BLP Flashcards

Question

Two individuals (Partner A and Partner B) began trading together as a partnership five years ago. Two years ago a third partner, (Partner C) joined the partnership. Partner A put in 75% of the start up capital and partner B put in the remaining 25%. Partner C has never contributed any capital but the partnership uses a warehouse owned by Partner C. The partners have never entered into any formal agreement. Which of the following statements represents the correct position with regards to the rights to the profits of the partnership and a salary for each partner under the default provisions of the Partnership Act 1890? The three partners are entitled to an equal share of the profits but none of the Partners are entitled to a salary. Partner A and Partner B are entitled to an equal share of the profits, but Partner C is not entitled to any profits. All three partners are entitled to an equal salary. The three partners are entitled to an equal share of the profits and a salary in equal proportions to their original capital investment. The three partners are entitled to a share of the profits equal to the percentage of their original capital investment and no salary. Partner A and Partner B are entitled to an equal share of the profits, but Partner C is not entitled to any profits. None of the partners are entitled to a salary.

Answer 1

The three partners are entitled to an equal share of the profits but none of the Partners are entitled to a salary. Correct. Under the Partnership Act 1890 all partners are entitled to an equal share of the profits, regardless of their original investment and the PA 1890 states that unless it is agreed to the contrary no partner shall take a salary.

Answer 2

Yes, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, all those persons who were partners at the time that the loan agreement was entered into will be jointly liable for repaying the loan regardless of retirement. Correct. Under the Partnership Act 1890 every partner is jointly liable for contractual debts and a partner will still be liable even though they have retired. Partners in a partnership have joint liability in contract, and joint and several liability in tort.

Answer 3

A limited liability partnership because it is a separate legal entity offering limited liability and does not require a written agreement to operate on the Agreed Terms. Correct. Whilst the other answer options might sound plausible, they are each incorrect. A partnership is not a separate legal entity and does not offer limited liability for the partners whereas the opposite is true for a limited liability partnership. Additionally, a partnership agreement is not legally required to set up a partnership or limited liability partnership and would not strictly be needed if the terms agreed matched the statutory default provisions.

Answer 4

The Articles take effect as a contract between the company and its members. Members will only be able to enforce provisions contained in Articles against other members through the company itself. Correct

Answer 5

The newly incorporated company will have unrestricted objects unless the client chooses to restrict them. Correct

Answer 6

The memorandum has no constitutional significance but it is required to be filed on incorporation. It simply amounts to a declaration on the part of the company’s subscribers that they wish to form a company and agree to become members of that company. correct

Answer 7

Your client will control PP123 Limited once it is entered on the register of members. Correct

Answer 8

The new name will be effective once the Registrar of Companies issues a new certificate of incorporation. correct

Answer 9

The memorandum, fee and Form IN01. correct

Answer 10

A and B can pass the special resolution alone. -- On a written resolution vote, abstaining counts as voting against.

Answer 11

If A is not in favour of the resolution, it cannot be passed. Correct. A holds 50% of the shares therefore can call a poll vote and is able to block the ordinary resolution (since more than 50% is required to pass).

Answer 12

The special resolution may be passed by A and B alone. Correct. A majority of 75% or more is required to pass a special resolution.

Answer 13

B, C and D correct a GM may be called on short notice if this is agreed to by: a majority in number of the members who, together hold shares with a nominal value of not less than 90% of the total nominal value of the shares which give the right to attend and vote at the GM.

Answer 14

Copy of the amended articles and a copy of the special resolution. Correct Filing at Companies House All special resolutions must be filed. Generally ordinary resolutions do not need to be filed (but you will encounter some exceptions). Amended Articles must be filed, along with any forms that the Companies House requires eg Change of Name form.

Answer 15

The Board must call the General Meeting, giving 14 clear days’ notice. The quorum for the meeting is 2 shareholders.

Answer 16

The insolvency practitioner is unlikely to be considered a shadow director. Correct

Answer 17

The brother is likely to be considered a shadow director. Correct. Section 251(1) CA 2006 defines a shadow director as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’.

Answer 18

A private limited company must have a minimum of one director. A secretary is not required. A public limited company must have a minimum of two directors and a company secretary. correct

Answer 19

The directors can appoint the new director to the board with a board resolution. Correct

Answer 20

The company must file form AP01 at Companies House in relation to the director’s appointment. The directors’ service contract must be kept for inspection at the company’s registered office. correct

Answer 21

Information concerning directors’ salaries, bonus payments and pension entitlements and any compensation paid to directors and past directors for loss of office. correct

Answer 22

One of the factors for the directors to consider in deciding whether to go ahead with the proposal will be the environmental impact of the plant. correct

Answer 23

Directors must act within the company’s constitution and must exercise their powers for the purposes for which they are conferred. correct

Answer 24

The company. correct

Answer 25

The company will likely be entitled to damages for the breach. correct

Answer 26

The director should declare their interest in the proposed transaction to the board of ABC Ltd at the earliest opportunity and before the transaction is interested into. correct

Answer 27

Where the board is voting on the terms of the director’s service contract. Correct. There is an exception under s 177(6)(c ) that applies here.

Answer 28

The company is a wholly owned subsidiary so is exempt from obtaining approval. Correct

Answer 29

A contract with an initial term of 18 months, where the director has an option to extend the contract for a further year, provided they give notice to the company six months before the expiry of the initial period. The company does not have the same right to renew. During the period of the agreement the company can only terminate the employment if the director breaches the disciplinary policy. Correct

Answer 30

Shareholder approval will be required by ordinary resolution because this contract fits within the definition of a guaranteed term of more than two years. correct

Answer 31

Shareholder approval is not required because “aunt” is not a person connected to a director and therefore the acquisition does not fall within the legislation. correct

Answer 32

Shareholder approval by ordinary resolution will be required from the shareholders of DEF Ltd only. Correct. This is a substantial property transaction with a director of the company and the holding company, therefore shareholder approval will be needed. Since ABC Ltd is a wholly owned subsidiary, no approval is required from its members.

Answer 33

The disposal of some equipment worth £75,000 by Company A to another company in which one of Company’s A’s directors has a 25% shareholding. Correct. The value of the equipment exceeds 10% of the net asset value of the company and the disposal is to a connected person of one of the directors.

Answer 34

Shareholder approval will be required from Parent Plc but not Subsidiary Ltd. Correct

Answer 35

ABC Ltd wishes to provide a guarantee for a bank loan for £15,000 to one of its directors. Correct. This falls within s 197 therefore shareholder approval is required.

Answer 36

Shareholder approval by ordinary resolution will be required. ABC Ltd should prepare a memorandum setting out the terms of the proposed transaction and submit this to the shareholders together with a written resolution to approve the loan. The ordinary resolution will be passed as soon as over 50% of the shareholders sign the written resolution. Correct. Shareholder approval will be required since this is a loan to one of the company’s directors and it does not fall within any of the exceptions. Since ABC Ltd wishes to provide the loan as quickly as possible, a written resolution should be used to avoid the 15-day notice requirement for the memorandum. incorrect Incorrect. Shareholder approval will be required since this is a loan to one of the company’s directors and it does not fall within any of the exceptions. Since ABC Ltd wishes to provide the loan as quickly as possible, a written resolution should be used to avoid the 15-day notice requirement for the memorandum.

Answer 37

To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd's shareholders must pass a special resolution. Correct. Section 77(1)(a) Companies Act 2006 requires the shareholders of Shelfco Ltd to pass a Special Resolution. Section 77(1)(b) does allow for the company to determine another method for changing the name in its articles but since Shelfco Ltd has unamended Model Articles, the only option is to use the special resolution procedure.

Answer 38

The supplier can sue the company for the purchase price. This is correct. The doctrine of separate legal liability means that the company is liable for its own debts.

Answer 39

A Correct. Under s 51(1) Companies Act 2006, the person signing the purported agreement between the unincorporated company and C would be personally liable.

Answer 40

The change of name will be effective once the Registrar of Companies has issued the certificate of incorporation on a change of name. Correct. A change of name will be effective once the Registrar of Companies has issued the certificate of incorporation on a change of name (s 16 CA 2006). The company registration number will not change.

Answer 41

A special resolution to change the Company’s name, board resolutions to appoint the New Directors, board resolutions to accept the resignations of the Existing Directors and a board resolution to change the Company’s registered office. Correct. This answer reflects the most expeditious and correct way of implementing the client’s required changes. While the other answer options might sound plausible, they are each incorrect. Since the Company has unamended Model Articles of Association for Private Companies Limited by Shares, a special resolution is required to change its name. Although it is possible to appoint directors by board resolution or by ordinary resolution, the most expeditious way of appointing the New Directors (and what is generally done in practice) is by board resolution. The Existing Directors would resign as directors and a board resolution would be passed accepting their letters of resignation. Changing the registered office of the Company would be effected by the passing of a board resolution, followed by the filing of the relevant form at Companies House. Where there is more than one way of achieving the same result (the change in directors, for example)), you should consider the most expeditious and practical option.

Answer 42

The company should use the written resolution procedure as this should allow the process to be shortened significantly. Correct Correct. The written resolution procedure is the only procedure that can be used to potentially bring down the time period significantly. The fact pattern indicates that all shareholders are expected to be available and responsive so there is no reason to suggest that a written resolution would take longer than a general meeting whether on short notice or not. The company will need to comply with the provisions of s 188(5)(a) Companies Act 2006 and with the general rules on the written resolution procedure – see s 288 Companies Act 2006 onwards. Use of the short notice procedure for the sake of time is incorrect given that, in the case of directors’ long term service contracts, s 188(5)(b) Companies Act 2006 requires a memorandum setting out the proposed contract to be made available to the members (i) at the company’s registered office for not less than 15 days ending with the date of the meeting and (ii) at the meeting itself. In reality, therefore, this would only shorten the ‘normal’ procedure by one day – i.e. 15 days instead of 14 clear days. Use of the written resolution procedure for the reasoning that it will allow all shareholders to have an opportunity to participate in the voting is incorrect as the scenario states that all shareholders are due to be available and responsive over the coming weeks.

Answer 43

The MD should declare their interest in the proposed contract with Company B at the board meeting of Company A. The MD will not be allowed to vote on the proposed contract at the board meeting. This is correct. This is the effect of Model Article 14 and s 177 of the Companies Act 2006.

Answer 44

No shareholder resolution is necessary because the Companies Act 2006 does not require approval of this transaction. Correct. No shareholder resolution is necessary. The transaction described is a quasi-loan, as defined in s 199 Companies Act 2006. The requirement in s 198 (2) for shareholders to approve a quasi-loan to a director of a company applies only if such company is either (i) a public company or (ii) a private company associated with a public company. The company in this case is a private limited company. Because it is owned by individuals and has no subsidiaries, we can conclude that it is not associated with a public company (s 256). incorrect No shareholder approval is necessary because the value of the transaction is below £10,000. Incorrect. The conclusion of this statement is correct but the reasoning is not. Requirements for transactions involving directors can be found at ss 197, 198 and 200 of the Companies Act 2006. The company in this scenario is a private limited company; consider what conclusion you can draw from the information provided about its owners and subsidiaries. Now identify whether the transaction described in the scenario is addressed by s 197, 198 or 200 and check to which types of company the requirement applies.

Answer 45

Company B must seek shareholder approval for the Contract by ordinary resolution. If it fails to do so, clause 11 of the Contract would be void and deemed replaced with a clause allowing Company B to terminate the Contract on reasonable notice. Correct. This answer reflects the correct position. While the other answer option might sound plausible, they are each incorrect. Clause 11 of the Contract constitutes a “guaranteed term” of more than two years. As such, Company B cannot agree to such a provision unless it has been approved by the shareholders by ordinary resolution. If Company B enters into the Contract without the Term being approved by the shareholders as described, the contravening clause (clause 11) would be void to the extent of the contravention and the Contract would be deemed to contain a term entitling Company B to terminate it at any time by giving reasonable notice.

Answer 46

Shareholder resolution: Ordinary resolution to approve the loan. Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a memorandum setting out the nature, amount and purpose of the Loan, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters. Correct. This answer reflects the correct position. While the other answer options might sound plausible, they are each incorrect. A company may not make a loan to its director unless the transaction has been approved by the shareholders passing an ordinary resolution. This is the only shareholder resolution required to implement the Loan. Since the Company does not use the written resolution procedure for such matters, a general meeting will need to be convened. A board meeting will therefore be required and board resolutions passed to convene the general meeting and approve the form of notice for the meeting. The ordinary resolution approving the Loan may not be passed unless a memorandum setting out the nature and amount of the Loan and the purpose for which it is required is made available for inspection by the shareholders for at least 15 days ending with the date of the general meeting at which it is voted on and at the general meeting itself. Once the ordinary resolution approving the Loan is passed by the shareholders, a second board meeting is required to implement the Loan. This will entail passing board resolutions to approve entering into the loan agreement and appointing a director to sign the document on behalf of the Company. A board resolution requiring the company secretary to deal with post meeting matters is also required.

Answer 47

5% Correct Correct. Shareholders together holding not less than 5% of the paid-up voting share capital of the company can require a general meeting, by serving a request on the company.

Answer 48

They would not have a claim under the articles as rights which do not relate to their membership are not enforceable under s 33 CA 2006. Correct Correct

Answer 49

The shareholders should enter a shareholders’ agreement requiring unanimity to remove a director. Correct Correct

Answer 50

If the resolution is passed to remove the director, they will likely have a claim for breach of the shareholders’ agreement against the shareholders that voted for the resolution. Correct Correct

Answer 51

Day 50 Correct

Answer 52

The board does not need to put this on the agenda of a GM to be considered. Correct Correct

Answer 53

The shareholder can bring a claim against the defaulting director and his wife. correct

Answer 54

The complaining shareholder will not be able to bring a derivative claim because they are no longer a member. Correct Correct

Answer 55

A claim brought by a member in respect of a cause of action vested in the company seeking relief on behalf of the company. correct

Answer 56

Unfair prejudice under s 994 CA 2006. Correct Correct incorrect No claims are open to her as being removed as a director and being a shareholder are separate roles. Incorrect Incorrect. It is correct that they are separate roles. However, she could have had a legitimate expectation that she would have remained on the board. She has no control over the company with a 20% shareholding so a s 994 CA 2006 unfair prejudice claim is possible.

Answer 57

An order that the company or the other shareholders purchase the petitioner’s shares. Correct Correct.

Answer 58

The petitioner must show that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members. Correct Correct

Answer 59

5% cumulative preference shares. correct

Answer 60

4% participating non-cumulative preference shares.

Answer 61

When their name is entered into the company’s register of members. Correct Correct

Answer 62

Stamp duty of 0.5% of the value of the transfer will be payable be B. Correct Correct

Answer 63

When their name is entered into the company’s register of members. Correct Correct. See section 112(2) CA 2006.

Answer 64

When an existing shareholder of the company gifts their shares to a family member during their life. Correct Correct. This is a transfer of shares and therefore a stock transfer form is required.

Answer 65

The company will need an ordinary resolution from the shareholders to give the directors authority to allot the shares. Correct Correct incorrect The company will not need any shareholder resolutions, only a board resolution to allot. Incorrect Incorrect. The company will need authority from the shareholders by OR to allot the shares under s 551 CA 2006. WHY ARE THE OTHER OPTIONS WRONG??

Answer 66

The company will need a special resolution to disapply pre-emption rights because the shares are equity securities. correct

Answer 67

An ordinary resolution to give the directors authority to allot the shares and a special resolution to disapply pre-emption rights. correct incorrect A special resolution to disapply pre-emption rights only. Incorrect Incorrect. As well as the special resolution to disapply pre-emption rights, the company will need permission to issue the shares under s 550 CA 2006 as it is a 1985 Act company. 1985!!

Answer 68

D - Only the security from PMMR Plc is caught by the prohibited financial assistance regime Answer is D because: The target is PMR Ltd PMR Ltd is a private company The prohibition on financial assistance applies to PMMR Plc only Security is indirect financial assistance given for the purposes of the acquisition useful to draw a structure!

Answer 69

None of the security options fall within the prohibited financial assistance regime. Correct

Answer 70

Only the security proposed by the Plc subsidiary is caught by the prohibited financial assistance regime. Correct Correct

Answer 71

The security offered by the Target and both subsidiaries will be caught by the prohibited financial assistance regime. Correct

Answer 72

The terms on which redeemable shares may be redeemed are determined at the time that the shares are issued and are set out in the company’s articles. correct

Answer 73

The share capital of a company is seen as a permanent fund available to its creditors. Companies are not permitted to return capital to shareholders other than in limited circumstances. correct

Answer 74

An ordinary resolution to approve the terms of the contract for the buyback and a special resolution to approve the payment out of capital. Correct

Answer 75

The sums received from the sale of the painting and the grandfather clock will be income receipts and the sum received from the sale of the share portfolio will be a capital receipt. Correct

Answer 76

The receipts from the sale of the oil painting and shares in XYZ Plc are capital receipts and the dividend is an income receipt. Correct

Answer 77

The expenditure on heating and lighting and the advertising campaign are income expenditure. The expenditure on the new printing press machine is capital expenditure. correct how is the advertising campaign an income expenditure?? incorrect The expenditure on heating and lighting is income expenditure. The expenditure on the advertising campaign and the new printing press machine is capital expenditure. Incorrect. The expenditure on the advertising campaign is income expenditure.

Answer 78

£67,750 correct Incorrect 72,750 Incorrect. You may have included the sale of the painting which is a capital receipt.

Answer 79

£8,768 Correct. The correct calculation is: Dividend 35,000 Other non-savings income 26,225 Available Basic Rate (37,700 - 26,225) 11,475 Dividend will be taxed as follows: £2,000 @ 0% dividend nil rate £0 Remaining Basic Rate (11,475 - 2,000) 9,475 @ 8.75% £829 (£35,000 - 11,475) £23,525 @ 33.75% £7,939 Total tax payable on dividend £8,768 Incorrect £8,943 Incorrect. The dividend nil rate has not been applied.

Answer 80

£1,360 Correct Correct. The correct calculation is: Interest 5,000 Other non-savings income 35,000 Available Basic Rate (37,700 – 35,000) 2,700 Interest will be taxed as follows: £500 @ 0% PSA nil rate £0 Remaining Basic Rate (2,700-500) 2200 @ 20% £440 Higher rate for remaining 2,300 @ 40% £920 Total tax payable on savings £1360

Answer 81

£21,150 Correct Correct. The correct calculation is: Consideration £225,000 Less costs of disposal (£900) Net sale proceeds: £224,100 Less base cost (£300) Total chargeable gain £223,800 Less AE (£12,300) Taxable chargeable gain: £211,500 Taxed at 10% as TP would be entitled to Business Asset Disposal Relief = £21,150

Answer 82

The taxpayer will not benefit from Business Asset Disposal relief because not all of the criteria are met. correct

Answer 83

Replacement of roof tiles to the shop following a storm in 2006. Correct The surveyor’s fees incurred when they purchased the shop in 1994. Incorrect. Incidental costs of acquisition are an allowable expenditure.

Answer 84

Inheritance Tax Correct

Answer 85

PETs, LCTs and death Correct

Answer 86

A business consisting wholly or mainly for making or holding investments. Correct

Answer 87

£67,300 Correct Correct. The Net Income is calculated by calculating the Total Income and deducting available tax reliefs such as interest on qualifying loans and pension contributions.

Answer 88

£3,000 Correct. The 15,000 chargeable gain is taxed at 20%.

Answer 89

Business Assets Disposal Relief will apply to reduce the capital gains tax payable from 20% to 10% of the value of the gain. Correct. This disposal fulfils the criteria for BADR to apply.

Answer 90

£337 Correct Correct. You have correctly applied identified that the taxable income minus the dividend is £40,000, therefore the higher rate applies to the dividend. The first £2,000 of the dividend income is taxed at 0% and the remaining £1,000 will be taxed at the higher rate for dividends of 33.75%.

Answer 91

£7,000 Correct Correct. The net proceeds of sale will be £95,000 (£100,000 minus £5,000 sale costs). After deducting initial acquisition cost (£45,000) and incidental disposal costs of £2,700, the chargeable gain will be £47,300. The taxable chargeable gain will be £47,300 minus the annual exemption (£12,300) = £35,000. As CGT is taxed after income, and we are told the person is a higher rate taxpayer with a taxable income of £50,000, all of the taxable chargeable gain of £35,000 will be taxed at the higher rate of 20%. The tax liability will therefore be £7,000.

Answer 92

Your client can be removed as a director of the company by the shareholders passing an ordinary resolution. However, if removed, your client could bring a claim for breach of contract against the other shareholders who voted in favour of his removal. Correct. The shareholder’s vote would still be effective under s 168(1) CA 2006, but your client would be able to bring an action for breach of contract (i.e. the shareholders’ agreement). Remember that this agreement was a private agreement amongst the shareholders and does not bind the company.

Answer 93

Your client should pursue an unfair prejudice claim. The company is likely to qualify as a quasi-partnership. If successful, it is likely that the court would order the purchase of your client’s shares by the other shareholders or by the company. Correct. This will provide your client with a mechanism to recover their investment in the company without the difficulty of having to find an external investor to buy their shares. Based on the information you have been provided this action is most likely to be successful.

Answer 94

A special notice of the proposed resolution for removal and a request requiring the directors to call a general meeting. Correct. Shareholders can remove a director by passing an Ordinary Resolution under s 168(1) CA 2006. Section 168(2) requires the shareholders to serve special notice of the proposed resolution. The directors are not obliged to place the proposed resolution on the agenda at a meeting of the shareholders (Pedley v Inland Waterways Association Ltd) and on the facts they are unlikely to. The shareholders can call a general meeting themselves in accordance with s 303 CA 2006. In order for unhappy shareholders to ensure the resolution to remove a director is heard as soon as possible, they will submit a s 303 CA 2006 request requiring the directors to call a general meeting at the same time as sending their s 312 CA 2006 special notice to the board. The written resolution procedure cannot be used to remove a director (s 288(2)(a) CA 2006).

Answer 95

The Board should put the Resolution on the agenda for the upcoming general meeting, since if the Board does not do so, then the Shareholders can call a general meeting to move the Resolution. Correct. The special notice period can be observed. Although technically the Board may refuse to place the Resolution on the agenda of the next general meeting (Pedley v Inland Waterways), it would be unwise to do so as the Shareholders meet the 5% voting threshold to call the general meeting if the Board fails to do so within 21 days of notice of intention to remove a director. incorrect The Board can refuse to put the Resolution on the agenda of the next general meeting. Incorrect. Whilst this statement is correct, it is not the best advice. Although technically the Board may refuse to place the Resolution on the agenda of the next general meeting (Pedley v Inland Waterways), it would be unwise to do so as the Shareholders meet the 5% voting threshold to call the general meeting if the Board fails to do so within 21 days of notice of intention to remove a director.

Answer 96

A shareholders’ agreement. Correct. Remember that any provision in the articles which requires the company to restrict its statutory powers in any way will be void. Shareholders on the other hand may deal with how they should exercise their voting rights however they so agree. Any such provision should be set out in a shareholders’ agreement and not the articles so that such a provision is a personal obligation between the shareholders only and not a restriction on the company. incorrect The company’s articles of association. Incorrect. Review your notes on the types of provision which are suitable for a company’s articles of association.

Answer 97

Reduced rated at 5% VAT Correct Correct

Answer 98

The price of the supply of printer cartridges is deemed to include the VAT. Correct Correct

Answer 99

£900 Correct Correct.

Answer 100

£41,756 Correct. The calculation works out as follows: Year 1 Writing Down/Capital Allowance (WDA/CA) = (18% x £345,000) = £62,100 Written Down Value (WDV) = (£345,000 - £62,100) = £282,900 Year 2 WDA / CA = (18% x £282,900) = £50,922 WDV = (£282,900 - £50,922) = £231,978 Year 3 WDA / CA = (18% x £231,978) = £41,756 WDV = (£231,978 - £41,756) = £190,222 incorrect £231,978 Incorrect. This is the WDV of the asset at the end of year 2. £190,222 Incorrect. This is the WDV of the asset at the end of year 3.

Answer 101

£404,500 Correct. The calculation is as follows: The company's TTP is made up of its trading income: Trading receipts: £555,000 Less deductible expenditure: (£105,000+10,500+35,000= £150,500) TTP = £404,500 (555,000-150,500) Incorrect £244,500 Incorrect. The cost of the new premises is a capital expense.

Answer 102

£230,641 Correct. The calculation is: The company's TTP is made up of its trading income and chargeable gain: Trading receipts: £2,212,500 Less deductible expenditure: (£596,000) Less AIA (£1,000,000) Less CA (£12,600) Plus Chargeable Gain £610,000 TTP = £1,213,900 @19% = £230,641

Answer 103

The company must pay corporation tax at a rate of income tax payable in dividends by a higher rate tax payer. Correct

Answer 104

ABC is a close company on both tests. correct incorrect ABC is a close company only because it is under the control of any number of participators who are also directors. Incorrect. ABC is a close company on both tests.

Answer 105

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

Answer 106

WS7 consolidate client entertainment expenditure is not deductible for tax purposes.

Answer 107

£1,100 Correct. The amount in each transaction that is paid to HMRC is the difference between the input tax and the output tax.

Answer 108

WS7 consolidate incorrect Yes, because no trading or capital losses were incurred in the first accounting period. Incorrect Incorrect. In the scenario there was in fact a trading loss of £50,000 in the first accounting period.

Answer 109

The client can deduct the chargeable gain of £25,000 against the price of the premises to give a new base cost for the premises of £225,000 or against the price of the machinery to give a new base cost for the machinery of £35,000. Incorrect Incorrect. The client cannot deduct the chargeable gain against the price of the machinery as the cost of the machinery when deducted from the sale proceeds of the land, is greater than £25,000 (eg. 175,000 – 60,000 = £115,000).

Answer 110

Bank overdraft Correct Correct incorrect drawings Incorrect. These are a withdrawal of capital.

Answer 111

Printing machinery Correct Correct

Answer 112

An expense account does not include spending on long-term assets. Correct Correct. incorrect The profits of a business which have been retained in a sole trader’s business over the years are an asset account. Incorrect Incorrect. This will be included in a sole trader’s capital account.

Answer 113

Net profit Correct incorrect Gross profit Incorrect. This is not the label for the final figure. This label represents the 'total income' of the business less the 'cost of sales'.

Answer 114

All income entries from the trial balance are put at the top of the profit and loss account. Correct Correct why are the following wrong? A profit and loss account is prepared exclusively by using the income and expenses accounts of the business. Incorrect. The 'cost of sales' figure in the profit and loss account is calculated using the figures for 'opening stock' and 'closing stock'. These are both asset accounts, so these two accounts are exceptions to the general rule that a profit and loss account shows only income and expense accounts. Accountants usually prepare the profit and loss account directly from the book-keeping ledgers of the business. Incorrect. Accountants use the entries from a trial balance to construct the profit and loss account. Instead it is the trial balance which would be prepared using the book-keeping ledgers directly.

Answer 115

In order to calculate the 'cost of sales' figure on a profit and loss account, the accountants of the business will carry out the following formula: Opening stock + purchases – closing stock = cost of sales. correct -- why?? incorrect In order to calculate the 'cost of sales' figure on a profit and loss account, the accountants of the business will carry out the following formula: Opening stock – purchases – closing stock = cost of sales. Incorrect. This is not the correct formula for calculating the 'cost of sales' figure on a profit and loss account.

Answer 116

£10,000 Correct. Each transaction will have a dual effect on the balance sheet. On the top part of the balance sheet, the injection of £10,000 of capital would increase the cash assets of the business by £10,000. Cash is a current asset in the top part. The £10,000 also represents an increase in the capital which is recorded in the bottom part of the balance sheet. The loan of £6,000 to purchase fixed assets will increase the value of the fixed assets of the business by £6,000 in the top part of the balance sheet. However, there is a corresponding £6,000 liability as the business has an obligation to repay the loan. There is no effect on the bottom part of the balance sheet. After both transactions, on the top part of the balance sheet, the total assets (£10,000 cash and £6,000 fixed assets) will be £16,000, but as there is also a long term liability of £6,000, the net asset value will be £10,000. On the bottom part of the balance sheet, there will be the initial £10,000 injection of capital. The bottom and top parts of the balance sheet will balance.

Answer 117

The net current assets figure on the balance sheet gives an indication of how much cash the business could make available at short notice. Correct. This figure is calculated by deducting all current liabilities from all current assets. incorrect The net current assets figure (on the top part of the balance sheet) and the total capital figure (on the bottom part of the balance sheet) must be the same in order to show how the money invested by the owners of the business has been used. Incorrect. The net asset value figure (rather than the net current assets figure) on the top part of the balance sheet must be the same as the total capital figure on the bottom part. The net current assets figure on a balance sheet is calculated by deducting all current liabilities from all fixed assets. Incorrect. The net current assets figure is calculated by deducting all current liabilities from all current assets (rather than fixed assets). The fixed assets are dealt with higher up on the balance sheet. Fixed assets such as equipment, machinery and stock are held in the business long term. Incorrect. Fixed assets are indeed classed as being those which are held in the business long term. However, not all of those examples are fixed assets.

Answer 118

Fixed assets (premises) will decrease by £100,000. Current assets (cash) will increase by £100,000. Correct Correct. The only changes are to the top part of the balance sheet. As one entry increases and the other decreases (both in the top part), there is no change to the bottom part of the balance sheet. The top and bottom parts of the balance sheet will continue to balance.

Answer 119

It spreads the depreciation charge evenly over the life of the asset. Correct

Answer 120

£24,000 Correct what is the provision for depreciation? and why does it get factored in?

Answer 121

£8,400 Correct Correct. Since the reducing balance method is used, the provision of £8,000 for depreciation needs to be deducted from the cost figure of £50,000 to give £42,000 as the written down value for the start of the year. The depreciation charge of 20% should then be applied to the £42,000 to give a charge for depreciation for the year of £8,400. incorrect £18,000 Incorrect. This would be the accumulated depreciation at the end of the year using the straight line method. £10,000 Incorrect. It looks as if you have made the calculation using the straight-line method.

Answer 122

An accrual is made when an expense for the year has been incurred but not charged against profit. A prepayment is made when an expense for the year has not been incurred but has been charged as an expense this year. Correct

Answer 123

£7,770 Correct incorrect £770 current liability. Incorrect. This would be the entry on the balance sheet.

Answer 124

A prepayment of £15,000. Correct

Answer 125

£720 correct Receivables in trail balance sheet already take into account the bad debts in trial balance. No need to adjust Receivables figure as no further bad debts written off at the end of the year. Provision for doubtful debts at the end of year : general provision of 1% of Receivables (£72,000) = £720. incorrect £1,720 Incorrect. The provision for doubtful debts is 1% of the Receivables figure of £72,000. £696 Incorrect Incorrect. The provision for doubtful debts is 1% of the Receivables figure of £72,000.

Answer 126

£3,850 correct Trial balance Receivables £102,000 does not include the bad debts at the end of the year of £7,000. Adjusted Receivables £102,000 - 7,000 = 95,000 General provision for doubtful debts is 3% of Adjusted Receivables so 95,000 x 3% = 2,850 Profit and Loss account only shows the difference between provision for doubtful debts and start of year and the provision for doubtful debts at the end of year : So £6,000 (start of year) - £2850 end of year = increase of £3850. incorrect £2,850 Incorrect. This is the provision for doubtful debts at the end of the year. £10,150 Incorrect. It looks as if you have added £3,150 to the bad debt rather than subtracted it (as it is a negative figure). £7,000 Incorrect. This is the bad debt for the year.

Answer 127

Decrease of £355 Correct Receivables in trial balance sheet £41,00 Adjusted Receivables : Deduct bad debts written off at the end of the year (£1,500) = £39.500 General provision for DD 1% of Adjusted Receivables 39,500 x 1% = £395 Difference between doubtful debt at start of year (£750) and at end of year (£395) = £355 Decrease of £395 Incorrect. £395 is the provision for doubtful debts at the end of the year. Increase of £355 Incorrect. The provision for doubtful debts has decreased from £750 to £395.

Answer 128

Drawings are withdrawals of profit by the partners of a partnership. Correct Correct incorrect Drawings are appropriations of profit by partners which never need to be repaid. Incorrect. A partner could be liable to make a balancing repayment if they withdraw too much.

Answer 129

A profit appropriation statement is a way of working out the distribution of profits in a partnership. correct

Answer 130

The top half is similar to that of a sole trader; the bottom half is different. Correct Correct

Answer 131

An addition to the balance sheet which shows profits brought forward plus current year profit (less dividends paid). correct incorrect An addition to the balance sheet that only shows dividends paid. Incorrect. It is an addition to the balance sheet which shows profits brought forward plus current year profit (less dividends paid).

Answer 132

The Profit and Loss Account of a company includes a statement of the tax the company should pay on its profits. Correct

Answer 133

The provision for doubtful debts.

Answer 134

The share premium account represents the difference between the nominal value of the share and the amount the shareholder paid. correct

Answer 135

The shareholders have paid £100,000 excluding premium to the company for their shares. correct

Answer 136

Revenue reserves can be distributed to shareholders by way of dividend. Correct

Answer 137

Dividends are paid out of profits generated in the current or previous accounting period. Correct Correct

Answer 138

Final dividends are made after the financial year end and interim dividends are paid during the financial year. correct incorrect Both interim and final dividends constitute debts of the company. Incorrect. Interim dividends are not a debt of the company.

Answer 139

The share capital would increase and the retained earnings would decrease. Correct why would share capital increase? what does that mean? incorrect The current liabilities on the top half of the balance sheet would increase and the retained earnings would decrease. Incorrect. The current liabilities on the top half of the balance sheet will not be affected. Nothing would change on the balance sheet. Incorrect. There will be changes on the balance sheet where a bonus issue is made.

Answer 140

A bond Correct

Answer 141

A statement of fact as to legal and commercial matters made on signing the loan agreement and repeated periodically during the life of the loan. correct

Answer 142

A term loan Correct Correct. This is not a debenture.

Answer 143

A floating charge over the microchips and a fixed charge over the machinery that makes the microchips.

Answer 144

A floating charge over the microchips and a fixed charge over the machinery that makes the microchips. correct

Answer 145

The charges are void against any liquidator or creditor of the company. Correct Correct.

Answer 146

When a floating charge crystallises, it ceases to float over all of the assets in a class and instead fixes onto the assets in the class charged at the time of the crystallisation, preventing the borrower from dealing with those assets. correct

Answer 147

Share capital will increase by £100; share premium account will increase by £100. correct confused incorrect Retained earnings will increase by £200; net assets will increase by £200. Incorrect. Retained earnings will not be affected by a share issue. Share premium account will increase by £200. Incorrect. Only the premium amount paid will need to be represented separately on the accounts in the share premium account. Share capital will increase by £200; share premium account will not change. Incorrect. The premium amount paid will need to be represented separately on the accounts in the share premium account. Share capital will increase by £100; net assets will increase by £100. Incorrect. Net assets will increase by £200 representing the total amount paid for the shares.

Answer 148

The company will be more highly geared as a result of the loan. Correct

Answer 149

50% Correct. Gearing is calculated by the formula "Long term debt divided by total equity".

Answer 150

Form MR01 detailing: - the company creating the charge, - the date of creation of the charge, - the persons entitled to the charge, and - a short description of any land, ships, aircraft or intellectual property registered (or required to be registered) in the UK which is subject to a fixed charge;

Answer 151

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

Answer 152

Cash increases by £200,000; share capital increases by £100,000 and the share premium account increases by £100,000 Correct. This is correct as it describes the effect on each relevant item in the balance sheet.

Answer 153

Increase in non-current liabilities by £800,000; no change on cash/cash equivalents; increase in non-current assets by £800,000; no change in Net Asset Value. Correct Correct. The first transaction – taking out the loan increases the non-current liabilities by £800,000 and increases the cash and cash equivalents by £800,000. The second transaction – purchase of machinery increases the non-current assets by £800,000 and reduces the cash and cash equivalents by £800,000. The net effect of both transactions is no change to the cash and cash equivalents or to the Net Asset Value. incorrect Increase in current liabilities by £800,000; no change on cash/cash equivalents; increase in current assets by £800,000; no change in Net Asset Value. Incorrect. Please review your materials on business accounts and ensure you understand the difference between a non-current liability and a current liability and non-current and current assets.

Answer 154

A floating charge because the vehicles are a type of fluctuating asset. Correct. This answer reflects the most appropriate answer. Whilst the other answer options might sound plausible, they are each incorrect. The vehicles represent fluctuating assets in this scenario (as they are the stock of the company) in relation to which a floating charge is the most appropriate security that the bank could take. A pledge, whilst possible as a form of security, is not appropriate as it would involve the as sets being physically transferred to the bank which due to their size and number and the fact that the company would then not be able to sell them would be inappropriate. Whilst vehicles can sometimes be considered a permanent asset, in this case they represent the stock of the company. As the vehicles are therefore a fluctuating assets the company needs to be able to freely dispose of them and so are not appropriate for a fixed charge. Whilst a debenture does contain comprehensive security interests, a debenture in itself is not a form of security interest. A charge by way of legal mortgage is only appropriate as a form of security over land.

Answer 155

The security document will need to be registered at Companies House within 21 days beginning with the day after the date of creation of the security. Correct. This reflects the position under s 859A(4) CA 2006. The loan agreement will contain commercially sensitive information so will not be registered at Companies House. A shareholder resolution to approve the grant of security is only required if the constitution of the company requires it. This company was incorporated in 2016 with model articles (which have not been changed) so no requirement for shareholder approval applies.

Answer 156

A company which has failed to comply with a statutory demand for £500. Correct. Failure to comply with a statutory demand for a debt of over £750 is one of the tests for insolvency. incorrect A company which has failed to satisfy enforcement of a judgment debt for £500. Incorrect. Failure to satisfy enforcement of a judgment debt is one of the tests for insolvency.

Answer 157

Because directors may be personally liable under provisions of IA 1986 where the company is insolvent if they do not take the correct steps and in breach of their duties under CA 2006. Correct Correct. Insolvency is one of the rare situations in which directors may risk incurring personal liability for the debts of the company.

Answer 158

The directors could consider obtaining a pre-insolvency moratorium by filing specified documents at court correct incorrect The company could enter into a CVA, which is an informal arrangement between a company and its creditors. Incorrect. A CVA is a formal arrangement between a company and its creditors.

Answer 159

Whilst the CVA is supervised by a licensed insolvency practitioner, the directors of the company remain in control of the business. correct

Answer 160

The Plan must be approved by 75% in value of each affected class of creditors and shareholders. However, the court may sanction the Plan even if one or more classes have not approved it. correct

Answer 161

The directors must file a notice of intention to appoint an administrator at court and serve this on any QFCH 5 business days before they file the notice of appointment to appoint an administrator. correct

Answer 162

A QFCH can appoint its own choice of administrator. Correct

Answer 163

A fixed charge receiver owes its duties primarily to its appointor. correct

Answer 164

Members' voluntary liquidation Correct - this can only be used when the company is solvent.

Answer 165

All employees will be automatically dismissed; the directors lose their powers and are automatically dismissed from office. correct

Answer 166

The shareholders will pass a special resolution to put the company into liquidation and an ordinary resolution to nominate a liquidator. Correct

Answer 167

The proceeds of an insolvent estate should be divided up in the following order of priority: (1) liquidators fees of realising fixed charge assets; (2) fixed charge creditors; (3) other costs and expenses of the liquidation; (4) preferential creditors; (5) prescribed part fund; (6) floating charge creditors; (7) unsecured creditors; (8) interest; (9) shareholders. Correct

Answer 168

Employees Correct Correct. There are 2 tiers of preferential creditors – employees for remuneration due in the 4 months before the winding up subject to a maximum of £800 plus accrued holiday pay, and HMRC.

Answer 169

Unsecured creditors, employees (if they are owed monies over and above the preferential amount) and shareholders. correct

Answer 170

An IVA must be approved by more than 75% in value of all creditors. correct

Answer 171

The debtor is unable to pay its debts as evidenced by an unsatisfied statutory demand that has been outstanding for three weeks from the date of service of the statutory demand. Correct incorrect The creditor believes that the debtor is likely to become unable to pay its debts in the near future. Incorrect. The creditor must establish that the debtor is unable/has no reasonable prospect to pay its petition debts at the time of the petition.

Answer 172

The ‘relevant time’ for a trustee in bankruptcy to bring a claim for a transaction at an undervalue is within 5 years preceding the day of presentation of the bankruptcy petition.

Answer 173

From funds for the preferential and unsecured creditors Correct. Whilst the other answer options might sound plausible, they are each incorrect. As the employees in this scenario meet the criteria as preferential creditors in relation to some of the monies owed to them, they will recover the rest as unsecured creditors. Whilst ultimately some of the funds paid to them as an unsecured creditor may come from the prescribed part fund, they will receive this in their capacity as an unsecured creditor along with any other unsecured creditors. incorrect From funds for the preferential creditors and the prescribed part fund Incorrect. Whilst the employees may receive some funds from the prescribed part, they will receive this in their capacity as unsecured creditors along with any other unsecured creditors. As the employees in this scenario meet the criteria as preferential creditors in relation to some of the monies owed to them, they will recover these monies as preferential creditors and recover the remaining monies as unsecured creditors. From funds for the preferential creditors Incorrect. As the employees in this scenario meet the criteria as preferential creditors in relation to some of the monies owed to them, they will recover these monies as preferential creditors and recover the remaining monies as unsecured creditors.

Answer 174

(1) Preferential creditors (2) set aside the prescribed part (3) the supplier (4) the lender (5) the unsecured creditors. Correct. The employees will rank as preferential creditors for part of their claim. incorrect (1) Preferential creditors (2) set aside the prescribed part (3) the lender (4) the supplier (5) the unsecured creditors. Incorrect. Security ranks in the order of creation and not the date of registration at Companies House, provided the charges are registered within the required period. The supplier will be paid ahead of the lender.

Answer 175

The winding-up petition proceedings would be stayed and would require the consent of the administrator or the court to continue. Correct. The proceedings would be stayed due to the moratorium on creditor action which comes into force upon the company entering into administration. The moratorium prevents a winding-up order being made against the company. As a qualifying floating charge holder, the appointment of the administrator made by the bank takes effect immediately and cannot be superseded by any other party. incorrect The winding-up petition proceedings would be stayed, but the unsecured creditor could appoint its own administrator to consent to the proceedings continuing. Incorrect. As a qualifying floating charge holder, the appointment made by the bank takes effect immediately and cannot be superseded by any other party. An unsecured creditor would need to apply to the court to appoint its choice of administrator in any event.

Answer 176

The bank will receive payment from the fixed charge fund. The floating charge assets are then sold and distributed as follows (1) preferential creditors – the employees followed by HMRC (2) set aside the prescribed part (3) the bank receives any further payment required from the floating charge assets (4) the unsecured creditors, who will benefit from the prescribed part fund as well as any remaining floating charge assets. Correct. The employees and HMRC are both preferential creditors, but the employees are tier 1 and HMRC tier 2. The bank may receive payment out of the fixed charge assets and the floating charge assets but may not benefit from the prescribed part fund. incorrect The bank will receive payment from the fixed charge fund. The floating charge assets are then sold and distributed as follows (1) set aside the prescribed part (2) preferential creditors – the employees followed by HMRC (3) the bank receives any further payment required from the floating charge assets (4) the unsecured creditors, who will benefit from the prescribed part fund as well as any remaining floating charge assets. Incorrect. Preferential creditors are paid before the prescribed part fund is set aside.

Answer 177

The CVA Proposal, if approved by 75% in value of creditors and a simple majority of shareholders, will bind all the unsecured creditors. However, the bank will not be bound unless they consent. Correct Correct. A CVA can compromise unsecured debt but not secured debt without the secured creditor’s consent; s.4 Insolvency Act. Incorrect. A debt owed to a bank is capable of being compromised by a CVA. What is important is not whether the creditor is a bank but what type of debt the company owes the bank. CVAs can compromise unsecured debt but not secured debt without the secured creditor’s consent; s.4 Insolvency Act. Incorrect Incorrect. The CVA also needs to be approved by a simple majority of members. If the requisite approvals are obtained, the CVA will bind all unsecured creditors.

Answer 178

Any person who is knowingly party to the carrying on of any business of the company with an intent to defraud creditors. Correct

Answer 179

A liquidator or administrator. Correct - see s 213 and s 246ZA IA 1986.

Answer 180

An intent to defraud creditors which involves actual dishonesty, assessed on a subjective basis. Correct

Answer 181

A claim may be brought by a liquidator or administrator of the company against any person who was at the relevant time a director of the company and who knew or ought to have concluded that there is no reasonable prospect of the company avoiding insolvent liquidation. Correct

Answer 182

The court applies the ‘reasonably diligent person’ test in order to determine whether a director ought to have concluded that there was no reasonable prospect of avoiding an insolvent liquidation or administration and whether the director then took every step to minimise the potential loss to the company’s creditors. Correct

Answer 183

The time before the commencement of the winding up or insolvent administration at which the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation (or insolvent administration). Correct

Answer 184

Transaction at an undervalue correct

Answer 185

The floating charge is invalid for the existing overdraft of £10,000 but valid in respect of the additional £15,000 of ‘new money’. correct incorrect The floating charge is valid for the entire £25,000 since new consideration was granted. Incorrect. The floating charge is only valid in respect of the additional £15,000 of ‘new money’.

Answer 186

Preference correct

Answer 187

C. The floating charge was created within the relevant time. This means the administrator could seek to challenge the floating charge if Company D was insolvent at the time or became insolvent as a result of granting the floating charge. However, the floating charge will be valid to secure £30,000 provided Company D has paid £20,000 or more into its account since the creation of the floating charge. if part of the overdraft has been paid off then the rest will be considered new money In Re Yeovil Glove Co. Ltd [1965] CH 148, the company granted a floating charge to its bank to secure an existing unsecured overdraft, as a condition of the bank not calling in the overdraft, at a time when it was insolvent. The company went into liquidation a few month later. The liquidator challenged the validity of the floating charge as it related to past unsecured indebtedness. The court held that the floating charge was valid because (1) each time the company used its overdraft facility after the creation of the floating charge, this was deemed to be ‘new money’ advanced by the bank (2) The rule in Devaynes v Noble [1816] 1 Mer. 572 provides that payments into a bank account discharges the earliest advances made by the bank first. As the company had paid more than £67,000 into the account since the grant of the floating charge, it could be said that the pre-charge debt of £67,000 had been paid off and that the existing overdraft balance at the time of appointment of the officeholder was ‘new’ debt. A is partially correct

Answer 188

The administrator is likely to obtain the remedy sought. The company has entered into a transaction at an undervalue at a relevant time with a person connected to the company. There will be a presumption that the company was insolvent at the time or became so as a result. Correct. The administrator is likely to obtain the remedy sought under s 241(1)(d) Insolvency Act 1986 because the company entered into a transaction at an undervalue and the material facts should be easy for the administrator to prove. The director gave no consideration for the van (s 238(4)(a)); the transaction took place at a relevant time (s. 220(1)(a)); and the director is a person connected to the company (s 249(a), giving rise to a presumption of insolvency under s. 240(2). We cannot tell on the facts whether or not there is any chance of the director proving the defence under s 238(5).

Answer 189

The liquidator may bring a claim against the directors for wrongful trading. Correct Correct. The directors will be liable for wrongful trading unless they can show that they took every step to minimise loss to creditors (s 214(3)). This does not look to be the case on the facts of this scenario.

Answer 190

The floating charge will be valid security for the additional £250,000 at the point at which it is granted and will be invalid against the liquidator in respect of the £500,000 already drawn. Correct. Floating charges granted at a time when the company is insolvent are void against a liquidator except to the extent that they secure money granted at the same time or after the floating charge is granted. The existing £500,000 overdraft will therefore not be secured by the floating charge but the £250,000 advanced at the same time that the floating charge was granted will be secured by the floating charge.

Answer 191

The administrator may challenge the transaction as a voidable preference since it took place within the relevant time and a desire to prefer will be presumed due to the director being connected to the company. correct

Answer 192

A claim to set aside the transaction as a transaction at an undervalue. Correct. The fact pattern points to a transaction at undervalue. Preferences involve putting a creditor in a better position eg by paying-off the creditor ahead of other creditors in the run up to an insolvency. A liquidator would prefer to rely on s 239 IA 1986 transactions at undervalue as opposed to s 423 IA 1986 because there is no requirement to prove that there was intention to put assets beyond the reach of creditors.

Answer 193

Private limited company This question is about business structures. A private limited company is the most appropriate structure for these clients as the clients will have limited liability and flexibility in raising finance. Correct. A private limited company is the most appropriate structure as there is limited liability and flexibility in raising finance.

Answer 194

This is a quasi loan to a director of the Company’s holding company. Shareholder approval is not required. The transaction described is a quasi loan given to a director of a holding company (s 199). Shareholder approval is only required under s 198 if the company is a PLC or associated with a PLC. This is not the case here.

Answer 195

An ordinary resolution to grant the directors authority to allot the preference shares and a special resolution to amend the articles to include the new class of shares. This question is about the procedure for issue of a new class of preference shares for a 1985 Act company which has adopted Model Articles under CA 2006. The company has removed the cap on its authorised share capital as it has adopted the Model Articles. An OR is required to give directors authority to allot as this is a new class of shares (s 550 does not apply); the preference shares are not equity securities (s 560) as they do not carry a right to participate so pre-emption rights do not need to be disapplied. Finally, as the company has only ordinary shares in issue the articles must also be amended by SR to create the rights to the preference shares.

Answer 196

Both the buyer and the buyer’s holding company are able to provide the requested security, however the target company is prohibited from providing security since this constitutes unlawful financial assistance. This question concerns the prohibitions on financial assistance under s 678 and 679 CA 2006. Section 678 of the Companies Act 2006 applies as the target is a public company. There is no prohibition for either the buyer or the holding company of the buyer to financially assist with the acquisition. However, where a target is a public company then under s 678 it cannot financially assist itself with its own acquisition. Giving security to the bank would constitute prohibited financial assistance, in circumstances where the charge is security exchange for the bank lender to the buyer to facilitate the share purchase.

Answer 197

The majority shareholder and two of the minority shareholders. This question concerns the approval necessary to call a general meeting on short notice. According to s 307(4) – (6), calling a general meeting on short notice requires the consent of shareholders representing 90% of the total voting rights and a majority in number of the shareholders.

Answer 198

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

Answer 199

Person D may vote against their removal at the General Meeting. However, Persons A, B and C will be able to achieve the necessary majority to pass the ordinary resolution to remove Person D as a director at the General Meeting. This question concerns the removal of a director. An ordinary resolution is required. Directors who are also shareholders are able to count in the quorum and vote against their removal at the relevant General Meeting.

Answer 200

No, because the service contract’s ‘guaranteed term’ is three months. This question concerns the requirement for shareholder approval for directors’ service contracts where those contracts fall into the definition of long term service contracts under s 188. No shareholder resolution is required on the facts here as the ‘guaranteed term’ of this contract is less than 2 years. Although the director has the option to renew the contract so that it could potentially run for more than two years, it can be terminated by the company at any time by giving 3 months’ notice: s 188 (3) (b) Companies Act 2006. The guaranteed term of the contract is therefore just 3 months.

Answer 201

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

Answer 202

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

Answer 203

Yes, because the transaction involves the sale and purchase of machinery whose value exceeds 10% of the company’s asset value. The director’s son is a connected person. This question concerns substantial property transactions under s 190. The transaction is between the company and a person connected to one of its directors. The asset is a non-cash asset and the value of the transaction exceeds 10% of the company’s net asset value therefore shareholder approval by ordinary resolution will be required.

Answer 204

The lease is not binding on the company but will be binding on the director who signed the lease on the company’s behalf. This question concerns pre-incorporation contracts. Under s 51 Companies Act 2006, a contract entered into on behalf of a company but prior to the date of incorporation will not bind the company. The person who signed the contract purportedly on behalf of the company will instead assume personal liability under the contract. Correct. Because the lease was entered into prior to the date of incorporation of the company, the company will not be bound by it but instead the person who signed purportedly on behalf of the company will be liable under s 51 Companies Act 2006.

Answer 205

Yes, as apart from registration requirements there is no requirement for a memorandum or articles and no particular management structure is imposed on an LLP, apart from the need for at least two ‘designated’ members. This question concerns the features of LLPs. Apart from registration requirements there is no requirement for a memorandum or articles and no particular management structure is imposed on an LLP, apart from the need for at least two ‘designated’ members. All members enjoy limited liability other than in the very limited case where the business is carried on for over 6 months after the LLP is down to one member, that member becomes jointly and severally liable, with the LLP, for debts incurred after the 6 month grace period. LLPs do need to file accounts at Companies House but there are far fewer filing requirements than for a company.

Answer 206

The shareholder could bring an action for unfair prejudice against the company. This question concerns the claims available to minority shareholders. An action for unfair prejudice under s 994(1) CA 2006 could be brought against the company on the facts by a member of the company on the grounds that the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members. This includes serious and/or repeated mismanagement which puts at risk the value of the minority shareholder’s interest. The most likely remedy the court may order is the purchase of the petitioner’s shares by the other shareholders or the company. A derivative claim under s 260 would also be possible – this is a claim brought by a shareholder on the company’s behalf. However, where a derivative claim is brought, relief is obtained on behalf of the company.

Answer 207

A, B and D would be able to pass an ordinary resolution to remove C, but C will likely have a claim under the shareholders’ agreement against those shareholders that voted to remove them. This question concerns removal of a director under s 168 Companies Act 2006 and the effect of a provision in a shareholders’ agreement requiring unanimity. Section 168 provides that a director may be removed by ordinary resolution and this will always take precedence over a shareholders’ agreement. If A, B and D vote to remove C then the removal resolution will be passed. C will however have a claim under the shareholders’ agreement against them for damages. Correct. Whilst an ordinary resolution under s. 168 Companies Act 2006 would still be valid, C would have a personal claim under the shareholders’ agreement against those Shareholders that voted in full knowledge that unanimity to remove C would be unlikely (C would not vote for his own removal).

Answer 208

The Director is entitled to speak and have written representations circulated and read out at the general meeting in which the Resolution is moved. This question concerns removal of a director under s 168 Companies Act 2006 and the rights of the director whose removal has been proposed. Irrespective of whether the director in question is a shareholder, they are entitled to speak and have written representations circulated and read out at the general meeting in which the Resolution is moved. On the facts here, the director is not a shareholder so will not be entitled to vote at the general meeting.

Answer 209

This decision requires a special resolution and any 6 shareholders will need to vote in favour. This question concerns the resolution required to change a company’s name. Under s 77(1) a special resolution is required (or any other method specified in the articles, but the Model Articles do not set out another method). On the facts here, any 6 shareholders would be able to pass a special resolution (since they would hold 75% of the votes on either a show of hands or a poll vote). Correct. Changing the Company’s name can be achieved by way of a special resolution under s 77(1) Companies Act 2006 as the Company has articles in the form of unamended Model Articles. Pursuant to s 283(1), a special resolution is required to be passed by a majority of not less than 75%. This would require a majority of 6 / 8 shareholders to vote in favour.

Answer 210

The director should disclose their shareholding to the other directors at the board meeting because they are indirectly interested in this transaction. This question concerns the duty on directors to declare their interests in proposed transactions under s 177 Companies Act 2006. The director here has an indirect interest in the transaction due to their shareholding in Company B, which they should disclose at the board meeting. They will not be able to form part of the quorum or vote on the board resolution relating to the transaction.

Answer 211

The solicitor can act because the shares together with the shares already owned by the individual is more than 50% of the voting shares in Company A. This question concerns whether a solicitor can advise a person on an acquisition of shares in accordance with regulations covering such advice. Correct. The specified investments are shares. The specified activity is arranging deals in shares. However, the exclusion in Article 70 RAO applies as the shares being brought together with the shares already owned by the individual is more than 50% of the voting shares in Company A. Incorrect. The advice to the individual may be incidental but it would not arise out of the provision of professional services to the individual.

Answer 212

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

Answer 213

A claim to set aside the transaction as a preference.   This question concerns analysis around voidable transactions and the claim that a liquidator can make to claw back monies for the benefit of the creditors on a winding up of the company. Correct. Preferences involve putting a creditor in a better position, for example, by paying-off the creditor ahead of other creditors in the run up to an insolvency.

Answer 214

The liquidator has grounds to challenge the gift as a transaction at an undervalue because it took place within the relevant time and is an undervalue transaction. There is no need to prove insolvency. This question concerns voidable transactions when a company enters into an insolvency procedure. Here a liquidator of the company has been appointed and is looking back to see if they can challenge a gift of the computer equipment to one of its directors. The correct type of voidable transaction under the Insolvency Act 1986 needed to be considered and whether the transaction fell within the relevant time.

Answer 215

Form MR01; a certified copy of the debenture; and the relevant fee. This question is about debt finance and security and the documents that need to be filed at Companies House to protect the bank's security. Correct. The loan agreement and guarantee do not need to be registered at CH

Answer 216

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

Answer 217

Increase in non-current liabilities by £400,000; no change on cash/cash equivalents; increase in non-current assets by £400,000; no change in Net Asset Value. This question tests understanding of how raising funds to purchase an asset will impact upon a company's balance sheet. Correct. Taking out the loan increases the non-current liabilities by £400,000 and increases the cash and cash equivalents by £400,000. The second transaction – purchase of machinery increases the non-current assets by £400,000 and reduces the cash and cash equivalents by £400,000.  The net effect of both transactions is no change to the cash and cash equivalents or to the Net Asset Value.

Answer 218

Cash increases by £600,000 which increases current assets by £600,000; share capital increases by £300,000 and the share premium account increases by £300,000. This question concerns business accounts and the impact on the balance sheet when a company chooses to issue new shares to raise finance. Correct. Where shares are sold at a premium, a share premium account needs to be created.

Answer 219

The company will calculate their tax liability at the end of the accounting period and pay HMRC within 9 months and one day of the end of the accounting period. This question concerns how a company should pay its tax liability on its profits. The question requires you to identify the level of profit and apply the relevant tax rules. Correct. Companies with TTP of £1,500,00 or less pay within 9 months and 1 day of the end of the accounting period.

Answer 220

£7,000  This question concerns applying the relevant calculation to work out a person's capital gains tax liability using the information given in the question. Correct. The net proceeds of sale will be £95,000 (£100,000 minus £5,000 sale costs). After deducting initial acquisition cost (£45,000) and incidental disposal costs of £2,700, the chargeable gain will be £47,300. The taxable chargeable gain will be £47,300 minus the annual exemption (£12,300) = £35,000. As CGT is taxed after income, and we are told the person is a higher rate taxpayer with a taxable income of £50,000, all of the taxable chargeable gain of £35,000 will be taxed at the higher rate of 20%. The tax liability will therefore be £7,000.

Answer 221

No tax reliefs are available. Business Assets Disposal Relief will not apply as the person only has a 3% shareholding in the company. This question concerns the tax reliefs available, if any, for an employee who is selling shares in a company. This question means you need to analyse the information to see whether the person selling their shares qualifies for any available tax relief. Correct. The criteria for BADR has not been satisfied as the employee only has a 3% shareholding. Conditions for BADR are 5% shareholding; employee/director; ownership for 2 years or more; not used up lifetime allowance of £1m.

Answer 222

£3,000  This question tests understanding of how to calculate a person's capital gains tax liability using information about the person's income and the actual amount of the chargeable gain. It requires analysis to ensure the correct CGT tax rate is being used for the relevant proportions of the chargeable gain. Correct. The £15,000 chargeable gain is taxed at 20%  because the person’s taxable income exceeds the basic rate threshold.  The annual exemption has already been deducted as we are given the chargeable gain figure.

Answer 223

The employees will be paid first. A prescribed part fund will be set aside. The Bank is then paid under its floating charge. The remaining funds together with the prescribed part fund will be divided amongst the unsecured creditors. This question is looking at the order of priority in respect of which debts are paid out in the event of a company being placed in liquidation. Correct. The employees are preferential creditors in respect of their unpaid wages. The prescribed part is set aside. The bank is then paid under its floating charge. The remaining funds are added to the prescribed part to be divided amongst the unsecured creditors.

Answer 224

The floating charge is void against a liquidator, administrator and any creditor of the company. The debt due from the company to the bank is immediately payable. This question is about the consequences of not registering a floating charge at Companies House. Correct. The charge is void against any liquidator, administrator and creditor of the company. In addition, the debt becomes immediately due and payable.

Answer 225

The proceedings brought by the supplier would be stayed and no administration procedure can be commenced by the bank whilst the pre-insolvency moratorium is in force.  This question concerns the effect of a pre-insolvency moratorium in respect of the bank threatening to appoint an administrator and a supplier issuing proceedings in respect of an outstanding debt. Correct. The moratorium would result in the proceedings being stayed. No winding up procedure or administration can be commenced during the moratorium. It is designed to give the company a breathing space to sort out its finances.

Answer 226

Taking out a further loan would increase the company’s gearing but may have no adverse effect on the earnings per share. The question concerns the considerations for a company concerning its gearing ratio (i.e. the long term debt to equity ratio) and how this is impacted by the company taking out a loan from the bank upon its earnings per share. Correct. Gearing is the ratio of long term debt to equity. The loan has no effect on total equity. The company’s liabilities are increased by the loan but the company’s cash are also increased so net assets remain unchanged. If a company is profitable and financially strong it may be that if it can afford to pay the interest and any other sums due under a loan agreement and its earnings per share may increase rather than be adversely impacted.

Answer 227

Appoint a fixed charge receiver This question focuses on the different insolvency procedures and which would be most suitable for the bank. Correct. A receiver would be able to realise the value of the assets subject to the fixed charge which would be sufficient to discharge the liabilities outstanding to the bank.

Answer 228

From funds for the preferential and unsecured creditors  incorporating the prescribed part fund This question concerns application of the order of priority to work out from where the employees will be paid the wages they are owed. Correct. As the employees in this scenario meet the criteria as preferential creditors in relation to some of the monies owed to them, they will recover the rest as unsecured creditors.  Whilst ultimately some of the funds paid to them as an unsecured creditor may come from the prescribed part fund, they will receive this in their capacity as an unsecured creditor along with any other unsecured creditors.

Answer 229

The company is not a close company because it is not under the control of (1) five or fewer participators nor (2) any number of participators who are also directors. This question is looking at the tax consequences of making a loan to one of its shareholders. This involves an analysis of whether the company is a close company in order to establish the position using the tests to determine whether it is or not. Correct. Test 1 is not satisfied as 5 shareholders only own 50% of the shareholding so 5 or fewer participators do not have ‘control’. Nor is test 2 satisfied as the five shareholders who are also directors only have 50% of the shareholding and not ‘control’.

Answer 230

The company can deduct the chargeable gain of £50,000 made on the sale of the premises from the price of the plant and machinery to give a new base cost for the plant and machinery of £350,000. This question concerns the availability of tax relief in respect the sale of premises and the purchase of plant and machinery i.e can it claim rollover relief to reduce its tax liability in respect of the chargeable gain on the sale of the premises. Correct. The sale and purchase do not have to take place within the same accounting year. The purchase of the replacement asset can be 12 months before or 3 years after the sale. The assets do not need to be of the same type. Land and plant are both qualifying assets.

Answer 231

A transaction at an undervalue claim against the brother of the director who received the van.  This question considers different types of voidable transactions once an administrator has been appointed. The question is asking you to identify the type of claim the administrator might bring and against whom so is looking at your knowledge of some of the provisions of the Insolvency Act 1986. Correct. The transaction falls within the definition of a TUV to a person connected to a director of the company. The claim is against the brother. On the facts there is no evidence of an intention to defraud creditors. Correct. The company has received the value of the legal advice already but has not yet paid for it.  It will therefore be an accrual (as opposed to a prepayment).  As the value has been received already and the company has committed to paying this sum then £5,000 has already been incurred.  This needs to be reflected as a liability in the balance sheet, otherwise it would be misleading.

Answer 232

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

Answer 233

A special resolution is required to change the name of the company. Any three shareholders will have sufficient voting power to pass the resolution at a general meeting. This is a BLP question. A company may elect to change its name either by special resolution or by other means provided for in the company’s articles. The scenario indicates that the company has adopted articles in the form of unamended Model Articles and, on this basis, a special resolution will be required to be passed in a general meeting. A special resolution is required to be passed by a majority of not less than 75%. Applying this to the facts, this would require three of the shareholders to vote in favour.

Answer 234

The woman will be solely liable to pay the rent under the lease agreement. This is a BLP question. This is a pre-incorporation contract. Under s 51 CA 2006, a person purporting to sign a contract on behalf of a company which has not yet been incorporated will be personally liable for performance of the contract. The woman will therefore be solely liable to pay the rent under the lease agreement.

Answer 235

Partner A and Partner B are jointly liable for the payment. This is a BLP question. This question concerns the liability of partners under the default provisions of the Partnership Act 1890. In the absence of agreement to the contrary, every partner is jointly liable for contractual debts, but a new partner will not be liable for any debts incurred by the partnership before they joined. Partner A and Partner B only will therefore be jointly liable for the payment.

Answer 236

The application for registration (Form IN01); the Memorandum; and the incorporation fee for Companies House. This is a BLP question. As the company intends to use unamended Model Articles, it is not necessary to deliver a copy of the articles to Companies House. The required documents are therefore the application for registration (Form IN01); the Memorandum; and the incorporation fee for Companies House.

Answer 237

The board should circulate the ordinary resolution as a written resolution as this will allow the process to be shortened significantly. The written resolution will be passed once shareholders representing over 50% of the total voting rights sign it. This is a BLP question. Where a company seeks to make a loan to a director, shareholder approval by way of ordinary resolution is required. If approval is sought at a GM, a written memorandum needs to be displayed at the registered office for 15 days ending with the date of the GM. A short notice GM is therefore not beneficial since it would only save one day. The quickest way to obtain the shareholder approval is therefore to use a written resolution, since the memorandum may be attached to the written resolution and the 15-day display requirement is not applicable. The written resolution will be passed once shareholders representing over 50% of the total voting rights sign it.

Answer 238

The individual should pursue a claim for unfair prejudice because the company is likely to qualify as a quasi-partnership. This is a BLP question. This is a question about minority shareholder remedies. The individual should pursue a claim for unfair prejudice because the company is likely to qualify as a quasi-partnership. None of the other options are appropriate. -- Legitimate expectation — in terms of certain small private companies (which are often referred to as quasi-partnerships, case law has established that shareholders may have a legitimate expectation that they be involved in the management of the company, and the prevention of such involvement may equate to unfairly prejudicial conduct.

Answer 239

Company B will need to seek shareholder approval by ordinary resolution. This is a BLP question. This is a loan to a director of the holding company. Under s 197 CA 2006, shareholder approval by ordinary resolution would therefore normally be required from both the company and the holding company. However, the wholly-owned subsidiary exception applies to Company A, therefore shareholder approval is only required from Company B in this scenario.

Answer 240

An ordinary resolution to give directors authority to allot the shares, a special resolution to disapply pre-emption rights and a special resolution to amend the articles. This is a BLP question. This question concerns the resolutions required for the issue of participating preference shares. These shares fall within the definition of equity securities under s 560 CA 2006 therefore a special resolution to disapply pre-emption rights will be required. Since the shares are of a new class, an ordinary resolution to give directors authority to allot the shares and a special resolution to amend the articles will also be required.

Answer 241

A floating charge. This is a BLP question. The vehicles represent fluctuating assets in this scenario (as they are the stock of the company) therefore a floating charge is the most appropriate security that the bank could take.

Answer 242

The solicitor should not read the email and should return the email to the supplier’s solicitor, as the email was sent by mistake. This question concerns the solicitor’s duty to make their client aware of all information material to their client’s matter of which they have knowledge and the specific exceptions to this rule. There is an exception in SRA Code of Conduct for Solicitors, RELs and RFLs 6.4 (d), stating that a solicitor should not make a client aware of information material to their matter if the reason the solicitor has knowledge of the information is because it was in a privileged document which was mistakenly disclosed.

Answer 243

There is no conflict of interest and your firm can act for the client and you can be involved with the purchase. This question concerns conflicts of interest and confidentiality. You will need to maintain the duty of confidentiality that you owe to your previous client. However, there is no conflict of interest on the facts here. The information that you are aware of from the personal injury case is unlikely to affect the purchase of the factory.

Answer 244

The capital loss cannot be set off against the trading profits in the current accounting period and it cannot be set off against the chargeable gain in the previous accounting period. It can only be set off against chargeable gains in subsequent accounting periods. This is a BLP question. This question concerns the use of capital losses to offset trading profits and/or chargeable gains due to corporation tax. Capital losses can generally be set off against chargeable gains only. If there are unused capital losses in the current accounting period, these losses can be carried forward and set off against chargeable gains in subsequent accounting periods.

Answer 245

The pension contributions of £3,000, the interest of £400 and a personal allowance of £12,500. This is a BLP question. This question concerns the deductions that may be made to an individual’s total income to calculate the figure for taxable income. In this example, the deductions would be the personal allowance, pension contributions and interest on a qualifying loan. Pension contributions and interest on qualifying loans are tax reliefs that are available and are required to calculate the net income figure. The personal allowance must then be deducted to calculate the taxable income figure.

Answer 246

When the loan is written off, the tax paid by the company to HMRC will be refunded to the company. The shareholder will be deemed to have received a dividend equal to the amount of the loan written off. This is a BLP question. The company falls within the definition of a close company since it is under the control of five or fewer participators (or any number of participators who are also directors). It will therefore be subject to the special tax avoidance rules, which will mean that when the loan is written off, the tax paid by the company to HMRC will be refunded to the company. The shareholder will be deemed to have received a dividend equal to the amount of the loan written off.

Answer 247

The taxable chargeable gain will be taxed at 20% because the director is a higher rate taxpayer and the sale does not satisfy the criteria for business asset disposal relief. This is a BLP question. This question concerns the capital gains tax on the sale of shares in a private company. The taxable chargeable gain will be taxed at 20% because the director is a higher rate taxpayer and the sale does not satisfy the criteria for business asset disposal relief.

Answer 248

The CVA Proposal, if approved by the requisite majority of creditors, will bind all the unsecured creditors. The bank will not be bound unless it consents. This is a BLP question. This question concerns the effect of a CVA proposal if approved by the requisite majority of creditors. A CVA will bind all unsecured creditors if approved by the requisite majority of unsecured creditors. CVAs cannot bind secured creditors unless they consent (which would be rare). A debt owed to a bank is capable of being compromised by a CVA. What is important is not whether the creditor is a bank but what type of debt the company owes the bank. CVAs can compromise unsecured debt but not secured debt without the secured creditor’s consent. A CVA does not give rise to an automatic moratorium.

Answer 249

The liquidator may be able to challenge the transaction as a voidable preference since it took place within the relevant time, provided that it is proven that the company was insolvent at the time of the transaction or became so as a result of it. A desire to prefer will be presumed on the facts. This is a BLP question. This question concerns voidable transactions. The liquidator may be able to challenge the transaction as a voidable preference since it took place within the relevant time, provided that it is proven that the company was insolvent at the time of the transaction or became so as a result of it. A desire to prefer will be presumed on the facts.

Answer 250

The director should ensure that they take every step to minimise losses to creditors. This would include raising concerns at board meetings, putting in place cost cutting measures, ensuring adequate up to date financial information is available and seeking financial and legal advice. This is a BLP question. This question concerns the liability of directors of an insolvent company. The major risk here would be liability for wrongful trading. In order to ensure that the director does not incur liability for wrongful trading, they should ensure that they take every step to minimise losses to creditors. This would include raising concerns at board meetings, putting in place cost cutting measures, ensuring adequate up to date financial information is available and seeking financial and legal advice.

Answer 251

sole trader partnership llp private and unlisted public companies

Answer 252

costs risk structure formalities privacy finance tax

Answer 253

name must end with - private: limited/ltd - public: public limited company/plc min shareholders - private: 1 - public: 1 min directors: - private: 1 - public: 2 company secretary required? - private: no - public: yes AGM required? - private: no but able to - public: yes min share capital to be issued - private: must have at lease one share (could be incorporate with one share of 1p) - public: min of 50k (or prescribed euro amount) certificates required before commencement of trading - private: certificate of incorporation (can commence business as soon as is incorporated) - public: certificate of incorporation AND cannot commence business until a trading certificate is issued by Registrar showing that the company's allotted share capital is not less than the minimum CA 2006 allows offer of shares to the public? - private: prohibited - public: permitted use of written resolutions? - private: permitted - public: not permitted

Answer 254

separate legal personality + limited liability separate legal personality: a company has a separate from that of its owner(s) - a company becomes a legal person from the date of incorporation (date of issue of certificate of incorporation) - from this date, the company has its own existence and personality limited liability: shareholders' liability for the company's debts is limited - compare with unincorporated models: a sole trader or partners in a partnership

Answer 255

traditional partnership is very easy to establish no formality is required "relationship between persons carrying on a business in common with a view to making a profit" NOT a legal entity separate from the partners themselves "firm"/"partnership" are nouns used to refer to the partners collectively

Answer 256

contractual liability + tortious liability contractual liability - every partner in the firm is liable JOINTLY with the other partners for all the debts and obligations of the firm incurred while they ar a partner tortious liability - in tort, the partners' liability is JOINT AND SEVERAL

Answer 257

the partners each individually pay income tax on their share of profits to HMRC

Answer 258

most partnerships will have some form of express written partnership agreement governing usual min provision - commencement and duration - partnership name and place of business - partnership property - capital, profits and losses - drawings, salary - accounts - dissolution of partnership - duties, powers and restrictions on partners -- work input and roles; any limits on the authority of the partners -- partnership decision making -- incoming partners -- retirement/expulsions of existing partners -- non compete / other restrictions

Answer 259

corporate characteristics + partnerships characteristics corporate characteristics x6 - separate legal personality - limited liability for members - incorporation and registration requirements - requirement to file account at companies house - can create a floating charge over the assets of LLP - certain provisions of company law and corporate insolvency law apply to LLPs in modified form partnerships characteristics x5 - no share capital or capital maintenance requirements - no real distinction between members and management - members can agree amongst themselves -- how to share profits -- management duties -- how decisions are to be made -- how new members are to be appointed -- what retirement provisions shall apply - member's agreement (if there is one) is private - tax transparent

Answer 260

constitutional documents under CA 1985: articles of association + memorandum CA 2006: article of association - memorandum only required as part of procedure to register company at Companies House

Answer 261

all companies must have them they are the main constitutional documents purpose is to regulate the relationship between the shareholders, the directors and the company nature of the contract binds the company and its members to the same extent as if there were covenants on the party of the company and each member to observe those provisions company <--> articles (contract between the company and the members <--> members

Answer 262

incorporation from scratch + shelf company conversion incorporation from scratch: by submitting relevant information to Companies House/online shelf company conversion: purchase of shelf company followed by formalities to enable necessary changes

Answer 263

directors + shareholders directors - decisions taken by board resolutions at board meetings (BMs) - board resolution: each director has one vote - board resolution are passed by simple majority unless the directors have agreed that a particular decision requires unanimity shareholders - two different types of shareholder resolution 1 - OR: passed by simple majority OVER 50% of the votes 2 - Special R: 75% OR MORE of the votes - shareholder resolutions may be passed either at General meeting or in written resolutions -- latter for private companies only

Answer 264

when shareholders vote on show of hands - each shareholder who is present at the meeting will be entitled to one vote - regardless of the number of shares held by that shareholder - provided the share has voting rights under the Articles when the shareholders vote on poll - every shareholder has one vote in respect of each share hef by them

Answer 265

BM + GM BM - who calls? any director - notice? reasonable (Brown v La Trinidad) - quorum? 2 directors - voting? board resolutions pass by majority vote GM - who calls? the board (at a BM) - notice? 14 clear days or short notice - quorum? 2 shareholders (or 1 for single member company) - voting? -- OR: >50% -- SR: =/> 75%

Answer 266

BM --> GM --> BM --> PMMs where a shareholder vote is required for a certain transaction, is is necessary for the company to hold a series of meetings a BM is first required to call the GM a GM is then required for the shareholders to vote on the resolution a further BM is then required to put into effect the outcome of the shareholder vote and there may be post meeting matters to attend to such as filings at Companies House

Answer 267

directors - manage the company on a day to day basis: on an agency basis - powers derive from MA3 and MA5 - certain actions can only be taken by directors if the shareholders have given authority - owe duties to the company shareholders - own the company - are able to control key decisions through shareholder resolutions eg to give directors authority to change the articles, or name of the company

Answer 268

3 categories (can overlap) 1 -- at law - de jure - de factor - shadow 2 -- in practice - executive - non executive 3 -- the company's articles may also provide for alternative directors

Answer 269

governed by the Articles of the company CA 2006 does not stipulate a procedure for the appointment of directors companies with MA may appoint director - by an OR of the shareholders - by a decision of the directors usually latter since easier always check articles as these can set out an alternative procedure

Answer 270

ultimate sanction by shareholders against a director under CA 2006, a company (ie the shareholders) may by OR remove a director NEVER written resolution so GM special notice (28 days) required of resolution for board board is not obliged to put resolution on agenda of a GM if board fails to call a GM within 21 days, shareholders may call it themselves on normal notice not possible for board to remove a director (unless articles provide for it) directors who are also shareholders can vote in capacity as shareholder on OR to remove them AND may protect by Bushell v Faith clause into articles or entering into a shareholder's agreement a company may pay compensation to a director who leaves office -- shareholder approval unless an exceptions apply

Answer 271

x7 duty to 1 -- act within powers 2 -- promote success of the company for the benefit of the members as a whole 3 -- exercise independent judgment 4 -- exercise reasonable care, skill and diligence 5 -- avoid conflict of interests 6 -- not accept benefits from third parties 7 -- declare any interest in a proposed transaction

Answer 272

3 types of transactions between the company and its directors (or people connected to them) which are regulated by CA 2006 and which require the approval of the company's shareholders by OR, in order for the transaction to be valid 1 -- director's long-term service contracts 2 -- substantial property transactions 3 -- loans, quasi-loans and credit transactions in these, there is a risk of conflict of interests so potential breach of duties

Answer 273

Shareholder approval by ordinary resolution is required for any director’s service contract which is, or may be, for a guaranteed period in excess of two years (s 188(2)(a) CA 2006). The guaranteed term is the period during which the contract is to continue other than at the instance of the company where the company either cannot terminate the contract or can only terminate in specific circumstances (s 188(3)). In the absence of approval the term will be void and the contract deemed to terminate on reasonable notice (s 189). Under s 188(6)(b) approval is not required by the members of any company which is a wholly owned subsidiary of another company. If the director is also a director of any holding company, the shareholders of the holding company will also need to give approval (s 188(2)(b)). Where an ordinary resolution is required, a memorandum setting out the terms of the proposed contract must be made available for inspection by members of the company at the company’s registered office for not less than 15 days ending with the day of the meting and at the meeting itself (s188(5)(b)) Where a written resolution is used, the memorandum must be annexed to the written resolution and sent to all eligible members.

Answer 274

Shareholder approval by ordinary resolution is required where there is an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company. Shareholder approval must be given either before the transaction is entered into, or after, provided that the transaction is made conditional on approval being obtained. ‘Substantial non-cash asset’ means an asset other than cash where the value is either: over £5,000 and 10% of the company’s net asset value; or over £100,000. If the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR (s 190(2)). Approval is not required by the members of any company which is a wholly-owned subsidiary of another company (s 190(4)(b)).

Answer 275

For private limited companies which are not associated with a Plc, the only relevant provision is s 197 which provides that an ordinary resolution is required to approve loans to its directors or to directors of its holding company or give guarantees or enter into security in connection with loans to such directors. Plcs and private limited companies which are associated with Plcs are subject to further restrictions relating to loans to a person connected to a director of the company / holding company; quasi-loans to, or credit transactions with, their directors / directors of a holding company / connected persons and guarantees or security in respect of any of these transactions (s 198 – 202). Where the transaction is with a director of the holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR. Approval is not required by the members of any company which is a wholly-owned subsidiary of another company. Where an ordinary resolution is required to approve a loan / quasi-loan / credit transaction / guarantee or security, a memorandum setting out the proposed contract must be made available for inspection by members of the company at the company’s registered office for not less than 15 days ending with the date of the meeting and at the meeting itself. Where a written resolution is used, the memorandum must be annexed to the written resolution and sent to all eligible members.

Answer 276

GMs may be called on less than the usual amount of short notice if sufficient members agree. CA 2006 provides that, for a private company, a GM may be called on short notice if this is agreed to by a majority in number of the members who together hold shares with a nominal value of not less than 90% of the total nominal value of the shares which give the right to attend and vote at the GM. This percentage may be increased to up to 95% by a provision in the company’s articles of association but there is no such provision in the MA. Where companies have few shareholders, it is often possible for meetings to be held at short notice. If all the shareholders are available at the time the directors decide to convene a GM, the following sequence of events may be possible. All of this can be done in well under an hour. BM - Approve notice of GM and consent to short notice. GM - Vote on resolutions set out in notice. Reconvene BM - Directors authorise relevant action and PMM. PMM - carried out.

Answer 277

Copies of all resolutions affecting the company’s constitution must be sent to the Registrar of Companies within 15 days of their being passed. All special resolutions must be filed as they form part of a company’s constitution (ss 17(b) and 29(1)(a) CA 2006), as do a few particular ordinary resolutions specified by the relevant provisions of the CA 2006. Copies of any amended articles must also be filed (s 26(1) CA 2006), together with various company forms. The CA 2006 refers in numerous places (e.g. s 87(1) CA 2006) to requirements for notice of certain events and/or decisions to be given to the Registrar of Companies. The directors will also be responsible for updating the statutory books, e.g. the registers of members and directors, and the BM and GM minute books. If the company has a company secretary he/she will update the statutory books.

Answer 278

membership rights -- CA 2006 shareholder agreements shareholder rights under CA 2006 the removal of directors CA 2006 unfair prejudice actions CA 2006 just and equitable winding up Insolvency Act 1986

Answer 279

claim initiated by a MEMBER of a company rather than by the company itself a) in respect of a CAUSE OF ACTION VESTED IN THE COMPANY and b) seeking relief ON BEHALF OF COMPANY a claim may be brought in respect of a cause of action from an ACTUAL or PROPOSED act or OMISSION involving negligence, default, breach of duty or breach of trust by DIRECTOR of the company 2 stage approval for derivate claim 1 -- court decides if there exists a prima facie case 2 -- detailed consideration of criteria, including evidence from other members; case the proceeds to trial any remedy is granted on behalf of the company and not the shareholder who brought the claim

Answer 280

CA 2006 allows a member to bring an action on the grounds that the company is being run in such a way that they have suffered unfair prejudice Any shareholder can bring an unfair prejudice claim under s 994 CA 2006 on the grounds that the running of the company has unfairly prejudiced them. A claim under s 994 CA 2006 is a personal action brought by the shareholder against the company. The various orders for relief are set out in s 996 CA 2006 and the most common order would be that the other shareholders or the company buy the claimant shareholders' shares from them.

Answer 281

IA 1986: the right for a disgruntled shareholder to apply for the company to be wound up on the grounds that it is just and equitable to do so

Answer 282

the rights attached to a class of shares are determined in the company's articles ordinary shares redeemable shares preference shares non-voting shares employees' shares cumulative shares convertible shares deferred shares

Answer 283

an ALLOTMENT of shares is a contract between the company and ta new/existing shareholder under which the company agrees to issue new shares in return for the purchaser paying the subscription price allotment: company --> shareholder A a TRANSFER is a contract to sell existing shares in the company between an existing shareholder and the purchaser. The company is NOT a party to the contract on a transfer of shares (with the exception of a sale out of treasury shares) transfer: shareholder A <--> shareholder B A company can allot new shares or existing shares can transfer between shareholders by sale or gift. Private limited companies are prohibited from offering shares to the public. When a shareholder is seeking to transfer shares, the Articles must always be checked to ensure there are no restrictions on transfer or pre-emption rights. Transfer of shares is effected by the transferor signing a stock transfer form and giving this to the transferee together with the share certificate. Stamp duty is payable on transfer of shares at 0.5% (min payment £5) where sale price > £1,000. Transmission of shares is an automatic process in the event of death or bankruptcy of a shareholder.

Answer 284

x6 1 -- check if there is a CAP on the amount of shares that can be issued by the company 2 -- check if company directors needs AUTHORITY to allot shares 3 -- EQUITY SECURITIES? look at capital and dividend payout on the shares -- if BOTH are capped, the share is NOT an equity security so no pre-emption rights -- if equity securities: disapply pre-emption rights? 4 -- is company creating a new class of share? if so, the articles will need be amended (SR) to incorporate new class of shares 5 -- BR to allot shares (always required regardless of other steps) 6 -- administrative matters (fillings at companies house and updating company registers)

Answer 285

How can the cap be removed? CA 1985: OR CA 2006: MA = N/A but if Articles = SR The requirement for a company to have an ASC no longer exists under CA 2006. Companies incorporated under CA 2006 will not have an authorised share capital and shareholders wishing to impose a cap to restrict the number of shares which such a company can issue will need to amend the Articles (by special resolution) to include suitable provisions. For companies incorporated under CA 1985, shareholders wishing to remove or amend the deemed restriction in a company’s Articles may do so by ordinary resolution. This is despite the fact that removing such a deemed restriction involves changing the Articles, which would normally require a special resolution under s 21(1) CA 2006. Any such deemed restriction will also fall away due to the company adopting, wholesale, new Articles (eg MA) which do not include provision for any cap (applying s 21(1) CA 2006). Companies incorporated under CA 2006 will not have an authorised share capital. For such companies, therefore, there will be no bar to issuing shares under step 1. The only exception would be if the company has placed a provision in its Articles limiting the number of shares that may be issued. If such a restriction exists, it can be removed, or the limit increased, by special resolution under s 21(1) CA 2006. Per s617(2)(a) CA 2006, each time a company issues shares, its share capital increases automatically.

Answer 286

private + one class of share = automatic unless CA 1985 = OR other companies: OR + restrictions? CA 2006 provides that the directors of a company must not exercise any power of the company to allot shares in the company except: for private companies with only one class of shares in existence, directors have automatic authority to allot new shares of the same class (unless prohibited by Articles) but CA 1985 = OR. or for all other companies, the directors will need to be granted authority to allot the new shares by the shareholders by way of ordinary resolution. -- Authority to allot under s 551(1) CA 2006 can only be given subject to limits in terms of both time and number of shares (s 551(3) CA 2006). --This means that if the company has already granted its directors a s 551(1) CA 2006 authority, it must be checked to ensure it is still valid.

Answer 287

Any new ‘equity securities’ (defined ins 560 CA 2006) must be offered to the existing shareholders of a company (holding ordinary shares), in proportion to their existing shareholdings, before they can be offered to anyone outside the company. Where pre-emption rights apply, the most usual approach is for the company to request the existing shareholders to disapply these pre-emption rights by special resolution.

Answer 288

In order to create a new class of shares, it is necessary for the company, in addition to taking some or all of the steps set out previously, to insert new provisions in its Articles dealing with the rights attached to those new shares. An alteration to the Articles, you will recall, requires a special resolution of the shareholders under s 21 CA 2006 (except if removing a cap transferred from a company’s authorised share capital in its memorandum).

Answer 289

Any requirements for shareholder resolutions must be dealt with in a general meeting before the board meeting is held at which the new shares are allotted. A general meeting will not be needed in advance of the board meeting if x4: has no limit in its constitution on the number of shares which can be issued by the company; + does not require directors’ authorisation because the company is a private company with only one class of shares and there is no restriction in the company’s Articles – s 550 CA 2006) or has already given the directors authority to allot shares; + is issuing the shares to existing shareholders in proportion to their existing shareholdings and follows the procedure in s 562 CA 2006 or has already disapplied s 561 CA 2006 or is a private company and has taken advantage of s 567 CA 2006; and + has the relevant class rights in its Articles.

Answer 290

x4 Copies of resolutions to be sent to Companies House within 15 days Company forms to be sent to Companies House Updating company registers -- Update register of members within two months -- Update PSC register if necessary Share certificates: must be prepared and sent to new shareholders within two months

Answer 291

assistance must be being given; and the assistance must be financial in nature. Financial assistance is covered by the rules whether it is direct (eg a loan given to the buyer of shares) or indirect (eg a guarantee given to a bank in relation to a loan made by the bank to a buyer of shares). Finally, to fall within the statutory provisions, the financial assistance must be being given for the purpose of the acquisition (or, if given after the acquisition, for the purpose of reducing or discharging a liability incurred for the purpose of the acquisition), ie the company giving the assistance must have intended to facilitate the acquisition. the prohibition on a company providing financial assistance for the purchase of its own shares apply onto -- public companies and -- private companies offering assistance for the purchase of shares in a public holding company (conditional and unconditional exceptions: eg dividend payments) principal purpose and incidental part of a larger purpose defences (but narrowly construed by court) financial assistance is a criminal offence and the company and defaulting officers are liable to -- a fine and/or -- up to 2 years' imprisonment

Answer 292

Anumber of specific types of transaction which will be exempt from prohibition provided certain conditions are met. These transactions include, for example: -- Money lending in the ordinary course of business (s 682(2)(a) CA 2006). -- Assistance in respect of employee share schemes (s 682(2)(b) CA 2006). The conditions are that (i) the company giving the assistance is a private company or (ii) the company giving the assistance is a public company and the net assets of that company are not reduced by the giving of the assistance or to the extent that they are reduced the assistance is provided out of distributable profits (s 682(1) CA 2006).

Answer 293

Essentially, the purpose exception states that the giving of financial assistance will not be unlawful if the principal purpose in giving it is not for the purpose of the acquisition or if that purpose (the acquisition) is only an incidental part of some larger purpose. It should be noted however that because of its narrow application as stated in case law and because of the very serious consequences of giving unlawful financial assistance, this exemption is not normally relied upon.

Answer 294

a buyback of shares takes place when a company purchases its own shares from an existing shareholder there are 3 ways in which a company may fund a buyback of shares the company may use 1 -- distributable profits 2 -- proceeds of a fresh issue of shares made for the purpose of financing the buyback; or 3 -- capital Where a buyback is funded out of profits / proceeds of a fresh issue, a contract is required which must be approved by an OR of the shareholders.

Answer 295

share capital of a company is seen as a permanent fund available to its creditors companies are not allowed to purchase their own shares but a company may buy back its own shares (or redeem redeemable shares) provided it follows CA 2006 procedure

Answer 296

x4 Check Articles for any prohibition on buyback Verify distributable profits Terms of buyback must be set out in a contract - must be available for inspection at least 15 days before GM and at GM itself (or circulated with written resolution) Shareholders must approve the contract by OR

Answer 297

timing + notification + procedure x6 no earlier than 5 weeks, and no later than 7 weeks, after the date of the SR Within 7 days SR company must give notice to its creditors by: -- Publishing a notice in the Gazette + -- Publishing a notice in the same form as the Gazette notice in an appropriate national newspaper, or give notice in writing to each of its creditors, and + -- Filing copies of the directors’ statement and auditors’ report at Companies House. This is so that any interested creditor may inspect these. x6 Check Articles for any prohibition on buyback and on use of capital Terms of buyback must be set out in a contract (15 day display) directors’ statement of solvency (‘DSS’) + the auditors’ report (‘AR’) + accounts (<3 mths old) Shareholders must approve the contract by OR Shareholders must approve the payment out of capital by SR Detailed notification requirements for creditors

Answer 298

Redeemable shares are shares which are issued as redeemable shares. Redeemable shares effectively give the holder temporary membership in the company. They are issued to be redeemed on the occurrence of certain circumstances (for example by providing for redemption on a fixed date and at a fixed price) or may be redeemed at the option of the issuing company or the shareholder. All details of the redemption, including date of redemption and the price to be paid at that date, will either be in the Articles or determined by the directors. As a result, a contract is NOT required to redeem shares, irrespective of the source of funding used. This is because the terms of the redemption have already been set out in the company’s Articles (or determined by the directors) prior to the shares being allotted. Where a company uses capital to fund the redemption there is a lot more regulation and procedure. The procedure is very similar to the buyback of shares out of capital.

Answer 299

INCOME: regular -- receipts: if a receipt is the product of how the taxpayer generates money on a REGULAR basis eg trading profits; interest received on savings account -- expenditure: if an expense is incurred as an integral part of day-to-day TRADING eg bills for heating, rent, marketing, stationary... CAPITAL: one-off -- receipts: eg if a business owned the premises from which the business operates then any gain on the sale -- expenditure: if an expense brings into existence a capital asset as part of the infrastructure of the business or as a business

Answer 300

individuals: - income and capital gains tax - on the basis of a tax year - 6 April to 5 April companies - corporation tax - basis of financial year - 1 April to 31 March

Answer 301

x7: total, net, taxable, split, band, rates, add (TNT S BRA) 1 -- TOTAL INCOME 2 -- less available tax reliefs (interest on qualifying loans and pension contributions) = NET INCOME 3 -- less personal allowance: £12,570 (reduce by £1 for every £2 of net income above £100,000) = TAXABLE INCOMe 4 -- split the taxable income into non-savings, savings and dividend income: taxable less (savings + dividend) = non-savings income 5 -- calculate whether the personal savings allowance is available (ie looking at the taxable income figure to see which income tax band it ends in) 6 -- apply relevant rates 7 -- add together the amounts of tax calculated at step 6 TOTAL TAX LIABILITY

Answer 302

10 steps: value, disposal, net, initial, subsequence, carry, AE net sale proceeds total chargeable gain taxable chargeable gain A: sale proceeds/market value B -- less disposal expenditure C = net proceeds D -- less initial expenditure E -- less subsequence expenditure F = total chargeable gain G -- less carried forward or carried-across losses H -- less annual exemption: 12.3k I = taxable chargeable gain J: apply CGT to the taxable chargeable gain (I) at the applicable rate (10% or 20%) -- Broadly, basic rate taxpayers pay 10% CGT and higher and additional rate taxpayers pay 20% CGT. --It is important to have calculated a person’s income tax prior to their capital gains tax in order to establish this.

Answer 303

x4 1 -- business asset disposal relief: reduces the higher rates of CGT from 20% to 10% for gains arising on qualifying disposals 2 -- investor's relief: reduces the higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying shares, subject to a lifetime limit of 10M 3 -- rollover relief (replacement of business asset relief): defers liability to CGT 4 -- hold-over relief (gift of business assets relief): defers liability to CGT

Answer 304

BPR is an exemption which applies to the value of qualifying business assets and is available to LIFETIME transfers and the DEATH estate Business property includes 1 -- a business or interest in a business eg business of a sole trader or partnership 2 -- shares in an unquoted company 3 -- shares in a quoted company 4 -- land or buildings, machinery or plant owned by a transferor but owned for business purpose by either a company of which the transferor was a partner the transferor must have owned the business asset for at least 2 YEARS IMMEDIATELY prior to the transfer. BPR not available if the business consists wholly or mainly for making or holding investments

Answer 305

VAT is charged on 1-- any supply of goods or services made in the UK 2 -- where it is a taxable supply 3 -- made by a taxable person 4 -- in the course of furtherance of any business carried on by that person

Answer 306

output: the VAT chargeable by a business when making a supply of goods or services input: the VAT paid by a person on goods or services supplied to the person

Answer 307

standard rated: 20% reduced rated: 5% zero rated: 0% exempt

Answer 308

1a -- Supply of Goods or Services: Any supply made in the UK of goods or services done in return for consideration. 1b -- Made in the UK: The place of supply of the relevant goods or services must be in the UK. There are complex rules for working out the place of supply for VAT purposes in cross-border transactions, which are outside the scope of this Workbook. 2 -- Taxable supply: Any supply made in the UK which is not an exempt supply. See below for the various types of supply. 3 -- Taxable person: A person who is, or is required to be, registered for VAT purposes. ‘Person’ includes individuals, partners, companies and unincorporated organisations. -- A person is required to be registered: The current registration threshold is £85,000/ The current deregistration threshold is £83,000. 4 -- In the course or furtherance of any business carried on by him: ‘Business’ is a very wide term and basically any economic activity carried on, on a regular basis. An employee’s services to an employer are excluded. All of a person’s business activities are included in one VAT registration. In this element we will use the phrase ‘taxable business’ to mean a person who is VAT registered or required to be VAT registered.

Answer 309

Standard Rated -- Generally, the standard rate of VAT is 20%. A supply by a business will be standard rated unless it falls within one of the other three categories. -- A VAT registered business charges VAT at standard rate on its outputs and recovers any VAT suffered on its inputs (unless it makes supplies which fall into the exempt category below). Reduced Rated -- A very limited number of types of supply are charged at 5%. These include supplies such as domestic heating and power, installation of mobility aids for the elderly, smoking cessation products and children’s car seats. Zero Rated -- Further supplies are zero rated for public policy reasons. Zero rated supplies include food (within certain categories), sewerage and water, books / newspapers, talking books for the blind, new houses and the construction of new houses, public transport and children’s clothing. -- Zero rated supplies fall into the category of taxable supplies. This means that when a VAT registered business makes zero rated supplies it charges VAT at the rate of 0% on its outputs and it can recover any VAT suffered on its inputs. This is therefore a very favourable supply for a business to make. Exempt -- Supplies that are exempt include the provision of insurance, finance, education / health services and the sale of land and buildings (unless it comprises a new commercial building or the supplier of a commercial building has chosen to make the supply standard rated by waiving the exemption). -- When a business makes exempt supplies it does not charge VAT on its supplies but equally it is notable to recover any VAT suffered on its inputs. This input tax is a cost to the business.

Answer 310

1 -- all income profits 2 -- chargeable gains 3 -- of a body corporate 4 -- that arise in its accounting period the sum of a company's profits and gains is known as 'TTP' (taxable total profits chargeable to corporation tax) companies are assessed to corporation tax by reference to the financial year (1 April -- 31 March) because a company can choose its accounting period, it is often different to the financial year, which is the same for all companies the amount of TTP will determine the amount of corporation tax payable the rate of corporation tax for the current tax year is 19%

Answer 311

chargeable gains + income profits chargeable gains = + sale proceeds - allowable expenditure - indexation allowance - capital/trading losses income profits = + income receipts - deductible expenditure - capital allowance - trading losses

Answer 312

a company will be a close company if it is under the control of -- 5 or fewer participants OR -- any number of participators who are also directors a participator is a person having a share or interest in capital or income of the company for example, shareholders and some creditors control means the ability to exercise control over the company's affairs, normally by voting rights, or the possession of or entitlement to: -- issued shared share capital allowing the greater part (ie more than 50%) of income of the company if distributed -- the greater part of assets of the company on winding up

Answer 313

bookkeeping ledgers --> trial balance --> ALCIE classification + year end adjustments ALCIE classification -- profit and loss account -- balance sheet each transaction will be recorded in two places in the books of the business -- debit entry -- credit entry at the end of the accounting period, total of debit = credit every entry on the trial balance will relate to a ledger: -- asset -- liability -- capital -- income -- expense account before trial balance can be used to prepare the financial statements, year-end adjustment will need to be made to some of the figures to ensure they are accurate for the accounting period

Answer 314

INCOME of a business throughout an accounting period minus EXPENSES incurred in that period to arrive at a profit (or a loss) figure for the period a profit and loss account is a summary of the fortunes of a business over a passage of time

Answer 315

NAV: top half of balance sheet --the net worth or net asset value (NAV) of the business -- ie the value of the assets it has less the liabilities it owes) Capital: bottom half of balance sheet -- capital invested in the business to achieve that net worth

Answer 316

YEA are transactions or modifications to the account entries on the trial balance they are needed to apply the accruals concept to the preparation of financial statements this concept requires that -- all income and expenditure must be 'matched' to the relevant account period AND -- all current obligations must be anticipated as liabilities and all asset value must be assessed to make sure they can be recovered through future profits in conditions of uncertainty x5 -- depreciation -- accruals -- prepayments -- bad debts and doubtful debts

Answer 317

within a partnership, each partner will have their own accounts -- commonly both a capital account and a current account -- these are capital accounts partners in a partnership will take 'drawings' ie a share of the profits of the partnership surplus profits are distributed to partners in the following order -- interest on their capital -- salaries -- remaining profit will be distributed according to an agreed profit share ratio the Profit Appropriation Statement must be completed before the Balance Sheet can be drawn up the top half of a partnership Balance Sheet is similar to that of a sole trader the bottom half, which shows capital, follows a different format

Answer 318

companies prepare accounts because they are obliged to do so by statute companies are required to make up their accounts by their Accounting Reference Date (ARD) companies are permitted to change their ARD there are 3 main differences in the financial statements for companies 1 -- format 2 -- tax 3 -- dividends the BOTTOM portion of the balance sheet shows what is referred to as TOTAL EQUITY or EQUITY AND RESERVES companies can make adjustment to the financial statements to reflect the fact that their assets have decreased in value

Answer 319

the bottom half of a company's balance sheet shows the equity and will balance the top half of the balance there are different entries to consider on the bottom half of a company's balance sheet the called-up share capital is the amount of the nominal value of its shares that the company has required its shareholders to pay there are different kinds of reserves -- capital -- revenue the share premium account represents the difference between the nominal value of the shares and the amount that the shares actually paid for the shares a revaluation reserve is created when a company's directors, as a matter of accounting policy, wish to show more up to date values of non-current assets in the account

Answer 320

the BOTTOM portion of the balance sheet shows what is referred to as TOTAL EQUITY or EQUITY AND RESERVES

Answer 321

2 types: interm and final dividends are paid or payable out of profits generated in the current or previous account periods the owners of companies are shareholders shareholders' return on their investment is the dividend that they may receive like drawings that a sole trader takes from his business, a dividend is an appropriation of profits (after tax). it is not an expense of the business dividends will usually appear in the financial statement called the 'statement of equity' because they are transactions between the company and its shareholders the resulting 'Retained Earnings' will appear on the bottom half of the balance sheet, showing the total profits carried forward on the next account period

Answer 322

loan facilties or debt securities a lender will wish to ensure that they are protected as far as possible from the possibility that the borrowing company may be unable to repay the loan a key method of protection is for the lender to take SECURITY OVER THE ASSETS of the borrowing company

Answer 323

pledge lien mortgage fixed charge floating charge guarantee

Answer 324

a fixed charge is normally taken over assets such as machinery and vehicles the creditor can control what the security provider can do with the fixed charge assets if the charge becomes enforceable, the creditor will have the ability to appoint a receiver of that asset or to exercise a power of sale of the asset

Answer 325

floats over the whole of a class of circulating assets whatever assets in that class happen to be owned by the security provider at any given time are subject to the floating charge, and the security provider is free to dispose of the assets as it wishes until CRYSTALLISATION crystallisation means that the floating charge stops floating and fixes to the assets in the relevant class which are owned by the security provider at the time of crystallisation the creditor thus acquires control of those assets and to this extent a crystallised floating charge is like a fixed charge

Answer 326

when a company issues shares or raises finance by way of a loan, it will need to record these changes in its accounts whether a company chooses equity finance or debt finance, it will have an effect on the balance sheet of the company when taking finance the general rules are: EQUITY -- both the NAV of the company will change AND the total equity -- ie both halves of the balance sheet will be affected by the finance DEBT -- the NAV of the company will not change as a result of the loan and the equity will not change -- ie only the top half of the balance sheet will be affected by the finance

Answer 327

the ratio of liabilities to shareholder funds (total equity in the balance sheet), or in simpler terms, the ration of debt to equity, is an important indicator of the financial health of a company this ration is known as a company's gearing (or leverage) the higher the ration of debt to equity, the more highly a company is geared gearing is calculated by the formula: long term debt (non-current liabilities) /divided by/ equity (total equity) x 100%

Answer 328

a company may be wound up if it is unable to pay its debts there are four tests for insolvency 1 -- the CASH FLOW test: an inability to pay debts as they fall due 2 -- the BALANCE SHEET test: the company's liabilities are greater than its assets 3 -- failure to comply with a statutory demand for a debt of over 750 4 -- failure to satisfy enforcement of a judgement debt

Answer 329

1 -- do nothing: directors risk personal liability under IA 1986 and breach of a directors' duties under CA 2006 2 -- make a deal: reaching either an informal or formal arrangement with the company's creditors with a view to reschedule debts 3 -- appoint an administrator: this is a collective formal insolvency procedure (a procedure which considers the interests of all creditors) 4 -- request the appointment of a receiver: an enforcement procedure (where a creditor, or small group of creditors, are acting to pursue their rights and recover their debt) 5 -- put the company into liquidation: this is a collective insolvency procedure

Answer 330

informal arrangements with creditors: these are standstill agreements with a view to not enforcing rights for a period of time to rescue the company formal arrangements x3 1 -- pre-insolvency moratorium: gives the company a temporary breathing space to rescue the company 2 -- company voluntary agreements (CVA) -- arrangement agreed by the company's creditors and members to achieve an agreement in respect of its debts; CVAs do not bind secured creditors and there is no requirement for court approval 3 -- restructuring plan: court-sanctioned compromise between a company and its creditors and shareholders to restructure the company's debt

Answer 331

a) rescuing the company as a going concern b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up c) realising the property in order to make a distribution to one or more secure or preferential credits these cascading objectives are extremely important as they guide the actions of the administrator throughout the process b) is most likely

Answer 332

whilst administration is a collective procedure receivership is an individual enforcement procedure which benefits only the appointing creditor 3 main types of receivers 1 -- administrative receivers (rare) 2 -- fixed charge received 3 -- court-appointed receivers

Answer 333

liquidation is the process by which a company's business is wound up and its assets transferred to creditors and (if there is a surplus of assets over liabilities) to its member 2 types 1 -- compulsory liquidation 2 -- voluntary liquidation -- a) member's voluntary liquidation -- b) creditors' voluntary liquidation following liquidation, the company's life is generally brought to an end automatically by dissolution

Answer 334

x9: liquid, fixed, other, prefer, create?, float, unsecured, interest, shareholders 1 -- liquidator's fees and expenses of preserving and realising assets subject to fixed charges 2 -- amount due to fixed charge creditor out of the proceeds of selling assets subject to fixed charge 3 -- other costs and expenses of the liquidation 4 -- preferential creditors (the first tier and then the secondary tier) 5 -- creation of the prescribed part fund (if available) for unsecured creditors 6 -- amount due to creditors with floating charges 7 -- unsecured/trade creditors (including payment of the prescribed part) 8 -- interest owed to unsecured creditors 9 -- shareholders

Answer 335

the two formal insolvency procedures for insolvent individuals are 1 - bankruptcy: a collective insolvency procedure enabling an orderly collection, sale and distribution of an insolvent individual's assets for the benefit of all the bankrupt's creditors 2 -- Individual voluntary arrangement (IVA) -- alternative to bankruptcy and is also a collective procedure -- IA 1986 + Insolvecny rules 2016

Answer 336

by a liquidator or an administrator against 1 -- any person 2 -- who is knowingly party to the carrying on of any business of the company 3 -- with intent to defraud creditors or for any fraudulent purposes + actual dishonesty must be proven for a claim for fraudulent trading to succeed

Answer 337

by a liquidator or administrator against any person who was at the relevant time a director court must be satisfied that before the commencement of the winding up or insolvent administration, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation (or insolvent administration) a director may be able to escape liability if they can satisfy the court that, after they first knew or ought to have concluded that there was no reasonable prospect of the company avoiding an insolvent administration or liquidation, they took "every step with a view to minimising the potential loss to the company's creditors" the court applies the reasonably diligent person test a person found to be liable can be ordered to make such a contribution to the company's assets as the curt thinks proper and may also me disqualified

Answer 338

x4 -- transactions at an undervalue -- transactions defrauding creditors -- avoidance of floating charges -- preferences both liquidators and administrators have the ability to challenge certain transactions that have taken place within specified statutory periods prior to the insolvency of a company the aim of a challenge is to restore the company to the same position it would have been in had the transaction not taken place and thereby, increase the funds available in the insolvent estate for the benefit of creditors questions to ask -- did the transaction involve a 'connected person' or 'associate'? -- did the transaction take place within the 'relevant time'? -- was the company insolvent at the time of the transaction or did it become insolvent as a result of the transaction? -- is there a presumption available which shifts the burden of proof from the liquidator/administrator to the other party?

Answer 339

transaction for an undervalue within 2 years prior to onset of insolvency company insolvent at time / as a result (presumed with connected persons) defence: Company acted in good faith and transaction benefited the company

Answer 340

a person is connected with a company if— (a)he is a director or shadow director of the company or an associate of such a director or shadow director, or (b)he is an associate of the company, A person is an associate of an individual if that person is— (a)the individual’s husband or wife or civil partner, (b)a relative of— (i)the individual, or (ii)the individual’s husband or wife or civil partner, or (c)the husband or wife or civil partner of a relative of— (i)the individual, or (ii)the individual’s husband or wife or civil partner.]

Answer 341

transaction for an undervalue intention to defraud creditors no need for company to be insolvent defence: No intention + Company acted in good faith and transaction benefited the company

Answer 342

floating charge created for no new consideration within 12 months prior to onsent of insolvency / within 2 years if connected person company insolvent at time / as a result defence: Valid for ‘new’ monies/’fresh’ consideration

Answer 343

company puts creditor in better position and influenced by desire to prefer within 6 months prior to onset of insolvency / 2 years if connected persons and presumption of preference company insolvent at time/as a result defence: No desire to prefer e.g commercial pressure

Answer 344

The individuals should incorporate an LLP because they will enjoy limited liability. Correct

Answer 345

There is no change in taxation; the LLP is treated as a partnership for taxation purposes. correct