BL Flashcards
UNANIMOUS VOTE
REQUIRED
UNANIMOUS VOTE
REQUIRED
* Admitting new partner
* Changing nature of partnership business
* Amending partnership agreement
* Expulsion of partner (unless partnership agreement provides otherwise)
DUTY TO OTHER PARTNERS
DUTY TO OTHER PARTNERS
* Must render true accounts and provide full information
* Must account for profits made by using partnership’s property or name
* Must refrain from competing with partnership
DISSOLUTION OF PARTNERSHIP
DISSOLUTION OF PARTNERSHIP
* Partnership for specific term or undertaking: dissolves on expiration of term or completion of undertaking
* Partnership at will: dissolved by any partner giving notice to others
Any partner’s death or bankruptcy - automatic dissolution
Court has power to dissolve partnership
EFFECT OF DISSOLUTION
EFFECT OF DISSOLUTION
Business continues and partners can still bind partnership
* Partners must wind up business and pay off debts
* Distribution of leftover money
- Repay partners ‘loans, then
- Repay partners’ capital,
then
- Distribute in accordance with agreement (or equally if no agreement)
INCORPORATION
DOCUMENTs
INCORPORATION
DOCUMENTs
* Name of LLP
* Country and address of registered office
* Name and address of each member (at least two
* Identities of designated members
* Details of people with significant control
- More than 25% of assets or voting rights, or other right to control
MEMBERS
MEMBERS
* At least two
- Less than two for more than six months: person who carried on business liable with
LLP for debts
* Free to leave
* Adding member requires unanimous consent
Please note:
Please note: The facts I just gave you rarely happen in real life, but they can, and examiners sometimes like testing on such unusual events. So, watch out for situations such as:
one of two partners in an LLP leaves and the other scrambles to find a new partner, but it takes eight months.
For the two months beyond the first six that the partner was the sole member of the LLP, the partner is liable for all LLP debts incurred during that time.
(Press play to continue the video)
RIGHTS OF MEMBERS
RIGHTS OF MEMBERS
* Share of profits (equal by default
* Indemnification
* Inspect books and records
* Management
DUTIES
DUTIES
Refrain from competing with
LLP
Refrain from profiting off LLP’s name or property
* Account to LLP
LIABILITY OF MEMBERS
LIABILITY OF MEMBERS
*
*
No liability for LLP’s debts, or for wrongful acts or omissions of fellow members
Only liable for amount of capital contribution
Still subject to rules for wrongful and fraudulent trading
What is the difference in liability between a member of an LLP and a partner of a partnership for obligations of the firm?
A member of an LLP has limited liability, meaning they are not personally liable for the LLP’s debts beyond their investment, unless there’s wrongdoing. In contrast, a partner in a traditional partnership has unlimited liability, making them personally responsible for all the partnership’s obligations and debts. This key difference affects the financial risk exposure of individuals involved in LLPs versus traditional partnerships.
Let’s review before moving on to the next topic. Which of the following are required to form an LLP?
(check all that apply)
Two or more persons carrying on a business with a view to profit
* A partnership agreement
Filing an incorporation document with the
Registrar of Companies
There must be two or more persons carrying on a business with a view to profit, and an incorporation document must be filed with the Registrar of Companies. Most LLPs will have a partnership agreement, but this is not actually required.
How does formation of an LLP differ from formation of a general partnership and how are they alike?
The formation of an LLP requires filing documents with the Registrar of Companies, giving it a separate legal identity, similar to a general partnership where individuals agree to conduct business together for profit, but without the need for formal registration.
Can you remember any other form of business media that requires filing at Companies House?
Limited companies also require filing at Companies House, as they need to submit incorporation documents, annual accounts, and other statutory filings to maintain compliance with legal requirements.
Both limited partnerships and limited liability partnerships (LLPs) must be registered with the Registrar of Companies at Companies House before beginning trading.
MEMORANDUM OF ASSOCIATION
MEMORANDUM OF ASSOCIATION
Document authenticated/signed by persons wishing to become members
APPLICATION FOR REGISTRATION
APPLICATION FOR REGISTRATION
Standard form
Must include:
* Name of proposed company
* Locationof registered office
* Business details
* Share capital statement
* Initial shareholding
Directors
* Officers (company secretary)
* Persons with significant control
What do you call people who are seeking to form a company?
Promoters
What is the term used for a pre-incorporated company that has already been set up by solicitors that a promoter can simply purchase and take over as a quick way to start a company?
The term used for a pre-incorporated company set up for quick purchase and takeover by a promoter is a “shelf company” or “ready-made company.”
If the promoter does not want to purchase a shelf company but instead wishes to file all the documentation themselves, where do they file?
If a promoter wishes to file the documentation themselves to start a company, they would file the necessary documents with the Companies House, which is the official registrar of companies in the United Kingdom.
In your own words, what does it mean for a provision in the articles to be ‘entrenched’? How is this different from other provisions? Why does this matter?
An entrenched provision in the articles of association is a clause that is more difficult to amend or remove than other provisions, often requiring a higher level of agreement among the company’s members, such as a supermajority vote. This differs from standard provisions, which can typically be altered by a special resolution (usually a 75% majority). Entrenchment matters because it provides extra protection for specific provisions, ensuring that key aspects of the company’s governance or operations are not easily changed and thereby safeguarding certain interests or principles deemed crucial by the founders or stakeholders.
An entrenched provision in a company’s articles requires a greater consensus for amendment than standard provisions, offering added protection to specific governance aspects.
Michael is the sole shareholder and director and the only employee in a company, Michael Ltd, which delivers sandwiches to city workers at their desks.
He owns 100 £1 shares, all fully paid.
Following the coronavirus lockdown, the company went into liquidation owing £35,000 to its creditors.How much would Michael have to pay to the creditors here?
As the sole shareholder of Michael Ltd with 100 £1 shares all fully paid, Michael would not be required to pay any additional amount to the creditors beyond his initial £100 investment, due to the limited liability protection offered by the company structure.
Charles resigned as a director from his family company, as his wife wanted him to move to Spain to enjoy retirement with her, after many years working long hours. Every Sunday night, he has a long Zoom call with his son and daughter, the current directors, when he sets out his vision for the company and discusses the business for the following week, telling his children what steps to take.
His children listen dutifully to his advice, and agree fully with their father on Sunday evening, but do not always follow his advice.
Is Charles a shadow director and subject to the duties of a director?
no
Identify each type of director in the table below:
A - De Jure Director
B - De Facto Director
C - Shadow Director
1. A person who acts as a director, claims to be a director, but has never been appointed as a director.
2. A person who acts as a director, claims to be a director, and has been appointed as a director.
3. A person who influences other directors, but does not claim to be a director, and has not been appointed as a director.
- B - De Facto Director
- A - De Jure Director
- C - Shadow Director
Who do you think the directors owe these duties to?
Directors owe their duties primarily to the company itself, acting in the best interests of the company as a whole. This includes considering the interests of shareholders, employees, and potentially other stakeholders, depending on the specific circumstances and jurisdiction.
DUTY TO PROMOTE
SUCCESS OF COmPANY
DUTY TO PROMOTE
SUCCESS OF COmPANY
* Act in good faith to promote company for benefit of its members as a whole
* Not just maximizing profit
today
* Consider:
- Long term consequences
- Interests of employees
- Relationships with suppliers and customers
- Impact on
community/environment
Match the following director misdeeds with the letter of the duty that was most likely violated in that scenario. (Each choice is only used once.)
A - Duty to act within powers.
B - Duty to promote the success of the company.
C - Duty to exercise independent judgement.
- Director votes against a business opportunity for Company because he feels sorry for a competitor that the director suspects needs the opportunity to stay afloat.
- Director is unsure how to vote on a proposal, so bases his vote solely on the advice that a friend gave him on social media.
- Director unilaterally decides to purchase an extravagant retirement gift using Company funds for another retiring director.
- B - Duty to promote the success of the company. (The director’s decision was influenced by external factors not related to the company’s success.)
- C - Duty to exercise independent judgement. (The director relied on someone else’s opinion rather than making an independent decision.)
- A - Duty to act within powers. (The director exceeded their authority by making a unilateral financial decision without proper approval.)
Match the following director misdeeds with the letter of the duty that was most likely violated in that scenario. (Each choice is only used once.)
A - Duty to act within powers.
B - Duty to exercise reasonable care, skill, and diligence.
C - Duty to avoid conflicts of interest.
- Director forgets to read financial reports regarding an upcoming vote, so he quickly flips a coin to decide whether to vote to approve the deal.
- Director starts a side business of his own, purchasing Company’s products and re-selling them overseas.
- To garner favour with a foreign government to obtain a contract, the board of directors authorise payment of a bribe to an official of the foreign government.
- B - Duty to exercise reasonable care, skill, and diligence. (The director’s lack of preparation and careless decision-making method violates this duty.)
- C - Duty to avoid conflicts of interest. (The director’s side business directly conflicts with the company’s interests.)
- A - Duty to act within powers. (Authorizing a bribe likely exceeds the directors’ powers and violates company policies and laws.)
REMEDIES FOR BREACH OF
DIrEcTOr’s DUTY
REMEDIES FOR BREACH OF
DIrEcTOr’s DUTY
* Account of profits
Return of company property
* Payment of equitable compensation
* Recission of a contract
* Injunctions
* Common law damages
Removal of director through majority vote
Disqualification of director
Michael has recently been appointed as a non-executive director of a company which sells new cars. He has various other business interests, including owning 40% of the shares in a company (Dazzle Cleaners Ltd) which specialises in cleaning large areas of plate glass, mainly for commercial premises. At his first board meeting, one of the items on the agenda is to decide which business will win the contract to clean the glass in the company’s car showrooms, Dazzle Cleaners Ltd or a rival business.
Write a sentence or two explaining what action Michael should take.
Michael should declare his interest in Dazzle Cleaners Ltd to the board at the earliest opportunity, preferably before the discussion on the cleaning contract begins, and he should recuse himself from any decision-making or discussions related to awarding the cleaning contract to avoid a conflict of interest.
What is the key deciding factor regarding dividends?
* (A) Whether the shareholders want a dividend.
* (B) Whether the directors feel that a dividend would attract more shareholders.
© (C) Whether the company is looking
to expand.
* (D) Whether there are profits available
for the purpose.
D
A company must not make distributions to shareholders except out of profits available for that purpose.
Shares
ORDINARY SHARES
Equal rights for voting. dividends, and on dissolution
PREFERRED SHARES
Created with rights superior to ordinary shares
Dividend Preference
* Paid first, before ordinary shares
Cumulative
- Rolls over to next year if not paid
Noncumulative
That year’s right disappears at end of year if not paid
DERIVATIVE ACTION
PERMISSION PROCESS
DERIVATIVE ACTION
PERMISSION PROCESS
Initial Stage
Court reviews application to determine if:
* Prima facie case for breach of duty
Second Stage
Hearing to determine:
* If shareholder acting in good faith
* If reasonable director would continue claim
Likelihood the wrong would be ratified
A company has 4 shareholders:
R holds 5% of the shares
S holds 25% of the shares
T holds 50% of the shares
U holds 20% of the shares
R & T are the only directors
U is unhappy with the direction the company is taking.
Would he be able to bring a derivative action? Why?
U might be able to bring a derivative action if he believes that the directors are acting in a way that harms the company, as derivative actions are brought by shareholders on behalf of the company for wrongs done to the company. However, success depends on the specifics of the case and whether U can demonstrate that the directors’ actions are indeed harmful to the company and not just decisions U personally disagrees with. Shareholding size is not a direct factor in the eligibility to bring a derivative action, but it may influence the ability to get support for the action from other shareholders.
GENERAL MEETINGS
Directors call general meetings
Shareholders owning at least 5% of the company’s paid-in voting capital have the right to require the directors to call a meeting
Which of the following do not need to be notified of a general meeting?
* (A) Each shareholder of the company
* (B) Each director of the company
O (C) Companies House
O (D) The personal representative of any deceased
shareholder
C) Companies House need not be notified. Notice must be given to all the shareholders but also the directors, any personal representatives of a deceased shareholder, the trustee in a bankruptcy of an insolvent member, and the company’s auditor.
NOTICE MUST CONTAIN:
NOTICE MUST CONTAIN:
* Company name
* Date, time, and place of meeting
General nature of business to be considered
* Text of any special resolutions
* Proxy statement
If a notice is to be sent by email on 1 January, what is the earliest date the meeting can be held?
ChatGPT
If a notice is to be sent by email, it’s typically considered delivered on the same day it’s sent, assuming no evidence to the contrary. The minimum notice period for general meetings for private companies is 14 clear days unless the company’s articles require a longer period or all members entitled to attend and vote agree to a shorter notice period. For public companies, the minimum notice period is 21 clear days for an annual general meeting (AGM) and 14 clear days for other meetings, unless a longer period is specified in the company’s articles.
So, if the notice is sent on 1 January, the earliest the meeting can be held for a private company is 16 January, and for a public company’s non-AGM, it’s also 16 January, but for a public company’s AGM, it would be 23 January, assuming no weekend or public holiday affects these dates.
18 January - the notice date plus 17. Notice sent on 1 January is deemed received on 3 January. So, start counting the 14 days on 4 January. 14 days from 4 January is 17 January, so the next clear day is 18 January.
A company has 10 members and has adopted the model articles. How many members must be present to have a quorum at a general meeting?
* (A) Six members, as that is a majority.
O (B) Five members, as at least half must be
present.
O (C) Two members, as that is what is provided by statute unless modified.
O (D) One member, so long as all members
received notice.
(C) is correct. You probably didn’t miss this (because you just heard the rule), but I wanted to reinforce the rule and show you that examiners can easily make wrong answer choices seem reasonable. This is something you simply must memorise - good reasoning will not do!
ORDINARY RESOLUTION OR
SPECIAL RESOLUTION
ORDINARY RESOLUTION OR
SPECIAL RESOLUTION
Ordinary resolution passed:
Over 50% vote in favour
Special resolution passed: Over
75% vote in favour
A company has 10 members and has adopted the model articles without change. At a general meeting at which six members are present, the board seeks approval from the shareholders to purchase a new office building. What is the minimum number of votes needed to approve the matter?
O (A) 2
O (B)3
O (C)4
O (D5
O (E) 6
(C) 4 is correct. This is an ordinary resolution because it is not among the list of special resolution issues I just noted. Therefore, approval requires the majority of those present at the meeting. There are six members present, so approval requires four votes (as three would not be a majority).
A has 40% of the shares.
B has 40% of the shares.
C has 20% of the shares.
Who would be able to pass ordinary resolutions? Who would be able to pass special resolutions?
Ordinary resolutions require a simple majority (more than 50%) of votes cast by shareholders present and voting at a general meeting. In this scenario, A and B, each holding 40% of the shares, could individually or collectively pass ordinary resolutions, as their combined shareholding exceeds the simple majority threshold.
Special resolutions, on the other hand, require a 75% majority of votes cast. None of A, B, or C individually could pass a special resolution since none holds a 75% share. Even A and B together, with a combined shareholding of 80%, could pass special resolutions, while C alone or any other combination without both A and B would not meet the 75% requirement.
In your own words, what is the difference between equity finance and debt finance?
Equity finance involves raising capital through the sale of shares in the company, giving investors ownership interests, while debt finance involves borrowing money that must be repaid, typically with interest, without giving away any ownership.
Remember, equity finance is the company raising capital by selling its shares; debt finance is the company borrowing money to raise capital.
A company’s articles provide that each share of the company shall have a nominal value of £5. The company sold 100 shares to Steve at a price of £25 per share (a total of £2,500). How much of the sale price will be allocated to the premium account?
* (A) Whatever amount the board deems appropriate.
* (B) All £2,500 because the shares were issued at a premium.
O (c) £2,000 because that
represents the premium received for the shares above nominal
value.
* (D) I don’t know, maths is not my strong point.
C
I don’t expect that many of you got this wrong. In any case, I just wanted to reinforce the rule. And yes, you may be called upon to do maths on the exam.
Which statement is correct?
* (A) A shareholder has a guaranteed income return.
* (B) A shareholder has a guaranteed capital return.
* (c) A fixed charge entered into on
21 August 2020 and registered on 25
August 2020 will take priority over a fixed charge entered on 20 August and registered on 7 September.
* (D) All of the statements are correct.
* (E) All of the statements are incorrect.
E
What information can you obtain from Companies House and/or the registered office of a company you are interested in?
From Companies House, you can obtain a wide range of information about a company, including:
- Company name and registration number.
- Date of incorporation.
- Registered office address.
- Current and resigned officers (directors and secretaries).
- Document filing history, including annual returns, accounts, and changes in company details.
- Share capital and shareholder information.
- Charges and mortgages registered against the company.
- Insolvency information, if applicable.
- Confirmation statement and Persons of Significant Control (PSC).
- Previous company names.
At the registered office of a company, you might be able to request and view certain statutory registers and documents that the company is required to maintain, such as:
- Register of members (shareholders).
- Register of directors and secretaries.
- Register of directors’ residential addresses (not publicly accessible).
- Register of charges.
- Minutes of general meetings and resolutions.
- Articles of association and memorandum of association.
Note that some information might only be accessible with proper authorization or under specific circumstances, and companies may charge a fee to provide copies of certain documents.
Let’s test your understanding of this topic in another scenario:
George runs a pub in London as a sole proprietor. Business recently slowed due to a downturn in tourism, but it is starting to make a comeback. Unfortunately, George owes £20,000 to each of five beer distributors. The debt owed to each creditor is unsecured. If George wants to enter an IVA to lower his monthly payments to avoid bankruptcy, how many of the distributors must agree?
* (A) Three
* (B) Four
* (c) Five
B
George needs agreement from at least half (in number) of the independent creditors. Since there are five creditors, that means he needs at least three. But he also needs creditors holding at least 75% in value of the outstanding unsecured debt. Here the entire debt is £100,000—£20,000 to each of the five beer distributors. The assent of only three distributors would account for only £60,000—60% of the outstanding debt. The assent of four would account for £80,000 or 80%, thus meeting the minimum threshold.
Under an IVA, what is the difference between a supervisor and a nominee?
A correct response would indicate that the insolvency practitioner who agrees to propose an IVA to creditors is called a nominee. If the creditors approve the IVA, then the insolvency practitioner oversees implementation of the plan and is now called a supervisor. I don’t think you’ll be tested on this directly, but you are likely to see these terms in SQE questions, and I don’t want you to be confused.
The nominee is an insolvency practitioner proposed by the debtor to help draft the IVA proposal and present it to creditors, playing a key role in the initial stages of setting up the IVA. Once the IVA is approved by the creditors, the nominee typically becomes the supervisor, whose role is to oversee the implementation of the IVA, ensuring the debtor adheres to the terms, collects payments from the debtor, and distributes them to creditors according to the agreement.
Anne owns a small pub as a sole proprietor. She owes a beer distributor £3,000, a web designer £1,000, and a food supplier £2,000. Anne has been unable to pay her debts to all three creditors for several months. Which creditors would have to join to petition Anne into bankruptcy?
The beer distributor and the food supplier. We need creditors who are owed at least £5,000 in unsecured debt. We would not have enough debt if the web designer joined with just one other unsecured creditor.
For a creditor to petition for bankruptcy against a debtor in the UK, the debt owed must be at least £5,000. In Anne’s case, no single creditor is owed £5,000 or more. However, creditors can join together to meet the £5,000 threshold required for a bankruptcy petition. Therefore, any combination of Anne’s creditors whose total claims meet or exceed £5,000 would have to join to petition her into bankruptcy. This could be the beer distributor (£3,000) and the food supplier (£2,000), as their combined debts total £5,000, meeting the threshold.
The Savage family business has three partners: Tracy, her husband, and her daughter. Tracy and her husband each contributed £5,000 capital. Tracy’s daughter has been made bankrupt and owes £50,000. After the assets of the Savage family business are sold and creditors paid, there is £100,000 left. How much of that do you think will go to the trustee in her daughter’s bankruptcy case? Why?
The trustee in the daughter’s bankruptcy case would likely receive her share of the partnership’s remaining £100,000, which would be £33,333.33, assuming equal partnership shares, to contribute towards her debts.
Donald owes tens of thousands of pounds from failed property ventures. He invested heavily in hotels and golf courses which have not been successful. The properties are all mortgaged and the banks are seeking to repossess them to recover the loans. Donald has no other sources of income.
Which of the options we’ve just discussed would be most appropriate for Donald to get relief from his creditors? Why?
Bankruptcy would be the most appropriate option for Donald to get relief from his creditors, given his significant debts, lack of income, and the banks’ actions to repossess mortgaged properties.
Refresh your memory:
Before we begin, in a previous module, I mentioned something important that changes when a company is insolvent or on the brink of insolvency. Can you recall what that was?
(Hint: it was in the module discussing a director’s duties)
When a company is insolvent or on the brink of insolvency, the directors’ duties shift from focusing on the best interests of the shareholders to prioritizing the interests of the creditors to minimize their potential losses.
If you remembered that the director’s duties have changed, you are correct. If a company is insolvent or on the brink of becoming insolvent, the directors must consider or act for the benefit of the creditors, displacing their duty to the shareholders.
True or False: Fixed asset receivership is not an insolvency proceeding, but usually leads to insolvency.
* True
* False
True. You probably didn’t get this wrong (don’t worry if you did - you only just heard this for the first time a moment ago). In any case, I just wanted you to think about it a little more. A receiver takes an asset in which the creditor has a security interest after the debtor has defaulted in payment. Since these are usually assets that are important to the business, and without which the business cannot usually operate, fixed asset receivership usually leads to bankruptcy.
