - profits paid to after preference shareholders, have full voting rights on resolutions

Question 57

Shareholder's rights

Answer 57

Right to inspect service contracts of the directors, companies must keep these a year after a director has left. Right to inspect register of members

Question 58

What is the primary difference in shareholder meeting requirements between public and private companies?

Answer 58

Public companies are required by statute to hold an annual general shareholders’ meeting. Private companies have no such statutory obligation, but they can hold general shareholders’ meetings as needed.

Question 59

Under what conditions can shareholders require directors to call a meeting?

Answer 59

Shareholders holding at least 5% of the paid-up voting capital can require the directors to call a meeting. Directors must then call the meeting within 21 days, and it must occur within 28 days. If directors fail to act, shareholders with at least 50% voting rights can call the meeting themselves.

Question 60

Define "ordinary resolution" and "special resolution" and their respective approval requirements.

Answer 60

Ordinary Resolution: Requires a simple majority (more than 50%) of votes at the meeting. Special Resolution: Requires 75% or more affirmative votes. Typically used for significant matters like altering the articles of association or winding up the company.

Question 61

Explain the process and purpose of a written resolution?

Answer 61

A written resolution allows private companies to pass resolutions (ordinary or special) without a meeting. It must be circulated to all eligible members, state the method for agreement, and typically lapse after 28 days unless stated otherwise.

Question 62

What are examples of matters requiring approval by special resolution?

Answer 62

Examples include changing the company’s articles of association, altering the company’s name, or most decisions to buy back company shares.

Question 63

What rights do shareholders have at different shareholding thresholds?

Answer 63

5%: Request meetings, circulate resolutions/statements. 10%: Demand a poll vote. 25%+: Block special resolutions. 50%+: Block or pass ordinary resolutions. 75%: Pass special resolutions.

Question 64

Method of voting at meetings?

Answer 64

Vote by hands one vote per shareholder present or their proxy at the meeting. However, if 5 shareholders or more or shareholders holding more than 10% of shares or capital assets to demand a poll instead, changing everyone's vote from one per person to one per share.

Question 65

Examples of shareholder's approval by ordinary resolution?

Answer 65

Appointment of auditors Appointment, re-appointment, and removal of directors Declaration of dividends Adoption of annual accounts and reports of directors Ratification of director's breach of duty Entering service contract with director for more than 2 years Making a loan to a director

Question 66

What are the two main types of finance a company can raise?

Answer 66

Equity Finance: Raising capital through selling shares, which grants ownership stakes. Debt Finance: Borrowing funds that must be repaid, often with interest.

Question 67

What is the difference between nominal value and market value of shares?

Answer 67

Nominal Value (Par Value): The minimum amount a shareholder must pay for a share, as stated in the company’s articles. Market Value: The current value of shares based on the company’s performance and market conditions. Shares can be sold at a premium above nominal value.

Question 68

Explain the concept of "Preemption Rights."

Answer 68

A: Existing shareholders have the right to purchase new shares first, in proportion to their current ownership, to maintain their voting power. These rights can be altered or disapplied by special resolution or articles

Question 69

What is the difference between secured and unsecured loans in debt finance?

Answer 69

Secured Loans: Backed by collateral (e.g., property or machinery), giving the lender a claim to specific assets if the borrower defaults. Unsecured Loans: Not backed by collateral, often with higher interest rates due to increased risk for the lender.

Question 70

What are fixed and floating charges in secured debt?

Answer 70

Fixed Charge: Tied to specific assets (e.g., equipment) that the company cannot sell without lender consent. Floating Charge: Covers fluctuating assets (e.g., inventory). It becomes fixed upon a "crystallization event," like default.

Question 71

What happens if a charge is not registered at Companies House within 21 days?

Answer 71

A: The charge becomes void against the liquidator, administrator, or creditors, leaving the lender with no claim on the secured assets.

Question 72

What are the key registers private companies must maintain under the Companies Act 2006?

Answer 72

Register of Members Register of Directors Register of Secretaries Register of Charges Register of People with Significant Control (PSC)

Question 73

What is required in the annual confirmation statement filed with Companies House?

Answer 73

A: It verifies that company details are up to date. Companies must submit the statement annually within 14 days of their review period ending, even if no changes occurred

Question 74

What financial information must be included in a company’s accounts?

Answer 74

Registration details (e.g., number, type of company). Balance sheet and profit/loss statement showing a "true and fair view" of the company’s finances. Approval from directors to confirm accuracy.

Question 75

What happens if a company fails to file its accounts on time?

Answer 75

A: The company faces financial penalties, potential criminal sanctions, and possible disqualification of directors.

Question 76

What reports are mandatory for medium and large companies but not for small companies?

Answer 76

Directors’ Report: Names directors and proposed dividends. Strategic Report: Assesses business performance and success. Medium and large companies are regarding has having 50 or more employers or annual turnover in excess of £10 mil or more

Question 77

What details must be disclosed on a company’s letterhead?

Answer 77

Registered name. UK registration region. Registered number. Registered office address. If director names are included, all directors’ names must be listed.

Question 78

What key changes require filing with Companies House within specific timeframes?

Answer 78

Appointment/removal of directors: 14 days. Issuance of shares: 1 month. Special resolutions (e.g., changing articles): 15 days. Allotment of new shares: 15 days

Question 79

Explain the process for transferring shares in a private company.

Answer 79

The seller provides the share certificate and stock transfer form. Transferee pays stamp duty (if applicable). The board reviews and may refuse registration under company articles. If approved, a new share certificate is issued, and the register of members is updated

Question 80

When must accounts be filed with companies house?

Answer 80

Private - no later than 9 months from accounting period Public - no late than 6 months from accounting period

Question 81

what is included on letterhead for sole trader?

Answer 81

Business name Real name (if different to business name) Business address

Question 82

What are the options available to a sole proprietor or partner facing insolvency?

Answer 82

Options include negotiating with creditors, entering an Individual Voluntary Arrangement (IVA), or applying for bankruptcy.

Question 83

What is an Individual Voluntary Arrangement (IVA)?

Answer 83

A formal, negotiated agreement between a debtor and their creditors to pay a portion of the debt, typically under supervision by an insolvency practitioner. It requires approval by creditors holding at least 75% of the debt's value.

Question 84

What happens during bankruptcy for sole proprietors or partners?

Answer 84

The debtor’s assets are handed over to a trustee in bankruptcy, who liquidates them to repay creditors. After one year, the debtor is typically discharged from most debts unless found culpable for dishonesty or negligence.

Question 85

What are the main corporate insolvency procedures?

Answer 85

They include receivership, restructuring plans, moratoriums, administration, company voluntary arrangements, and liquidation (voluntary or compulsory).

Question 86

Are all creditors bound by the IVA agreement?

Answer 86

Ordinary unsecured creditors are bound by the IVA if they receive notice of the meeting and the proposal is approved. Preferential and secured creditors are not bound unless they agree to the proposal.

Question 87

What protections does an IVA offer the debtor?

Answer 87

A: While an interim order is in place, creditors cannot present a bankruptcy petition or take other enforcement actions, giving the debtor time to negotiate and implement the IVA.

Question 88

What is a Members’ Voluntary Liquidation (MVL)

Answer 88

MVL is a process initiated by a company’s members to voluntarily wind up the company when it is solvent, typically because the business is no longer needed or the owners wish to retire.

Question 89

What is a Creditors’ Voluntary Liquidation (CVL)?

Answer 89

A: CVL is a process initiated by the directors and members of an insolvent company to wind it up. The process is controlled by the creditors after the initial resolution

Question 90

What is meant by 'clawback of assets' in insolvency?

Answer 90

A: Clawback refers to the legal process where a liquidator, administrator, or trustee in bankruptcy reverses transactions made by a debtor before insolvency that are deemed unfair, fraudulent, or prejudicial to creditors.

Question 91

What is a preference in the context of clawback of assets?

Answer 91

A preference occurs when a debtor takes actions that give one creditor better repayment terms than others, placing that creditor in a more favourable position during insolvency proceedings.

Question 92

What are the time limits for challenging a preference?

Answer 92

If they occur within six months before insolvency for unconnected persons, or two years for connected persons (e.g., directors, family members).

Question 93

What constitutes a 'transaction at an undervalue'?

Answer 93

A transaction at an undervalue involves a debtor selling assets for significantly less than their market value or gifting assets without adequate consideration, within two years (companies) or five years (individuals) before insolvency.