Formative Flashcards by Isabella Tatford

A company takes legal advice on a property sale and incurs legal fees of £3,000 but has not yet been invoiced for that work by the end of its financial year.  The company’s business accounts for the said financial year are being drawn up.   
 
Which of the following statements is correct? 

Select one alternative:

The legal fees are a prepayment and if not reflected in the business accounts then the company’s assets will be overstated by £3,000 in the balance sheet. 

The balance sheet will not balance owing to the sum of £3,000 having not been paid yet.

The legal fees are a prepayment and if not reflected in the business accounts then the company’s profits will by understated by £3,000. 

The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be overstated by £3,000 in the balance sheet. 

The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be understated by £3,000 in the balance sheet. 

The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be overstated by £3,000 in the balance sheet. 

Correct. The company has received the value of the legal advice already but has not yet paid for it.  It will therefore be an accrual (as opposed to a prepayment).  As the value has been received already and the company has committed to paying this sum then £5,000 has already been incurred.  This needs to be reflected as a liability in the balance sheet, otherwise it would be misleading.

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A private company operates a VAT registered business selling cleaning equipment to other businesses. The company enters into a contract with a hotel for the sale of cleaning products. The contract is silent on VAT.

Which of the following statements correctly describes the VAT position on the supply of the cleaning products?

Select one alternative:

The supply of cleaning products is exempt from VAT. 

The  supply of cleaning products is reduced rated and is deemed to be exclusive of VAT.

The supply of cleaning products is standard rated and is deemed to be exclusive of VAT.

The  supply of cleaning products is reduced rated and is deemed to be inclusive of VAT.

The supply of cleaning products is standard rated and is deemed to be inclusive of VAT.

Correct. A price is deemed to be VAT inclusive unless the contract for the supply of goods states otherwise. So, the stated consideration paid for the products includes any VAT payable. The cleaning products are standard rated.

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A private company enters into a loan agreement with a bank to borrow £500,000 for working capital purposes. As security for the loan, the bank takes a debenture over the company’s assets and a personal guarantee from the company’s managing director.

Which of the following correctly lists the documentation that will need to be sent to Companies House to ensure the bank has valid security?

Select one alternative:

Form MR01; a certified copy of the loan agreement; a certified copy of the personal guarantee; and the relevant fee.

Form MR01; a certified copy of the loan agreement; a certified copy of the debenture; a certified copy of the personal guarantee; and the relevant fee.

Form MR01; a certified copy of the loan agreement; a certified copy of the debenture; and the relevant fee.

Form MR01; a certified copy of the debenture; and the relevant fee.

Form MR01; a certified copy of the debenture; a certified copy of the personal guarantee; and the relevant fee.

Form MR01; a certified copy of the debenture; and the relevant fee.

Correct. The loan agreement and guarantee do not need to be registered at CH

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A private limited company went into liquidation following the presentation of a creditor’s petition. Nine months ago, the company had repaid a sum of money loaned from one of its directors. Under the terms of the loan agreement, the loan was not due to be repaid until three months later.
What is the most likely claim that the liquidator would bring against the director?
Select one alternative:

A claim to set aside the transaction as a preference.  

A claim to set aside the transaction as a transaction at an undervalue.

A claim for fraudulent trading.

A claim for wrongful trading.  

A claim to set aside the transaction as a transaction defrauding creditors.  

A claim to set aside the transaction as a preference.  

Correct. Preferences involve putting a creditor in a better position, for example, by paying-off the creditor ahead of other creditors in the run up to an insolvency.

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A person has taxable income of £45,000. In the same tax year, after the deduction of their annual exemption, they have chargeable gains of £15,000. They have no capital losses for capital gains tax (CGT) purposes. The basic rate tax band for the relevant tax year is £0 - £37,700. The two rates of CGT for the relevant tax year are 10% and 20%. 
 
Based on the above information, what is the person’s CGT liability? 

Select one alternative:

£3,000 

£1,800

£5,250

£900

£1,500 

£3,000 

Correct. The £15,000 chargeable gain is taxed at 20%  because the person’s taxable income exceeds the basic rate threshold.  The annual exemption has already been deducted as we are given the chargeable gain figure.

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A private company sold premises in October last year for £250,000 making a chargeable gain of £50,000. In June this year, the company bought some fixed plant and machinery for £400,000. The company seeks your advice as to whether any tax relief is available on the chargeable gain.

Which statement below represents the best advice to the company?

Select one alternative:

The company cannot claim rollover relief on the gain made on the purchase of the plant and machinery since this is not a qualifying asset for rollover relief. 

The company cannot claim rollover relief on the gain made on the sale of the premises since the purchase of the plant and machinery did not take place in the same year.

The company cannot claim rollover relief on the gain made on the sale of the premises since the assets are not of the same type. 

The company cannot claim rollover relief on the gain made on the sale of the premises since this is not a qualifying asset for rollover relief. 

The company can deduct the chargeable gain of £50,000 made on the sale of the premises from the price of the plant and machinery to give a new base cost for the plant and machinery of £350,000.

Correct. The sale and purchase do not have to take place within the same accounting year. The purchase of the replacement asset can be 12 months before or 3 years after the sale. The assets do not need to be of the same type. Land and plant are both qualifying assets.

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A private limited company has a Total Taxable Profit of £1,100,000 for the tax year ending 5 April 2023.

Which of the following statements best describes how the company must pay their tax liability to HMRC?

Select one alternative:

The company will calculate their tax liability at the end of the accounting period and pay HMRC in four instalments over the course of the next accounting period.

The company will calculate their tax liability at the end of the accounting period and pay HMRC in four instalments over the course of the next two accounting periods.

The company will calculate their tax liability at the end of the accounting period and pay HMRC within 9 months and one day of the end of the accounting period.

The company will calculate their tax liability and pay HMRC within 9 months of the end of the accounting period of the accounting period.

The company will calculate their tax liability at the end of the accounting period and immediately pay HMRC any tax which is due.

The company will calculate their tax liability at the end of the accounting period and pay HMRC within 9 months and one day of the end of the accounting period.

Correct. Companies with TTP of £1,500,00 or less pay within 9 months and 1 day of the end of the accounting period.

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8
A company is in financial difficulty and one supplier has issued proceedings for an unpaid debt. The company has a term loan and an overdraft from a bank, secured by fixed and floating charges. The bank has threatened to appoint an administrator. The company wishes to apply for a pre-insolvency moratorium.
What effect would the pre-insolvency moratorium have on the actions by the supplier and the bank?

Select one alternative:

The proceedings brought by the supplier would be stayed and no administration procedure can be commenced by the bank whilst the pre-insolvency moratorium is in force. 

The proceedings brought by the supplier would be stayed, but the supplier could issue a winding-up petition provided the correct procedures were followed. The pre-insolvency moratorium will not prevent the bank from appointing an administrator.

The proceedings brought by the supplier would be stayed. However, the pre-insolvency moratorium will not prevent the bank from appointing an administrator.

The proceedings brought by the supplier would continue, as they were issued prior to the pre-insolvency moratorium coming into force. However, the bank would be unable to appoint an administrator whilst the pre-insolvency moratorium is in force.

The proceedings brought by the supplier would continue but could be stayed at the discretion of the court.  No administration procedure can be commenced by the bank whilst the pre-insolvency moratorium is in force. 

The proceedings brought by the supplier would be stayed and no administration procedure can be commenced by the bank whilst the pre-insolvency moratorium is in force. 

Correct. The moratorium would result in the proceedings being stayed. No winding up procedure or administration can be commenced during the moratorium. It is designed to give the company a breathing space to sort out its finances.

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A private limited company in financial difficulties sold one of its delivery vans to the brother of one of its directors last week for £10,000, in order to try to realise some cash to pay urgent outstanding invoices. The market value of the van was £20,000.

The company has today gone into administration.

What is the most likely claim that the administrator may bring in relation to the sale of the delivery van?

Select one alternative:

An intention to defraud creditors claim against the directors of the company who authorised the sale.

A preference claim against the brother of the director who received the van. 

A transaction at an undervalue claim against the brother of the director who received the van. 

A preference claim against the directors of the company who authorised the sale

A transaction at an undervalue claim against the directors of the company who authorised the sale.

A transaction at an undervalue claim against the brother of the director who received the van. 

Correct. The transaction falls within the definition of a TUV to a person connected to a director of the company. The claim is against the brother. On the facts there is no evidence of an intention to defraud creditors.

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A company raises £400,000 by way of a 5-year term loan and uses these funds to purchase some new machinery for £400,000.

Which of the following statements describes the net impact of these transactions on the company’s balance sheet?
Select one alternative:

Increase in non-current liabilities by £400,000;  increase in cash/cash equivalents by £400,000; increase in non-current assets by £400,000; increase in Net Asset Value by £400,000. 

Increase in current liabilities by £400,000;  no change on cash/cash equivalents; increase in current assets by £400,000; no change in Net Asset Value. 

Increase in non-current liabilities by £400,000;  decrease in  cash/cash equivalents by £400,000; increase in non-current assets by £400,000;  decrease in  Net Asset Value  by £400,000.

Increase in current liabilities by £400,000;  no change on cash/cash equivalents; increase in non-current assets by £400,000;  no change in Net Asset Value. 

Increase in non-current liabilities by £400,000; no change on cash/cash equivalents; increase in non-current assets by £400,000; no change in Net Asset Value.

Increase in non-current liabilities by £400,000; no change on cash/cash equivalents; increase in non-current assets by £400,000; no change in Net Asset Value.
Answered and correct

Correct. Taking out the loan increases the non-current liabilities by £400,000 and increases the cash and cash equivalents by £400,000. The second transaction – purchase of machinery increases the non-current assets by £400,000 and reduces the cash and cash equivalents by £400,000.  The net effect of both transactions is no change to the cash and cash equivalents or to the Net Asset Value.

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In January 2022, a private limited company gifted computer equipment worth £5,000 to one of its directors. In March 2023, the company went into liquidation.

Can the liquidator challenge the transaction? 

Select one alternative:

The liquidator has no grounds to challenge the gift because although this is an undervalue transaction which took place within the relevant time, the value of the transaction is not significant.

The liquidator has no grounds to challenge the gift as a preference because, although it was a transaction with a connected person therefore a desire to prefer is presumed, the transaction took place over 12 months ago.

The liquidator has grounds to challenge the gift as a preference because it was a transaction with a connected person therefore a desire to prefer is presumed.

The liquidator has grounds to challenge the gift as a transaction at an undervalue because it took place within the relevant time and is an undervalue transaction provided that the liquidator can prove insolvency.

The liquidator has grounds to challenge the gift as a transaction at an undervalue because it took place within the relevant time and is an undervalue transaction. There is no need to prove insolvency.

Correct. The transaction falls within the definition of an undervalue transaction. The challenge period is two years before the commencement of the insolvency process and here the transaction took place within that time period.  Since the transaction is with a connected person, insolvency is presumed.  There is no de minimis value for a transaction at an undervalue.

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A private limited company has 10 shareholders who are all individuals and who each own 10% of the issued share capital. 5 of the shareholders also make up the board of directors of the company. The company has agreed to make a loan to one of the shareholders in the amount of £20,000 and seeks your advice in connection with the tax consequences of making this loan.

Which of the following statements most accurately describes whether the company is a close company?

Select one alternative:

The company is not a close company because it not under the control of five or fewer participators.

The company is not a close company because it is not under the control of (1) five or fewer participators nor (2) any number of participators who are also directors.

The company is a close company because it is under the control of five or fewer participators.

The company is not a close company because it is not under the control of any number of participators who are also directors.

The company is a close company because it is under the control of five or fewer participators who are also directors of the company.

The company is not a close company because it is not under the control of (1) five or fewer participators nor (2) any number of participators who are also directors.

Correct. Test 1 is not satisfied as 5 shareholders only own 50% of the shareholding so 5 or fewer participators do not have ‘control’. Nor is test 2 satisfied as the five shareholders who are also directors only have 50% of the shareholding and not ‘control’.

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An employee of a company with unamended model articles sells his shares in the company and makes a taxable chargeable gain of £25,000. The employee has held the shares for 5 years and the shares represent a 3% shareholding in the company. The employee has a taxable income of £160,000. The employee has not previously made any chargeable gains.

What tax relief will the person be able to claim on this gain?
Select one alternative:

Business Assets Disposal Relief will apply because the person is an employee and they have held the shares for 5 years.

No tax reliefs are available. Business Assets Disposal Relief will not apply as the person is an additional rate taxpayer.

No tax reliefs are available. Business Assets Disposal Relief will not apply as the person is not a director of the company.

No tax reliefs are available. Business Assets Disposal Relief will not apply as the person only has a 3% shareholding in the company.

Business Assets Disposal Relief will apply because the person has not previously made any chargeable gains.

No tax reliefs are available. Business Assets Disposal Relief will not apply as the person only has a 3% shareholding in the company.

Correct. The criteria for BADR has not been satisfied as the employee only has a 3% shareholding. Conditions for BADR are 5% shareholding; employee/director; ownership for 2 years or more; not used up lifetime allowance of £1m.

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A private limited company raises £600,000 through an issue of 300,000 £1 ordinary shares at a price of £2 per share fully paid in cash.

Which of the following statements best describes the detailed effect of the share issue on the company’s balance sheet?

Select one alternative:

Current assets increase  by £600,000; share capital increases by £300,000 and the share premium account increases by £300,000.

Net assets and total equity increase by £600,000.

Current assets and equity increase by £600,000.

Cash increases by £600,000 and share capital increases by £600,000.

Cash increases by £600,000 which increases current assets by £600,000; share capital increases by £300,000 and the share premium account increases by £300,000.

Correct. Where shares are sold at a premium, a share premium account needs to be created.

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A private limited company is seeking to raise finance by way of a loan from its bank.
The board of directors is seeking advice as to the effect on the gearing of the company and the earnings per share of raising the further finance through taking a loan.
Which one of the following is the best advice for the board?
Select one alternative:

Taking out a further loan would increase the company’s gearing and increase the earnings per share.

Taking out a further loan would increase the company’s gearing and reduce the earnings per share.

Taking out a further loan would increase the company’s gearing but may have no adverse effect on the earnings per share.

Taking out a further loan would have no effect on the company’s gearing and no effect on the earnings per share.

Taking out a further loan would reduce the company’s gearing but have no effect on the earnings per share.

Taking out a further loan would increase the company’s gearing but may have no adverse effect on the earnings per share.

Correct. Gearing is the ratio of long term debt to equity. The loan has no effect on total equity. The company’s liabilities are increased by the loan but the company’s cash are also increased so net assets remain unchanged. If a company is profitable and financially strong it may be that if it can afford to pay the interest and any other sums due under a loan agreement and its earnings per share may increase rather than be adversely impacted.

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A company granted a floating charge to a bank last year in return for a term loan of £100,000. The floating charge has not been registered at Companies House.

Which of the following statements most accurately sets out the effect of the failure to register the floating charge?

Select one alternative:

The debt due from the company to the bank is immediately payable.

The floating charge is void against any administrator of the company.

The floating charge is void against any creditor of the company. The debt due from the company to the bank is immediately payable.

The floating charge is void against a liquidator, administrator and any creditor of the company. The debt due from the company to the bank is immediately payable.

The floating charge is void against a liquidator, administrator and any creditor of the company.

The floating charge is void against a liquidator, administrator and any creditor of the company. The debt due from the company to the bank is immediately payable.

Correct. The charge is void against any liquidator, administrator and creditor of the company. In addition, the debt becomes immediately due and payable.

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A company granted fixed and floating charges to a bank to secure a term loan. The charges were properly registered at Companies House. The company has defaulted on the loan. The company owes unpaid wages to its employees for the last month and large amounts to various unsecured trade creditors. The company has no outstanding sums due to HMRC. The company goes into insolvent liquidation. The proceeds of the sale of the fixed charge assets are insufficient to pay the money owing to the bank in full.

In what order will the liquidator apply the money realised by the sale of the floating charge assets?
Select one alternative:

The employees will be paid first. A prescribed part fund will be set aside. The Bank is then paid under its floating charge. The remaining funds together with the prescribed part fund will be divided amongst the unsecured creditors.

The Bank will be paid first. A prescribed part fund will be set aside. The employees are then paid. The remaining funds together with the prescribed part fund will be divided amongst the unsecured creditors.

The Bank will be paid first. The employees are then paid. The remaining funds will be divided amongst the  unsecured creditors.

The employees will be paid first. The Bank will be paid next. The remaining funds will be divided amongst the unsecured creditors.

The Bank will be paid first. The remaining funds will be divided amongst the employees and the unsecured creditors.

Correct. The employees are preferential creditors in respect of their unpaid wages. The prescribed part is set aside. The bank is then paid under its floating charge. The remaining funds are added to the prescribed part to be divided amongst the unsecured creditors.

A person disposed of only one chargeable asset in the current tax year, which was sold for £100,000. They bought the asset ten years ago for £45,000 with acquisition costs of £5,000. There was no subsequent expenditure before sale. The annual exemption for the relevant year is £6,000. Sale costs were £2,700. The capital gains tax (‘CGT’) rate for basic rate taxpayers is 10%, and for higher rate taxpayers it is 20%. 
The person’s Taxable Income for the current year was £50,000.  

How much capital gains tax will the person have to pay on the disposal of the asset? 
Select one alternative:

£9,460

£4,130

£18,585 

£8,260

£8,800

£8,260

Correct. The net proceeds of sale will be £97,300 (£100,000 minus £2,700 sale costs). After deducting initial acquisition cost (£45,000) and incidental disposal costs of £5,000, the chargeable gain will be £47,300. The taxable chargeable gain will be £47,300 minus the annual exemption (£6.000) = £41,300. As CGT is taxed after income, and we are told the person is a higher rate taxpayer with a taxable income of £50,000, all of the taxable chargeable gain of £41,300 will be taxed at the higher rate of 20%. The tax liability will therefore be £8,260.

A private limited company has been put into insolvent liquidation.  At the time of the liquidation, the company had a number of unsecured creditors and 3 employees who are owed £1000 each in respect of wages for work carried out in the two months prior to the liquidation.  
From where could the employees recover the wages they are owed? 

Select one alternative:

From funds for the preferential creditors and the prescribed part fund 

From funds for the preferential creditors 

From funds for the preferential and unsecured creditors  incorporating the prescribed part fund

From funds for the prescribed part 

From funds for the unsecured creditors 

From funds for the preferential and unsecured creditors  incorporating the prescribed part fund

Correct. As the employees in this scenario meet the criteria as preferential creditors in relation to some of the monies owed to them, they will recover the rest as unsecured creditors.  Whilst ultimately some of the funds paid to them as an unsecured creditor may come from the prescribed part fund, they will receive this in their capacity as an unsecured creditor along with any other unsecured creditors.

A company took a five-year term loan from a bank of £100,000. The bank was granted a fixed charge to the bank over the company’s plant and machinery and a qualifying floating charge over all its assets.
The amount now outstanding under the loan is £50,000. The company is in financial difficulty and has missed a scheduled loan repayment to the bank. The bank now wishes to take action to recover the £50,000 owed to it.
The company has the following assets:
Plant and machinery with a value of £65,000
Book debts and cash in bank with a value of approximately £55,000
What would be the most appropriate action for the bank to take to recover the £50,000 owed to it?

Select one alternative:

Request the company to enter into a CVA

Appoint an administrator

Appoint a liquidator

Appoint a fixed charge receiver

Request the company to enter into a restructuring plan

Appoint a fixed charge receiver

Correct. A receiver would be able to realise the value of the assets subject to the fixed charge which would be sufficient to discharge the liabilities outstanding to the bank.

Client A and Client B want to set up an office solutions business. Their main concern is the ability to raise finance quickly and easily. Client A would prefer not to disclose how much profit the business is making. Client B has just bought a new home and wants to ensure they have limited liability as they do not want to lose their assets if the business fails.

Which business structure is most suitable for client A and client B?
Select one alternative:
* Private limited company
* Public limited company
* Limited liability partnership
* Sole trader
* Traditional partnership

Private limited company

Correct. A private limited company is the most appropriate structure as there is limited liability and flexibility in raising finance.

A private limited company (‘the Company’) proposes to pay off the bank overdraft of a director of its holding company (which is also a private limited company) on the understanding that the director will pay the Company back over time. There are no other companies associated with the Company. Which statement best explains the nature of this transaction and whether shareholder approval is required?

Select one alternative:
* This is a credit transaction for the benefit of a director of the Company’s holding company. Shareholder approval is required.
* This is a quasi loan to a person connected to a director of the Company. Shareholder approval is not required.
* This is a quasi loan to a director of the Company’s holding company. Shareholder approval is not required.
* This is a credit transaction for the benefit of the Company’s director. Shareholder approval is not required.
* This is a quasi loan to a director of the Company’s holding company. Shareholder approval is required.

This is a quasi loan to a director of the Company’s holding company. Shareholder approval is not required.

A private limited company which was incorporated on 23 May 2002 has an issued share capital of £30,000 ordinary shares of £1 each. The shares are owned equally by two shareholders. The company has agreed to issue 10,000 £1 preference shares to a new shareholder for £25,000. These preference shares grant a right to the holder to claim a fixed dividend, no right to participate in surplus profits and no right to a return of any surplus capital on winding up. In 2014, the company adopted Model Articles with one amendment to the chairperson’s casting vote.

What shareholder resolutions will be required to issue the preference shares?
Select one alternative:
* An ordinary resolution to grant the directors authority to allot the preference shares and a special resolution to amend the articles to remove the cap on the company’s share capital.
* An ordinary resolution to amend the articles to remove the cap on the company’s share capital; an ordinary resolution to grant the directors authority to allot the preference shares and a special resolution to amend the articles to include a new class of shares.
* An ordinary resolution to grant the directors authority to allot the preference shares; a special resolution to disapply pre-emption rights and a special resolution to amend the articles to include the new class of shares.
* An ordinary resolution to grant the directors authority to allot the preference shares and a special resolution to amend the articles to include the new class of shares.
* A special resolution to disapply pre-emption rights and a special resolution to amend the articles to include the new class of shares.

An ordinary resolution to grant the directors authority to allot the preference shares and a special resolution to amend the articles to include the new class of shares.

The shares in a public company incorporated in 2011 are now being sold to another public company. The buyer is taking out a bank loan in order to fund the share purchase and the bank is seeking security over the assets of the buyer and the buyer’s holding company and security over the assets of the target company.

Can the companies involved provide the required security?

Select one alternative:
* All of the requested security may be given since none of these constitute unlawful financial assistance.
* The buyer’s holding company is able to provide the requested security but both the buyer and the target company are prohibited from providing security since this constitutes unlawful financial assistance.
* The target company is able to provide the requested security, but both the buyer and the buyer’s holding company are prohibited from providing security since this constitutes unlawful financial assistance.
* None of the requested security may be given since these constitute unlawful financial assistance.
* Both the buyer and the buyer’s holding company are able to provide the requested security, however the target company is prohibited from providing security since this constitutes unlawful financial assistance.

Both the buyer and the buyer’s holding company are able to provide the requested security, however the target company is prohibited from providing security since this constitutes unlawful financial assistance.

A private limited company has four shareholders. The majority shareholder has 88% of the ordinary voting shares of the company and three other shareholders have 4% of the ordinary voting shares of the company each. The board of directors wishes to call a general meeting of the shareholders using the short notice procedure. What is the minimum number of shareholders who would need to consent to the calling of a general meeting using the short notice procedure? Select one alternative: * All the shareholders. * The majority shareholder and one of the minority shareholders. * The majority shareholder and two of the minority shareholders. * The three minority shareholders. * The majority shareholder alone.

* The majority shareholder and two of the minority shareholders. Correct. This is the minimum number of shareholders that would represent 90% of the voting rights (92%) and a majority in number (3/4) of the shareholders.

Three friends enter into a business venture together with a view to making profit whereby one of them invests 50% of the capital and the other two invest 25% each. They do not seek legal advice and have not entered into any written agreement or taken any further steps. Which of the following best describes whether the three friends have formed a partnership? Select one alternative: * A partnership has not been formed because the friends invested unequal amounts into the business. * A partnership has been formed as the friends have invested capital into the business together. * A partnership has not been formed because the friends have not registered a partnership at Companies House. * A partnership has been formed as the friends are in business together with a view to making a profit. * A partnership has not been formed because there is no written partnership agreement.

A partnership has been formed as the friends are in business together with a view to making a profit. Correct. A partnership arises under s1 Partnership Act 1890 if two or more persons enter into business with a view to making a profit

7 You act for a company. There are four shareholders of the company: * Person A (45%) * Person B (20%) * Person C (5%) * Person D (30%) Person D is also one of the directors of the company. The company is a private limited company with unamended Model Articles and no shareholders’ agreement. Persons A, B and C have been unhappy with Person D’s work as a director of the company. On the agenda for the next general meeting is a shareholder vote for the removal of Person D as a director. All four shareholders of the company plan to be present and voting at the company’s upcoming general meeting on the proposed removal of Person D as a director. Will the shareholders be able to pass the removal resolution? Select one alternative: * Person D will not be able to count in the quorum or vote on the removal resolution at the General Meeting since they have an interest. Persons A, B and C will therefore be able to pass the special resolution to remove Person D as a director. * Person D may vote against their removal at the General Meeting. It will not be possible for Persons A, B and C to achieve the necessary majority to pass the special resolution to remove Person D as a director at the General Meeting. * Person D may vote against their removal at the General Meeting. However, Persons A, B and C will be able to achieve the necessary majority to pass the ordinary resolution to remove Person D as a director at the General Meeting. * Person D may vote against their removal at the General Meeting. It will not be possible for Persons A, B and C to achieve the necessary majority to pass the resolution to remove Person D as a director at the General Meeting, since unanimity is required. * Person D will not be able to count in the quorum or vote on the removal resolution at the General Meeting since they have an interest. Persons A, B and C will therefore be able to pass the ordinary resolution to remove Person D as a director.

* Person D may vote against their removal at the General Meeting. However, Persons A, B and C will be able to achieve the necessary majority to pass the ordinary resolution to remove Person D as a director at the General Meeting.

A company incorporated in 2015 with unamended model articles is planning to enter into a service contract with one of its directors. The draft contract stipulates a term of one year with the option for the director only to renew the contract for a further two years. There is also a clause allowing the company to terminate the contract at any time on giving 3 months’ notice. Does the proposed service contract require prior shareholder approval? Select one alternative: * No, because approving service contracts falls under the director’s general authority to manage the company’s business. * Yes, because the contract could potentially run for more than two years. * No, because the service contract’s ‘guaranteed term’ is three months. * Yes, because any contract between a company and one of its directors requires prior approval by ordinary resolution. * No, because the service contract has an initial term of under two years.

* No, because the service contract’s ‘guaranteed term’ is three months. Correct. No shareholder resolution is required as the ‘guaranteed term’ of this contract is less than 2 years. Although it can potentially run for more than two years, it can be terminated by the company by giving 3 months’ notice: s 188 (3) (b) Companies Act 2006.

recently purchased shelf company. The shelf company is a private company limited by shares with unamended Model Articles. The client wishes to change the following as swiftly as possible: 1. The name of the company; 2. The board of directors of the company (removing all current directors and appointing your client and another director to the board); and 3. The shareholders of the company (so that your client becomes the sole shareholder). What resolutions will be needed to effect these changes? Select one alternative: * A special resolution would be needed to change the company name. An ordinary resolution should be passed to appoint the new directors, followed by an ordinary resolution to remove the old directors. A board resolution would be needed to approve the share transfer and the entry of your client’s name into the Register of Members. * A board resolution would be needed to change the company name. A board resolution would be needed to appoint the new directors, followed by an ordinary resolution to remove the old directors. A board resolution would be needed to approve the share transfer and the entry of your client’s name into the Register of Members. * A board resolution can be used to change this company’s name. Board resolutions (one board resolution to appoint the new directors, followed by one board resolution to accept the resignations of the old directors) should be used to change the directors of the company. An ordinary resolution would be needed to approve the share transfer, along with a board resolution to enter your client’s name into the Register of Members. * A special resolution would be needed to change the company name. Board resolutions (one board resolution to appoint the new directors, followed by one board resolution to accept the resignations of the old directors) should be used to change the directors of the company. A board resolution would be needed to approve the share transfer and the entry of your client’s name into the Register of Members. * A special resolution would be needed to change the company name. Board resolutions (one board resolution to accept the resignations of the old directors, followed by one board resolution to appoint the new directors) should be used to change the directors of the company. A board resolution would be needed to approve the share transfer and the entry of your client’s name into the Register of Members.

* A special resolution would be needed to change the company name. Board resolutions (one board resolution to appoint the new directors, followed by one board resolution to accept the resignations of the old directors) should be used to change the directors of the company. A board resolution would be needed to approve the share transfer and the entry of your client’s name into the Register of Members.

Three people have recently set up a business together making and selling handmade greetings cards. They have not yet taken any legal advice or entered into any formal or informal partnership agreement. They each contributed capital to the partnership when the business was set up, but in unequal amounts. They come to you for advice as to whether they will need to enter into any formal agreement. In the absence of any express agreement, what entitlement, if any, do the partners have to share in the profits of the partnership or to receive a salary? Select one alternative: * Each partner is entitled to share equally in the profits of the partnership but has no right to a salary. * No partner has a right to a share in the profits of the partnership or to a salary. * Each partner is entitled to a share in the profits of the partnership in proportion to their capital contribution but has no right to a salary. * Each partner is entitled to a share in the profits of the partnership in proportion to his or her capital contribution, and to draw a reasonable salary. * Each partner is entitled to share equally in the profits of the partnership and to draw a reasonable salary.

* Each partner is entitled to share equally in the profits of the partnership but has no right to a salary. Correct. Under the Partnership Act 1890, the provisions of which have not here been varied by any partnership agreement, partners are entitled to share equally in the profits of the partnership even where they have made different capital contributions, and partners have no right to draw a salary.

11 The board of directors of a private limited company incorporated in 2014 with unamended Model Articles plan to sell some machinery which is owned by the company to the son of one of the directors. The company has three directors who are all also shareholders in the company. The son is not a director or a shareholder in the company. The agreed sale price of the machinery will be £95,000. The sale price has been independently valued at the same price. The company’s latest audited accounts state the net asset value of the company as £900,000. Does the sale of machinery require shareholder approval? Select one alternative: * No, because the transaction is with the son of one of the directors rather than with one of the company’s directors themselves. * Yes, because the company’s directors are all also shareholders in the company. * Yes, because the transaction involves the sale and purchase of machinery whose value exceeds 10% of the company’s asset value. The director’s son is a connected person. * No, because the transaction involves the sale of an asset at independently assessed market value. * No, because the transaction falls under the directors’ general authority to manage the company’s business.

* Yes, because the transaction involves the sale and purchase of machinery whose value exceeds 10% of the company’s asset value. The director’s son is a connected person.

A recently incorporated company has two directors who are also the two equal shareholders in the company. A few days prior to the date of incorporation of the company, one of the directors signed a lease for new office space to be used by the company “as director for and on behalf of the company”. Is the lease binding on any of the parties? Select one alternative: * The lease is not binding on any party. * The lease is binding on the company and the director who signed the lease on the company’s behalf. * The lease is binding on the shareholders. * The lease is binding on the company as it has subsequently been validly incorporated. * The lease is not binding on the company but will be binding on the director who signed the lease on the company’s behalf.

* The lease is not binding on the company but will be binding on the director who signed the lease on the company’s behalf. Correct. Because the lease was entered into prior to the date of incorporation of the company, the company will not be bound by it but instead the person who signed purportedly on behalf of the company will be liable under s 51 Companies Act 2006.

13 A group of five entrepreneurs wish to set-up and run a business with the following objectives: * each investor has limited liability for the entire duration of the business; * a flexible management structure is adopted; and * set-up costs and formalities are kept to a minimum. Would setting up this business as a Limited Liability Partnership (LLP) meet the entrepreneurs’ requirements? Select one alternative: * Yes, as apart from registration requirements there is no requirement for a memorandum or articles and no particular management structure is imposed on an LLP, apart from the need for at least two ‘designated’ members. * Yes, as all members of an LLP will enjoy limited liability for the entire duration of the LLP regardless of any changes to the composition of the members. * No, as there needs to be a formal Members’ Agreement drawn up which needs to be filed at Companies House. * Yes, as unlike a limited company, an LLP is not required to file documents at Companies House, apart from change of name and change of registered office. * No, as a ‘general partner’ will need to be appointed, who will have unlimited liability for the debts of the LLP, with the remaining partners having the benefit of limited liability.

* Yes, as apart from registration requirements there is no requirement for a memorandum or articles and no particular management structure is imposed on an LLP, apart from the need for at least two ‘designated’ members.

A minority shareholder with 5% of the shares in a company is very concerned about the company’s current financial situation which has gone from bad to worse due to serious financial mismanagement by the company’s finance director over a period of several years. The other shareholders in the company are all directors and are unwilling to either remove the director or to bring a claim against them. The minority shareholder would like the other shareholders or the company to purchase their shareholding at the market value, but the other shareholders have indicated they are not willing to do this. What claim could the minority shareholder bring in these circumstances? Select one alternative: * The shareholder could bring an action for unfair prejudice against the company. * The shareholder could bring an action for unfair prejudice against all the directors. * The shareholder could bring a derivative action against the company. * The shareholder could bring an action for unfair prejudice against the finance director. * The shareholder could bring a derivative action against the finance director.

* The shareholder could bring an action for unfair prejudice against the company. Correct. An action for unfair prejudice under s 994(1) CA 2006 could be brought on the facts by a member of the company on the grounds that the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members. This includes serious and/or repeated mismanagement which puts at risk the value of the minority shareholder’s interest. The most likely remedy the court may order is the purchase of the petitioner’s shares by the other shareholders or the company.

The company has four shareholders (A, B, C and D) who each own 25% of the shares of the company. Two of the shareholders (C and D) are also directors of the company. The company has unamended Model Articles. A and B are not happy with one of the directors (C) and wish to remove them as a director. D is uncertain whether to support any resolution to remove C. There is a shareholders’ agreement in place which all four shareholders have signed which states that shareholders must vote unanimously to remove a director. Will the shareholders be able to remove C as a director? Select one alternative: * A, B and D will not be able to remove C as a director since unanimity is required to pass this resolution. * A and B would be able to pass an ordinary resolution to remove C, but C will likely have a claim under the shareholders’ agreement against those shareholders that voted to remove them. * A, B and D would be able to pass an ordinary resolution to remove C, but C will likely have a claim under the shareholders’ agreement against those shareholders that voted to remove them. * A, B and D would be able to pass an ordinary resolution to remove C. C would have no claim under the shareholders’ agreement in these circumstances. * A and B would be able to pass an ordinary resolution to remove C. C would have no claim under the shareholders’ agreement in these circumstances.

* A, B and D would be able to pass an ordinary resolution to remove C, but C will likely have a claim under the shareholders’ agreement against those shareholders that voted to remove them. Correct. Whilst an ordinary resolution under s. 168 Companies Act 2006 would still be valid, C would have a personal claim under the shareholders’ agreement against those Shareholders that voted in full knowledge that unanimity to remove C would be unlikely (C would not vote for his own removal).

Shareholders, unhappy with the performance of a company director (the ‘Director’), have served valid notices under sections 312 and 303 of the Companies Act 2006 to move an ordinary resolution to remove the Director (the ‘Resolution’). The Director is not a shareholder in the company. What rights does the Director have in respect of the proposed Resolution? Select one alternative: * The Director is entitled to vote against their own removal at the general meeting in which the Resolution is moved. * The Director is not entitled to vote against their own removal at the general meeting in which the Resolution is moved since they have a conflict of interest. * The Director is neither entitled to speak, nor have written representations circulated and read out at the general meeting in which the Resolution is moved. * The Director may not speak at the general meeting at which the Resolution is moved. However, they may make written representations which can be circulated and read out at the general meeting in which the Resolution is moved. * The Director is entitled to speak and have written representations circulated and read out at the general meeting in which the Resolution is moved.

* The Director may not speak at the general meeting at which the Resolution is moved. However, they may make written representations which can be circulated and read out at the general meeting in which the Resolution is moved.

17 A private limited company incorporated in 2015 has articles in the form of unamended Model Articles. The company has 5 directors and 8 shareholders, each with an equal shareholding. The 5 directors are all also shareholders. The company is planning on changing its name and is seeking advice as to how this can be achieved. All of the shareholders and directors are available to attend the necessary meetings. What type of resolution is required, and who will need to vote to pass the resolution? Select one alternative: * This decision requires a special resolution and any 7 shareholders will need to vote in favour. * This decision requires a special resolution and any 6 shareholders will need to vote in favour. * This decision requires an ordinary resolution and any 4 shareholders will need to vote in favour. * This decision requires a board resolution and any 3 directors will need to vote in favour. * This decision requires an ordinary resolution and any 5 shareholders will need to vote in favour.

* This decision requires a special resolution and any 6 shareholders will need to vote in favour. Correct. Changing the Company’s name can be achieved by way of a special resolution under s 77(1) Companies Act 2006 as the Company has articles in the form of unamended Model Articles. Pursuant to s 283(1), a special resolution is required to be passed by a majority of not less than 75%. This would require a majority of 6 / 8 shareholders to vote in favour.

18 A private limited company (‘A’), which operates hotels, is currently refurbishing one of its properties and considering whether or not to purchase furniture from another company (‘B’). All directors of Company A intend to attend a board meeting tomorrow to discuss this matter and pass all relevant board resolutions. The articles of association of Company A are in the form of unamended Model Articles and its board comprises three directors, two of whom are unaware that the third owns 33% of the issued share capital of Company B. What is the best advice to the director of Company A who owns shares in Company B? Select one alternative: * The director should not attend the board meeting tomorrow to avoid incurring personal liability for procuring a transaction to which Company A is party and in which they have a personal interest. * The director should disclose their shareholding to the other directors at the board meeting because they are indirectly interested in this transaction. * Provided the director discloses their shareholding to the other directors at the board meeting, they may vote on the board resolution to enter the transaction. * The director should disclose their shareholding to the other directors at the board meeting because Company B qualifies as one of their ‘connected persons’. * The director should sell their shares in Company B because they have a duty to avoid any actual or potential conflict between their own interests and those of Company A.

* The director should disclose their shareholding to the other directors at the board meeting because they are indirectly interested in this transaction. Correct. Section 177 Companies Act 2006 applies to the scenario. The director is not themselves party to a transaction with the company, but they own shares in a company which is.

An individual wants to acquire 45% of the voting shares in Company A from another company. The individual already owns the remaining 55% of the voting shares in Company A. The individual instructs his solicitor to advise him on the purchase and to draft and negotiate the necessary documentation. Neither the solicitor nor their firm is authorised by the Financial Conduct Authority to carry on ‘regulated activity’ as defined in the Financial Services and Markets Act 2000 and related secondary legislation. Which of the following statements correctly explains why the solicitor can advise the individual on the sale? Select one alternative: * The solicitor can act because giving this advice to the individual is incidental and arises out of the provision of professional services to the individual. * The solicitor can act because the individual is buying more than 25% of the voting shares in Company A. * The solicitor can act because FSMA 2000 does not apply as giving this advice is not a specified activity. * The solicitor can act because FSMA 2000 does not apply as shares in private companies are not specified investments. * The solicitor can act because the shares together with the shares already owned by the individual is more than 50% of the voting shares in Company A.

The solicitor can act because the shares together with the shares already owned by the individual is more than 50% of the voting shares in Company A. Correct. The specified investments are shares. The specified activity is arranging deals in shares. However, the exclusion in Article 70 RAO applies as the shares being brought together with the shares already owned by the individual is more than 50% of the voting shares in Company A.

A solicitor recently acted for a client in relation to the sale of a property portfolio. The client is now considering how to invest the sale proceeds. The client would like the solicitor to explain the key differences between bonds and shares. Neither the solicitor nor their firm is authorised by the Financial Conduct Authority to carry on a regulated activity. Can the solicitor give the explanation requested? Select one alternative: * No, because bonds and shares are specified investments and neither the solicitor nor their firm are authorised by the FCA. * No, because such advice is not a necessary part of the provision of legal services by the solicitor to the client. * Yes, because bonds and shares are not specified investments so the solicitor would not be breaching the general prohibition against carrying on a regulated activity. * Yes, because such advice is incidental and it would arise out of or be complementary to the provision of legal services to the client. * Yes, because although bonds and shares are specified investments, giving generic advice on the differences between bonds and shares is not a specified activity.

* Yes, because although bonds and shares are specified investments, giving generic advice on the differences between bonds and shares is not a specified activity. Correct. Neither the solicitor nor the firm has to be FCA authorised to give generic advice on the differences between bonds and shares.