Chapter 7 - Company law Flashcards
(141 cards)
1
Q
What is a company under the Companies Act 2006?
A
A company is an entity registered under the Companies Act 2006 or any earlier Companies Act. It is distinct from its members and directors.
2
Q
What does it mean for a company to have a separate legal personality?
A
A company is a separate legal entity from its shareholders and directors. This means:
- It is an artificial person.
- Members have limited liability.
- It can hold property.
- It has continual succession, meaning it continues to exist despite changes in membership.
3
Q
Can a company be liable for torts or crimes?
A
Yes, a company may have liabilities in tort or crime. However, it is often difficult to prosecute a company successfully for a criminal offence.
4
Q
Which of the following is NOT a characteristic of a company?
A) Continual succession.
B) Unlimited liability for members.
C) Ability to hold property.
D) Separate legal personality.
A
B) Unlimited liability for members.
5
Q
What is the key consequence of a company’s separate legal personality?
A
Members of a company enjoy limited liability. They are only required to contribute specific amounts to the company’s assets, depending on the type of company, in the event of winding up.
6
Q
What are the liability limits for members of a company limited by shares?
A
Fully paid shares: No further liability.
Partly paid shares: Any unpaid amount on the nominal value of the shares.
Share premium: Any unpaid premium over the nominal value, unless the shareholder is not the original holder of the shares.
7
Q
What is the liability of members in a company limited by guarantee?
A
Members are liable to pay the amount they guaranteed in the event of the company’s winding up.
8
Q
In a company limited by shares, when is a member NOT liable for unpaid premiums?
A) When the shares are fully paid.
B) When the member is the original shareholder.
C) When the member is not the original shareholder.
D) When the company is solvent.
A
C) When the member is not the original shareholder.
9
Q
What does the “veil of incorporation” refer to?
A
The “veil of incorporation” separates the members and the company as distinct legal entities, shielding members from liability and identification in relation to the company’s activities.
10
Q
Why might the court “lift the veil of incorporation”?
A
Courts may lift the veil to expose the commercial reality of a situation, especially when the separate legal personality of the company is being used to commit fraud, evade obligations, or act inequitably.
11
Q
The veil of incorporation is always maintained, regardless of circumstances.
A
False. The veil can be lifted by courts or legislation in specific cases to ensure fairness or prevent abuse.
12
Q
When can the veil be lifted for a group of companies?
A
When the subsidiary acts as an agent of the holding company, justifying treating them as a single entity.
13
Q
How does the court handle companies used for tax evasion?
A
The court may treat the subsidiary’s assets or actions as part of the parent company to impose tax liabilities or prevent tax evasion.
14
Q
Can creditors of an insolvent subsidiary hold a solvent holding company liable for debts?
A
No, unless there is a specific legal or factual basis for lifting the veil.
15
Q
When might the veil be lifted to reveal true national identity?
A
In cases where the company’s members are primarily foreign nationals, and the company operates contrary to national laws (e.g., during wartime).
16
Q
What is a quasi-partnership, and why might the veil be lifted?
A
A company operating like a partnership may have its veil lifted if dissolution is necessary for fairness, as it operates more as a partnership than a company.
17
Q
How might a company be used to evade obligations?
A
A company might be formed to breach contractual agreements (e.g., an ex-employee soliciting customers of a former employer through a “sham” company). The court can lift the veil to hold individuals accountable.
18
Q
What happens when a disqualified director participates in managing a company?
A
They can be held personally liable for the company’s debts under the Company Directors Disqualification Act 1986.
19
Q
What is the distinction between fraudulent and wrongful trading?
A
Fraudulent Trading: Intentional deceit or defrauding creditors.
Wrongful Trading: Continuing business while knowing the company cannot avoid insolvency.
Directors involved in either can be held personally liable for the company’s debts.
20
Q
In which of the following situations can the veil of incorporation be lifted?
A) A company operates solely to avoid tax.
B) Directors engage in wrongful trading.
C) A company acts as an agent of another.
D) All of the above.
A
D) All of the above.
21
Q
What happens if a public company trades without a certificate of incorporation?
A
The directors can be held personally liable for any losses or damages suffered by third parties.
22
Q
A
23
Q
What are the two types of companies?
A
Limited companies - broken into public and private
Unlimited companies
24
Q
What are the two types of limited companies?
A
Public companies.
Private companies.
25
What is an unlimited company?
An unlimited company is a rare type of company where shareholders have unlimited liability for the company's debts.
26
What does a limited company by shares mean?
A limited company by shares is a type of company where the liability of its members (shareholders) is limited to the unpaid amount, if any, on the shares they own.
27
What does a limited company by guarantee mean?
A limited company by guarantee is a type of company where the members (often referred to as guarantors) agree to contribute a specific amount of money toward the company's debts if it is wound up. This amount is usually nominal and defined in the company's constitution.
28
can a company change its status between limited and unlimited?
Limited to unlimited: Requires the consent of all shareholders.
Unlimited to limited: Requires a special resolution (>75%).
29
True OR False A company limited by guarantee can change to a company limited by shares.
False. It is not possible to switch between a company limited by guarantee and a company limited by shares.
30
What is the liability requirement for public and private companies?
Public: Must be limited liability.
Private: May be limited or unlimited.
31
What is the minimum share capital for a public company?
£50,000.
32
Does a private company require a minimum share capital?
No, there is no minimum requirement for private companies.
33
What is the trading certificate requirement for public and private companies?
Public: Must obtain a trading certificate before commencing trading.
Private: May commence trading once incorporated.
34
Can public and private companies offer securities to the public?
Public: Yes, they can offer securities to the public and may list on stock exchanges.
Private: No, they are prohibited from offering securities to the public.
35
How must the names of public and private companies end?
Public: Must end with “public limited company” or “plc.”
Private: Must end with “limited” or “Ltd” unless exempted (e.g., charities).
36
What are the minimum director and secretary requirements?
Public: Must have at least two directors and one company secretary.
Private: Must have at least one director and does not require a company secretary.
37
Are Annual General Meetings (AGMs) mandatory for public and private companies?
Public: Yes, AGMs are mandatory.
Private: No, they are not required to hold AGM.
38
What are the filing deadlines for accounts and reports?
Public: Must file within 6 months of the financial year-end.
Private: Must file within 9 months of the financial year-end.
39
Are small or medium-sized companies eligible for audit exemptions?
Public: Not applicable.
Private: Yes, if they meet the criteria for small or medium-sized companies.
40
How does the appointment of auditors differ?
Public: Must appoint auditors each year if necessary.
Private: Existing auditors may be deemed reappointed under specific conditions.
41
Can pre-emption rights be excluded?
Public: No, they may not be excluded.
Private: Yes, they may be excluded.
42
What is required for a public company to reduce its capital?
A) Special resolution and directors' solvency statement.
B) Only a directors' meeting.
C) Special resolution confirmed by the court.
C) Special resolution confirmed by the court.
43
INTERACTIVE QUESTION 13: TYPES OF COMPANY
Alex, Barry and Carol have operated as a partnership for five years trading in domestic carpets. The business has been successful and they are now considering expanding the business operations by opening three new shops and an additional wholesale unit. The partners are aware that the expansion will require new business capital. They are considering the formation of a company rather than continuing as a partnership.
What types of company may be formed under the Companies Act 2006? Which type of company is suitable for this business?
The main categories of companies which may be formed under the CA'06 are a public company limited by shares, and a private company, which may be limited by shares or by guarantee or be an unlimited company.
A private company limited by shares is the most suitable type for a small business venture of this kind. It offers the advantages of being a corporate entity separate from its members, giving them the protection of limited liability. This means that on a winding-up of the company, each shareholder would only have to contribute any amount that was not already paid up on their shares. The main restriction on a private company is that it may not offer its shares or debentures to the public. However, it is subject to fewer restrictions than a public company including not needing a company secretary or an AGM. It may use capital to finance the purchase of its own shares and it may give financial assistance for the purchase of its shares. If the company ranks as a small or a medium-sized company for the purposes of its annual accounts, the accounts delivered to the registrar need not contain all the material required in the accounts of a public company and need not be audited.
44
What is an "off the shelf" company?
It is a company that has already been incorporated and is available for purchase, allowing quick access to a "ready-to-go" company.
45
What are the advantages of purchasing an "off the shelf" company? (2)
Faster process to have a company operational.
Avoids potential liabilities from pre-incorporation contracts since the company already exists.
46
What are the disadvantages of an "off the shelf" company? (4)
Need to change the name.
Transfer of subscribers' shares.
Replacement of directors and possibly the company secretary.
Alteration of articles of association
47
What is the purpose of a certificate of incorporation? (3)
It is issued by the Registrar of Companies.
Confirms that the company is registered under the law and is a legal entity.
Serves as conclusive evidence of incorporation, even if irregularities or errors are found later.
48
What additional requirement must a public company meet before trading? (2)
A public company must obtain a trading certificate, which involves:
Submitting an application confirming that the company's allotted share capital meets the minimum authorized value.
Providing a statement of compliance.
49
True OR False If a public company trades without a certificate, transactions will be invalid.
False. The transactions remain valid, but company officers may face fines or personal liability.
50
What can happen if a public company fails to obtain a trading certificate within a year of incorporation?
It may face compulsory winding up under the Insolvency Act 1986.
51
What is the purpose of the memorandum of association? (2)
States that subscribers agree to form the company and become its members.
For companies with share capital, subscribers must agree to take at least one share each.
52
What details must be included in the application for incorporation? (4)
Proposed company name.
Whether liability is limited by shares or guarantee.
Whether the company is public or private.
Registered office location and address.
53
What must be included in the statement of capital for a company with share capital? (4)
Total number of shares.
Aggregate nominal value of shares.
Details of share classes.
Amounts paid and unpaid on each share.
54
What does the statement of guarantee specify for companies limited by guarantee?
It states the maximum amount each member agrees to contribute to the company's assets if wound up.
55
What is included in the statement of proposed officers? (2)
Names and consent of the first director(s).
Details of the first company secretary (optional for private companies).
56
What does the statement of compliance confirm?
it confirms that the company meets all legal requirements under the Companies Act.
57
Are articles of association mandatory during incorporation? (2)
If no specific articles are submitted, default articles provided by law will apply.
Custom articles are required if the company wishes to adopt its own governance rules.
58
Who is considered a promoter of a company?
A promoter is anyone who makes business preparations for a company. This includes taking procedural steps to incorporate the company or organizing its formation.
59
What are the two key duties of a promoter to the company?
General Duty: To exercise reasonable care and skill in the promotion of the company.
Fiduciary Duty:
Disclose any personal interest in company transactions.
Account for profits made from promoting the company unless explicitly approved by the company.
Any failure to disclose such profits may require them to be surrendered to the company.
60
How can a promoter retain profits made during promotion?
By fully disclosing these profits to the company (e.g., through prospectuses or to directors) and obtaining the company’s consent.
61
What happens if a promoter fails to disclose personal profits made from promoting the company?
The profits must be surrendered to the company, as the promoter has breached their fiduciary duty.
62
What is a pre-incorporation contract?
Answer:
It is a contract entered into by the promoter on behalf of a company before the company legally exists (before receiving its certificate of incorporation).
It is a contract entered into by the promoter on behalf of a company before the company legally exists (before receiving its certificate of incorporation).
63
Why can't a company be bound by a pre-incorporation contract? (3)
1. The company has no legal capacity to enter into contracts before its incorporation.
2. The company cannot ratify the contract, as it did not exist at the time.
3. The company cannot enforce the contract against a third party unless rights are expressly assigned under the Contracts (Rights of Third Parties) Act 1999.
64
Who is liable for a pre-incorporation contract?
The promoter is personally liable for the contract unless liability is transferred via novation or other means.
65
How can a promoter avoid personal liability for a pre-incorporation contract? (4)
1. Wait until the company is incorporated before entering into contracts.
2. Use an off-the-shelf company.
3, Draft an agreement with the third party, stating the company (once incorporated) will take over the contract.
4, Use novation to transfer the contract to the company post-incorporation.
66
Can a promoter claim expenses incurred during the promotion of a company?
Not legally, unless the company agrees to reimburse the promoter after incorporation. Such reimbursement typically occurs if the company’s directors or members approve the arrangement.
67
TRUE OR FALSE A promoter can claim remuneration for their services without any agreement.
False. The promoter cannot legally claim remuneration unless the company explicitly agrees after incorporation.
68
INTERACTIVE QUESTION 14: PRE-INCORPORATION CONTRACTS
Imran is in the process of setting up a new company, Silver Stumps Ltd. Before submitting the application for registration, he enters into a contract on behalf of the company with Greenfields plc for the purchase of a cricket ground on the banks of the River Avon. Shortly after the company is registered and a certificate of incorporation issued, Silver Stumps Ltd finds that it is unable to raise sufficient funds and so fails to complete on the purchase on the due date.
Which of the following best describes the legal position?
A Greenfields plc may enforce the contact against Silver Stumps Ltd because Silver Stumps Ltd automatically assumes responsibility for contracts entered into on its behalf upon incorporation.
B Provided Silver Stumps Ltd ratifies the contract with Greenfields plc, Greenfields plc may enforce the contract against Silver Stumps Ltd.
C Greenfields plc may enforce the contract against Imran personally because Silver Stumps Ltd cannot ratify the contract.
D Imran's liability on the contract ceased because he has transferred all rights to Silver Stumps Ltd in accordance with the Contracts (Rights of Third Parties) Act 1999.
C There is no automatic assumption of responsibility for promoters' contracts on incorporation. A company cannot ratify a contract entered into by a promoter before the company is formed because a principal must have been in existence at the time the contract was made in order to be capable of ratifying it. The reference to Imran's rights being transferred by the Act in D is inappropriate.
69
What are the rules for naming a public limited company (plc) or a private limited company?
A public company must end its name with ‘public limited company’ (plc).
A private limited company must end its name with ‘limited’ or ‘ltd’.
70
Under what circumstances will the Registrar refuse to register a company name? (4)
1. If the name is offensive or its use would constitute a criminal offence.
2. If the name is misleading (e.g., suggesting government connection without approval).
3. If it indicates a different legal form than what the company actually is.
4. If it is identical or too similar to an existing company’s name.
71
When is approval from the Secretary of State required for a company name?
For sensitive names implying a connection to government or public authority (e.g., using terms like “British” or “International”), particularly if the name could mislead about the company’s size or role.
72
Can a company register a name that is identical or similar to an existing company?
No. This is prohibited to avoid confusion and potential disputes.
73
How can a company change its name?
By passing a special resolution. (>75%)
By notifying the Registrar and obtaining a new certificate of incorporation.
74
Can the Secretary of State order a company to change its name?
Yes, if the name is too similar to an existing company’s name or if it is likely to mislead the public.
75
Where must a company display its name? (3)
At specified locations as per regulations.
On documents such as invoices, letters, and websites.
Legibly engraved on the company’s seal.
76
TRUE OR FALSE Failure to properly display a company’s name can result in a fine.
TRUE
77
Can a company operate under a name different from its registered name?
Yes. A company can adopt a business name, similar to individuals or partnerships.
78
What are the restrictions on adopting a business name?
It must not be misleading or prohibited.
Approval from the Secretary of State may be required for sensitive or restricted names.
79
Do business names follow the same rules as company names?
Yes, similar restrictions and requirements apply.
80
What are "Model Articles"?
Model articles are the default articles of association provided by the Companies Act 2006 for private and listed companies. Companies can adopt these or create their own alternative articles.
81
What is the legal significance of a company's articles under Section 33 of the Companies Act 2006? (4)
The articles act as a contract:
Binding the company to its members
Binding members to each other
They do not bind the company to third parties and apply to members only in their capacity as members.
82
Can a company alter its articles? How?
Yes, a company can alter its articles by passing a special resolution under Section 21 of the Companies Act 2006.
83
What is a "provision for entrenchment"? (2)
Provisions that make certain articles more difficult to alter. These require:
Agreement by all members or
A court order for alteration.
These provisions cannot be removed or amended unless notice is given to the Registrar.
84
What must a company do after altering its articles?
A copy of the amended articles must be sent to the Registrar within 15 days.
85
Are members bound by all alterations to the articles?
No, members are not bound by alterations that:
Require them to take more shares or
Increase their liability to contribute money to the company (Section 25).
86
Do articles of association bind third parties?
No, articles do not bind third parties. They are only enforceable between the company and its members, and between members themselves, in their capacity as members.
87
What are company records?
Documents, registers, minutes, accounting records required by the Act, kept in hard copy or electronic form.
88
What records must a company keep? 8
A register of members
A register of directors and (if applicable) company secretaries
A register of people with significant control
A register of directors' residential addresses (protected from public inspection)
Copies of directors' service contracts and indemnity provisions
Records of resolutions and minutes (kept for ten years)
Directors' statement and auditor’s report
A register of charges and copies of charges.
89
What does the Registrar of Companies maintain? 4
Certificate of incorporation
Trading certificate (for public companies)
Certificates of registration of charges
Information on annual accounts, resolutions, changes to directors.
90
What exceptions exist for accessing the register? 2
Protected information (e.g., directors’ residential addresses).
Contents of charges.
91
What is a Confirmation Statement?
A yearly declaration confirming or updating key company information.
92
When should s a Confirmation Statement be sent?
This statement can be sent at any time but no more than 12 months must pass in between statements.
93
What information must it include? 4
Registered office address
Type of company and activities
Share capital
Details of members and significant control changes.
94
If a company does not comply with accounts provisions what happens?
A company must comply with the following provisions. Failure to do so may render the company and any relevant officers liable to a fine and, in some cases, imprisonment.
95
What records must a company maintain? 3
Daily entries of income and expenditure.
Record of assets and liabilities.
Stock records if applicable.
96
What must annual accounts provide? 3
A 'true and fair view' of the company’s financial position.
Notes on employee costs, director remuneration.
Approval and signature by the board of directors.
97
When must annals accounts be filled at the registry? Who must it be approved and signed by?
The accounts must be:
Approved by and signed on behalf of the board of directors
Filed at the Registry within 9 months (private company) or 6 months (public company) after the end of the accounting period
98
What must be included in a director's report? 3
Names of directors
Principal activities
Auditor’s confirmation of awareness of audit details.
(A consolidated report should be produced where group accounts are prepared). The directors' report must be approved by and signed on behalf of the board of directors.
99
Which companies must disclose directors’ remuneration?
Director’s remuneration report
Quoted companies must disclose directors’ remuneration.
100
What should the auditor’s report confirm? 4
What should the auditor’s report confirm?
Identification of audited accounts.
Confirmation accounts give a 'true and fair view.'
Consistency with the director's report.
Scope of audit
101
Who must prepare a strategic report?
What does it include?
What's the purpose?
Who must prepare a strategic report?
Large and medium-sized companies.
What does it include?
Review of the business
Principal risks and uncertainties
Environmental and governance reporting for large companies.
What's the purpose?
Its purpose is to allow members to assess how well the directors have performed their duty to promote the success of the company.
102
What are the key reporting requirements introduced by the Companies (Miscellaneous Reporting) Regulations 2018? 4
Disclosures on engagement with employees, suppliers, customers, and others.
Large companies must provide a statement in their strategic report about compliance with s.172 of the Companies Act 2006.
Companies with over 2,000 employees globally or a global turnover of over £200 million and a balance sheet of over £2 billion must include a corporate governance statement.
Quoted companies with over 250 employees must provide additional disclosures on directors' remuneration.
103
Which companies are required to disclose statements on corporate governance arrangements? 2
Companies with over 2,000 employees globally.
Companies with a global turnover exceeding £200 million and a global balance sheet exceeding £2 billion.
104
What specific disclosures must quoted companies with more than 250 employees provide? 1
Quoted companies with more than 250 employees must include additional disclosures about directors' remuneration in their strategic report.
105
How do these regulations enhance transparency regarding engagement with stakeholders?
By requiring companies to disclose their interactions and engagement with employees, suppliers, customers, and other key stakeholders, fostering accountability and better corporate governance.
106
7.4.8 Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018
What additional disclosures are required under these regulations? 3
Disclosures about:
Energy consumption.
Emissions data.
Energy efficiency measures taken by the company.
107
Which types of companies are required to comply with energy and carbon reporting requirements?
Quoted companies and large unquoted companies must comply with these energy and carbon reporting requirements.
108
What are the circumstances under which companies are exempt from an annual audit? 4
Companies are exempt if they are:
Micro or small companies.
Dormant companies.
Non-profit-making companies subject to a public sector audit.
Subsidiaries whose parent guarantees their liabilities.
109
What percentage of shareholders must request an audit for it to be conducted, even if an exemption applies?
10% of the shareholders must request an audit for it to be conducted.
110
Why might dormant companies or micro-entities be exempt from audit requirements?
Dormant companies have no financial transactions to audit, and micro-entities have reduced reporting obligations to simplify compliance.
111
What obligations do companies have when their parent guarantees liabilities?
Subsidiaries with parent guarantees must still conduct an annual audit if the guarantee is in place at the balance sheet date.
112
What criteria define micro, small, and medium companies?
Micro: Turnover ≤ £632k, Balance Sheet ≤ £316k, Employees ≤ 10
Small: Turnover ≤ £10.2m, Balance Sheet ≤ £5.1m, Employees ≤ 50
Medium: Turnover ≤ £36m, Balance Sheet ≤ £18m, Employees ≤ 250.
113
Who appoints auditors for a company?
Auditors are appointed for each financial year by the shareholders or directors. In a private company, they are deemed to be reappointed unless the company decides otherwise.
114
ow can an auditor be removed?
An auditor can be removed by an ordinary resolution passed with special notice.
115
What rights does an auditor have regarding company records?
The auditor has a right to access the company’s books and accounts.
116
What are the consequences of including misleading, false, or deceptive information in an auditor’s report?
An auditor who knowingly or recklessly includes misleading, false, or deceptive information in their report commits an offense punishable by a fine.
117
What legal protection exists against negligent misstatements by auditors?
Auditors are subject to liability for negligent misstatements, as governed by relevant regulations.
118
Is it mandatory for all companies to appoint a company secretary?
No. It is mandatory for public companies to appoint a company secretary. Private companies may choose to appoint one but are not obliged to.
119
What are the primary responsibilities of a company secretary? 4
Convening board meetings, issuing agendas, and drafting minutes.
Managing statutory registers.
Filing documents with the Registrar.
Overseeing administrative operations of the company.
120
What is the legal status of a company secretary?
A company secretary is an officer of the company and is subject to civil and criminal liability alongside the directors.
121
What authority does a company secretary have?
Implied authority to contract on behalf of the company for administrative operations, including office staff employment.
Authority does not extend to significant actions like buying land, borrowing money, or other acts typically reserved for directors.
122
Who appoints the company secretary?
The company secretary is usually appointed by the board of directors.
123
INTERACTIVE QUESTION 16: COMPANY V PARTNERSHIPS
Indicate whether or not each of the following is true or false
A A benefit for the participants of a partnership over a company is that because it has separate legal personality, they have limited liability.
B A benefit for the owners of a company over a partnership is that because it has separate legal personality, they have limited legal liability
C A benefit of a limited company over a partnership is that a company's liability is limited
D A benefit of a partnership over a company is that a partnership is not subject to any legislative regulation.
A False. Partnerships do not have separate legal personality but companies do, so it is a benefit of
companies that members may have limited liability.
B True. As noted above, it is a benefit of a company that members have limited legal liability.
C False. The company's liability is unlimited (it is the members' liability that may be limited).
D False. Although nothing like as extensive as the companies legislation, the Partnership Act 1890 does lay down some rules for partnerships, although most may be varied or overridden by a partnership agreement.
124
INTERACTIVE QUESTION 15: FORMATION OF A COMPANY
What are the documents that must be delivered to the Registrar on formation of a private company limited by shares
Memorandum of association
Application stating name, domicile and intended address of registered office, and a statement describing the liability of the members as limited by shares and whether the company is to be public or private
Copy articles of association (although if none is submitted, prescribed default articles will apply)
Statement of capital and initial shareholdings
Statement of proposed directors (and company secretary if applicable)
Statement of compliance
125
3 Are the following statements true or false?
LO 2a
Where a public limited company fails to obtain a trading certificate, a member-director may be personally liable as a result. This is one example of statute lifting the corporate veil.
A True
B False
A company is always liable without limit for its own debts.
C True
D False
LO 2a
Correct answer(s): A True
Similarly, where directors are also members, provisions such as those in respect of fraudulent trading and wrongful trading lift the veil between the company and its members to impose a liability for the company’s wrongful acts.
Correct answer(s): C True
126
6 Which of the following statements is incorrect?
A A private company cannot offer its securities to the public.
B Only a private limited company can pass written resolutions.
C Public and private limited companies must have at least two directors.
D A private limited company does not need to hold an annual general meeting.
LO 2a, 2b
Correct answer(s): C Public and private limited companies must have at least two directors.
A private limited company must have at least one director; a public limited company must have at least two directors.
127
9 Which of the following statements is correct only in respect of a public limited company?
A The company may exclude rights of pre-emption.
B The company may reduce its share capital subject to obtaining a special resolution and providing a directors’ declaration of solvency.
C Shares must be at least one quarter paid up on allotment.
D The company may redeem its shares out of its own share capital, subject to its articles of association.
Correct answer(s): C Shares must be at least one quarter paid up on allotment.
A, B and D are true of private limited companies only. A public limited company cannot exclude pre-emption rights, it must get a court order to reduce its capital and it cannot redeem shares out of its own capital.
128
10 Are the following statements true or false?
When a company applies for registration, a copy of its proposed articles of association must be supplied to the Registrar of Companies.
A True
B False
A certificate of incorporation is conclusive evidence that a company is registered in accordance with the Companies Act 2006.
C True
D False
LO 2b
Correct answer(s): B False
In the event that none is provided, model articles prescribed by the Secretary of State will apply.
Correct answer(s): C True
129
11 Paddy arranges for the registration of New Style Ltd. Before the company is incorporated, he enters into a contract on its behalf for the purchase of premises at a prime retail location. When the time comes for completion of the purchase, the vendor refuses to complete the transaction with New Style Ltd (which is now incorporated) as a matter of principle, because it dislikes some of the merchandise that New Style Ltd proposes to sell.
Requirements:
Can New Style Ltd enforce the contract against the vendor?
A Yes
B No
Can New Style Ltd ratify the contract for the purchase of the premises?
C Yes
D No
Correct answer(s): B No
Not unless Paddy and the vendor gave rights to New Style Ltd under the Contracts (Rights of Third Parties) Act 1999.
Correct answer(s): D No
Because it did not exist at the time the contract was made.
130
13 Josephine was one of two directors (who were also members) of Tone-Up Ltd, a supplier of health and fitness products. She did the administrative work in relation to setting up the company. She included a provision in its articles that Tone-Up Ltd would always employ her as its company secretary on a salary of £12,000 p.a. She also had a separate contract appointing her as company secretary, but it made no mention of remuneration or termination. After a year, Tone-Up Ltd appointed John as company secretary and Josephine sued the company for breach of contract because the articles had been contravened and, she argued, the articles have contractual effect.
Requirements:
Can Josephine rely on the articles to compel Tone-Up Ltd to pay her £12,000 p.a. in the absence of a term in her contract, during her period of office as company secretary?
A Yes
B No
Can Josephine rely on the contractual effect of the articles to seek redress for breach of contract?
C Yes
D No
LO 2b
Correct answer(s): A Yes
On the basis that the articles can be implied into her contract of employment.
Correct answer(s): D No
No because her claim is not made in her capacity as member (but rather as company secretary) and the articles bind the company and its members as if each member had contracted to observe its provisions.
131
14 Are the following statements true or false?
A company’s articles of association can be altered by the passing of an ordinary resolution unless there is a provision for entrenchment, in which case a special resolution is required.
A True
B False
A company may provide that a provision for entrenchment cannot be repealed.
C True
D False
LO 2b
Correct answer(s): B False
Alteration requires a special resolution (in accordance with the Companies Act 2006) but unanimous agreement or a court order is required to alter a provision for entrenchment.
Correct answer(s): D False
Nor can it provide that a provision for entrenchment cannot be amended.
132
16 With regard to the statutory books and records of a registered company limited by shares, answer the following.
Requirements:
Is a company required to keep a register of its directors’ residential addresses?
A Yes
B No
Is a company required to keep a register of debentureholders?
C Yes
D No
Correct answer(s): A Yes
However, they must not be made available for public inspection.
Correct answer(s): D No
It is not compulsory, but if the company does keep such a register, it must comply with the legislative provisions as to its availability for inspection.
133
17 Martine is the company secretary of Top Tents Ltd, a private company limited by shares. She seeks your advice on the following matters:
Requirements:
Must the company provide a directors’ remuneration report?
A Yes
B No
Must she file accounts and reports within nine months after the end of the relevant accounting reference period?
C Yes
D No
Correct answer(s): B No
Only quoted companies need do so.
Correct answer(s): C Yes
A public limited company must do so within six months.
134
18 A company’s confirmation statement must contain all of the following options except one.
Requirement:
Which is the exception?
A Prescribed particulars of the directors and any company secretary
B Details of resolutions passed by the company
C Details of people with significant control
D A description of the type of company and its principal business activities
LO 2c
Correct answer(s): B Details of resolutions passed by the company
A confirmation statement is a document which confirms there are no changes to prescribed information about the company or sets out what changes have occurred. Details of company resolutions are not covered by the statement.
135
20 Craig is the company secretary of Lotsaland Ltd. He regularly negotiates contracts for the company for the acquisition of small development plots and then passes the file on to the managing director, Malcolm, who enters into the contract on behalf of the company. Feeling under pressure to secure a particularly good deal on a site during Malcolm’s sabbatical, Craig enters into a contract for Lotsaland Ltd to borrow £15,000 so that it can secure the deal. When Malcolm returns, he is not happy with the borrowing arrangement made by Craig.
Requirement:
Which of the following best describes the legal position?
A Lotsaland Ltd is bound because Craig has ostensible authority to enter into the contract.
B Lotsaland Ltd is bound because Craig has the implied actual authority of a company secretary.
C Lotsaland Ltd is not bound by the borrowing contract, because the lender should have checked whether Craig had sufficient authority.
D Lotsaland Ltd is not bound because Craig lacked sufficient authority.
Correct answer(s): D Lotsaland Ltd is not bound because Craig lacked sufficient authority.
Borrowing is not within the implied usual authority of a company secretary, nor did he have express or ostensible authority.
136
21 Albert entered into a pre-incorporation contract on behalf of Stir Ltd.
Requirement:
By whom and against whom may the contract be enforced?
A By and against the company only
B By and against Albert only
C By the company and against Albert
D Against the company and by Albert
LO 2c
Correct answer(s): B By and against Albert only
A pre-incorporation contract is not enforceable by or against the company (that is not incorporated at the time).
137
27 Which of the following companies is not required to appoint an auditor?
A A small-sized insurance company
B A medium-sized company
C A quoted company
D A not-for-profit company that is subject to public sector audit
LO 2e
Correct answer(s): D A not-for-profit company that is subject to public sector audit
All insurance and banking companies must appoint an auditor. Only micro and small companies are exempt from audit, medium companies must appoint an auditor. Quoted companies must appoint an auditor. Not-for-profit companies that are subject to public sector audit are exempt from appointing an auditor.
138
28 Powell is applying to register a new company First Step Ltd. He is currently preparing the statement of capital and initial shareholdings but is unsure of what he needs to include.
Requirements:
Does Powell need to include the details of individual classes of share?
A Yes
B No
Does Powell need to include information on whether rights of pre-emption apply to each class of share?
C Yes
D No
LO 2b
Correct answer(s): A Yes
The statement of capital and initial shareholdings includes the total number of shares, their aggregate nominal value, details of individual classes of shares and the amount to be paid and unpaid on each share.
Correct answer(s): D No
Pre-emption rights are not covered by the statement.
139
29 Minimus plc is a public company but is not listed on a stock exchange. It is the parent company of a number of subsidiaries and produces group accounts.
Requirements:
Are the following statements true or false?
Minimus plc is required to produce a consolidated directors’ report.
A True
B False
Minimus plc is required to produce a directors’ remuneration report.
C True
D False
Correct answer(s): A True
Because Minimus plc produces group accounts it must produce a consolidated directors’ report.
Correct answer(s): D False
Only quoted companies are required to produce a directors’ remuneration report. Minimus plc is not quoted because it is not listed on a stock exchange.
140
31 The Companies (Miscellaneous Reporting) Regulations 2018 require companies to make disclosures in relation to all of the following areas, except one.
Requirement:
Which is the exception?
A Corporate governance
B Director remuneration
C Compliance with money laundering regulations
D Stakeholder engagement
LO 2c
Correct answer(s): C Compliance with money laundering regulations
Disclosure with regard to compliance with money laundering regulations is not required by the regulations. The other options are all areas that do require disclosures to be made.
141
32 In relation to ordinary partnerships, answer the following.
Can the partnership raise finance by creating a floating charge over its assets or undertaking?
A Yes
B No
Can a partner assign their interest in the partnership to another person?
C Yes
D No
Correct answer(s): B No
This is one of the differences between an ordinary partnership and a company.
Correct answer(s): C Yes
They can do so, but the other person does not thereby become a partner. They merely receive the right to benefits from the partnership that are determined according to the interest that has been assigned.
