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Sam - SQE2 - Legal Content > 1a. Business > Flashcards

1a. Business Flashcards

1
Q

General partnerships

What are the three requirements for a general partnership under the Partnerships Act 1890?

A
  1. Two or more persons
  2. Carrying on a business in common
  3. With the intention to make a profit

Persons includes corporate bodies as well as people

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2
Q

General partnerships

Is it material if a business never actually realises a profit?

A

No, as long as they intend to

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3
Q

General partnerships

What is a party receiving a share of the profits of a business prima facie evidence of?

A

That a partnership exists

Agreement to or sharing of losses is some evidence of a partnership, but not prima facie evidence

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4
Q

General partnerships

In what three situations will receiving a share of the profits of a business not raise the presumption that a partnership exists?

A

Money is:

  1. Repayment of a debt
  2. Remuneration to employee/agent
  3. Annuity to a survivor of a partner on account of their share or to a person who has sold the goodwill in the business
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5
Q

General partnerships

Does a party need to contribute capital to be considered a partner?

A

No

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6
Q

General partnerships

What is the limit on the number of partners that can be in a general partnership?

A

There is no limit

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7
Q

General partnerships

Can the partners use a partnership agreement to override most rules in the Partnership Act?

What is the effect of this?

A

Yes

Most of the rules in this deck will not apply if the question provides that the partnership agreement overrides them

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8
Q

General partnerships

What is the general rule for a partner’s ability to bind the partnership and other partners?

A

A partner in a partnership is an agent of the partnership and the other partners, and can bind both as long as he has authority

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9
Q

General partnerships

What are the two ways a party can be bestowed with actual authority?

A
  1. Expressly authorised by the partners, either in the partneship agreement or through a vote
  2. Impliedly authorised by the partners’ failure to object to past conduct of this nature
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10
Q

General partnerships

What type of act must a partner make to bind the firm through apparent/ostensible authority?

A

An act carrying on the business of the firm in the usual way

Would a reasonable person think a business of this kind would usually do this act? What authority would a reasonable person expect a partner in such a business to have?

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11
Q

General partnerships

What two things must be true for apparent authority to not bind the firm?

A
  1. Partner had no authority to act, and
  2. The person with whom the partner was dealing either knew the partner had no authority to act, or did not think the person with whom they were dealing was a partner
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12
Q

General partnerships

If it turns out that there was neither actual nor apparent authority, who is bound?

A

Only the partner who entered into the dealing, in their personal capacity

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13
Q

General partnerships

What four things have case law shown partners will have the authority to do?

A
  1. Buy and sell firm goods
  2. Receive debt payments due to the firm
  3. Hire employees
  4. Employ a solicitor to act for the firm
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14
Q

General partnerships

What is a general partner’s liability for debts of the partnership?

What does it mean that partnership liability is joint and several?

A

Unlimited

A creditor can pursue one or all of the partners

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15
Q

General partnerships

When will the partners be jointly and severally liable for torts committed by another partner?

A

When the tort is committed in the course of business, or with authority of the partners

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16
Q

General partnerships

Is an incoming partner liable to the creditors of a partnership for anything done before becoming a partner?

What is needed to add a new partner?

A

Not unless they agree

The consent of all partners

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17
Q

General partnerships

Is a retiring partner liable for debts incurred before they leave?

What is a hold harmless agreement and against whom is it not effective?

A

Yes

Agreement between a retiring partner and the firm that the retiring partner will not be liable for debts incurred before leaving. Does not apply to a retiring partner’s direct liabilities to a third party unless the third party agrees

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18
Q

General partnerships

What is the general rule regarding a person dealing with a partnership after a change in its partners?

A

The person is entitled to treat all apparent partners of the old firm as still being partners until they receive notice of the change

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19
Q

General partnerships

In the case of (1) existing creditors and (2) world at large, what must a retiring partner do to give notice of their retirement and therefore not be liable for obligations arising after they leave?

When will a third party not be able to enforce an obligation on a retiring partner which arose after they left, even in the absence of notice?

A
  1. Existing creditors: Provide actual notice to creditors
  2. World at large: Place advertisement in London Gazette

Where the third party did not know the person was a partner

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20
Q

General partnerships

What is the holding out rule?

A

If a person holds themselves out to be a partner even if they are not, they may be held liable as a partner if any third party extends credit on the strength of the holding out.

The same is true if a person knowingly allows another to hold them out as a partner.

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21
Q

General partnerships

How can holding out apply to retiring partners?

A

If they fail to give proper notice, or do not ensure their name is removed from partnership notices, websites, or stationery, they may inadvertently hold themselves out to still be a partner

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22
Q

General partnerships

What is the statutory definition of partnership property?

Unless agreed, how must partnership property be held and applied?

A

Property acquired or brought into the partnership for partnership purposes and in the course of partnership business, as well as money earned or property purchased with money earned

Exclusively for the purposes of the partnership

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23
Q

General partnerships

How is property:
(1) belonging to an individual partner and used in the business and:
(2) given by a partner to the business

treated?

A
  1. Property belonging to an individual partner remains their property
  2. Property given by a partner to the firm becomes partnership property and is treated as a capital contribution
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24
Q

General partnerships

Unless a contrary intention is shown, how is property bought with money belonging to the partnership and property titled in the firm name treated?

Can creditors of an individual partner seek to satisfy their debt from partnership property?

A

As partnership property

No

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25
Q

General partnerships

What is the determining factor in determining whether property brought into the partnership becomes the partnership’s or remains property of the individual?

A

The intention of the individual

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26
Q

General partnerships

What is required for individual property to become partnership property?

A

Express or implied agreement between the partners

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27
Q

General partnerships

What is the effect of an individual partner’s creditor being granted a court order for a share of that partner’s profits?

What about when a partner assigns their share of the profits?

A

They become entitled to the profits in satisfaction of their debt, but this does not make the creditor a partner

It does not make the assignee a partner

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28
Q

General partnerships

In the absence of a profit-sharing agreement, and irrespective of capital contributions or any other factor, how are partnership profits split?

What about losses in the same situation?

A

Equally

Same

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29
Q

General partnerships

Are partners entitled to a distribution of the firm’s profits and capital as of right?

A

No, not without agreement of the partners

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30
Q

General partnerships

What is a partner’s tax liability if they are an individual?

A

Each partner must include in their income their share of the profit made by the partnership whether or not it was distributed

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31
Q

General partnerships

Where there is a profit-sharing agreement leading to an unequal split of profits, how are losses shared upon dissolution?

A

In the proportion of the profit-share

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32
Q

General partnerships

Is a partner entitled to interest on:
(1) their capital contributions and
(2) a loan made to the partnership?

A
  • Capital: No
  • Loan: Yes, at 5% per year
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33
Q

General partnerships

How is the right to manage the partnership business shared?

Is a partner generally entitled to remuneration for acting in the partnership business?

A

Equally. One partner, one vote

Irrespective of capital contributions, etc., unless agreed

Not unless the partnership agreement provides for such

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34
Q

General partnerships

Whilst most decisions require a simple majority vote, what three decisions require unanimity?

A
  1. Admission of a new partner
  2. Change in the nature of the partnership business
  3. Alteration to the partnership agreement
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35
Q

General partnerships

What is the duty to account for secret profits?

A

Each partner must account to the partnership for any profit/benefit obtained without the consent of the other partners from:

  1. A transaction concerning the partnership, or
  2. Any use by the partner of partnership name/property
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36
Q

General partnerships

What is the duty to account for profits of a competing business?

A

If a partner carries on a business in competition with the partnership, without the consent of the partners, they must account for all profits

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37
Q

General partnerships

What is a partnership at will, how is it dissolved by notice?

When does this take place?

A

A partnership that was not set up for a fixed term will be dissolved by any partner giving notice to the others of their intention to dissolve

It will be dissolved on the date provided in the notice, and if none is provided, upon communication of the notice.

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38
Q

General partnerships

How is a partnership dissolved by death, bankruptcy or charge?

A

A partnership is dissolved if:

  1. Any partner dies (automatically)
  2. Any partner becomes bankrupt (automatically), or
  3. Any partner charges their share of profits to pay off a personal debt (at the option of the other partners)
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39
Q

General partnerships

What are the fives reasons a partnership may be dissolved by court order?

A
  1. Permanent incapacity of a partner
  2. Prejudicial conduct
  3. Willful or persistent breach of partnership agreement
  4. Business can only be carried on at a loss
  5. Just and equitable
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40
Q

General partnerships

What is the effect of dissolution on partner authority?

A

The authority of each partner to bind the firm will continue:

  1. In order to wind up the partnership, and
  2. To complete transactions which were started but unfinished at the time of dissolution

Partnership will be bound for other contracts entered into unless notice of the dissolution was given to the other party

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41
Q

General partnerships

When a partnership is dissolved, what is the order of entitlement to assets?

A
  1. Debts owed to outside creditors
  2. Loans made by partners
  3. Partners’ capital contributions

If partnership assets are insufficient to repay creditors, partners are personally liable

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42
Q

General partnerships

Under the Partnership Act, what is the order by which losses should be paid?

A

Losses should be paid from:

  1. Profits, then
  2. Capital, then if necessary
  3. Further contributions by partners
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43
Q

LLPs

For a general partnership to be a LLP, it must be registered:

What four things must be included in the incorporation documents for a LLP that are submitted to Companies Houses?

How is a LLP taxed and run?

A
  1. Name of the LLP
  2. Registered office address
  3. Names/addresses of partners
  4. Details of people with significant control

Taxed and run like a general partnership (members taxed individually on share of profit, whether distributed or not)

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44
Q

LLPs

If an LLP is not properly set up, what is the result?

A

A general partnership forms and the partners have unlimited liability

If properly set up, partners in a LLP are not personally liable

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45
Q

LLPs

What is the minimum number of members?

For how long can an LLP operate with one member, and what happens after that period?

A

Two

Six months, after which the single member is jointly and severally liable with the LLP for debts accrued after the six month period

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46
Q

LLPs

Unless the agreement provides otherwise, what is required to add a new member?

A

Consent of all members

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47
Q

LLPs

What is the role of the designated member?

How many designated members must the LLP have, and what is the position if the LLP does not designate any?

A

Perform administrative and filing duties of the LLP, including:

  • Appoint and remove auditors
  • Submit annual statements
  • Sign and file accounts
  • Comply with statutory filing requirements

Two. If none designated, all members are treated as designated members

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48
Q

LLPs

Within what time period of a change to the members or designated members must the Registrar be notified?

A

14 days

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49
Q

LLPs

What is the position regarding agency and authority in an LLP?

A

The same as a general partnership.

Every member is an agent of the LLP.

LLP not bound by anything done if a member has no authority and the person with whom they are dealing knows they have no authority or doesn’t think they do

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50
Q

LLPs

Until when is a former member deemed to still be a member for the purposes of dealings with third parties?

A

Until notice is given to the person or sent to the Registrar

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51
Q

LLPs

What four possible ways could someone’s stake in an LLP make them a person with significant control?

A
  1. Directly or indirectly holding more than 25% of the surplus assets upon winding up
  2. Directly or indirectly holding more than 25% of the voting rights
  3. Directly or indirectly holding the right to appoint or remove the majority of management
  4. Otherwise having the right to exercise or actually exercising significant control or influence
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52
Q

LLPs

Are members in an LLP liable for wrongful acts or omissions of other members in the course of business or with the LLP’s authority?

A

No, but the LLP is liable with the offending member

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53
Q

LLPs

In order to benefit from limited liability, what five things is an LLP obligated to make available to the public?

A
  1. Annual accounts
  2. Annual confirmation statement

Details of:
3. Appointment/removal of members
4. Changes to members’ details
5. Changes to LLP name or address

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54
Q

LLPs

In what three circumstances is it not permitted to strike off an LLP?

What proportion of the members may apply to the Registrar for an LLP to be struck off and dissolved?

A
  1. LLP has traded or carried on business in the last three months
  2. LLP changed name in last three months
  3. LLP is the subject of any insolvency proceeding

##

Majority

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55
Q

LLPs

What four parties must the members making the application to strike off notify?

What time period after the notice to strike off will the Registrar strike off the LLP, dissolving it?

A
  1. Other members
  2. Creditors of the LLP
  3. Employees
  4. Trustee of any pension fund

Three months

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56
Q

Nature and formation of companies

In addition to the general requirements for a private limited company, what two additional things are required to register as a public limited company?

A
  1. Nominal share capital of at least £50,000
  2. Trading certificate
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57
Q

Nature and formation of companies

Within what time period from the end of the accounting period must annual accounts be filed for a private company and a public company, and need they be audited?

A

Private: Nine months. Need not be audited.
Public: Six months. Must be audited.

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58
Q

Nature and formation of companies

Who is a promotor?

What duties are owed between promotors?

A

A person who takes the necessary steps to form a company

Promoters owe fiduciary duty and duty of good faith, and to not profit at the company’s expense

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59
Q

Nature and formation of companies

Who is liable on pre-incorporation contracts entered into in the company name, and what is a way to avoid this?

A

The promotor. Can be avoided by novating the contract after incorporation.

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60
Q

Nature and formation of companies

What is a Memorandum of Association?

A

A statement signed by people wishing to become shareholders, indicating this intent and agreement

It is filed with the application for registration at Companies House

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61
Q

Nature and formation of companies

What ten things must be included in the application for a company to the Registrar?

A
  1. Name
  2. Address
  3. Details about company’s business
  4. Whether public or private
  5. Whether limited by shares or guarantee
  6. Statement of capital and initial shareholdings
  7. Proposed officers/directors, and their residential address
  8. Details of people with significant control
  9. Statement of compliance with Companies Act 2006
  10. Payment of the relevant fee
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62
Q

Nature and formation of companies

What are the five limitations on a company name?

A
  1. Cannot be the same or essentially the same as an existing company
  2. Must end in Limited or Ltd or Public Limited Company or Plc
  3. Cannot be offensive
  4. Approval required if name suggests connection to government
  5. Approval required if name suggests a protected profession
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63
Q

Nature and formation of companies

What is required for a company to change its name and the articles?

A

A special resolution of the shareholders

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64
Q

Nature and formation of companies

What documents make up a company’s constitution?

A
  • Articles of Association
  • Any resolutions/agreements adopted to amend the articles

The Model Articles automatically apply unless the company opts for its own. Therefore the Articles need not be filed with the application.

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65
Q

Nature and formation of companies

What five things are dealt with in the articles?

What is the legal effect of the articles?

A
  1. Directors’ meetings and decision making
  2. Appointment/removal of directors
  3. Share capital
  4. Rights attached to shares
  5. Shareholder meetings

They are a contract between the company and each of the shareholders, as well as the shareholders with each other

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66
Q

Nature and formation of companies

Whilst a company need not restrict its objects, what must the directors do if it does restrict them, and what is the consequence of failing to do so?

Even though a director would be in breach, what is the status of an act done beyond the scope of the objects?

A

Directors must adhere to the restriction, and they breach their duty if they do not, and may be subject to an injunction if the act is not yet carried out, otherwise equitable action for damage caused

It is still valid

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67
Q

Nature and formation of companies

What is the extent of a shareholder’s right to enforce provisions of the articles, and when is a shareholder not able to enforce?

A

Only insofar as it relates to membership rights, and a shareholder cannot enforce the articles in any other capacity, e.g. a personal right, or if they are also a director

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68
Q

Nature and formation of companies

Can the articles contain a provision requiring unanimous consent to amend them?

A

No, this is prohibited by the Companies Act

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69
Q

Nature and formation of companies

Can the shareholders agree among themselves in a shareholders agreement to not amend the articles unless they all agree?

Why is this different?

A

Yes, because they are merely agreeing among themselves to a course of action they will take

It is not enshrined in the company’s constitution itself, which is what the prohibition in the Companies Act is concerned with

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70
Q

Nature and formation of companies

What is one thing an amendment to the articles cannot require?

A

A shareholder to increase their liability to the company, i.e. subscribe for more shares

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71
Q

Nature and formation of companies

What does an entrenched provision of the articles require?

In what two ways can provision for entrenchment be made?

A

A more onerous approval process than even a special resolution, e.g. 100% of shareholders

In the articles on formation (with notice of this given to Companies House), or by special resolution

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72
Q

Nature and formation of companies

What is the fate of a provision in the articles which attempts to prevent amendment of the articles, and what will always be the rule?

A

Such a provision will be ineffective, and the articles can always be changed by special resolution

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73
Q

Nature and formation of companies

What must be true of an amendment to the articles before a shareholder who did not vote for it can apply for the court to set it aside?

What alone is not grounds for challenging an amendment to the articles?

A

No reasonable person would consider it to be for the benefit of the company

That it adversely affects minority shareholders, as long the amendment is made in good faith

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74
Q

Nature and formation of companies

What are the only times that the corporate veil has deemed to have been lifted?

A

Directors or shareholders in breach of other legal provisions, e.g. company was formed to carry out a fraud or avoid existing obligation

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75
Q

Companies: directors and officers

What is the minimum number of directors in a private company and a public company?

A

Private: One
Public: Two

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76
Q

Companies: directors and officers

What are the two ways a director can be appointed in a company limited by shares under the model articles?

Within what time period of a director appointment or a change to a director’s details must Companies House be notified?

A
  1. Board resolution, or
  2. Ordinary shareholder resolution

14 days

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77
Q

What four things will not affect the validity of acts of a person acting as a director, if they are subsequently discovered?

A
  1. Defect in appointment
  2. Disqualified from holding office
  3. Ceased to hold office
  4. Not entitled to vote on the matter in question
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78
Q

Companies: directors and officers

What is a de jure director?

A

Director who has been formally and properly appointed, and registered with the Registrar

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79
Q

Companies: directors and officers

What is a de facto director?

A

Someone who is not a de jure director, but who carries out all of the duties of and behaves like one

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80
Q

Companies: directors and officers

What is a shadow director?

A

A non-director in accordance with whose instructions the actual directors are accustomed to act, and they are treated the same as de jure or de facto

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81
Q

Companies: directors and officers

What is an alternate director?

A

Someone appointed by a director to attend and vote at board meetings when the director is unable to

Also known as a proxy

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82
Q

Companies: directors and officers

What is a nominee director?

A

Someone appointed by the board to represent the interests of a particular shareholder, although they must still act in the best interests of the company

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83
Q

Companies: directors and officers

What is:
(1) an executive director, and
(2) a non-executive director?

A
  • Executive: responsible for the day-to-day running of the company and are considered employees
  • Non-executive: consultants with a more supervisory role
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84
Q

Companies: directors and officers

What is a director’s status from an agency perspective?

A

Directors are agents of the company, and can bind the company in contract, and in tort (if acting with authority)

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85
Q

Companies: directors and officers

How is actual authority granted expressly?

A

In the articles, or by resolution

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86
Q

Companies: directors and officers

Why does apparent authority not arise frequently in a company?

What is one situation where it might?

A

Because a director will generally not have the power to bind the company, except when the directors act as a board

Apparent authority could arise through past dealings

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87
Q

Companies: directors and officers

What are the two ways a company can execute a document?

A
  1. Affixing their seal
  2. Signature of: two directors; director and secretary; single director if signed by attesting witness
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88
Q

Companies: directors and officers

Although the articles generally require the board to act collectively, may the board delegate authority over specific matters to a particular director or group of directors?

A

Yes

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89
Q

Companies: directors and officers

What is required for shareholders to ratify a director’s conduct which was in breach of their duty, and whose vote would be disregarded?

A

Ordinary shareholders resolution, disregarding the vote of the director in question if he is also a shareholder

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90
Q

Companies: directors and officers

What is the fate of any provision in the articles or contract that purports to exempt a director from liability that would otherwise attach through breach of duty, negligence, or breach of trust?

What are the limits on a company’s ability to indemnify directors against claims brought by third parties concerning the director’s actions for the company?

A

Void

Cannot be used for criminal or regulatory fines

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91
Q

Companies: directors and officers

Can a director still be subject to a statutory and fiduciary duty for the period they were a director, even after they cease to be one?

A

Yes, e.g. cannot act on an opportunity after you cease to be a director that you learned about whilst you were one

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92
Q

Companies: directors and officers

What is the limit on a director’s powers?

A

They must exercise powers only for the purpose for which they were conferred

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93
Q

Companies: directors and officers

What is the duty to promote success?

A

A director must act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole

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94
Q

Companies: directors and officers

What is the concept of enlightened shareholder value?

A

In promoting the success of the company, the directors need not focus solely on maximizing profit, and can consider other things like:

  1. Long term consequences of a decision
  2. Interests of company employees
  3. Need to foster business relationships
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95
Q

Companies: directors and officers

If a company is insolvent or on the brink of such, to whom is the director’s duty to company displaced?

A

To the creditors

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96
Q

Companies: directors and officers

What are the objective and subjective limbs of a director’s duty to exercise care, skill, and diligence?

What standard will a director be judged by?

A

A director must exercise the care, skill, and diligence that would be exercised by a reasonably diligent person with:

  1. The general knowledge, skill and experience that may be expected of a director (objective), or
  2. The general knowledge, skill and experience the director in question actually has (subjective)

Whichever imposes the higher obligation

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97
Q

Companies: directors and officers

What is the duty to exercise independent judgment?

A

Director must exercise independent judgment, without subordinating their powers to the will of others

A director will not be deemed to have subordinated their powers to the will of others if they seek advice from experts, as long as the director makes the final decision as does not delegate this to the expert

98
Q

Companies: directors and officers

In determining whether a conflict exists between a director and the company, is it relevant that the company was not able to take advantage of a particular opportunity themselves?

A

No, it is still a conflict

99
Q

Companies: directors and officers

In what three situations will a conflict not arise?

A
  1. Transaction is with the company itself, and the board knows of the director’s interest
  2. Situation cannot reasonably be regarded as likely to give rise to a conflict
  3. Matter has been authorised by the directors
100
Q

Companies: directors and officers

What is the duty to declare interest in a transaction?

Is a director interested in a transaction counted toward the quorum on that decision?

A

If a director is directly or indirectly interested in a proposed transaction with the company, or becomes such, they must give notice to the other directors before entering into or continuing

No

101
Q

Companies: directors and officers

Even though a director need not declare an interest in a transaction of which the shareholders are already aware, what is good practice?

Why?

A

Declare it at the board meeting anyway

So that it forms part of the minutes and nobody can challenge whether they were aware later

102
Q

Companies: directors and officers

What is required for a company to make a loan to a director, or to guarantee or give security for a loan to a director by a third party?

A

Shareholder approval via ordinary resolution

£10k directly to director or £50k if it is to fund company business does not require approval

103
Q

Companies: directors and officers

What is the maximum length a director’s employment contract can be before it needs shareholder approval?

Who is able to determine what fair compensation in a director’s service contract should be?

A

Two years

The board

104
Q

Companies: directors and officers

Under the model articles, what is required for any director to call a board meeting?

A

Giving reasonable notice, which need not be in writing, with the date time and location, to each director

Reasonable notice is determined based on the situation

105
Q

Companies: directors and officers

When does notice not need to be given to all directors?

A

If a particular director or directors has waived their entitlement to notice of that meeting

106
Q

Companies: directors and officers

What is the minimum amount of directors needed for a quorum at a board meeting?

A

Two

107
Q

Companies: directors and officers

What is the usual threshold for votes on an issue at a board meeting?

Who has the casting vote in the event of a deadlock, and what is the effect of this?

A

Simple majority

The chairman, effectively giving them a second vote on the issue

108
Q

Companies: directors and officers

If the board wants to pass a board resolution in writing, what is required?

A

Unanimous approval of directors

109
Q

Companies: directors and officers

When is a director excluded from the quorum on a particular issue?

A

When they have an interest in the transaction being voted on

110
Q

Companies: directors and officers

Who has the power to remove directors, and what is the vote threshold?

Can a director be removed by written resolution?

A

Shareholders, by simple majority

No

111
Q

Companies: directors and officers

Although the shareholders’ statutory right to remove a director overrides most provisions to the contrary in the articles, what does a Bushell v Faith clause provide?

A

It gives weighted voting rights to a director who is also a shareholder in the event of a resolution to remove them as a director

112
Q

Companies: directors and officers

If the shareholders remove a director in violation of their contract, what is the consequence?

A

The company will be liable for breach of contract

113
Q

Companies: directors and officers

How much notice before a general shareholder meeting must a shareholder give of their intention to propose a resolution to remove a director?

A

28 days

114
Q

Companies: directors and officers

What rights does the director have at the shareholder meeting to remove them?

A
  1. Make a written representation
  2. Speak at the shareholder meetings, even if not a shareholder
115
Q

Companies: directors and officers

What three things is a disqualified director prohibited from doing?

A
  1. Act as a director
  2. Act as a receiver of a company’s property
  3. Take part in any way in promotion, formation, or management of a company
116
Q

Companies: directors and officers

What four categories of things can a director be disqualified for?

A
  1. Conviction of indictable offence related to a company
  2. Persistent breaches of companies’ legislation
  3. Fraud
  4. Summary conviction of offence relating to failure to comply with filing requirements
117
Q

Companies: directors and officers

When may a director be disqualified for being an unfit director of an insolvent company, and what is the range of disqualification?

A

A director can be disqualified for 2-15 years if their conduct, taken alone or viewed in line with their conduct as director of another company, makes them unfit to be in the management of a company

118
Q

Companies: directors and officers

How can a director be disqualified for wrongful trading?

A

If the company was insolvent when they traded and they knew

119
Q

Companies: shareholders

What are the two requirements for a dividends to be declared?

A
  1. Must be paid from profits available for the purpose
  2. Must not render a company insolvent

Profits available for the purpose is essentially net profits

120
Q

Companies: shareholders

What is a preference share?

What are preference shareholders’ voting rights typically limited to?

A

A share paid a dividend based on a fixed % ahead of ordinary shareholders, which rolls over and accumulates if unpaid, but usually lacking voting rights

Decisions that affect their class rights

121
Q

Companies: shareholders

Even if profits are available, who must still recommend a dividend?

A

The board

122
Q

Companies: shareholders

After the board resolve to recommend a dividend, how is it declared?

A

The recommendation is approved by the shareholders, who declare the dividend by ordinary resolution

123
Q

Companies: shareholders

Can the shareholders decline a dividend, or change the amount?

A

The shareholders can decline to approve the dividend, and they can lower its amount. They cannot increase the amount.

124
Q

Companies: shareholders

What is an unlawful dividend?

In what circumstances will a shareholder be liable to repay an unlawful dividend?

A

A dividend not paid out of profits available for the purpose, e.g. capital

If, when the distribution was made, they knew or had reasonable grounds to believe it was unlawful

125
Q

Companies: shareholders

When may a shareholder bring a derivative claim, and against whom is it brought?

Only who can bring a derivative action?

A

When the shareholder believes a director has or is about to breach a duty owed to the company and it appears the board are not acting to prevent this, the shareholder can bring a claim against the offending director

Shareholders, and those to whom shares were transferred through operation of law, e.g. inheritance

126
Q

Companies: shareholders

Can a shareholder assert a claim which arose before they became a shareholder?

A

Yes

127
Q

Companies: shareholders

What must the court do if the shareholder does not show a prima facie case?

A

Dismiss the claim

128
Q

Companies: shareholders

If the shareholder does show a prima facie case, the court must be satisfied of one of what two things at the second stage for them to dismiss the claim?

A
  1. Continuance of the claim does not promote the best interests of the company, or
  2. The action was authorised by the company or authorisation would be likely
129
Q

Companies: shareholders

Who receives any damages awarded in a derivative claim?

A

The company

130
Q

Companies: shareholders

What can a shareholder, even a minority, do if they feel they are being unfairly prejudiced?

If a minority shareholder is successful, what is the most likely remedy?

A

Petition the court for a remedy

The minority shareholder is bought out at fair value

131
Q

Companies: shareholders

What must any shareholder be able to show to apply to have a company wound up?

A
  1. The company is solvent, and
  2. It is just and equitable to wind it up
132
Q

Companies: shareholders

How long after a director leaves must their service contract be retained for inspection by the shareholders?

A

At least one year

133
Q

Companies: joint decision making

Who usually calls meetings?

A

Directors

134
Q

Companies: joint decision making

A shareholder holding at least what % of the paid-up voting capital can require the directors to call a meeting, within what time must the directors (1) call the meeting and (2) hold the meeting?

What happens if the directors fail to call the meeting?

A

5%. Called within 21 days; held within 28 days.

The shareholder who requested the meeting, or any shareholder(s) holding 50% of the voting rights can call the meeting themselves

135
Q

Companies: joint decision making

To whom must notice of a general shareholders meeting be given?

In what four forms can notice of a meeting be?

A
  1. All shareholders and directors
  2. Personal representatives of deceased shareholders
  3. Trustee in bankruptcy of any bankrupt shareholders
  4. Auditor, if there is one

Writing, electronic, email, via website

136
Q

Companies: joint decision making

What five things must the notice of the meeting contain?

A
  1. Company name
  2. Time, date and place of the meeting
  3. General nature of business to be carried on at the meeting
  4. Right to appoint a proxy to attend
  5. Full text of any special resolution
137
Q

Companies: joint decision making

How much notice must be given for a meeting?

A

14 clear days, unless articles provide for longer

138
Q

Companies: joint decision making

What additional time period is added where notice is communicated by a method other than hand delivery?

A

48 hours

139
Q

Companies: joint decision making

How can you work out notice periods quickly on the exam?

A

Last date notice can be given:
- Meeting date minus 15 days if hand delivered
- Meeting date minus 17 days if other method

Earliest date a meeting can be held:
- Notice date plus 15 days if hand delivered
- Notice date plus 17 days if other method

140
Q

Companies: joint decision making

What is a shareholder’s option if notice is insufficient?

A

They can seek to have any action taken at the meeting for which notice was insufficient declared invalid

141
Q

Companies: joint decision making

What proportion of shareholders must agree to hold a meeting on shorter notice?

A

Majority of shareholders (in number), holding 90% of the shares

142
Q

Companies: joint decision making

In what situation can the short notice procedure not be used?

What is a workaround?

A

For matters requiring documents to be left at the registered office for 15 days prior to the meeting

If the relevant majority of the shareholders is also on the board (and in attendance at the meeting), the board can adjourn a board meeting and have the shareholders pass whatever is to be passed as a written resolution, which can include the documents, getting around the 15 day requirement. Should only be used when you are sure the shareholders in attendance are on side and will approve

143
Q

Companies: joint decision making

If a company has more than one shareholder, can a single shareholder who is present in his own capacity but also as proxy for another shareholder form a quorum of two?

A

No

144
Q

Companies: joint decision making

What proportion of shareholders at a meeting are required to approve (1) an ordinary resolution and (2) a special resolution?

A

Ordinary resolution: Simple majority of shareholders at the meeting
Special resolution: 75% or more of the shareholders at the meeting

Compare with written resolutions which require those percentages of all shareholders.

145
Q

Companies: joint decision making

What six things are among those for which a special resolution is required?

A
  1. Amend the articles
  2. Reduce share capital / buy back shares
  3. Wind up the company
  4. Change company name
  5. Disapply pre-emption rights
  6. Change company status, i.e. private to public
146
Q

Companies: joint decision making

Within what time period must a special resolution be filed at Companies House?

A

15 days

147
Q

Companies: joint decision making

What is the normal method of voting at meetings?

A

Show of hands

148
Q

Companies: joint decision making

What is a poll vote and what two groups can demand one?

A

Instead of one vote per shareholder in the show of hands method, it becomes one vote per share, and can be demanded by:

  1. Any five shareholders or more, or
  2. Shareholders with not less than 10% of the voting rights or 10% of the paid-up capital
149
Q

Companies: joint decision making

Can a written resolution be used for both types of shareholder resolutions?

What action can a written resolution not be used for?

A

Yes

Dismissing a director or auditor

150
Q

Companies: joint decision making

In addition to the board deciding to circulate a written resolution, who can require them to do so?

A

Shareholders who hold at least 5% of the voting rights

(same % as for a shareholder demanding a general meeting)

151
Q

Companies: joint decision making

To whom must a written resolution be circulated?

A

All shareholders eligible to vote

152
Q

Companies: joint decision making

What two things must a written resolution contain?

A
  1. Statement informing the shareholder how to signify agreement
  2. When the resolution will lapse if not approved, typically 28 days from and including the circulation date (unless the articles provide differently)
153
Q

Companies: joint decision making

Whilst the % thresholds for ordinary and special resolutions are the same >50% and 75%+ as when voted in person, what is the crucial difference with a written resolution with regard to the pool from which those % are taken?

A

For a written resolution, it is >50% and 75%+ of all shareholders, compared to just those present at a meeting

154
Q

Companies: joint decision making

What is the four step process when a decision requires approval of both the directors and shareholders?

A
  1. Approval starts with board meeting and board resolution approving the matter
  2. Board then resolves to call shareholders general meeting or circulate written resolution for shareholders to approve
  3. Shareholders vote whether to pass the resolution, and it is passed if they do
  4. Board then enters into the approved transaction, resolving this if relevant
155
Q

Companies: joint decision making

Whilst no further action is usually required, what is one situation where directors will need to take further action, and what is that action?

A

If the resolutions have approved entering a contract to purchase property, the directors would need to resolve to appoint two directors to execute the contract

156
Q

Companies: joint decision making

Unless otherwise provided, what nine things require an ordinary shareholder resolution only?

A
  1. Appoint/remove director/auditor
  2. Adopt annual accounts
  3. Declare a dividend
  4. Approve director’s decision to allot shares
  5. Approve substantial property transaction with an interested director
  6. Ratify of director’s breach of duty
  7. Enter service contract with director of more than two years
  8. Make loan to director
  9. Give payment to director for loss of office
157
Q

Companies: joint decision making

What is a substantial property transaction and what is the de minimis threshold?

At what threshold is a transaction automatically an SPT and what is the test for figures between £5,000 and it?

A

Where a director buys or sells property from or to the company.

Less than £5,000 is de minimis

£100,000. If between 5k and 100k, it will be an SPT if its value exceeds 10% of the company’s net assets

158
Q

Companies: joint decision making

Within what time period of a resolution being adopted by the board, shareholders, or both must it be filed at Companies House?

A

14 days

15 days for special resolution

159
Q

Companies: raising finance

What are the two ways a company can raise finance?

A
  1. Equity (selling shares for money)
  2. Debt (borrowing money)
160
Q

Companies: raising finance

What is a company’s share capital?

A

Money received on account of the nominal or par value of shares, which is not returned to the shareholders and is theoretically always available to pay creditors

161
Q

Companies: raising finance

What is the amount paid for new shares that exceeds the nominal or par value, and where does this go?

A

Share premium, into the share premium account, and forms part of the same share capital which is not returned to the shareholders and is theoretically always available to pay creditors

162
Q

Companies: raising finance

For company incorporated after 2009, when will there not be any restrictions on a director if they wish to allot more shares?

A

If the company only has one class of shares, and there is no restriction removing the director’s power

163
Q

Companies: raising finance

In other situations, e.g. where there are multiple classes of shares, what is required to allot new shares?

A

Shareholder’s ordinary resolution

164
Q

Companies: raising finance

What must shares be offered for in order for existing shareholders to have a preemption right?

A

Cash

Shares issued for anything else, e.g. property, will not give rise to the preemption right

165
Q

Companies: raising finance

Where a preemption right does arise, how long must the existing shareholders be given to decide whether to accept?

A

14 days

166
Q

Companies: raising finance

Does preemption apply to preference shares?

A

No

167
Q

Companies: raising finance

How is a preemption right disapplied?

A

Through shareholder special resolution (on a case by case basis), or by amending the articles (to make it permanent)

168
Q

Companies: raising finance

Under the model articles, what is the director’s right regarding a transfer of shares?

A

They have the absolute power to refuse to allow a transfer

169
Q

Companies: raising finance

Do the directors have the power to borrow money on behalf of the company?

A

Yes, unless excluded by the articles

170
Q

Companies: raising finance

What is a:
(1) fixed charge and
(2) floating charge
granted over?

A
  1. Assets the company will own for a substantial period of time
  2. A group of assets that change regularly, and does not crystallise until default
171
Q

Companies: raising finance

Within what time limit of the creation of a charge by a company must it be registered at Companies House?

What is the impact of failing to register a charge at Companies House?

A

21 days

The charge is void against a liquidator or administrator of the company, and the company’s creditors (still valid against the company itself)

172
Q

Companies: raising finance

How is the priority of:
(1) fixed charges over the same asset
(2) floating charges over the same asset
determined?

A

Both based on the date of their creation, as long as they were validly registered at Companies House

173
Q

Companies: raising finance

What is the priority of a fixed charge and a floating charge in the same asset?

A

As long as it is properly registered, a fixed charge will take priority over a floating in the same asset, even if the floating charge was created and registered first

174
Q

Companies: recordkeeping, filing, disclosure

A private company is required to keep a register of what four groups and what one thing?

Where are the registers required to be kept, to be inspected by whom?

A
  1. Members
  2. Directors
  3. Secretaries
  4. People with significant control
  5. Charges against the company’s assets

At the company’s registered address, to be inspected by members for free and the public for a fee

175
Q

Companies: recordkeeping, filing, disclosure

Which registers can the company elect to keep at Companies House?

A

Registers of directors and members

176
Q

Companies: recordkeeping, filing, disclosure

What is the minimum time minutes of shareholders’ meetings must be kept and made available for inspection?

A

10 years

177
Q

Companies: recordkeeping, filing, disclosure

What is a confirmation statement and is it always required?

A

An annual update from the company confirming that the information held by Companies House is up to date, and must be filed even if there have not been any changes

It is a criminal offence to not file the confirmation statement within 14 days of the end of the company’s accounting period

178
Q

Companies: recordkeeping, filing, disclosure

What two things must be included in the accounts?

What view of the company must the accounts give?

A
  1. Balance sheets on the last day of the accounting period
  2. Statement of profit and losses

Must give a true and fair view of the company.

179
Q

Companies: recordkeeping, filing, disclosure

Who must approve that the accounts reach this standard?

A

The board

180
Q

Companies: recordkeeping, filing, disclosure

What type of companies must file an annual directors report?

What type of companies must file a strategic report, and what is the purpose of this?

A

Medium and large companies, i.e. companies with more than 50 employees or turnover of £10 million or more

Same. Strategic report helps members assess how the directors have promoted the success of the company.

181
Q

Companies: recordkeeping, filing, disclosure

Within what time period must special resolutions, as well as ordinary resolutions to allot new shares or buy back shares be filed with Companies House?

Where a special resolution to reduce share capital is filed with Companies House, what must accompany it?

A

15 days

A statement of solvency

182
Q

Companies: recordkeeping, filing, disclosure

When is a change of company’s registered office effective?

A

When it is filed with Companies House

183
Q

Companies: recordkeeping, filing, disclosure

What four things must a company disclose on its letterhead?

What must a company do if it displays the name of one director on its letterhead?

A
  1. Registered name
  2. Part of the UK it is registered
  3. Company number
  4. Registered office address

Display the name of all of them

184
Q

Companies: recordkeeping, filing, disclosure

What three things must a partnership display on its letterhead?

A
  1. Name of the partnership
  2. Name of each member
  3. Business address
185
Q

Insolvency

What is an individual voluntary arrangement?

A

Agreement between individual debtor and all creditors where each agrees to accept less than is owed

186
Q

Insolvency

What is the advantage of an IVA to a (1) debtor and (2) creditor?

What must a debtor do before agreeing to an IVA?

A
  1. They can avoid the restrictions and qualifications they would be subject to if made bankrupt
  2. They may receive more money than in a bankruptcy proceeding, and more quickly

Take professional advice

187
Q

Insolvency

What is the protection offered by the court order received by an insolvency practitioner preparing and filing a statement of affairs on behalf of the debtor?

A

No bankruptcy proceedings can be brought when the order is in force

188
Q

Insolvency

What percentage of unsecured creditors must agree to the agreement before it is binding on all ordinary unsecured creditors, whether they voted for it or not?

Who are not bound?

A

Majority in number and 75% in value

Preferential and secured creditors

189
Q

Insolvency

Who are two examples of a preferential creditor?

A
  1. Employees owed waged in the last four months
  2. HMRC in respect of VAT, PAYE, and National Insurance
190
Q

Insolvency

What may the insolvency practitioner (now a supervisor) or a creditor do if a debtor does not adhere to the IVA, or if the debtor provided false or misleading information?

A

Petition for the debtor’s bankruptcy

191
Q

Insolvency

What is bankruptcy?

What period after a bankruptcy application is a debtor deemed discharged from the debts?

A

A judicial process in which assets of a bankrupt debtor are automatically passed to a third party, the trustee in bankruptcy, who liquidates the assets and uses the proceeds to pay off as many debts as possible, in a strict order set out by legislation

One year

192
Q

Insolvency

What are the three ways a debtor can be placed into bankruptcy?

A
  1. Debtor applies online to declare themselves bankrupt
  2. One or more unsecured creditors owed at least £5,000 can apply
  3. Supervisor or creditor can apply if debtor has breached IVA
193
Q

Insolvency

Put simply, what are the two ways a creditor who applies to put a debtor in bankruptcy can prove that they are insolvent?

A
  1. Debt immediately payable and debtor does not have the funds
  2. Debt payable in future, and debtor has no reasonable prospect of being able to pay
194
Q

Insolvency

What are the three specific ways in which insolvency can be demonstrated?

A

Insolvent if debtor owes £5,000 or more and:

  1. Creditor makes a statutory demand for payment; debt not paid within 3 weeks or debtor does not apply to set aside demand within 3 weeks
  2. Creditor seeks to execute on the judgment; attempt to execute judgment fails
  3. Debt owed in future, and creditor serves a statutory demand of proof of ability to pay; debtor does not show reasonable prospect of being able to pay
195
Q

Insolvency

What assets is a bankrupt able to retain?

A
  • Assets needed for day-to-day living, including furniture
  • Salary, and
  • Any tools required for their job
196
Q

Insolvency

What is an income payments order, and what is the maximum length of one?

A

Although a bankrupt is entitled to retain any salary they make, if the salary exceeds the amount needed for the reasonable needs of them and their family, an income payments order can be made, for a maximum of three years

197
Q

Insolvency

Although the bankrupt’s interest in their home passes to the trustee, what are the four interests, which if they exist in the home, mean that it cannot be sold within the first year without a court order?

What happens after one year?

A
  1. Held in joint names
  2. Equitable interest of spouse
  3. Right to occupy
  4. Children under 18 in occupation

The interests of creditor override those interests in the home

198
Q

Insolvency

What three things is a debtor in a bankruptcy restricted from doing, until discharged?

A
  1. Apply for credit over £500 without disclosing the bankruptcy to the lender
  2. Act as company director or be a partner
  3. Trade under another name without disclosing the bankruptcy
199
Q

Insolvency

What is the order of priority in a bankruptcy distribution?

A
  1. Costs of the bankruptcy
  2. Secured creditors with a fixed charge
  3. Preferential creditors
  4. Secured creditors with a floating charge
  5. Unsecured creditors
  6. Connected unsecured creditors

Debts abate equally within a class

200
Q

Insolvency

What conduct will prevent the bankruptcy from being discharged after the usual one year?

What is the label given to the debtor, and how long does this bankruptcy last?

A

If the bankruptcy was caused by dishonesty, negligence, and recklessness

Debtor is culpable, and a culpabe bankruptcy lasts 15 years.

201
Q

Insolvency

What occurs if a partner is made bankrupt in a:
(1) partnership at will
(2) partnership for specified term/undertaking?

A
  1. Partnership is dissolved and the trustee receives any money due to the insolvent partner
  2. Partnership will continue if the remaining partners purchase the bankrupt partner’s interest from the trustee
202
Q

Insolvency

What occurs if a partner in an LLP is made bankrupt?

A

The partnership does not terminate, but the trustee will usually sell the interest to the remaining partners

The bankrupt partner cannot participate in the management of the LLP

203
Q

Insolvency

How does bankruptcy proceed in a partnership:

  1. Of individuals
  2. Of companies
  3. Of a mix of both?
A
  1. Bankruptcy processes apply to each partner
  2. Liquidation applies to each company
  3. Bankruptcy applies to individuals; liquidation to the companies
204
Q

Insolvency

Are the insolvency procedures for limited companies and LLPs broadly the same?

A

Yes, and reference to company will probably apply to LLP

205
Q

Insolvency

What are the six insolvency options available to companies?

A
  1. Receivership
  2. Restructuring plan
  3. Moratorium
  4. Administration
  5. Company voluntary arrangement
  6. Liquidation
206
Q

Insolvency

What is fixed asset receivership?

Is proof of insolvency needed? What are the most common breaches giving rise to fixed asset receivership?

A

Where a secured creditor exercises their right to appoint an administrative receiver because a company has breached a term, through which the receiver takes possession of the charged asset and usually disposes of it to use the proceeds to pay back the creditor

Receiver owes the duty to the particular creditor

No need to show insolvency. Common breaches are failure to pay interest or capital of a loan

207
Q

Insolvency

Why does fixed asset receivership usually place a company into insolvency anyway?

A

Because charges are usually granted against assets which are crucial to the functioning of the business, e.g. buildings and machinery

208
Q

Insolvency

What percentage of creditors must agree to a restructuring plan, and does it bind those who do not vote for it?

A

75% in value of the unsecured debt, and binds all if this threshold is reached

209
Q

Insolvency

What three things are prohibited when a company seeks a moratorium?

A
  1. Creditors cannot take action to enforce their rights or launch proceedings
  2. Landlord may not forfeit lease of company premises
  3. Floating charge holder may not crystallise charge
210
Q

Insolvency

What is the exception to the payment holiday a company enjoys during a moratorium?

What companies cannot avail of a moratorium?

A

Wages and other payments to employees, including holiday pay

Companies subject to insolvency proceedings currently or within the last 12 months

211
Q

Insolvency

What is administration?

What is the difference between an administrator and a receiver?

A

Procedure whereby an administrator (independent insolvency practitioner) can run, reorganise, or sell the company as a going concern

An administrator acts in the interests of creditors as a whole

212
Q

Insolvency

What are the three aims of an administrator, in order of importance?

A
  1. Rescue the company
  2. Achieve a better result for creditors than if it was wound up
  3. Realise property to distribute to creditors
213
Q

Insolvency

What are the two ways an administrator can be appointed to a company?

A
  1. Court appointment
  2. Company, directors, or holder of a qualifying floating charge file certain documents in court
214
Q

Insolvency

If the court appointment is used, what two things must the court be satisfied of?

A
  1. Company unable to pay debts
  2. Administrator likely to achieve better result for the creditors than liquidation
215
Q

Insolvency

If the company or directors appoint the administrator, who must they notify and what can they do?

A

They must notify any qualifying charge holders, who can agree or appoint an alternative administrator

216
Q

Insolvency

What is a qualifying floating charge?

A

Charge over the whole or substantially whole of the company’s assets, containing a provision enabling to holder to appoint an administrator if a breach allowing the creditor to terminate their agreement occurs

217
Q

Insolvency

What are four powers of an administrator?

Generally, what proportion of the value of the creditors must agree to an administrator’s proposals?

A
  1. Take control of and sell company assets
  2. Bring and defend legal proceedings on behalf of the company
  3. Carry out the company’s business
  4. Remove and replace directors

Majority

218
Q

Insolvency

What are the effects of the moratorium which gets imposed during administration?

A
  1. Restricts ability of third parties to enforce their rights
  2. Prevents commencement of insolvency proceedings
219
Q

Insolvency

What is a Company Voluntary Arrangement?

Only who is bound by a CVA?

A

Basically an IVA for companies, subject to the same 75% approval threshold and binding on dissenters if passed

Unsecured creditors

220
Q

Insolvency

What two groups can start a voluntary liquidation, and what are the two types?

A

Voluntary liquidation can be started by the members or directors, and the two types are:

  1. Members’ voluntary liquidation
  2. Creditors’ voluntary liquidation
221
Q

Insolvency

In a Members’ Voluntary Liquidation, who controls the process from start to finish, and what are the two requirements for it to be available?

A

The members and directors control it and to be available:

  1. The company must be solvent, and
  2. The individuals involved in running the company must wish to wind it up
222
Q

Insolvency

What are the steps in a MVL?

Within what time period after the final step of a MVL is the company dissolved?

A
  1. Directors make statutory declaration of solvency
  2. Shareholders pass a special resolution to start the liquidation and an ordinary resolution to appoint the liquidator
  3. Appointment of liquidator is advertised in London Gazette and Companies House is notified
  4. Liquidator investigates, and asks creditors for full details of debts
  5. Liquidator collects company assets, liquidates them, and distributes funds to creditors in the statutory order
  6. Final accounts are sent to creditors and members, and final return is filed at Companies House

Three months

223
Q

Insolvency

In a Creditors’ Voluntary Liquidation, who starts the process and who takes it over?

A

Started by the directors and then taken over by the creditors

224
Q

Insolvency

What is the main reason the directors would commence a CVL?

A

The directors are advised the company is insolvent, and do not wish to be personally liable for the debts of the company through fraudulent or wrongful trading if they continue to trade

225
Q

Insolvency

What are the steps required within the company to begin a CVL?

Within what time period after the final step of a CVL is the company dissolved?

A
  1. Directors resolve that the company is insolvent and should be placed into liquidation
  2. Shareholder pass special resolution to start the liquidation
  3. Resolution is advertised in the London Gazette
  4. Directors take certain steps outlined in next card
  5. Rest of the process is the same as MVL: appointment advertised, liquidator investgiates, liquidates, and pays creditors

Three months

226
Q

Insolvency

What must the directors do within 7 days of the shareholder’s resolution to liquidate being placed in the London Gazette?

A

Prepare a statement of company affairs and send it to the company’s creditors

227
Q

Insolvency

What must any creditor be able to show to petition the court to wind up a company?

What will cause the court to dismiss the petition if shown by the company?

A

Creditor must show company is unable to pay debts

Court will dismiss if company can show it may recover financially or that the debt upon which the petition is based is disputed

228
Q

Insolvency

What is the order of priority in a liquidation of a company?

A
  1. Costs of the liquidation
  2. Secured creditors with a fixed charge
  3. Preferential creditors
  4. Secured creditors with a floating charge
  5. Unsecured creditors
  6. Connected unsecured creditors
  7. Shareholders

Debts abate equally within a class

229
Q

Insolvency

What is a preference?

A

When a debtor intentionally does something that puts a creditor or other similar party in a better position on liquidation/administration than they otherwise would be

230
Q

Insolvency

When is intent to prefer presumed?

A

If the preference is to a connected person, e.g. director, their spouse, other close family member or associate

231
Q

Insolvency

To constitute a preference which can be clawed back, within what time limit of the onset of insolvency must it have occured for:

  1. Non-insiders, and
  2. Insiders?

Is it required that the preference cause the insolvency?

A
  1. Six months
  2. Two years

No

232
Q

Insolvency

What is a transaction at an undervalue?

What is the insolvency requirement for a transaction at an undervalue by a company?

A

When property that would otherwise have formed part of the bankruptcy estate is gifted or sold for significantly less than market value within two years of a company’s insolvency or five years of an individual’s bankruptcy

A company must have been insolvent at the time of the transaction, or became insolvent as a result

233
Q

Insolvency

In the context of a transaction at an undervalue by a company, when is insolvency presumed?

A

When the transaction is made to a connected person

234
Q

Insolvency

Regarding a transaction at an undervalue made by an insolvent individual, there is no requirement to prove insolvency if a transaction is made within what time limit before insolvency?

In the context of a transaction at an undervalue by an individual when is insolvency always presumed?

A

Two years

If a transaction is made to a close relative or business associate at any time

235
Q

Insolvency

What are the three defences available to a company for a transaction at an undervalue claim?

A

Transaction entered into:

  1. In good faith
  2. For the purpose of carrying on the business
  3. With reasonable grounds to believe it would benefit the company
236
Q

Insolvency

What is one thing which will not amount to a transaction at an undervalue, and why?

A

Granting a security interest in a company asset, because this does not change the value of the company’s assets

237
Q

Insolvency

When does the criminal offence of fraudulent trading arise?

A

When a director (or other person who knowingly participates) carries on business of the company, knowing it is insolvent, with the intent to defraud creditors

238
Q

Insolvency

When does wrongful trading arise?

A

When, at some time before a company became insolvent, the directors knew or ought reasonably to have known that was no prospect the company would avoid insolvency, and failed to take adequate steps to minimise losses for creditors

239
Q

In a wrongful trading situation, when does a director’s duty shift and to whom does it shift?

What can a director show in defence to a wrongful trading claim?

A

The duty shifts from what is best for the shareholders to what is best for the creditors, once the director knows or ought reasonably to know insolvency is unavoidable

That they took every step with a view to minimising potential loss to creditors

240
Q

In what situation is a floating charge void if given to (1) an unconnected person and (2) a connected person?

A

Unconnected:

  1. If it was created for no consideration within 12 months ending with insolvency and
  2. At the time it was created, the company was insolvent or became insolvent as a result

Connected:

If it was created for no consideration within two years ending with insolvency (no insolvency step 2)

Sam - SQE2 - Legal Content (15 decks)

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