Business Law & Practice Flashcards

Question

What 3 options are available to those starting a company when it comes to submitting the company's proposed articles?

Answer 1

1) Adopt the Model Articles in their entirety. If chosen, no need to file a copy of the Model Articles, just tick box on IN01 form to indicate that Model Articles will apply. 2) Adopt the Model Articles with some amendments. 3) Supply entirely bespoke articles.

Answer 2

- Companies incorporated from 2009 onwards will usually have Model Articles or amended form as their articles. - Companies incorporated before 2009 will still be governed by the Act. - Companies may still have Table A Articles if they have not modernised.

Answer 3

By shareholders passing a special resolution, requiring a 75% majority. Any amendments to the Articles must be filed within 15 days at Companies House, along with special resolution.

Answer 4

CA 2006 will prevail and contradictory Articles deemed invalid.

Answer 5

If the person; - Holds > 25% of the shares in the Company, or - Holds > 25% of the voting rights in the Company, or - Holds the right to remove or appoint a majority of the Board of directors of the company. N.B. Applicant must tick relevant box on IN01 form.

Answer 6

- > 25% but not more than 50% of the Company's shares/voting rights (can block special resolutions on their own, and may be able to block ordinary resolutions if they have exactly 50% of shares). - > 50% but < 75% of the Company's shares/voting rights (can block and pass ordinary resolutions, but cannot pass special resolutions on their own if < 75%). - 75% or more (can also pass special resolutions on their own).

Answer 7

Recorded on PSC register within 14 days of change and sent to CH within further 14 days.

Answer 8

By passing a special resolution, changing its name to include 'plc' and altering its articles to suit a public company structure. At the time of the resolution, the company must meet the share capital requirements necessary for public companies.

Answer 9

A certificate of incorporation to confirm the company's status as a public company and the revised articles and name change take effect on issue of the certificate.

Answer 10

A company that has already been set up to be used as and when a client needs a company forming quickly e.g. midway through a transaction.

Answer 11

Need to get the company in a position to start operating; likely to have a Board meeting to decide on the following; - Appointment of a Chairperson who will have casting vote in event of a tie. - Opening a bank account. - Use of a Company seal (optional) to execute official documents. - Changing the Company name. - Appointment of an auditor (if required). - Setting the accounting reference date. - Review and approve service contracts for directors, including any exceeding 2 years that require shareholder approval.

Answer 12

PA1890 (s1); when 2 or more persons are carrying on a business in common with a view of profit. N.B. Can arise informally and without partners knowing.

Answer 13

The PA 1890; however partners will often agree specific terms to override the provisions of the outdated Statute.

Answer 14

No; oral agreement just as valid, as is an agreement implied by conduct, in circumstances where a partner has acted in a certain way over a period of time and the other partners have not objected.

Answer 15

They ensure that it fully reflects the client's wishes and needs; impossible to do without knowing which terms will be implied into the contract by default.

Answer 16

- Name. - Place and nature of business. - Commencement and duration. - Work input. - Roles. - Decision-making. - Financial input. - Shares in income and capital profits and losses. - Drawings and salaries. - Ownership of assets. - Expulsion. - Dissolution. - Goodwill. - Distribution of proceeds of sale. - Restraint of trade. - Dispute resolution.

Answer 17

Must not; -- Include 'limited', 'Ltd', 'LLP' etc. -- Be offensive. -- Be the same as an existing trademark. -- Contain a 'sensitive' word or expression, or suggest a connection with government or local authorities, without permission.

Answer 18

Each partner's working hours, or state that each must work full-time in the business, as under PA 1890, partners may take part in the management of the business, but are not required to do so. N.B. Common clause = a partner must devote the whole of their time and attention to the business. Also include holiday entitlement, sickness and maternity and paternity provisions as there is no default position on these matters in PA 1890.

Answer 19

Full scope of their duties and responsibilities, with restrictions on what partners are allowed to do. N.B. If a partner breaches a restriction setting out the scope of their authority, will be in breach of the partnership agreement and could be a reason for expulsion.

Answer 20

By majority (1 vote each on a show of hands).

Answer 21

1) Changing the nature of the business. 2) Introducing a new partner. 3) Changing the terms of the partnership agreement. All can only be made unanimously.

Answer 22

More types of decision which can only be taken by unanimous agreement but weigh up possibility of deadlocks.

Answer 23

The amount of the partners' initial capital contributions and whether they will be obliged to contribute more capital in the future.

Answer 24

Equally. N.B. Any clause in partnership agreement setting out that the partners share capital in unequal proportions will vary the default position. N.B. Also state in partnership agreement the proportions in which income profits are to be shared (e.g. may be based on working hours).

Answer 25

How much each partner is allowed to 'draw down' in any given period, usually a month.

Answer 26

No majority of partners may expel another partner unless the partners have expressly agreed to this. Partnership agreements will therefore often contain an expulsion clause, allowing the partners to expel one of their number if they have conducted themselves in a certain way.

Answer 27

Any partner may end the partnership at any time by giving notice of their intention to do so to all of the other partners. Important that partnership agreements stipulate a notice period (often not in year 1 trading) and/or circumstances causing partnership to end.

Answer 28

When a partner retires. On expiry of a fixed term. By the death or bankruptcy of any of the partners. If the partners give notice of dissolution to a partner who (by order of the court) granted a charge over their share of the partnership property, for a debt owed by them alone and not the partnership as a whole. N.B. A partnership agreement can disapply the above.

Answer 29

Unless the partners all agree otherwise, the partnership must end, all the assets must be sold and outgoing partner has to receive their share. N.B. An outgoing partner can insist on the business being sold so the other partners do not necessarily have the option of continuing in business and just paying the outgoing partner for their share.

Answer 30

In the event that a partner leaves, the remaining partners will continue in partnership (partial dissolution). Specific provisions as to whether other partners must buy the outgoing partner's share or merely have option to do so, how the share should be valued and when it should be paid (instalments best).

Answer 31

The outgoing partner is entitled to either interest at a rate of 5% per annum on the value of their partnership share until they receive their share from the other partners, or such sum as the court may order representing the share of profits made which is attributable to the use of their share.

Answer 32

Part of the purchase price will be for the business's goodwill (reputation and value of clients/contacts). Value of goodwill usually taken as 2 years profit.

Answer 33

First, creditors of the firm are paid in full, with any shortfall balance paid by partners from their private assets. Second, partners who have lent money to the firm must be repaid the amount outstanding on the loan, including interest. Third, partners must be paid the share of the partnership's capital to which they are entitled. Last, any surplus is shared between the partners in accordance with partnership agreement terms.

Answer 34

A restraint of trade clause which seeks to restrict outgoing partners in their business dealings once they have left the partnership. A restraint of trade clause will only be enforceable if it protects a legitimate business interest (e.g. business contacts, confidential information) and is no wider than is reasonable to protect that interest, in terms of duration, geographical area, and scope. N.B. Restraint of trade clauses cover non-compete, non-solicitation, and non-dealing clauses.

Answer 35

Provision for arbitration or another form of ADR, rather than court process.

Answer 36

A duty of the utmost fairness and good faith. Partners; - Must be completely open with one another regarding any relevant information regarding the partnership. - Must account to the firm for any private profits they have earned without the other partners' consent from any transaction concerning the partnership. - Must not compete with the firm. If done without other partners' consent, that partner must account for and pay over to the firm all profits made by them in that competing business.

Answer 37

All of the partners acting together (e.g. all sign a lease of business premises) or by just one partner. N.B. If a partnership is bound, creditor has right to sue one or all of the partners for the entire amount.

Answer 38

Provided that the partner's actions were authorised by the partners. May be authorised in the following ways; -- Partners may have acted jointly in making the contract. -- Express actual authority (partner has permission to enter into a particular transaction or type of transaction/contract on behalf of the firm). -- Implied actual authority (partners may have impliedly accepted that 1 or more partners have the authority to represent the firm in a particular type of transaction; often through regular course of dealings to which the other partners have not objected).

Answer 39

Mix of subjective and objective elements; 1) The transaction is one which relates to business of the kind carried on by the firm. 2) The transaction is one for which a partner in such a firm would usually be expected to have the authority to act. 3) The other party to the transaction did not know that the partner did not have authority to act. 4) The other party deals with a person whom they know or believe to be a partner.

Answer 40

Firm is liable to 3rd party under contract. Partner is liable to indemnify their fellow partners for any liability or loss which they incur, because the partner has breached their agreement with their partners by acting without actual authority.

Answer 41

As the main source of potential liability for solicitors is professional negligence claims; these are usually covered by professional indemnity insurance.

Answer 42

A retiring partner will be released from an existing debt, by entering into a contract with the creditor and the other partners, and possibly an incoming partner. The creditor will release the original partners from their liability under the contract and the firm as newly constituted (new partner) will instead take it on.

Answer 43

The partner is liable for the debt but may be able to claim an indemnity from the other partners.

Answer 44

Those debts incurred while they were a partner (unless novation agreement exists to release them).

Answer 45

By complying with s36 PA 1890 requirements; -- Anyone who the firm has dealt with before must be given actual notice (informed directly) of the partner in question leaving. -- Anyone who the firm has not dealt with before must be notified by placing a notice in the London Gazette; 'notice to the whole world'. N.B. If the reason for ceasing to be a partner is death or bankruptcy (not retirement or expulsion), no notice of the event is required. The estate of the deceased/bankrupt will not be liable.

Answer 46

When a creditor of a partnership has relied on a representation that a particular person was a partner in the firm, they may be able to hold that person liable for the firm's debt, even if that person had never been a partner or had retired before the contract was made. Holding out may be oral e.g. person described as a partner in conversation, in writing e.g. leaving partner's name online/website or by conduct e.g. person representing the firm in a previous course of dealings.

Answer 47

Yes (provided it is made with the person's knowledge).

Answer 48

The claimant can sue the partner(s) with whom they made the contract due to privity of contract between them. The claimant can sue anyone who was a partner when the debt was incurred and that partner can then claim an indemnity from their partners to share liability between them. The claimant can sue the firm (all partners) in the firm's name and anyone who was a partner at the time the debt was incurred is jointly liable to satisfy the judgment. N.B. Best option = sue all of the partners in a firm instead of just one partner. The judgment can then be enforced against the partnership assets and also against the partners' personal assets if necessary.

Answer 49

Leave in the partnership bank account a sum of money to pay their share of any outstanding debts.

Answer 50

The 3rd party can enforce the debt in the usual way; obtaining a charge over the partner's property(s), and applying for an order of sale of those properties in order to satisfy the outstanding debt. Alternatively, the 3rd party may seize assets belonging to the partner.

Answer 51

As a hybrid between a company and partnership, offering advantage of both limited liability for the LLPs debts and fewer administrative requirements than a Company.

Answer 52

- Must have at least 2 members on incorporation, and 2 designated members responsible for filing documents at Companies House. - The original 2 designated members will usually be the subscribers to the incorporation document, but can cease to be designated members at a later date if members decide this. - Incorporated by filing form LL IN01 at Companies House, along with applicable fee (they then issue a certificate of registration). - LLP name must end LLP, with similar restrictions applying as do to Companies. - Name can be changed at any time with consent of all the members. - Must have a registered office, which is its address for service of official documents.

Answer 53

No; designated members are assigned for this.

Answer 54

- Signing and filing the annual accounts with the Registrar. - Appointing, removing and remunerating the auditors. - Filing the annual confirmation statement. - Sending notices to the Registrar of Companies, e.g. concerning a member leaving or joining the LLP. - Winding up the LLP.

Answer 55

Capital and profits - members of the LLP share equally. Management and decision-making - ordinary matters can be decided by a majority of the members; changing the nature of the business and changing the terms of the contract can only be done by unanimous consent.

Answer 56

Notice to be sent to Companies House within 14 days for both, using appropriate forms (LL AP01/02 + LL TM01).

Answer 57

By giving reasonable notice to the other members; cannot be expelled unless members agree on a right of expulsion to be included in the LLP agreement. When a member leaves an LLP, the LLP must notify Companies House on form LL TM01 within 14 days of the member leaving.

Answer 58

Fiduciary duties as its agents; includes a duty of good faith, duty to account for any money received on behalf of the LLP and a duty to the other members to render true accounts and full information on matters concerning the LLP.

Answer 59

- Members have limited liability for the debts of the LLP. - Members are able to grant fixed and floating charges over their assets, unlike general partnerships. - Leeway with regard to management structure; can decide how they wish to structure their organisation.

Answer 60

- Administrative and accounting requirements; must file accounts with Registrar of Companies and other information such as notice of termination of membership with Companies House; these are then available for public inspection. - Subject to potential clawback provisions on insolvency.

Answer 61

A member of the company; the statutory contract imposes obligations upon the members, meaning that a shareholder can bring an action for breach of contract against other members of the company where his rights have been infringed.

Answer 62

Directors are responsible for the day-to-day running of the company. Shareholders provide the money to allow the business to operate and are responsible for some of the decisions the company can make.

Answer 63

1) Process starts at a Board Meeting where directors vote and make decisions called board resolutions. 2) Board Meeting calls a General Meeting where shareholders vote. 3) Final meeting with directors to finish things off; post-decision.

Answer 64

Reasonable notice (>24 hours but will depend on facts).

Answer 65

By a director/secretary at director's request to all directors. Must include the date, time and place of meeting or method of communication.

Answer 66

Default - 2 directors (valid only if >2 are present). Exceptions - if company only has 1 director, rules do not apply. N.B. If there is a quorum present at a board meeting, we say the meeting is quorate.

Answer 67

Simple majority (over half of those present must vote in favour). In the event of a tie, the chair can use their casting vote if they are in favour to pass the resolution.

Answer 68

No. N.B. A director can count in the quorum for the part of the meeting where other resolutions are being passed, and can vote on other resolutions.

Answer 69

Declare the nature and extent of this interest to the board. Exceptions; -- If it cannot reasonably be regarded as likely to give rise to a conflict of interest. -- If the other directors are already aware of it. -- If it concerns terms of a service contract that have been or are to be considered, by a meeting of the directors.

Answer 70

The obligation to declare a personal interest cannot be disapplied by the company's articles; the director must always declare the nature and extent of their interest unless one of the above exceptions apply. However, a company can disapply the prohibition on counting in the quorum and voting when the director has a personal interest and allow a director to count in the quorum and vote where they have a personal interest in the subject of the resolution (common practice in small companies articles). -- N.B. Even if disapplied, would still need to declare their interest if relevant.

Answer 71

No; written resolutions are common in practice as they remove the need for directors to spend time in a board meeting. To be passed, directors must vote unanimously in favour of a written resolution.

Answer 72

- Sending notice for the general meeting or making documents available for inspection. - Minutes must be kept for 10 years.

Answer 73

- Changing the AoA of the company. - Changing the name of the company.

Answer 74

1) Ordinary resolution. 2) Special resolution.

Answer 75

Over half of the votes cast at a shareholders' general meeting must be in favour of the resolution.

Answer 76

75% or more votes cast at a shareholders' general meeting must be in favour of the resolution.

Answer 77

1) General meeting. 2) Written resolution (not permitted for public companies). N.B. Board will choose most appropriate to use given the circumstances.

Answer 78

By the board of directors by passing a board resolution; when they want the shareholders to pass a shareholders' resolution.

Answer 79

14 clear days (excludes the day that notice is deemed received by the shareholders and the day of the general meeting itself).

Answer 80

Yes where a majority in number of the company's shareholders who between them hold 90%+ (95%+ for public companies) consent. Once requisite percentage of shareholders has consented, general meeting can be held straight away.

Answer 81

Directors must give notice to every shareholder and every director, and auditor (if one). Notice must be given in hard copy, in electronic form or by means of a website, or combination. Notice must include; - Time, date and place of the meeting. - The general nature of the business to be dealt with at the meeting. - If a special resolution is proposed, the exact wording of the special resolution. - Each shareholders' right to appoint a proxy (replacement) to attend and vote on their behalf.

Answer 82

48 hours after notice was posted or emailed (add this on to 14 clear days).

Answer 83

2; or 1 where a company only has 1 shareholder.

Answer 84

No (unlike with board meetings). This is because shareholders own the company and their interests are seen as being the same as the company's interests.

Answer 85

1) A resolution to buy back some or all of a shareholder's shares (as shareholder in question could be voting in their own interests, not company's when voting). 2) An ordinary resolution to ratify a director's breach of duty where the director in question is also a shareholder.

Answer 86

Prevented from counting in the quorum and voting at the board meeting. At general meeting, would be acting as shareholder so could vote and count in the quorum (unless resolution was one of the two described above).

Answer 87

Where shareholders vote in a general meeting on the basis of 1 vote for each share they own, instead of usual 1 vote per person. N.B. Allows those shareholders with more shares to have greater influence over outcome.

Answer 88

- The chair of the meeting. - The directors. - 2 or more persons having the right to vote on the resolution. - A person(s) representing not less than 10% of the total voting rights of all shareholders having right to vote on the resolution.

Answer 89

Before or during a general meeting (either before voting takes place or after the shareholders have already voted on a show of hands). N.B. If called after the shareholders have already voted on a show of hands, the outcome of the poll vote (if different), will override the vote on a show of hands.

Answer 90

Board will hand out, post or email the specific ordinary and/or special resolutions the board are proposing to all eligible shareholders who can sign and return it. It must include how to signify agreement and the deadline for returning the written resolution (lapse date).

Answer 91

28 days from circulation of the written resolution. N.B. Method of circulation is irrelevant here and it does not matter when the shareholders actually received the written resolution; if an eligible member signifies their agreement after the lapse date, their agreement will not be counted.

Answer 92

When the required majority of eligible members have signified agreement to the resolution.

Answer 93

With written resolutions, each shareholder has 1 vote for each share that they own as opposed to voting on a show of hands and only counting votes of those who attend general meeting.

Answer 94

Where they hold 5% or more of the voting rights in the company. N.B. company's articles can reduce this percentage to below 5% but cannot increase it to more than 5%.

Answer 95

An accompanying statement of up to 1000 words on the subject matter of the resolution. Company must then circulate a copy of the resolution and accompanying statement to all eligible shareholders, within 21 days of the shareholders request.

Answer 96

Yes; once they have received requests from shareholders representing at least 5% of such paid-up capital of the company as carries the right of voting at general meetings. If shareholders exercise this right, directors must call it within 21 days of the request, and meeting must then be held no later than 28 days from the date of notice of the general meeting.

Answer 97

Same as board meeting.

Answer 98

So 3rd parties entering into contracts with companies can make informed decisions; shareholders of companies benefit from limited liability.

Answer 99

Notify the Registrar of Companies when certain decisions are made; complete forms which suffice as notification; copies of all special resolutions must be filed at CH.

Answer 100

- Register of members. - Register of directors. - Board minutes and minutes of general meeting along with a record of the outcome of any written resolutions for 10 years. N.B. Above can be kept at the company's registered office, a Single Alternative Inspection Location (SAIL), or online at central CH register.

Answer 101

Remind clients of their obligation to file certain documents at CH, maintain the necessary registers and draft minutes to keep for 10 years at the company's registered office. N.B. Failure to do so is a criminal offence, punishable by fine for the company and every officer in default.

Answer 102

Yes; more powers since ECCTA 2023.

Answer 103

- Keep adequate accounting records and director to ensure accounts are produced for each financial year. - Directors of every company (bar private companies classed as small company or micro-entity) must prepare a directors' report for each financial year to accompany the accounts. - Director to circulate the accounts, directors' reports and if required, an auditors report to every shareholder and debenture holder, and anyone else entitled to receive notice of general meetings. - File the above each year at CH (time limit is 9 months from end of accounting reference period for a private company, 6 months for public company). - Every company must file a confirmation statement (form CS01) within 14 days from the company's confirmation date (anniversary of its incorporation) to ensure all information held at CH is up-to-date and correct.

Answer 104

Directors Company secretary (required by public limited companies). Auditor

Answer 105

Ensuring that the company keeps up to date with its filings at CH. Writing up the company's board minutes and minutes of general meetings.

Answer 106

Anyone; no qualifications required for private companies. Role varies from company to company. Can be corporate or joint secretaries, or a director for smaller companies.

Answer 107

Directors, often by board resolution. Will also decide the contractual terms upon which the company secretary will hold office. Power to do so under Model Articles if not in company articles. First company secretary named on IN01.

Answer 108

Only administrative contracts via apparent authority, not trading ones like borrowing money.

Answer 109

By resignation or board resolution. N.B. May involve contractual/employment law consequences.

Answer 110

Company must notify the Registrar of Companies on form AP03/AP04 within 14 days of the appointment of a company secretary. Every company with a company secretary must keep a register of secretaries with specified particulars (private companies can elect not to keep their own register of secretaries but keep information filed on central register at CH). Company must notify the Registrar of Companies on form TM02 when a company secretary resigns or is removed from office within 14 days of their resignation or removal. Company must notify the Registrar of Companies on form CH03/CH04 of any change in particulars of the company secretary within 14 days of any change.

Answer 111

Accountant (independent, usually a firm) whose main duty is to prepare a report on the company's annual accounts to be sent to its shareholders that states whether in the auditor's opinion, the accounts have been prepared properly and give a true and fair view of the company. Must ensure that the shareholders, whose money is invested in the company, are not defrauded or misled by directors.

Answer 112

Obligation for private companies unless exempt as small or dormant company.

Answer 113

First by the directors of a private company and after that by the shareholders (power to appoint auditor by ordinary resolution). Usually deemed auto-reappointed each year. N.B. Terms upon which auditor is to hold office and the auditor's fee are a matter of negotiation between auditor and company.

Answer 114

No DOC owed to shareholders or potential new shareholders when conducting their annual audit (for liability to be imposed, would have to be proximity between the relevant parties). N.B. Auditors can be sued for negligence by the company they are auditing. 2 criminal offences; - Knowingly or recklessly including misleading, false or deceptive material in the auditor's report. - Omitting certain statements from the report which are required to be included by CA 2006.

Answer 115

By shareholders via ordinary resolution. -- Special notice must be given to the company of the proposal to remove the auditor. Auditor can resign at any time by notice in writing sent to the company's registered office.

Answer 116

Provide a statement to the company detailing the circumstances connected with ceasing to hold office; can be useful to publicly highlight any unethical behaviour by the company.

Answer 117

Amending the AoA or adopting a new set of articles. Changing the company name. Disapplying pre-emption rights of shareholders. Carrying out a reduction of share capital.

Answer 118

The 2 people who sign the memorandum of association as subscribers automatically do and must be entered on the company's register of members.

Answer 119

1) By obtaining shares from an existing shareholder. -- Buying some shares of an existing shareholder. -- Receiving some shares of an existing shareholder. -- Receiving some shares of an existing shareholder by way of transmission when a shareholder dies or becomes bankrupt. 2) By allotting new shares and selling them to new or existing shareholders.

Answer 120

All companies must keep one. All shareholders have the right to have their name on the register of members, and a company must register the transfer (i.e. enter the new shareholder on the register of members or reflect an existing shareholder's increased number of shares) as soon as practicable but definitely within 2 months of the transfer being lodged with the company. Same 2 months applies for company allotting new shares from date of allotment. N.B. NO REQUIREMENT TO LOG THIS AT CH, ONLY INTERNALLY AS PER EECTA* 2025. N.B. If the company only has 1 member, must be a statement to this effect on the register of members. N.B. Criminal offence is register of members is incorrect or incomplete.

Answer 121

Yes; prima facie evidence of the holder's title to the shares. Companies must issue share certificates within 2 months of the allotment of shares, or a transfer being lodged with the company.

Answer 122

Any shareholder who owns more than 25% of the shares or controls more than 25% of the voting rights in the company.

Answer 123

Form PSC01 must be completed by any individual who is to appear on the PSC register for the first time. Form PSC02 must be completed by any relevant legal entity who is to appear on the PSC register for the first time. Any shareholder who already appears on the PSC register but whose details change must complete PSC04, and PSC05 for equivalent legal entity. Anyone ceasing to be a person with significant control must complete form PSC07.

Answer 124

14 days from the date the company made the change in its PSC register.

Answer 125

Yes; the company's constitution is a statutory contract between each shareholder and the company, and between each shareholder and every other shareholder.

Answer 126

All of the shareholders who have entered into the shareholders agreement.

Answer 127

Every shareholder, present and future.

Answer 128

Privacy; anyone can view a company's articles of association on CH website, but shareholders agreements are private. Protection of minority shareholders; provisions can be included here unlike in articles of association.

Answer 129

- Restrictions on transferring shares. - Non-compete clause. - Bushell v Faith clause (weighted voting rights).

Answer 130

Yes; e.g. cannot restrict shareholders from voting a particular way in board meetings if they are also a director, as this could lead to a shareholder breaching their director duties.

Answer 131

Right to send a proxy to a general meeting on their behalf. Right to demand a poll vote. Right to receive notice of general meetings. Right to requisition a general meeting. Right to apply to the court to call a general meeting if needed. Right for shareholders with 5%+ voting rights to circulate a written resolution regarding resolutions. Right for 5%+ shareholders to require circulation of a written resolution and accompanying statement.

Answer 132

Right to receive dividends when profits are available and recommended by directors. Right to apply for court for company winding up on just and equitable grounds. Right to remove directors and auditors by ordinary resolution. Right to inspect the company's minutes, statutory registers, and certain contracts without charge. Right to receive annual accounts and reports. Right to seek an injunction against actions prohibited by the constitution.

Answer 133

Both individuals and corporate entities.

Answer 134

CA allows a corporate shareholder to authorise a person to act as its representative.

Answer 135

When the other company; - Holds a majority of the voting rights, or - Can appoint/remove a majority of the board, or - Controls a majority of voting rights via agreement, or - Is a subsidiary of a subsidiary of that other company.

Answer 136

A company with no members except the holding company, its wholly owned subsidiaries, or persons acting on their behalf.

Answer 137

To limit liability; if one company becomes insolvent, others can continue operating.

Answer 138

Yes; additional rights and responsibilites.

Answer 139

State it is a single-member company in the register of members. N.B. If another shareholder is added, the register must be updated to state the company no longer has only one member, including the date.

Answer 140

Both names must be recorded in the register, but only one address.

Answer 141

1) Ordinary 2) Preference.

Answer 142

Most companies formed with them. Generally gives ordinary shareholders the right to attend and vote at general meetings. Entitled to dividends if declared by directors and approved by shareholders; vary based on company profits. May include different classes e.g. Ordinary A and B (defined in articles of association or all shares rank equally if not).

Answer 143

Preference shareholders have enhanced rights over those of ordinary shareholders; laid out in articles of association. May have dividend guarantees, or receive dividends first, or 'participating rights' (rights to additional profits beyond regular dividends). Often those who want to invest in a company and are willing to forego voting rights for greater financial returns. Ordinary shareholders are only willing to grant them enhanced rights on the basis that they do not exert power by voting at general meetings.

Answer 144

Cumulative - missed dividends must be paid in future years so long as profits are available to pay the dividends. - This right ranks before payment of dividends to ordinary shareholders in the current financial year. Non-cumulative - missed dividends are lost and shareholders have no right to receive it in the future. - If a dividend is not paid in a particular year, the shareholder loses the right to that year's dividend and does not have the right to receive it in the future.

Answer 145

Unfair prejudice actions. Derivative claims.

Answer 146

The company's affairs have been conducted in a manner that is unfairly prejudicial to the interests of the members generally, or some part of its members (including the claimant). An actual or proposed act or omission of that company is or would be so prejudicial.

Answer 147

Diverting opportunities to a competing business in which the majority shareholder holds an interest. Awarding excessive pay to directors. Excluding a shareholder from management of the company, where, when the company was incorporated, the shareholders' negotiations led to the shareholders believing they would participate in management.

Answer 148

Order to buy the prejudiced shareholders' shares (by other shareholders/company). Restrictions on altering articles without court approval. Permission for derivative action.

Answer 149

Objective; would a reasonable bystander view the conduct as unfair? N.B. Harder to prove unfair prejudice if conduct is permitted by the company's articles. May require extensive evidence to prove e.g. expert accounts/valuation reports.

Answer 150

Shareholder brings a claim on behalf of the company for wrongs by directors (negligence, default, breach of duty/trust). Allows action when the board refuses/fails to act. N.B. Claimant = shareholder (instigator), defendant = usually a director.

Answer 151

Initial stage (permission). - Court reviews application without a hearing. - Continues only if a prima facie case is shown. - Filters out unmeritorious claims. Full hearing - court MUST refuse if; - s172 test - no person promoting company success would continue. - Act/omission authorised (pre-event). - Act/omission ratified (post-event).

Answer 152

Claimant's good faith. Importance of continuing from a s172 perspective. Authorisation/ratification status. If the company chose not to claim. Whether the claim could be brought by the member personally. Views of non-interested shareholders.

Answer 153

To run the company day-to-day (by entering into contracts and making decisions regarding the trade or business of the company).

Answer 154

All companies must have 1 director (public companies need 2). Does not have to be a natural person, but every company needs at least 1 natural person, aged 16+. N.B. Few restrictions as to who can become a company director; a person can be a director without being called a director.

Answer 155

By passing board resolutions at board meetings. N.B. Can also exercise their powers unanimously without a meeting, but must indicate to each other that they share a common view on the matter (e.g. resolution in writing, informal text message).

Answer 156

Yes; enables a company to work effectively. All employees will be aware of the scope of their authority or job description and will exercise delegated powers as part of their work without even thinking about it.

Answer 157

No, but do have prior veto over the director's actions in certain circumstances (e.g. if the directors want to enter into a SPT, shareholders must first approve this by ordinary resolution).

Answer 158

Executive directors - those appointed to the board of directors who also have an employment contract with the company (service contract laying out job title, duties and responsibilities). Non-executive directors - appointed to the board and will be registered at Companies House as directors but will not have service agreements with the company (do not receive a salary, but receive directors' fees for attending board meetings).

Answer 159

To prevent poor decision making by a board of directors who are too heavily invested in a decision to act objectively.

Answer 160

By passing a board resolution. N.B. Additional power of the chair is a casting vote at board meetings.

Answer 161

De facto directors generally carry out the job of a director even though they are not officially appointed. Shadow directors are more likely to be in the background and not carry out the normal functions of a director, but they will have a great deal of influence and control over the other directors' actions in practice.

Answer 162

2. N.B. In companies with only 1 director, they can still validly take company decisions as MA allows them to make decisions without calling a board meeting.

Answer 163

The company's first director/directors will take office on the certificate of incorporation being issued, and will be those individuals named on form IN01. Following incorporation, directors will be appointed in accordance with the company's articles.

Answer 164

Either by the board or ordinary resolution of the shareholders. N.B. Quickest way is by board resolution, as it means that the board do not have to call a general meeting or circulate a written resolution to appoint the new director.

Answer 165

A person cannot take office if disqualified from doing so. A person will cease to be a director if a bankruptcy order has been made against them or a doctor gives a written opinion to the company stating that they have become physically or mentally incapable of acting as a director, and may remain so for more than 3 months.

Answer 166

Company must notify CH within 14 days of the appointment (by filling form AP01/AP02). Company must also enter the director on its register of directors.

Answer 167

Both actual and apparent authority to bind the company into contracts with 3rd parties. N.B. Directors are agents of the company, with the company being the principal.

Answer 168

The director is personally liable to the 3rd party and the company is not a party to the contract or liable to the 3rd party.

Answer 169

Board of directors can decide on the terms of a director's service contract under a combination of their general powers to run the company, and their specific power to decide on directors' remuneration. N.B. Service contracts cover such matters such as salary, what authority the director has, the directors' responsibilities, notice period etc.

Answer 170

Where the board is proposing to enter into a service contract with a guaranteed term of more than 2 years. These are considered 'long-term' service contracts and must be approved by the shareholders by ordinary resolution. N.B. If the company has the power under the terms of the service contract to terminate it with notice of 2 years or less, it will not fall under the definition of a guaranteed term of more than 2 years and will not need shareholder approval.

Answer 171

Would be financially harmful to a company if it were locked into a long-term service contract with a highly paid director with no possibility of ending it.

Answer 172

No; it is the guaranteed term element of the contract that needs authorisation, not the overall length of the contract.

Answer 173

The guaranteed term element would be void but the rest of the contract enforceable.

Answer 174

Yes; at the company's registered office for 15 days prior to the general meeting, and at the general meeting itself. N.B. If the ordinary resolution is proposed by written resolution, a copy of the memorandum must be circulated to the shareholders along with the written resolution.

Answer 175

Yes; at the company's registered office during their term and until a year after termination of the service contract. N.B. Shareholders have the right to inspect them without charge and within 7 days of requesting to see them.

Answer 176

Completing form TM01/TM02 within 14 days of resignation and notifying CH. N.B. Removing a director will not automatically terminate its service contract (has to be terminated in accordance of its terms) and vice versa.

Answer 177

By ordinary resolution passed at a general meeting; special notice is required for a resolution to remove a director.

Answer 178

That the ordinary resolution to remove the director is not effective unless notice of the intention to pass it has been given to the company at least 28 days before the general meeting at which the resolution is proposed. Once the company receives special notice for director removal, it must promptly inform the director and, if feasible, notify shareholders simultaneously with the general meeting notice; otherwise it must give shareholders 14 days notice via newspaper or other means permitted in the articles.

Answer 179

Yes and can also require the company to send copies of any written representations the director wishes to make to the shareholders. The director can use this as an opportunity to argue that they should not be removed. The legal advice they have obtained and the evidence collected during the 28 days or more between notification of the proposed resolution and the meeting itself will help them do this effectively.

Answer 180

To make sure that those who wish to remove the director tell the company that is what they intend to do, so that the company can formally notify the director and give them time to seek advice and prepare for the general meeting.

Answer 181

If, after special notice has been given to the company, a general meeting is called for 28 days or less after the notice has been given. N.B. Provision designed to prevent the board from calling a meeting before the 28 days' special notice has expired to frustrate the shareholders' intention to dismiss the director.

Answer 182

No; information to be kept at CH since EECTA 2023 and will be updated by a notification to the Registrar.

Answer 183

To the company itself; check on directors' powers.

Answer 184

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 3rd parties. Duty to declare interest in a proposed transaction or arrangement. Duty to declare interest in existing transaction or arrangement.

Answer 185

A director of a company must; a) Act in accordance with the company's constitution (AoA), and b) Only exercise powers for the purposes for which they are conferred. N.B. A breach of duty under a) may involve a director entering into a contract for which she does not have authority without authorisation from the board of directors.

Answer 186

A director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Takes into account the following factors; -- The likely consequences of any decision in the long-term. -- The interests of the company's employees. -- The need to foster the company's business RS with suppliers, customers and others. -- The impact of the company's operations on the community and environment. -- The desirability of the company maintaining a reputation for high standards of business conduct. -- The need to act fairly as between members of the company. N.B. Wide ranging but difficult to establish due to subjective test. As long as director acted in good faith (even if making poor decision) and considered the 6 factors, section will not be breached. N.B. Also unclear what 'success' means (increase in share value).

Answer 187

Not infringed by the director acting; a) In accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or b) In a way authorised by the company's constitution.

Answer 188

Means the care, skill and diligence that would be exercised by a reasonably diligent person with; a) The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and b) The general knowledge, skill and experience that the director has. N.B. a) sets the minimum standard expected, and b) imposes a higher standard where the director's knowledge, skill and expertise is greater than the minimum standard. N.B. Remedy available here for breach is damages.

Answer 189

Duty to avoid a conflict particularly applies to the exploitation of any property, information or opportunity; immaterial whether the company could take advantage of the property, information or opportunity. Must relate to a contract in which the company is not involved. No breach if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest or the matter has been authorised by the directors (e.g. a board resolution authorising the breach or potential breach is enough to protect the director in question from a claim for breach of duty under this section).

Answer 190

Conferred by reason of them being a director or doing (or not doing) anything as director. No breach if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. E.g. offering a specific benefit (1 week holiday home stay) to renew contract on favourable terms would constitute breach if client accepted (whether or not director then included favourable terms in the contract).

Answer 191

If a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors; before the company enters into the transaction or arrangement in question. Flexibility with how declaration can be made (board meeting or by a general notice in writing to the directors, but other ways permitted).

Answer 192

If the director is not aware of the interest, or of the transaction or arrangement in question (and a director is being treated as being aware of matters of which he ought reasonably to be aware). If the interest cannot reasonably be regarded as likely to give rise to a conflict of interest. If the directors are already aware of it (to the extent they are or ought reasonably to be). If it concerns the terms of the director's service contract.

Answer 193

When a company has disapplied MA14, the obligation to declare an interest under CA still remains and cannot be disapplied by the company.

Answer 194

Declaration must be made as soon as is reasonably practicable, and MUST be made at a meeting of the directors, or by notice in writing sent to all the other directors, or by general notice of the interest given at a board meeting. Same exceptions apply. Failure to comply with the requirement is a criminal offence punishable by fine (instead of civil matter).

Answer 195

The same as would apply if the corresponding common law rule or equitable principle applied, so are enforceable in the same way as any other fiduciary duty owed to a company by its directors. Potential remedies include; -- An account of profits. -- Equitable compensation for the loss suffered by the company. -- Rescission of any contract entered into as a direct/indirect result of the breach. -- An injunction, to prevent further breaches/continuing breach. -- Restoration of property transferred as a result of the breach.

Answer 196

Done by ordinary resolution. -- Where the ordinary resolution is proposed as a written resolution and the director in question is also a shareholder, they will not be an eligible member for the purposes of the written resolution. -- Where the ordinary resolution is proposed at a general meeting and the director in question is also a shareholder, their votes will not count. Effect being that director did not breach their duty at all and the director will escape liability to the company for duty breach.

Answer 197

Occurs when the director of a company continues to trade when they know, or ought to know, that there is no reasonable prospect of the company avoiding insolvent liquidation or an insolvent administration.

Answer 198

If; -- The company has gone into insolvent liquidation or insolvent administration. -- Before commencement of the winding up of the company, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation or insolvent administration. -- That person was a director of the company at the time.

Answer 199

If the director took every step with a view to minimising the potential loss to the company's creditors as they ought to have taken. 2 part test (objective and subjective elements) to apply to ascertain whether the director's conduct is caught by this defence. The standard expected of a director is that of a reasonably diligent person having both; a) The general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and b) The general knowledge, skill and experience that the director has (more will be expected here from an experienced director).

Answer 200

Seek professional advice from solicitors and/or accountants at the first sign of problems. Limit spending. Check the company's accounts regularly. Keep records of their own actions.

Answer 201

A liquidator or administrator; can only be brought when a company is in insolvent liquidation or insolvent administration.

Answer 202

Order the director to make a contribution to the company's assets, increasing the amount of money available to pay creditors.

Answer 203

If in the course of the company being wound up, it appears that the company's business has been carried on with intent to defraud creditors of the company or creditors of any other person, or for a fraudulent purpose. In such a case, the court may declare that any persons who were knowingly parties to the carrying on of the business in such a manner are liable to make such contributions (if any) to the company's assets as the court thinks proper.

Answer 204

A liquidator or administrator; can only be brought when a company is in insolvent liquidation or insolvent administration.

Answer 205

As the liquidator or administrator will need to show intention to defraud in order for the definition to be met, and hard to find evidence of this. As the same facts will usually give rise to a claim for wrongful trading too, liquidators will usually bring claim for both so if fraudulent trading does not succeed, wrongful trading will.

Answer 206

In situations where the director could benefit personally at the company's expense (by choosing how much to sell an item for or having a vote in how much company is prepared to pay for it), shareholders need to authorise their proposed action before it takes place to give the shareholders the opportunity to make sure that the transaction is in the company's best interests despite the involvement of a director in their personal capacity.

Answer 207

Substantial property transactions (SPTs) (OR). Loans to directors (OR). Long-term service contract (OR). Payment for loss of office (OR).

Answer 208

Where; - A director, in their personal capacity, or someone connected to a director, - Buys from or sells to the company, - A non-cash asset, - Of substantial value,

Answer 209

The shareholders' consent by way of ordinary resolution.

Answer 210

Either a member of a director's family or a company in which the director or a person(s) connected with a director (or the director and persons connected with the director taken together); -- Own(s) at least 20% of the body corporate's shares or -- Is/are entitled to exercise or control the exercise of more than 20% of the voting power at any general meeting of the company. Members of a director's family as defined as; -- The director's spouse/civil partner. -- The director's child/step-child. -- The director's parents. -- Any person who lives in a RS with the director as their partner (and any of their children).

Answer 211

Any property/interest in property other than cash.

Answer 212

If under £5000 = never substantial. £5000 - £100,000 = depends on company net assets; > 10% to be. More than £100,000 = always substantial.

Answer 213

An ordinary resolution is not needed to approve the following transactions; -- An SPT when the company in question is a wholly owned subsidiary of any other company. -- A transaction between a company and a person in his character as a member of the company. -- A transaction between a holding company and its wholly owned subsidiary. -- A transaction between 2 wholly owned subsidiaries of the same holding company.

Answer 214

The transaction is voidable. Following individuals may also be ordered to account to the company for any gain they have made and to indemnify the company for any loss/damage resulting from the arrangement/transaction; -- Any director of the company (or of its holding company) with whom the company entered into the arrangement. -- Any person with whom the company entered into the arrangement who is connected with a director of the company or of its holding company, and the director with whom any such person is connected. -- Any other director of the company who authorised the arrangement or any transaction entered into in pursuance of such an agreement.

Answer 215

Board of directors could enter into risky loans to benefit members of the board at the company's expense if there was no requirement for an ordinary resolution.

Answer 216

Expenditure on company business; for the purposes of enabling the director to properly perform their duties up to maximum £50,000. Expenditure on defending civil/criminal proceedings in relation to the company or an associated company. Expenditure on defending regulatory proceedings or defending himself/herself in an investigation by a regulatory authority. Minor and business transactions not exceeding £10,000.

Answer 217

The transaction is voidable at the instance of the company. N.B. The director who loaned the money from the company and any director who authorised the transaction/arrangement are liable to account to the company for any gain they have made, and are jointly and severally liable to indemnify the company for any loss/damage resulting from the transaction/arrangement.

Answer 218

Because the board members may be the same individuals who authorised the loan.

Answer 219

If the company becomes insolvent and an insolvency practitioner is appointed.

Answer 220

The transaction is no longer voidable and the directors are no longer liable in relation to the initial failure to obtain the ordinary resolution.

Answer 221

Any payments of £200 or more other than those to which the director is legally entitled (terms of service contract). N.B. Ordinary resolution also required for payments to past directors, payments to a person connected with a director, payments to any person at the direction of, or for the benefit of a director or a person connected with a director. N.B. Payment includes any situation where the director is selling their shares in the company, and the price is in excess of the price other shareholders could have obtained.

Answer 222

Fine; if accounting records, director(s) in default can be imprisoned for up to 2 years.

Answer 223

Between 2 and 15 years (length depends on director's behaviour in relation to current offence and previous).

Answer 224

Conviction for an indictable offence. Persistent breaches of companies legislation. Fraud on a winding up. Summary conviction for failure to file a required notice/doc. Being an unfit director of an insolvent company (most common). Following an investigation and a finding of unfitness. Fraudulent or wrongful trading. Breach of competition law.

Answer 225

Using money meant for paying VAT, PAYE, NI contributions as the company's working capital. Paying excessive directors' remuneration. Recklessly trading whilst insolvent.

Answer 226

Employing qualified financial staff. Taking professional advice. A personal financial investment in the company.

Answer 227

A director subject to a disqualification order cannot without leave of the court be a director or in any way concerned in the promotion, formation or management of a company. Leave is rarely granted, but may be where the director is not dishonest, the business is profitable (unlikely to become insolvent) and there are other directors who can provide a check on the activities of the director in question. Contravention of a disqualification order = criminal offence; director could be fined or sentenced for up to 2 years in person.

Answer 228

Ratification occurs after there has been a breach whereas authorisation occurs before the event, and prevents any wrongdoing in the first place.

Answer 229

No; typically authorised to borrow on behalf of the company, but their borrowing powers are usually limited by the company's AoA.

Answer 230

1) Prospective shareholders pay money or give property to the company in return for shares (equity finance). 2) Companies borrow money to fund expansion or just the day-to-day running of the company (debt finance).

Answer 231

As loans have a contractual right to be repaid and security often given for this. N.B. Shareholders have no contractual right to be repaid and cannot take security for money they have invested.

Answer 232

1) Allotment (when a company creates shares and gives them to an existing shareholder or new shareholder in return for payment). 2) Transfer (shareholder sells or gives shares to another shareholder or a new shareholder). -- Not as tightly controlled as allotment or buy-back as % shareholdings of shareholders not involved in transfer will not change. 3) Buy-back (company buys back some of its own shares from one or more shareholders). -- N.B. Reverse to allotment; total number of shares in the company decreases.

Answer 233

Company will then issue a share certificate relating to the shares and enter the person on the register of members (or amend their existing entry to reflect increased shareholding).

Answer 234

Ordinary resolution needed to authorise; return of purchase of own shares and notice of cancellation of shares to be filed at Companies House within 28 days.

Answer 235

When shares are transferred and paid for and the board has passed a resolution to register the transfer. The shares are issued by the company when the name of the shareholder has been entered on the register of members. N.B. When a company wants to raise equity finance by allotting shares, the board decides the price and how many shares it wishes to allot having taken advice from the company's accountant.

Answer 236

1) Are there are constitutional restrictions on allotment? 2) Do the directors have authority to allot shares? 3) Are there any pre-emption rights?

Answer 237

For companies incorporated prior to 1/10/09, check whether they have updated their articles since that date. If not, the shareholders will need to pass an ordinary resolution to remove the authorised share capital (ASC) upper limit on the number of shares a company could have from memorandum of association. For all companies, check the company's articles for a limit on the number of shares the company can have. If there is such a limit, change the articles by special resolution.

Answer 238

Private companies incorporated under the CA 2006 with 1 class of shares have authority to allot shares without shareholder approval; all that is needed is a board resolution. PLCs and private companies with more than 1 class of share may have authority to allot in their articles. If no authority in the company's articles, the shareholders will need to pass an ordinary resolution to allot shares. N.B. If company articles of association restrict the directors' power to allot shares; companies can remove this power by amending the articles by special resolution. N.B. Ordinary resolution must state the maximum number of shares the directors may allot and the date on which authority will expire - no more than 5 years from date ordinary resolution is passed. N.B. If the authority to allot is included in the company's articles of association from incorporation, such an article must state the maximum number of shares that may be allotted under it, and specify the date on which it must expire - no more than 5 years from incorporation of the company.

Answer 239

Rights of first refusal over shares being allotted unless excluded in company's articles; company must first offer existing shareholders the number of shares that will enable them to preserve their % shareholding in the company. Logical as the allotting of ordinary shares or shares which the owner can choose to convert into ordinary shares will dilute the voting power that the existing shareholders have. Offer period = minimum 14 days and must not be withdrawn during this period. If any or all shareholders decline the offer, shares can be offered to others.

Answer 240

In relation to the allotment of bonus shares, if the consideration for the allotment is wholly or partly non-cash, or if the shares are to be held under, allotted or transferred pursuant to an employee share scheme.

Answer 241

By special resolution; usually done where the company wishes to include pre-emption rights more tailored to how the company wishes to operate (e.g. shareholders may prefer 21 days, not 14 to consider a pre-emption offer). N.B. No pre-emption rights in the Model Articles.

Answer 242

By special resolution, but directors must make a written statement setting out; - The reasons for making the recommendation. - The amount the purchasers will pay. - The directors' justification of that amount. N.B. The directors written statement must be circulated to the shareholders along with notice of the general meeting, or if the resolution is proposed as a written resolution, it must be sent out with the written resolution.

Answer 243

Yes; means the buyer must pay for the shares when they receive them. If the company's articles do not include this model article, shares can be issued partly paid, but the shareholder must pay the remainder when contractually obliged to do so or if the company is wound up.

Answer 244

Copies of all resolutions to be sent to Companies House within 15 days. Company forms to be sent to Companies House; - Return of allotment and statement of capital (Form SH01) within 1 month of allotment. - Possibly form(s) PSC01, PSC02, PSC04, PSC07. Entries in company's own registers; - Amend register of members within 2 months. - Amend PSC register if necessary. Prepare share certificates within 2 months of allotment. N.B. Company must also prepare minutes of every board meeting and GM.

Answer 245

Nothing in the CA 2006 to prevent a shareholder from transferring the shares, nor any obligation to offer the shares to existing shareholders first (pre-emption). Company's articles will often contain restrictions on transfer of shares to stop problem occurring whereby shareholder gaining shares has increased power to e.g. block ordinary resolutions. - Conflict between shareholders would likely mean the company would not operate as smoothly; solicitors draft complex share transfer provisions. Articles cannot restrict a shareholder from selling the shares and cannot stop a particular purchaser from buying them. - However, a person does not become a shareholder of the company until registered on the register of members; Model Articles give board discretion to refuse to register the transfer of shares which can mean every transfer needs approval from the board.

Answer 246

They will be the beneficial owner of the shares, but the transferor will remain the legal owner of the shares. N.B. If a general meeting is held after the share transfer but before registration of the transfer, it is the transferor of the shares (as legal owner) who is permitted to attend and will receive any dividends paid as legal owner. - However, legal owner must vote in accordance with the wishes of the beneficial owner of the shares and pay any dividends to the beneficial owner.

Answer 247

By the transferor completing and signing a stock transfer form and giving it to the transferee along with the share certificate relating to the shares. N.B. If the sale price of the shares is over £1000, the buyer must pay stamp duty on the stock transfer form; none payable if shares are a gift. Transferee must then send the share certificate and stock transfer form to the company. Company to then; - Send new shareholder a new share certificate in their name within 2 months. - Enter their name on the register of members within 2 months. - Notify the Registrar of Companies of the change in ownership of the shares when the company files its annual confirmation statement.

Answer 248

An automatic process whereby; - If a shareholder dies, their shares automatically pass to their personal representatives (PRs), OR - If a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy. N.B. The trustee in bankruptcy and the PRs do not become shareholders of the company but are entitled to any dividends declared on the shares.

Answer 249

Company's share capital (money provided by shareholders in return for shares) cannot be reduced, as it is the fund which creditors look to for payments of debts owed to them. Means that dividends cannot be paid out of capital, just out of distributable profits and the company must not generally purchase its own shares.

Answer 250

1) A company can buy back its own shares as long as the correct procedure is followed. 2) A company can purchase its own shares under a court order to buy out an unfairly prejudiced minority shareholder. 3) A company can return capital to shareholders, after payment of the company's debts, in a winding up.

Answer 251

Shareholders may want to cut ties with the company but cannot find a purchaser for the shares. Restrictions on share transfer, but not enough of the shareholders would support a special resolution to change the articles permitting the shareholders to transfer the shares as they wish.

Answer 252

The shares in question are cancelled, and the company has to pay the outgoing shareholder for the shares, meaning the company is worse off a result of the buyback. Buyback results in the reduction of profits available for declaring dividends, or of capital available for creditors in the event that a company cannot pay its debts. N.B Directors to consider their duties under CA 2006 when buying back shares, and whether the buyback will be good for the company in the long run; can often be justified on basis that it is better long term for the company to buy out a disgruntled shareholder than continue to work with them in an unproductive way, especially if that shareholder is also a director and their resignation was conditional on the company buying back their shares.

Answer 253

The company's articles must not forbid buyback. The shares must be fully paid. The company must pay for the shares at the time of purchase. The shares must usually be paid for out of distributable profits (accumulated, realised profits less its accumulated realised losses) or the proceeds of a fresh issue of shares made for the purpose of financing the purchase. The shareholders must pass an ordinary resolution authorising the buyback contract. A copy of the buyback contract or summary of it, must be available for inspection for at least 15 days before the general meeting and at the general meeting itself (or be sent with the proposed written resolution when or before it is circulated). A copy of the buyback contract, or written memorandum setting out its terms (if contract not in writing) must be made available for inspection at the company's registered office or SAIL as soon as the contract has been concluded for a period of 10 years starting with date of the buyback.

Answer 254

File return of purchase of own shares and notice of cancellation of shares within 28 days of completion. Keep copy of contract at registered office for 10 years. Cancel the shares, update register of members and PSC register (if required).

Answer 255

No. Where the resolution is proposed as a written resolution, a member who holds shares which are being bought back is not an eligible member (and so is not entitled to vote). If the resolution is proposed at a general meeting, the shareholder whose shares are being bought back may vote, but the resolution will not be effective if that shareholder's votes made the difference between the resolution passing or not.

Answer 256

Whether the company has enough cash to pay for the shares out of distributable profits. If not, companies may choose to buy back their own shares out of capital (unless Articles forbid this), but can only do so when all distributable profits have been exhausted. - Shares bought back using partly company's profits and partly using capital. N.B. For payment to be lawful, same conditions for a buyback out of distributable profits must be met, and additional requirements below.

Answer 257

1) Company's directors must make a statement of solvency, no sooner than 1 week before the general meeting to state that the company is solvent and it will remain solvent during the year following the buyback. - N.B. Be careful before making such a statement; if company becomes insolvent and is wound up within 1 year of the statement of solvency, the seller of the shares and the directors of the company may be required to contribute to the financial losses of the company. 2) Auditors' report annexed to the statement of solvency confirming that the auditors are not aware of anything to indicate that the directors' opinion is unreasonable. 3) Payment out of capital must be approved by special resolution; in addition to the ordinary resolution passed by the shareholders to approve the buyback contract. 4) A copy of the directors' statement of solvency and auditors report must be available to the members (either sent to members along with written resolution OR made available for inspection at the meeting). - If not complied with, special resolution is ineffective. 5) Within 7 days of the special resolution being passed, company must put notice in the London Gazette stating that the shareholders have approved payment out of capital in order that the company can buy back its own shares. - Must specify the amount of capital to be used, the date of the special resolution and where the directors' statement and auditors' report are available for inspection. - Company must also publish equivalent notice in an appropriate national newspaper or give notice to each of its creditors. 6) Company must file a copy of the directors' statement and the auditors' report at Companies House before or at same time as it places the notices in the London Gazette and newspaper. 7) Directors' statement and auditors' report must be kept available for inspection at the company's registered office from the time the company publishes its first notice until 5 weeks after the passing of the special resolution. 8) As long as none of the creditors object to the buyback out of capital, the directors hold a board meeting and will pass a board resolution to decide to enter into the contract to buy back the shares. N.B. The payment out of capital must be made no earlier than 5 weeks after the date of the special resolution to approve the buyback out of capital, and no later than 7 weeks after the date of the special resolution so the board has a 2 week window to enter the contract.

Answer 258

No more than 3 months before the directors prepare the statement of solvency.

Answer 259

No earlier than 1 week before general meeting/passing of written resolution.

Answer 260

1) The value of the shares increasing as the company makes money, assuming it is successful. 2) Dividends paid by the company if it has profits available for the purpose. Directors decide whether or not to recommend that a dividend be paid and how much it should be. - Shareholders must then pass an ordinary resolution in order for this to be approved.

Answer 261

Bottom half under profit/loss reserve.

Answer 262

Due to low IR. Does not involve any new people in the formal decision making of the company.

Answer 263

1) Loans (business borrows money from a bank or another lender. -- Many types = bank overdraft, term loan and a revolving credit facility. 2) Debt securities (IOU's issued by the company to the investor in return for a cash payment, and have to be repaid by the company at an agreed future date).

Answer 264

Check that it is allowed under the Constitution; Model Articles place no restrictions on a private company borrowing. -- If the company was formed before 1/10/09 and has not updated its articles, important to also check the company's memorandum to ensure it contains no restrictions on the company borrowing money. -- If there are restrictions, shareholders to pass a special resolution to change the articles to remove the restrictions. Directors to ensure that they have the authority to act on behalf of the company. -- For a company with Model Articles, directors' authority comes from MA3; if the company has amended or bespoke articles, check to ensure no restrictions on for e.g. a requirement that shareholders give prior approval before the company borrows over a certain amount. N.B. Before partnership borrows money, check no restriction on doing so in their partnership agreement. If so, can generally only be changed by unanimous consent.

Answer 265

Contract law; some legislation mainly relevant to debentures and the granting of security by companies.

Answer 266

On the basis of usual market practice, purpose and length of the loan, background and financial position of the parties, and general economic conditions. N.B. Solicitors become involved once commercial terms have been agreed and negotiate legal documentation.

Answer 267

The business giving security to the lender over some or all of its property so that the bank can recover what is owed more easily if the business defaults on the loan. Loan said to be unsecured if the lender does not take security over the borrower's assets. -- N.B. Businesses pay higher rates of interest for unsecured loans, as the lender will require some financial advantage to compensate it for not taking security.

Answer 268

A contract between the business and its bank which allows the business to go overdrawn on its current account. A temporary loan used to cover everyday business expenses when there is no other source of money available. Maximum amount of the overdraft will be agreed with the bank in advance, but amount used or owed on a day-to-day basis will vary and business may move in and out of the overdraft facility day to day. N.B. Most small and medium-sized businesses rely heavily on overdraft facilities.

Answer 269

Uncommitted facility - usually payable on demand. Bank may demand immediate repayment by the business at any time, without giving any notice (not done in practice unless business is in financial difficulties). Business will have to pay a fee for the overdraft facility, with interest also charged by reference to the bank's base rate on a compound basis (any unpaid interest is added to the capital (amount borrowed) and interest is charged on the whole amount). - Implied in overdraft contracts unless parties have agreed otherwise.

Answer 270

Advantages; - Flexible source of finance for the business with few formalities required to arrange it. Disadvantages; - Repayment may be demanded at any time by the bank. - Relatively expensive way to borrow, as it is usually unsecured and the banks charge high interest rates in return for offering such flexibility to the borrower.

Answer 271

Arrangement where the business borrows a fixed amount of money (usually from a bank) for a specified period (term), at the end of which it must all be repaid. The borrower must also pay interest at regular intervals. - Short-term loans are usually for up to 1 year. - Medium-term loans are usually for 1-5 years. - Long-term loans are for over 5 years. N.B. Typically used by a business to purchase a capital asset such as land, building or machinery.

Answer 272

May be secured or unsecured but usually secured. Can be bilateral (loan between 2 parties; business and bank) or syndicated (between the business and a number of different lenders who jointly provide the money the business wants to borrow). Syndicated loans are common when the amount of the loan is high, and the risk of lending to the business is shared between a number of banks. The contract for a term loan may be called a loan/credit/facility agreement. Term loan may allow the business to draw down (take out the loan all in 1 go) or take it in instalments on, or by, agreed dates.

Answer 273

Advantages; - Gives the business greater certainty than an overdraft which is repayable on demand. Drawing down all the money in 1 go will reduce interest payments. - Borrower has greater control as the bank can only request repayment under the terms of the contract. Disadvantages; - Time and expense in negotiating and agreeing all the legal documentation for such a loan. - Once repaid, the money cannot then be re-borrowed by the business.

Answer 274

Where the bank agrees to make available a maximum amount of money to the business throughout the agreed period of the revolving credit facility. During the lifetime of the facility, the business can borrow and repay money; interest is payable at regular intervals. The business is also able to reborrow amounts it has already repaid, so long as it does not exceed the overall maximum figure. N.B. Share characteristics of both overdrafts and term loans; useful for businesses whose income is not evenly distributed throughout the year. May be secured or unsecured but usually secured. May be bilateral or syndicated. Contract for a revolving credit facility usually called facility agreement.

Answer 275

Advantages; - Flexible means of borrowing money for the business. - Possible to reduce the total amount of interest payable by reducing borrowings. Disadvantages; - Time and expense in negotiating and agreeing all the legal documentation for the loan. - High fees charged.

Answer 276

That once the loan agreement has been signed, the bank must provide the business with the loan monies when it requests them.

Answer 277

Payment of money to the borrower. - Amount of the loan. - Currency. - Type of loan. - Availability period(s) during which the loan can be taken. Repayment and pre-payment (set out the agreed repayment schedule for the loan). May be; - Of the whole loan in 1 go at the end of the term. - In equal instalments over the term of the loan. - In unequal instalments, with final instalment being the largest. N.B. Repayment in instalments will give the lender early notice should the business have difficulty in making repayments. Interest rates - Agreed between parties; may be fixed for loan period or 'floating rate' where altered. Express covenants (given by business to bank). - Final form will depend on negotiations between the parties, but the lender has the money and the business needs the money, so the commercial strength is on the lender's side. Implied covenants - Court's power to do so is limited; only will imply a contractual term where necessary to give business efficacy to the contract. Events of default. - Lender may terminate the agreement if business breaches terms (e.g. failure to pay any sum due, commencement of insolvency proceedings etc).

Answer 278

- Relating to the provision of information on the business. - Relating to the financial performance of the business. - Limitation of dividends (ensure dividends and other distributions to shareholders do not exceed a specified percentage of net profits). - Minimum capital requirements (ensure that current assets exceed current liabilities by a specified amount of money or percentage). - No disposal of assets, or change of business (business must not dispose of assets without the lender's consent, or change the scope or nature of the business). - No further security over the assets (business must not create any further security over the whole or any part of the undertaking without the lender's consent; a 'negative pledge' clause).

Answer 279

To ensure that the business conducts its business within agreed limits so the lender has every chance of being repaid in full.

Answer 280

To ensure that the business stays solvent and is not too dependent on debt. N.B. Borrower will also usually be obliged to seek equity finance for new ventures, as opposed to further debt finance.

Answer 281

A loan agreement in writing between a borrower and lender that is registered at Companies House; gives the lender security over the borrower's assets. Only companies and LLPs can enter into debentures; sole traders and partnerships cannot.

Answer 282

A lender with security may claim the secured assets of the business if the business fails to meet its obligations under the facility agreement. If the business becomes insolvent, secured creditors are in a stronger position than unsecured creditors, who generally do not have any rights of priority to the business's assets. Unsecured debts are governed by the pari passu (equality) principle, which means that the unsecured debts are all reduced pro rata if there are insufficient funds to pay all of the business's debts.

Answer 283

The relative risk of the investment; - Equity finance = higher risk as shareholders only receive dividends if distributable profits allow and even then payment of a dividend is discretionary. - Debt finance = interest payments are contractual and paid before dividends and a loan is often secured over the company's property; makes it more likely to be paid in insolvency. Involvement in the company; - Equity finance = shareholders (as owners) have certain rights e.g. to attend general meetings and vote; enables them to influence direction of company. - Debt finance = lenders are merely creditors of the company without any ownership rights, and therefore no say in how the company is run. Repayment of capital; - Equity finance = companies tend not to repay a shareholder's capital unless the company is wound up; value may however be realised through share sales to 3rd party. - Debt finance = loan capital must be repaid at some date in future, possible on demand. This is something directors of the company must make provision for (by ensuring funds are available). Statutory control; - Equity finance = tightly controlled by CA 2006. - Debt finance = predominantly contract law matter; may be a flexible way for company to raise money. Payment of income; - Equity finance = dividends only paid to members if sufficient distributable profits available; directors have full discretion as to whether a divided will be paid. - Debt finance = debt interest must be paid in accordance with terms of facility agreement, whether or not profits available (if no profits, use capital). Tax treatment of income payments; - Equity finance = payment of dividends is not a deductible expense for the company and is simply a distribution of profit, after it has paid corporation tax. - Debt finance = payment of debenture interest is a normal trading expense of the company, and is deductible by it in computing trading profit before corporation tax is assessed. Existing restrictions; - Equity finance = articles may restrict the company's ability to borrow. - Debt finance = terms of existing facility agreements may restrict the taking of new loans or debt, at least without existing lender's consent.

Answer 284

Ratio of borrowings to shareholder funds (high debts). This means a greater burden of borrowings and greater chance of insolvency. Company with high debts may only be able to obtain more finance in the form of equity finance, by a fresh issue of shares.

Answer 285

Advantageous for the lender as it lowers the risk of its loan not being repaid. If business fails to repay the loan as agreed, lender can seize the secured assets, sell them and pay itself out of the proceeds of sale. Business may benefit too from giving security as lender will usually allow business to borrow money at a rate lower than would otherwise be the case.

Answer 286

LLPs and companies. Sole traders and general partnerships can only grant fixed charges (must be registered at HM Land Registry if over land).

Answer 287

First that the company has the power to borrow. That the company has the power to grant security over its assets before entering into any security contracts on the company's behalf; otherwise they risk acting outside of their authority and in breach of duty. Companies formed under CA 2006 has unrestricted objects, unless specifically restricted by company's articles of association. - Model Articles for private companies place no restrictions on granting security; thus a company will have an implied power to grant security for any borrowing. - Check if company has amended Model Articles or bespoke articles for any restrictions. Pre 1/10/09 companies, check memorandum of association for restrictions and use special resolution to amend the company's articles if so.

Answer 288

Ensure that there are no restrictions on the company granting security, and the directors have the authority to act on behalf of the company in the transaction and those people have been properly appointed as directors. - Check articles, search CH records and request copies of board resolutions. Check for prior charges at CH; ensure that there is sufficient value in that property to provide adequate security for the proposed loan. - Registrar of Companies must include a certified copy of the instrument creating the charge and this is open to inspect by any person. Reveals; -- Date of creation of any existing charge. -- Amount secured. -- Which property is the subject of the charge. -- Who holds that charge (who can enforce it). Conduct a winding up search by telephone at the Companies Court to check that no insolvency proceedings have been commenced against the company.

Answer 289

Virtually all assets that a company or LLP might own (land, tangible and intangible property).

Answer 290

1) Mortgages 2) Fixed charges 3) Floating charges.

Answer 291

Highest form of security; lender would seek to take over high-quality assets (e.g. land, building, machinery) owned by borrower. With exception of land, a mortgage transfers legal ownership to the lender with the right to immediate possession; only exercised if the repayment defaults and ownership reverts to borrower on repayment.

Answer 292

A form of security which does not transfer ownership from the chargor (borrower) to the chargee (lender) and does not give the chargee the right to immediate possession of the property. It does however, give the lender important rights over the asset should the borrower fail to repay the money borrowed.

Answer 293

Fixed - may be taken over property and shares owned by other company. - Chargor must create a separate fixed charge over each asset; effect being that the lender has control of the asset (e.g. chargor will not be permitted to dispose of the asset without charge holder's consent). - Fixed charge holder has first right of claim over the proceeds if chargor gets into financial difficulties and goes into receivership/liquidation. - Possible to create more than 1 fixed charge over the same asset. Floating - worst form of security (assets subject to floating charge usually referred to generically). - Secures a group of assets e.g. stock that are constantly changing and unsuitable for fixed charge. - Company retains control until crystallisation (triggered by events like chargor going into liquidation, receivership, ceasing to trade), where it converts into a fixed charge and restricts the chargor's dealings with the assets.

Answer 294

The holder of the fixed charge which was created first will be able to sell the asset and pay itself out of the proceeds. The second fixed charge holder will then be able to pay itself out of the remainder.

Answer 295

1) They consist of an equitable charge over the whole or a class of the company/LLP's assets, such as stock. 2) The assets subject to the charge are constantly changing. 3) The company/LLP retains the freedom to deal with the assets in the ordinary course of business until the charge 'crystallises'.

Answer 296

From chargor's viewpoint; it allows it to deal with the secured assets on a day-to-day basis. As a form of security which can attach to assets unsuited for a fixed charge or mortgage, it allows the chargor to maximise the amount that it is able to borrow. Floating charge may be taken over the whole of a company/LLP's business.

Answer 297

Fixed charge will take priority over a floating charge over the same assets. From lender's viewpoint; chargor not allowed to deal with the assets. Certain other creditors have the right to claim money from the proceeds of sale of the assets covered by the floating charge if the company/LLP becomes insolvent before the charge holder itself gets the money. -- Includes 'preferential creditors' who take priority over the holder of a floating charge but not over the holder of a fixed charge.

Answer 298

Money owed to the company/LLP by its debtors. As an asset, book debts may be charged. As book debts vary over time, they are suitable for charging by way of a floating charge; case law has however established that they can be secured by a fixed charge where the charge holder had control over both the debts and proceeds once they were paid.

Answer 299

Personal guarantees. Pledge. Lien. Retention of title.

Answer 300

Security - state that the borrower charges the property to the lender and what the type of security is (fixed, floating, combo). - Specific assets subject to each charge will be listed. Representations and warranties - the borrower will make a series of contractual statements relating to the assets which it is charging; aim being to get borrower to reveal all relevant information about the assets. Covenants - made by borrower; seek to ensure that the value of the assets is maintained by the borrower, e.g. stipulating that the borrower will conduct proper maintenance and arrange adequate insurance. Enforcement and powers - set out circumstances where security will become enforceable e.g. if loan payments are not made on time, charging provisions breached etc and lender's powers to sell asset in such events. Procedural matters for companies issuing debentures. Registration - was previously compulsory to register most charges; now optional under CA 2006 but huge incentive to due to consequences of a failure to register a charge in the required time period. -- Lender's solicitors will almost certainly register the charge to ensure it is valid.

Answer 301

Renders the charge void against a liquidator or administrator of the company and also against company's other creditors. Void against a 3rd party but company still obliged to pay the debt immediately. - Same consequences apply if the 21 day period for delivery of required documents to CH is missed. - Lender cannot enforce the security. N.B. Court may order time extension in limited circumstances; if successful, the charge will have priority only from the date of actual registration, and it may therefore lose priority due to the delay if other charges have been registered in the meantime.

Answer 302

Within 21 days of creation of the charge, the company or any person 'interested in the charge' (which includes the charge holder) must file at Companies House a statement of particulars (usually form MR01), a certified copy of the instrument creating the charge and the fee. Once the documents have been delivered, assuming everything is in order, the Registrar of Companies must register the charge and include the certified copy of the charge on the register. The Registrar must also give the person who delivered the documents a certificate of registration, which is conclusive evidence that the charge is properly registered. Form MR01 and the certified copy of the charging document will be put on the company's file, which is available for public inspection. If the required documents are correctly delivered on time, the charge will be fully valid against another creditor of the company, or an administrator or a liquidator of the company. A copy of the charging document and form MR01 should be kept available for inspection at its registered office or SAIL.

Answer 303

A criminal offence; does not affect the validity of the charge.

Answer 304

Redemption - when a loan is repaid, form MR04 may be filed with Companies House to update the company's record. Land Registry entries, if any, should be removed. Release/sale - if the lender releases the charge or the asset is sold, form MR04 must be filed. Companies House will note the release or disposal, and Land Registry entries should be removed.

Answer 305

A fixed charge or mortgage will take priority over a floating charge over the same asset, even if the floating charge was created before the fixed charge or mortgage. If there is more than 1 registered fixed charge or mortgage over the same asset, they have priority in order of their date of creation, not their date of registration. If there is more than 1 registered floating charge over the same asset, they have priority in order of their date of creation, not their date of registration.

Answer 306

Where creditors enter into an agreement between themselves to alter the order of priority of their charges. The agreement is known as a deed of priority; executed by the creditors concerned and sometimes the company. Might happen e.g. if the holder of a fixed charge allowed a bank to have priority for its floating charge. Bank may do this as perhaps would only advance new funds to allow the borrower to continue to trade if the bank could have priority.

Answer 307

A floating charge ranks behind a later fixed charge if the fixed charge is properly registered. A negative pledge clause in the floating charge prohibits the company from creating later charges with priority without consent. If a subsequent lender has actual knowledge of the clause, their fixed charge is subordinate to the earlier floating charge. Disclosure of the negative pledge is made on form MR01, including the charging document. Constructive knowledge (e.g. just seeing form MR01) is not sufficient; actual knowledge (e.g. certified copy in company records) is required. A lender with actual knowledge may be liable for inducing breach of contract. To protect itself, the subsequent charge agreement should include a covenant confirming no earlier negative pledge clause exists - breach allows termination.

Answer 308

- Using the company seal or - By a person with express or implied authority (e.g. director or authorised employees).

Answer 309

- Affixing the company seal - Signed by 2 authorised signatories (director/company secretary). - Signed by 1 director in the presence of a witness who attests. MUST be delivered as a deed - i.e. clearly intended to be a deed on its face. N.B. With Model Articles, if using a seal, the document must also be signed by at least 1 authorised person in the presence of a witness.

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