BLP Flashcards
Which of the following correctly sets out the business models in which participants are not generally liable for the debts or liabilities of the business?
LLPs only.
Partnerships and sole traders.
LLPs, partnerships and companies.
Companies only
LLPs and companies
LLPs and companies
Correct
Which of the following best describes the key advantages of the company business model?
A company is a separate legal entity, shareholders have limited liability and there is more flexibility in raising finance since companies may issue shares to raise money and can also provide security to lenders.
Companies have more flexibility in raising finance since they may issue shares to raise money and can also provide security to lenders.
A company is a separate legal entity and the shareholders have limited liability.
A company is a separate legal entity and the shareholders have limited liability. There is no requirement for publicly filed accounts.
A company is a separate legal entity, shareholders have limited liability and there is more flexibility in raising finance since companies may issue shares to raise money and can also provide security to lenders.
Correct
Two women are setting up a business together. They are primarily concerned with their ability to raise finance and limiting their own personal liabilities as investors. They also do not want to spend lots of money setting up the business.
Which of the following is the best advice to the women in terms of the most suitable business model to use for their new business?
The women should incorporate an LLP. They will enjoy limited personal liability.
They should incorporate an LLP. Whilst there are costs involved in setting up the company, they will enjoy limited personal liability and be able to issue shares and take out bank loans in the LLP’s name.
They should incorporate a private limited company. Whilst there are costs involved in setting up the company, they will enjoy limited personal liability and have a choice of finance options.
They should trade as a traditional partnership. It is free to set up and the partnership has the ability to take out loans.
They should incorporate a private limited company. Whilst there are costs involved in setting up the company, they will enjoy limited personal liability and have a choice of finance options.
Correct
Which of the following correctly describes the structure and tax position of an LLP?
An LLP has a separate legal personality. The partners are taxed as individuals on their shares of the profits and gains.
An LLP has a separate legal personality. The LLP pays income tax on its profits and capital gains tax on its gains.
An LLP is not a separate entity from its partners. The partners are taxed as individuals on their shares of the profits and gains.
An LLP has a separate legal personality. The partners pay corporation tax on the partnership profits.
An LLP is not a separate entity from its partners. The LLP pays corporation tax on the partnership profits.
An LLP has a separate legal personality. The partners are taxed as individuals on their shares of the profits and gains.
Correct
Which one of the following correctly describes the structure and tax position of a traditional partnership?
A partnership has a separate legal personality and the partners are taxed as individuals.
A partnership has a separate legal personality. The partnership pays income tax on the partnership profits.
A partnership has a separate legal personality. The partnership pays corporation tax on the partnership profits.
A partnership is not a separate entity from its partners and the partners are taxed as individuals.
A partnership is not a separate entity from its partners and the partners are taxed as individuals.
Correct. A partnership is not a separate entity from its partners. The partners are taxed as individuals and pay income tax on their share of the profits and capital gains tax on their share of the gains.
What is meant by “double taxation of profits” in the context of a company?
The company pays corporation tax on its profits before the payment of dividends to its shareholders. The individual shareholders who receive the dividends will pay capital gains tax on the amount of the dividend.
The company pays corporation tax on its profits before the payment of dividends to its shareholders. The individual shareholders who receive the dividends will pay income tax on the amount of the dividend.
The company pays income tax on its profits before the payment of dividends to its shareholders. The individual shareholders who receive the dividends will pay income tax on the amount of the dividend.
The company pays capital gains tax on its profits before the payment of dividends to its shareholders. The individual shareholders who receive the dividends will pay income tax on the amount of the dividend.
The company pays corporation tax on its profits before the payment of dividends to its shareholders. The individual shareholders who receive the dividends will pay income tax on the amount of the dividend.
Correct
X Ltd is a private limited company. The board would like to re-register the company as a public limited company.
X Ltd currently has 1 director and 2 shareholders but does not have a company secretary. The company has an issued share capital of £100.
Which of the following statements about the structure of the re-registered PLC is correct?
The company will not need to increase its share capital to be re-registered as a PLC.
Once re-registered as a PLC the company can continue to use written resolutions to make shareholder decisions.
The company will need at least one more shareholder.
The company will not need to appoint a company secretary but may do so if it wishes.
The company will need to appoint at least one more director to the board.
The company will need to appoint at least one more director to the board.
Correct
ABC Plc is a public limited company. It has decided to seek listing on the London Stock Exchange. ABC Plc has a private limited subsidiary called DEF Ltd.
Which one of the following statements is correct?
The shares of DEF Ltd will also be listed once ABC Plc is listed.
It is not the company ABC Plc that will be listed, but its shares.
ABC Plc will only be able to offer shares to the public once it is a listed company.
DEF Ltd should apply for listing once ABC Plc has listed its shares.
As a Plc, ABC Plc must apply to have its shares listed.
It is not the company ABC Plc that will be listed, but its shares.
Correct
X Ltd is converting to a Plc. Which one of the following correctly sets out when X Plc may commence trading as a Plc?
Once the new certificate of incorporation has been issued by the Registrar of companies.
Once the trading certificate has been issued by the Registrar of companies.
Once the directors have changed the name of the company at its registered office and on its stationery.
Once the new certificate of incorporation and trading certificate showing that the company’s allotted share capital is not less than the minimum has been issued by the Registrar of companies.
Once the new certificate of incorporation and trading certificate showing that the company’s allotted share capital is not less than the minimum has been issued by the Registrar of companies.
Correct
A shareholder of a private limited company has bought 1000 £1 shares in the company but has only paid the company £100 so far.
The company has become insolvent but owes a creditor £25,000. The creditor is threatening to bring proceedings for the whole amount against the shareholder.
Which one of the following statements is correct?
The extent of the shareholder’s liability is a further payment of £1000 into the company. The shareholder will not be liable to the creditor for any further sums.
The extent of the shareholder’s liability is a further payment of £900 into the company. The shareholder will not be liable to the creditor for any further sums.
The shareholder’s liability will be limited to a proportion of the amount claimed depending on the proportion of their shareholding.
The shareholder is jointly and severally liable with all the other shareholders to the creditor for the total sum of the claim.
The company has limited liability to the amount invested by the shareholders.
The extent of the shareholder’s liability is a further payment of £900 into the company. The shareholder will not be liable to the creditor for any further sums.
Correct
A man applied to Companies House two days ago to incorporate a company. The certificate of incorporation was issued today by Companies House. The man is the sole shareholder and director of the company.
Which one of the following statements about the legal personality of the company is correct?
The company has a separate legal personality from the date that the man applied to incorporate the company.
It is not possible for the company to have separate legal personality from the sole shareholder and director because they will always be seen as one entity.
It will be possible for the company to own its own property or enter into contracts from the date of the man applied to incorporate the company.
The company has a separate legal personality from today.
If the director of the company changes the company is automatically wound up.
The company has a separate legal personality from today.
Correct
The significance of limited liability to shareholders in a company may be overridden to some extent by which one of the following?
Contractual means such as banks requiring a guarantee from the shareholder(s) of the company as part of lending money to the company.
Where the shareholders are also directors, they will have personal liability for debts of the company.
Where the company’s shareholder is itself a company, the parent or holding company will have unlimited liability for the debts of its subsidiary company.
Where the company has only one shareholder, that shareholder will have unlimited liability.
Contractual means such as banks requiring a guarantee from the shareholder(s) of the company as part of lending money to the company.
Correct
A and B entered a contract 2 months ago. B has breached a term of the contract. The term was stated in the contract expressly to be a condition. What remedies are available to A?
It will be up to the Court to decide what remedy A has.
A can repudiate the contract and/or sue for damages.
A can claim liquidated damages because it is a breach of condition.
A can only sue for damages as the term breached was a condition not a warranty.
A must repudiate the contract since the term breached was a condition.
A can repudiate the contract and/or sue for damages.
correct
X has made an offer to Y to enter into a contract on X’s standard terms of business.
Y sent a letter in the post two weeks ago accepting X’s offer in full. It was sent to the correct address. X has not yet received the acceptance. Can X revoke the offer?
Yes. X can revoke the offer as long as Y receives the revocation letter before X receives the acceptance.
No. X cannot revoke the letter because it is not possible to revoke a written offer.
No. X cannot revoke the offer because it has been validly accepted by Y under the postal rule.
Yes. X can revoke the offer because they have not yet received acceptance.
Yes. X can revoke the offer because the acceptance will lapse after a passage of time.
No. X cannot revoke the offer because it has been validly accepted by Y under the postal rule.
Correct
Which of the following statements represents the correct form of execution?
The document can be validly executed by one of the directors alone.
All of the directors will need to sign the document for it to be validly executed as a deed.
The document will only be validly executed if the company seal is attached.
The company will need an independent witness to sign the document alongside the signatories for it to be validly executed as a deed.
The document can be validly executed if two directors sign.
The document can be validly executed if two directors sign.
correct
Ten partners are in a partnership without a written agreement. The partnership is a firm of accountants.
The partnership is not doing very well financially and is two months late with rent. The finance partner signed the lease agreement with the landlord five years ago on behalf of the partnership.
The senior partner will retire in two months’ time.
Which one of the following statements represents the correct position with regards to the liability of the partners for the overdue rent?
The senior partner will not be liable for the overdue rent once they retire in two months.
Only the finance partner will be liable as they signed the lease.
All ten of the partners are jointly and severally liable for the rent.
All ten of the partners are jointly liable for the rent.
The partnership is liable for the overdue rent.
All ten of the partners are jointly liable for the rent.
Correct
Which one of the following is correct in relation to the tax treatment of partnerships?
Partners in a partnership are liable to pay income tax and capital gains tax on their share of the income and capital gains of the partnership. The partnership itself is also liable to pay income and capital gains tax.
Partners in a partnership are not liable to any tax in relation to the profits and gains of the partnership. The partnership itself is liable to pay corporation tax.
Partners in a partnership are liable to pay income tax and capital gains tax on their share of the income and capital gains of the partnership. The partnership itself is not liable to pay tax.
Partners in a partnership are liable to pay income tax and capital gains tax on their share of the income and capital gains of the partnership. Only the partners therefore need to submit tax returns.
Partners in a partnership are liable to pay income tax and capital gains tax on their share of the income and capital gains of the partnership. The partnership itself is also liable to pay corporation tax.
Partners in a partnership are liable to pay income tax and capital gains tax on their share of the income and capital gains of the partnership. The partnership itself is not liable to pay tax.
Correct. A partnership is not a separate legal entity and therefore does not pay tax.
A firm of surveyors is seeking your advice in relation to a contract entered into by one of the partners. The contract was for a building project and the managing partner had agreed that the partners would do the work for £5,000. The remaining partners are upset as they believe that the managing partner significantly under-quoted for this project and that in fact they should be charging at least £7,000.
Work has not yet started on this contract since the remaining partners are seeking to avoid the contract on the basis that the managing partner was not authorised to enter into it. The written partnership agreement requires that all quotes for work should be signed off by at least two partners.
Which one of the following is the best advice to the partnership?
The partnership will not be bound by the contract since the written partnership agreement requires that all quotes for work should be signed off by at least two partners. The managing partner was therefore acting in breach of the partnership agreement.
The partnership will be bound by the contract since the other partners, in allowing the managing partner to give the quote, will be said to have ratified the partner’s act.
The partnership will be bound by the contract since the act is for carrying on business of the kind carried on by the firm, in the usual way. There does not appear to be anything on the facts to indicate that the customer knew that the managing partner was not authorised to enter into the contract on behalf of the firm.
The partnership will be bound by the contract since the act is for carrying on business of the kind carried on by the firm, in the usual way. There does not appear to be anything on the facts to indicate that the customer knew that the managing partner was not authorised to enter into the contract on behalf of the firm.
Correct
Three individuals (Partner X, Partner Y and Partner Z) began trading together as a partnership 12 months ago. The partners have never signed a partnership agreement.
Partner X contributed 55% of the start up capital; partner Y contributed 40% of the start up capital and Partner C contributed 5% of the start up capital.
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?
All three partners are entitled to an equal share of the profits; none of the partners are entitled to a salary.
None of the partners are entitled to a share of the profits; all of the partners are entitled to a an equal salary.
All three partners are entitled to an equal share of the profits; all three partners are entitled to receive a salary in the proportion of their capital investments.
The three partners are entitled to a profit share in the proportion to their capital investments; and a salary in the proportion to their capital investments.
The three partners are entitled to a profit share in the proportion to their capital investments; none of the partners are entitled to a salary.
All three partners are entitled to an equal share of the profits; none of the partners are entitled to a salary.
Correct
Three individuals have started a business together and have been working in partnership for six months. They have not entered into any formal partnership agreement. Two of the individuals would like to introduce a new partner to the business, but the third individual has reservations about the new proposed partner.
Which of the following is the correct advice as to the appointment of the new partner?
In the absence of agreement, the appointment of a new partner requires unanimity therefore two of the partners cannot appoint the proposed new partner without the agreement of the third existing partner.
In the absence of agreement, the appointment of a new partner requires a majority vote therefore two of the partners can appoint the proposed new partner without the agreement of the third partner.
In the absence of agreement, it is not possible to introduce a new partner to an existing partnership. The effect of this will be that the existing partnership is dissolved, and a new partnership will arise automatically once the new individual commences working with the other partners.
In the absence of agreement, the appointment of a new partner requires unanimity therefore two of the partners cannot appoint the proposed new partner without the agreement of the third existing partner.
correct
Five partners are in a partnership with no formal partnership agreement. Four of the partners are unhappy with the fifth partner and wish to remove the partner.
Which of the following statements represents the correct advice to the partners about removal of the fifth partner?
It will not be possible to remove the fifth partner without unanimous consent.
Once the partner leaves, they will have no claim on the partnership assets.
Once removed, the partnership will continue without the fifth partner, provided that the partners appoint a fifth partner to take the place of the expelled partner.
It will be possible for the four partners to remove the fifth partner because they represent a majority.
Once removed, the partnership will continue without the fifth partner.
It will not be possible to remove the fifth partner without unanimous consent.
correct
Which one of the following is generally seen as an advantage of an LLP when compared to a private limited company?
LLPs are capable of creating a floating charge over the assets of the LLP.
There is little set statutory procedure to follow for an LLP when the partners are making decisions and in day to day management.
LLPs are not required to file accounts at Companies House.
Partners in an LLP have limited liability.
An LLP has a separate legal personality from its members.
There is little set statutory procedure to follow for an LLP when the partners are making decisions and in day to day management.
correct
Two individuals want to start a business together and are keen to limit their liability. They are both going to be active in the running of the business. They do not want to spend a lot of money in the set up of the business, but they need the ability to raise some finance in the future in the business name.
Which of the following would be the best vehicle for their business?
A partnership
A limited liability partnership
A sole trader
A private limited company
A public limited company
A private limited company
Correct. This option has the ability to raise finance and limit the personal liability of the individuals.
Your client is in the process of setting up an online recruitment business. In the future, it is hoped that staff will be employed to undertake a variety of tasks within the business, but for now, all work is carried out by your client who has secured investment from a family member. It has been agreed verbally that the family member will not be entitled salary and will not have any involvement in the day-to-day running of the business. Your client intends to take a salary from the business, but he has not discussed this with the family investor.
You have advised your client on the choice of business medium for this venture and your client has decided that a partnership would be the best option. Your client is keen to keep legal work and formality to a minimum at this stage and has asked you to explain the implications of continuing without a partnership agreement until the business has a regular turnover.
Which of the following statements best describes the impact of your client accepting the investment and continuing without a partnership agreement?
Neither partner would be entitled to any salary, both partners would be entitled to equal shares in the profits of the partnership and decisions would require the consent of both partners.
Both partners would be entitled to equal salaries and equal shares in the profits of the partnership, but decisions would be made by your client alone.
Both partners would be entitled to equal salaries, equal shares in the profits of the partnership and decisions would require the consent of both partners.
Neither partner would be entitled to any salary, both partners would be entitled to equal shares in the profits of the partnership and decisions would be made by your client alone.
Neither partner would be entitled to any salary, your client would be entitled to all of the profits of the partnership and decisions would be made by your client alone.
Neither partner would be entitled to any salary, both partners would be entitled to equal shares in the profits of the partnership and decisions would be made by your client alone.
Correct. The Partnership Act 1890 contains a default code, which applies to relations between the partners themselves in the absence of any contrary agreement. Here, there is a contrary agreement which provides that the family member will not be entitled to a salary and will not participate in decisions of the partnership. The default provisions will apply in respect of your client’s salary (no entitlement) and profit share (equal shares).
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.
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.
You act for a partnership which is made up of 8 partners. There is no written partnership agreement. Profits have always been shared equally between the partners.
Three years ago, the partners all agreed to take out a loan to renovate their main office. The partners all contributed equally to repaying the loan. Unfortunately, the partnership has not been profitable, and they have recently defaulted on the loan repayments.
One of the partners is about to retire. No documentation has been drafted to confirm the details of her retirement. Can the partner who is about to retire be liable for repaying any of the loan?
No, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, only the current partners will be jointly liable for debts of the partnership.
No, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, only the current partners will be jointly and severally liable for debts of the partnership.
No, because the partners have not entered into a written partnership agreement which deals with liability on retirement therefore once the partner retires, she is no longer a partner and therefore has no liability for any debts of the partnership.
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.
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 be jointly and severally liable for repaying the loan regardless of retirement.
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.
Client A and client B are looking to start up a new business offering commercial cleaning services locally. The only requirements of the clients are that (i) the profits and capital of the business are split equally between them and (ii) their liability is limited to their investment in the business (the ‘Agreed Terms’). Provided that these requirements are met, the clients want as little formality and documentation as possible.
What type of partnership would be most appropriate for the clients?
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.
A partnership because although it requires a written agreement to operate on the Agreed Terms and is not a separate legal entity, it does offer limited liability.
A limited liability partnership because although it is not a separate legal entity it does offer limited liability and does not require a written agreement to operate on the Agreed Terms.
A partnership because although it is not a separate legal entity, it offers limited liability and does not require a written agreement to operate on the Agreed Terms.
A limited liability partnership because although it requires a written agreement to operate on the Agreed Terms, it is a separate legal entity offering limited liability.
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.
Which of the following statements correctly describes the legal effect of the articles of a company?
The Articles take effect as a contract between the members themselves in their personal capacities. Members are able to enforce the provisions of the Articles both against the company and directly against other members.
The Articles take effect as a contract between the members themselves in their personal capacities and therefore members may enforce provisions contained in the Articles directly against other members.
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.
The Articles take effect as a contract between the company and its members. Members are able to enforce the provisions of the Articles both against the company and directly against other members.
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
You are advising a client about incorporating a limited company.
Which of the following statement about the constitution of the company is correct?
If there is a conflict between the Articles of Association and the CA 2006, the Articles of Association will prevail.
The newly incorporated company will have unrestricted objects unless the client chooses to restrict them.
The client will not need a memorandum of association to incorporate a company.
The main constitutional documents will be the memorandum.
The newly incorporated company will have unrestricted objects unless the client chooses to restrict them.
Correct
A company was incorporated in 2010. Which of the following statements about the company’s memorandum is correct?
The memorandum is a constitutional document. It will include an objects clause setting out the purposes for which the company has been formed. Any acts outside the scope of the objects clause are said to be ultra vires.
Since this company was incorporated in 2010, it would not have required a memorandum.
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.
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
You are instructed to convert a shelf company PP123 Limited for your client. The one issued share will be transferred to your client WYX Plc and your client plans to appoint 2 directors from its own board to the board of the shelf company.
Which one of the following statements about the conversion is correct?
Your client will control PP123 Limited once it is entered on the register of members.
Your client will control PP123 Limited once the share transfer is registered at Companies House.
PP123 Limited will be a separate legal entity after the conversion.
The current directors should resign before the new directors are appointed to ensure a clean break.
Your client will control PP123 Limited once its shareholding is paid for.
Your client will control PP123 Limited once it is entered on the register of members.
Correct
You are advising a client on a shelf company conversion. As part of the conversion, the client wishes to change the name of the company. The company has unamended Model Articles.
Which one of the following statements about the company name is correct?
The new name will be effective once the correct form has been submitted to Companies House.
The company requires an ordinary resolution to change the name of the company.
The new name will be effective once the Registrar of Companies issues a new certificate of incorporation.
The Directors can change the name themselves once they are appointed to the Board.
The new name will be effective once the Company votes to change the name.
The new name will be effective once the Registrar of Companies issues a new certificate of incorporation.
correct
Your client wishes to incorporate from scratch a new company, which will have unamended Model Articles. Which one of the following correctly describes the documents that will need to be filed at Companies House?
The fee and Form IN01.
The fee, Model Articles and Form IN01.
The memorandum, fee, the company’s Articles and Form IN01.
The memorandum, fee, Model Articles and Form IN01.
The memorandum, fee and Form IN01.
The memorandum, fee and Form IN01.
correct
A company has unamended model articles and 4 shareholders with the following shareholdings:
A - 500 (50%)
B - 250 (25%)
C - 150 (15%)
D - 100 (10%)
The company wishes to shareholders to pass a special resolution using the written resolution procedure.
Which of the following statements is correct advice regarding the procedure?
If one of the shareholders doesn’t vote for 21 days because they miss the email, it will be too late to vote for the resolution as the written resolution will have lapsed.
If C and D abstain, their votes won’t count.
All shareholders must unanimously consent to the written resolution.
A and B can pass the special resolution alone.
The special resolution can only be passed if 3 of the 4 shareholders vote in favour.
On a written resolution vote, abstaining counts as voting against.
A company has unamended model articles and 4 shareholders with the following shareholdings:
A - 500 (50%)
B - 250 (25%)
C - 150 (15%)
D - 100 (10%)
The company wishes to shareholders to pass an ordinary resolution at a General Meeting. All shareholders will attend the meeting and vote.
Which of the following statements is correct advice regarding the procedure?
If B, C and D all vote in favour of the ordinary resolution, it will be passed despite A voting against it.
If A is not in favour of the resolution, it cannot be passed.
A can pass the ordinary resolution alone.
The ordinary resolution can only be passed if 3 of the 4 shareholders vote in favour.
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).
A company has unamended model articles and 4 shareholders with the following shareholdings:
A - 500 (50%)
B - 250 (25%)
C - 150 (15%)
D - 100 (10%)
The company wishes to shareholders to pass a special resolution at a General Meeting. All shareholders will attend the meeting and vote.
Which of the following statements is the correct advice regarding the procedure?
The special resolution can be passed if any 3 of the 4 shareholders vote in favour.
The special resolution may be passed by A and B alone.
A, B and either C or D will need to vote in favour for the special resolution to be passed.
If B votes against the special resolution, it cannot be passed.
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.
A company has unamended Model Articles and an issued share capital of 100,000 ordinary shares which is held by the following shareholders:
A 5,000 (5%)
B 20,000 (20%)
C 70,000 (70%)
D 2,000 (2%)
E 3,000 (3%)
Which one of the following combinations of shareholders would be able to consent to the meeting being held on short notice?
B, C and D
B and C
C, D and E
A, D and E
A, B, and D
B, C and D
correct
aGM may be called on short noticeif this is agreed to by:
amajority 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 shareswhich give the right to attend and vote at the GM.
A company has held a general meeting to:
Amend its articles by special resolution and
Authorise a loan to a director by ordinary resolution
Which one of the following options represents the correct pair of documents that must be filed at Companies House?
Copy of the amended articles and the general meeting minutes where the approval for the loan occurred.
Copy of the amended articles and a copy of the ordinary resolution.
Copy of special resolution and a copy of the loan agreement.
Copy of the amended articles and a copy of the special resolution.
Copy of the special resolution and a copy of the ordinary resolution.
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.
A company with unamended Model Articles wishes to change its articles by special resolution. The company has four shareholders, two of whom are also directors. The company does not use the written resolution procedure and therefore a General Meeting will need to be held. Which of the following correctly sets out the requirements for a valid General Meeting?
The shareholders must call the General Meeting, giving 14 clear days’ notice. The quorum for the meeting is 2 shareholders. Voting takes place on a show of hands unless a poll vote is demanded.
The Board must call the General Meeting, giving 14 clear days’ notice. The quorum for the meeting is 2 shareholders.
The Board must call the General Meeting on reasonable notice. The quorum for the meeting is 2 shareholders.
The Board must call the General Meeting, giving 14 clear days’ notice. The quorum for the meeting is 1 shareholder. Voting takes place on a show of hands unless a poll vote is demanded.
The Board must call the General Meeting, giving 14 days’ notice. The quorum for the meeting is 2 shareholders.
The Board must call the General Meeting, giving 14 clear days’ notice. The quorum for the meeting is 2 shareholders.
A company has taken advice from an insolvency practitioner who is a qualified accountant about the financial position. Everybody on the board agrees with the advice and unanimously vote to follow it. The insolvency practitioner knows one of the directors socially.
Which one of the following statements reflects the insolvency practitioner’s position within the company?
It is likely that the insolvency practitioner will in effect be an alternate director.
It is likely that the insolvency practitioner will be considered a non-executive director.
The insolvency practitioner is unlikely to be considered a shadow director.
It is likely that the insolvency practitioner will be considered a shadow director as they have a social connection to one of the directors.
It is likely that the insolvency practitioner will be considered a shadow director as the board is unanimously following their advice.
The insolvency practitioner is unlikely to be considered a shadow director.
Correct
A company which imports fine wines has been taking advice from the brother of one of the directors, who owns a vineyard in the South of France. The brother has been involved in the company’s business since its inception three years ago and has given advice both on sourcing the best wines but also on marketing and branding. Everybody on the board agrees with the advice and always unanimously votes to follow it.
Which one of the following statements reflects the brother’s position within the company?
It is likely that the brother will be considered to be an alternate director.
It is likely that the brother will be considered a non-executive director of the company.
It is likely that the brother will be considered to be a de jure director.
It is unlikely that the brother will be considered a shadow director as he has not been appointed as a director of the company.
The brother is likely to be considered a shadow director.
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’.
Which one of the following statements is correct in relation to the requirements for directors and a company secretary for public and private companies?
A private limited company must have a minimum of two directors. A secretary is not required. A public limited company must have a minimum of two directors and a company secretary.
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 one director and a company secretary.
A private limited company must have a minimum of one director and a company secretary. A public limited company must have a minimum of two directors and a company secretary.
A private limited company must have a minimum of one director. A public limited company must have a minimum of two directors. A secretary is not required for any type of company, but most public limited companies do have company secretaries.
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.
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
XYZ Ltd is a small private company with three directors who are all shareholders in the company. There is a fourth shareholder who is not a director. XYZ Ltd has unamended model articles.
XYZ Ltd wants to appoint a new director to the board. Which of the following statements represents the best advice to the company?
It is not possible for the directors to appoint another director because there is a fourth shareholder who is not a director.
The directors can appoint the new director to the board with a unanimous decision.
The appointment of the director has to be approved by an ordinary resolution of the shareholders.
The directors can appoint the new director to the board with a board resolution.
The appointment of the director has to be approved by a special resolution of the shareholders.
The directors can appoint the new director to the board with a board resolution.
Correct
ABC Ltd has just appointed a director to the Board by a board resolution. The new director will be employee of the company in the position of finance director and has been given a 1 year service contract in the first instance.
Which of the following statements is correct regarding the information that the company must disclose in relation to the new appointment?
The company must file form AP01 at Companies House in relation to the director’s appointment. The director’s service contract must also be filed at Companies House.
The company must file form AP01 at Companies House in relation to the director’s appointment. Because the service contract is for one year only, it will not need to be kept for inspection.
The company must file form AP01 at Companies House in relation to the director’s appointment. The new director will have to provide their personal address for public inspection.
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.
Because their service is only for one year, the company is under no obligation to inform Companies House of the director’s appointment. The directors’ service contract must be kept for inspection at the company’s registered office.
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
Which of the following statements correctly lists all the details concerning directors that must be included in the company’s annual accounts?
Information concerning directors’ salaries, bonus payments and pension entitlements.
Information concerning any compensation paid to directors and past directors for loss of office.
Information concerning directors’ salaries and bonus payments and any compensation paid to directors and past directors for loss of office.
Information concerning directors’ salaries, bonus payments and pension entitlements and any compensation paid to directors and past directors for loss of office.
Information concerning directors’ salaries, bonus payments and pension entitlements and any compensation paid to directors and past directors for loss of office.
correct
A company is proposing to build a sewage plant in a small town in the south of England. This sewage plant will lead to a massive increase in profit for the company and boost employment in the area.
Which of the following statements best describes the directors’ duty under s 172 CA 2006?
As long as the minutes reflect the fact that s 172 CA 2006 has been considered the directors will not be in breach of their duty.
If the decision promotes the short term profits of the company, the directors can still proceed with the decision.
The boost in employment cannot be a factor.
It will be impossible for the directors to comply with s 172 and build the sewage plant because the environmental considerations will outweigh the duty to promote the success of the company.
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.
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
Which of the following statements correctly describes the duty of directors under s 171 CA 2006?
Directors must act within the company’s constitution and must exercise their powers for the purposes for which they are conferred.
Directors must exercise their powers for the purposes for which they are conferred and must exercise reasonable skill and care.
Directors must promote the success of the company.
Directors must act within the company’s constitution and must exercise independent judgment.
Directors must act within the company’s constitution and must exercise reasonable skill and care.
Directors must act within the company’s constitution and must exercise their powers for the purposes for which they are conferred.
correct
To whom do directors owe their duties under s 171 – 177 CA 2006?
The shareholders and the creditors.
The shareholders.
The creditors of the company.
The company and the shareholders.
The company.
The company.
correct
One shareholder of XYX Ltd thinks that the financial director has breached their duty to the company under s 174 CA 2006 of exercising their reasonable care skill and diligence by not properly conducting due diligence on a recent large purchase of land which has cost the company thousands of pounds.
Which of the following statements is correct about the remedies for this breach if it is found to be a breach?
A breach of s 174 CA 2006 is not actionable by either the company of the shareholder.
The Company will likely be entitled to an order setting aside the transaction.
The shareholder will likely be entitled to damages for the breach.
The shareholder will be entitled to claim any remedy for breach of fiduciary duty.
The company will likely be entitled to damages for the breach.
The company will likely be entitled to damages for the breach.
correct
ABC Ltd wants to enter into a contract with DEF Ltd for DEF Ltd to supply it with £200,000 of office furniture. One of ABC Ltd’s directors holds 25% of the shares in DEF Ltd. ABC Ltd has unamended model articles.
Which of the following statements represents the best advice to the director with regard to their directors’ duties under the CA 2006?
Section 175 CA applies to the conflict and the director needs to avoid this conflict.
The director must declare their interest in the proposed transaction in writing.
The director should declare their interest in the proposed transaction to the board of DEF Ltd at the earliest opportunity and before the transaction is interested into.
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.
As long as the director declares their interest, they will be able to vote on the transaction.
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
In which one of the following situations would a director NOT need to declare their interest under s 177 CA 2006?
Where the board is voting on a transaction with another company in which the director has a small (5%) shareholding.
Where the board is voting on the terms of the director’s service contract.
Where the board is considering the purchase of a property worth £300,000 from the sister of one of the directors.
Where the board is voting on the purchase of equipment worth £2,000 from the director’s father.
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.
A company wants to renew one of its directors’ service contracts. The company has one shareholder, which is its parent company.
The draft contract is for an initial period of two years. The director has the 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.
Which of the following statements is correct in respect of the need for shareholder approval of this contract?
The company is renewing the service contract as the director is already employed, so no shareholder approval is necessary.
The shareholders of the parent company will need to give permission because they are the ultimate owners of the group.
The quickest the shareholder approval can be obtained is 15 days.
The company is a wholly owned subsidiary so is exempt from obtaining approval.
Shareholder approval will be required by ordinary resolution because this contract fits within the definition of a guaranteed term of more than 2 years.
The company is a wholly owned subsidiary so is exempt from obtaining approval.
Correct
Which one of the following service contracts falls within the definition of a long-term service contract under s 188?
A contract with a fixed term of two years. During the period of the agreement the company can only terminate the employment if the director breaches the disciplinary policy.
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.
A contract with a fixed term of three years. During the period of the agreement the company can terminate the employment on six months’ notice.
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
A company wants to renew one of its director’s service contracts. The company has three shareholders, all of whom are also directors.
The draft contract is for an initial period of 18 months. The director has the 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.
Which of the following statements is correct in respect of the need for shareholder approval of this contract?
If shareholder approval is necessary, the quickest it could be obtained is 15 days.
This contract does not fall into the definition of a long-term service contract since the guaranteed term is not over two years, therefore no shareholder approval is necessary.
Since all of the shareholders of this company are also directors, no shareholder approval is necessary.
Shareholder approval will be required by ordinary resolution because this contract fits within the definition of a guaranteed term of more than two years.
The company is renewing the service contract as the director is already employed, so no shareholder approval is necessary.
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
ABC Ltd is proposing to buy a piece of land from the aunt of one of its directors. ABC Ltd has three shareholders including the director.
The land has been independently valued at £150,000 and all parties are happy with this valuation. The net asset value of ABC Ltd is £3.5 million.
Is the approval of the shareholders of ABC Ltd required for this transaction?
Shareholder approval is required because the company is buying an asset from a person connected to a director.
The asset is not substantial in value because it is not more than 10% of the net asset value of the ABC Ltd.
The director will be precluded from voting at the General Meeting when the loan comes to be voted on because of MA 14.
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.
Shareholder approval is not required and therefore the director has no conflict of interest.
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
ABC Ltd is proposing to buy some equipment from the father of one of its directors. ABC Ltd has a single shareholder, which is DEF Ltd. The director in question is also a director of DEF Ltd.
The equipment has been independently valued at £110,000. The net asset value of ABC Ltd is £2 million.
Which one of the following statements is correct regarding the need for shareholder approval for this transaction?
Shareholder approval is not required because “father” is not a person connected to a director and therefore the acquisition does not fall within the legislation.
Shareholder approval by ordinary resolution will be required from the shareholders of both ABC Ltd and DEF Ltd.
No shareholder approval is required, since value of the transaction is less than 10% of the company’s net asset value.
Shareholder approval by ordinary resolution will be required from the shareholders of DEF Ltd only.
Shareholder approval by ordinary resolution will be required from the shareholders of ABC Ltd only.
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.
Company A has four shareholders, all of whom are also directors. The net asset value of Company A is £700,000.
Which one of the following transactions falls within the statutory provisions on substantial property transactions and will require shareholder approval from the shareholders of Company A by way of ordinary resolution?
The purchase of some land worth £110,000 by Company A from the brother of one its directors.
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.
The purchase of some machinery worth £80,000 from the uncle of one of its directors.
The sale of some equipment worth £70,000 from Company A to one of its directors.
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.
Parent Plc owns 100% of the shares in Subsidiary Ltd. It is proposed that Subsidiary Ltd will lend the wife of one of Parent Plc’s directors £35,000 to start up a business.
Which of the following statements is correct in respect of the proposed loan?
The loan falls within the exceptions because it is under £50,000 and therefore no shareholder approval is needed.
Shareholder approval will be required from both Parent Plc and Subsidiary Ltd.
Shareholder approval will be required from Parent Plc but not Subsidiary Ltd.
The loan does not fall within the relevant legislation because a wife of a director of a holding company does not fall within the definition of person connected to a director.
Neither Parent Plc nor Subsidiary Ltd will need to obtain approval from their shareholders.
Shareholder approval will be required from Parent Plc but not Subsidiary Ltd.
Correct
ABC Ltd has two directors and four shareholders (who are the directors plus two other relatives of the directors). It has no subsidiaries.
For which one of the following transactions will ABC Ltd need shareholder approval by way of ordinary resolution?
ABC Ltd wishes to purchase a season travel ticket for one of its directors at a cost of £12,000. The director will repay the money in instalments on a salary sacrifice basis.
ABC Ltd wishes to lend £20,000 to the husband of one of its directors.
ABC Ltd wishes to pay £35,000 for renovations on the home of one of its directors, on the basis that the director will repay the money over a two-year period.
ABC Ltd wishes to provide a guarantee for a bank loan for £15,000 to one of its directors.
ABC Ltd wishes to lend one of its directors £8,000 in order to pay for a training course.
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.
ABC Ltd has three directors and three shareholders (who are the three directors). It has no subsidiaries. ABC Ltd wishes to lend £50,000 to one of its directors. All of the directors and shareholders are in agreement that the loan should be made and that none of the directors will be breaching any of their general duties in providing the loan.
ABC Ltd seeks your advice as to the procedure to be followed in order that the loan may be provided as quickly as possible. Which of the following is the best advice?
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.
Shareholder approval by ordinary resolution will be required. ABC Ltd should prepare a memorandum setting out the terms of the proposed transaction and display this at the registered office. The general meeting must be held on full notice for the ordinary resolution to be passed, due to the requirement for the memorandum to be displayed for 15 days ending with the date of the GM.
Shareholder approval by ordinary resolution will be required. ABC Ltd should prepare a memorandum setting out the terms of the proposed transaction and display this at the registered office. Since all the shareholders are in agreement, a general meeting may be held on short notice for the ordinary resolution to be passed.
Since the shareholders and directors are the same persons, no shareholder approval will be required for the loan. The board of ABC Ltd can pass a board resolution to approve the loan instead.
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.
A corporate client of your law firm has bought a shelf company named Shelfco 123 Ltd (‘Shelfco Ltd’) on your recommendation. Shelfco Ltd has unamended Model Articles for a private company limited by shares. The Board of Directors of Shelfco Ltd wishes to change the name of the company to a more suitable commercial name. What is the correct procedure for changing the company name of Shelfco Ltd under the Companies Act 2006? (Assume the name chosen by the client is available and not subject to any objections by another party.)
To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s shareholders may pass an Ordinary Resolution. Alternatively, the Board may pass a Board Resolution.
To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s Board merely needs to pass a Board Resolution.
To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s shareholders may pass a special resolution. Alternatively, the Board may pass a Board Resolution.
To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s shareholders must pass a special resolution.
To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s shareholders must pass an Ordinary Resolution.
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.
A company entered into a contract with an office equipment supplier to purchase 3 projectors. The contract was signed by the sole director on behalf of the company. The director and his wife are the shareholders of the company. The supplier delivered the projectors as agreed but the company failed to pay the purchase price.
Which statement best describes what legal action the supplier can take?
The supplier can sue the shareholders for the purchase price.
The supplier can sue the company and the director for the purchase price.
The supplier can sue the company and the shareholders for the purchase price.
The supplier can sue the sole director for the purchase price.
The supplier can sue the company for the purchase price.
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.
Two individuals (A and B) want to incorporate a private limited company as soon as possible. A and B propose to each take 50% of the shares and become directors of the company. A is negotiating a supply agreement, on behalf of the not yet incorporated company with a company (C) to take effect once the company is incorporated. If A were to sign the agreement with C now, before the company is incorporated, who would be liable under the agreement?
A
A, B and the not yet incorporated company
A and B
The not yet incorporated company, once it is incorporated.
Nobody, the contract would be void
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.
You act for a private limited company that was incorporated last year. The company’s only asset is the company bank account which holds £10,000 on deposit. The company has asked for your advice on changing its current company name.
Which one of the following statements is correct in relation to the company’s change of name?
The change of name will be effective once the Registrar of Companies has issued the certificate of incorporation on a change of name.
The company will be issued with a new certificate of incorporation following the change of name which will confirm its new name and new company number. The change of name is effective once this new certificate has been issued by the Registrar of Companies.
The change of name will be effective once the Registrar of Companies has received notice of the relevant special resolution.
The change of name will be effective as soon as the company has passed the required special resolution to change the company’s name.
The company will not be issued with a new certificate of incorporation following the change of name. The Registrar of Companies will change the company’s name online at Companies House only. The change of name is effective once the Registrar of Companies has received notice of the relevant special resolution.
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.
You are in the process of tailoring a shelf company (the “Company”) to meet a client’s requirements. The Company has adopted the unamended Model Articles of Association for Private Companies Limited by Shares. The client requires the Company’s name to be changed, the existing directors of the Company (“Existing Directors”) to be replaced with members of its team (the “New Directors”) and for the registered office of the Company to be changed before it is transferred to the client.
What board and shareholder resolutions are required to implement the client’s instructions most expeditiously (NOT including any resolutions required to convene meetings)?
A special resolution to change the company’s name, ordinary resolutions to appoint the New Directors, ordinary resolutions to remove the Existing Directors and a board resolution to change the Company’s registered office.
A special resolution to change the Company’s name, board resolutions to appoint the New Directors, ordinary resolutions to remove the Existing Directors and a board resolution to change the Company’s registered office.
An ordinary resolution to change the Company’s name, ordinary resolutions to appoint the New Directors, board resolutions to accept the resignations of the Existing Directors and an ordinary resolution to change the Company’s registered office.
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 special resolution to change the Company’s registered office.
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.
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.
A private limited company is planning to grant a service contract for a three-year term to one of its directors. The company was incorporated in 2010 and has adopted unamended model articles.
The company is keen for this to be approved by the shareholders as quickly as possible and has already been advised that this will need to be approved by way of an ordinary resolution.
All shareholders are understood to be generally available and responsive over the coming weeks.
Which of the following statements best describes the appropriate method the company should use?
The company should use the written resolution procedure to ensure that all shareholders have an opportunity to participate in the voting.
The company should use the short notice procedure in calling the general meeting to ensure that all shareholders have an opportunity to participate in the voting.
The company should call a general meeting under the usual notice requirements to ensure that all shareholders have an opportunity to participate in the voting.
The company should use the written resolution procedure as this should allow the process to be shortened significantly.
The company should use the short notice procedure in calling the general meeting as this should allow the process to be shortened significantly.
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.
Your client is a manufacturing company (‘Company A’).
The managing director of Company A (‘the MD’) asks to speak to you about a proposed contract between Company A and a website design company (‘Company B’).
Company B is run by the MD’s close friend. The managing director has even invested in Company B himself and now owns 5% in Company B.
The MD wants to discuss this proposed contract at the upcoming board meeting of the 5 directors of Company A. The other directors of Company A are already aware that the MD has shares in Company B. Company A is a private limited company with unamended Model Articles.
Which of the following statements best summarises the advice you should give to the MD of Company A?
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.
The MD should declare their interest in the proposed contract with Company B. If they do not, all 5 directors of Company A are at risk of breaching their directors’ duties contained within the Companies Act 2006.
The MD should sell their 5% shares in Company B to avoid a breach of their directors’ duties in the Companies Act 2006.
The MD has a duty under s 175 of the Companies Act to avoid a conflict of interest. They are at risk of breaching that duty. They should therefore not propose that this contract is entered into at the board meeting of Company A.
The MD should not declare their interest in the proposed contract with Company B as the other directors are already aware that the MD has an interest in the proposed transaction.
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.
A private limited company, which operates a publishing business, has no subsidiaries and is owned by individual shareholders. One of its directors wishes to undertake some home improvements and has obtained a quotation of £8,000 from a firm of builders. The director has asked the other board members if the company would pay this sum to the builders up-front, on condition that the director repay the company in monthly instalments over the coming year. The board is happy to approve such an arrangement and has asked you whether or not it also requires shareholder approval.
Which of the following comprises the best advice to the company’s board?
An ordinary resolution is necessary because the transaction is a quasi-loan.
No shareholder resolution is necessary because the company is not a wholly-owned subsidiary of any other company.
No shareholder resolution is necessary because the Companies Act 2006 does not require approval of this transaction.
An ordinary resolution is necessary because the transaction is a credit transaction.
No shareholder approval is necessary because the value of the transaction is below £10,000.
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.
Director A is a director of Company B. Company B proposes to issue Director A with a service contract (the “Contract”) for a fixed term of three years (the “Term”) which contains the following provision at clause 11:
“The Company may not terminate the Contract before the expiry of the Term except for disciplinary reasons as set out in clause 15.”
What does Company B need to do before offering the Contract to Director A and what is the consequence of it failing to do so?
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 six months’ notice.
Company B must seek shareholder approval for the Contract by special 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.
Company B must seek shareholder approval for the Contract by ordinary resolution. If it fails to do so, the Contract will be void.
Company B must seek shareholder approval for the Contract by special resolution. If it fails to do so, the Contract will be void.
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.
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.
A company (the “Company”) has three directors, a company secretary and four shareholders, each shareholder holding 25% of the Company’s share capital. The Company has unamended Model Articles of Association for Private Companies Limited by Shares. One of its directors would like a loan of £30,000 from the Company (the “Loan”) to fund some renovation work on personal property. The board of the Company would like to implement this Loan and do not anticipate the shareholders objecting to it. The Company does not use the written resolution procedure for such matters.
What resolutions (board and shareholder) are required for the Company to implement the Loan?
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 wording of the resolution to be passed, (4) approve entry into the loan agreement, (5) authorise a shareholder to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
Shareholder resolution: Special 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.
Shareholder resolution: Special 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 copy of the Loan agreement, (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.
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.
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 copy of the Loan agreement, (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.
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.
Which of the following is the correct threshold shareholding for a shareholder to give them the right to require the directors to call a general meeting?
10%
20%
1%
5%
25%
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.
An accountant has purchased some shares in a company on the basis that their accountancy firm would be instructed to prepare the annual accounts for the company. To be cautious the accountant required that a formal statement was inserted into the articles of the company to this effect. No other agreement was entered into on purchasing the shares or otherwise.
Which of the following statements would represent the correct advice to the accountant?
The articles are only advisory so are not legally binding as between the accountant and the company.
Being appointed in a professional capacity to advise the board is likely to constitute a membership right.
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.
They would have a claim under s 33 CA 2006 because the articles represent a contract between the company and the shareholders.
The court might imply terms into the articles in favour of the accountant if they can show such an implied term would create business efficacy.
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
You are advising a company on its incorporation. There are five directors who are all equal shareholders.
They want to ensure that none of them can be removed as a director without unanimous consent.
Which of the following statements represents the best advice to the shareholder/directors?
The shareholders should amend the articles to require unanimity to remove a director.
The shareholders should enter a shareholders’ agreement requiring unanimity to remove a director.
The company should make sure it is party to the whole shareholders’ agreement to ensure it is legally binding on both the company and the members.
A shareholders’ agreement would not necessarily be helpful as it could be amended with support of a simple majority of the shareholders.
There is nothing that they can do to prevent removal of a director by a majority of shareholders under s 168 CA 2006.
The shareholders should enter a shareholders’ agreement requiring unanimity to remove a director.
Correct
Correct
You act for XYZ Ltd, a company with unamended model articles and five shareholders, all of whom are also directors. All of the shareholders hold 20% of the shares.
Three of the shareholders are unhappy with one of the directors and wish to remove them as a director. The other shareholder is not in favour of the resolution.
On the incorporation of the company all five of the shareholders signed a shareholders agreement stating that all shareholders must vote unanimously to remove a director.
Which of the following statements is correct about the resolution to remove the director?
It will be necessary to check the articles to check there are no Bushell v Faith Clauses.
It will not be possible to pass the resolution to remove the director under s 168 CA 2006 because of the clause in the shareholders agreement requiring unanimity.
If the resolution is passed to remove the director, they will likely have a claim for breach of the articles against the shareholders that voted for the resolution.
The two opposing shareholders can block the resolution to remove the director.
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.
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
A company has received a notice from its shareholders which purports to be served under s 168 and s 303 of the Companies Act 2006 in order to move a resolution to remove a director.
The shareholders signing the notice together hold 10% of the shares of the company. If the company receives the notice today (Day 1) which of the statements is correct about the latest day on which the company can hold the General Meeting, assuming the directors want to co-operate with the Companies Act 2006 but also use all the time available to them?
Day 51
Day 30
Day 49
Day 16
Day 50
Day 50
Correct
A company has received a notice from its shareholders which purports to be served under s 168 CA 2006 in order to move a resolution to remove a director.
The shareholders signing the s 168 notice holds 4% of the shares of the company. The company does not think that any of the other shareholders support this notice as the shareholder has a history of serving vexatious s 168 notices.
Which of the following represents the best advice to the board?
The board has to put this on the agenda of the next GM.
If the board chooses to put this on the agenda of a GM they will have 21 days to call the GM, and a further 28 days to hold it.
If the board does not put this on the agenda of the GM, it will not need to tell the affected director.
If the board chooses not to out this on the agenda, the shareholder can serve a s 303 CA 2006 notice requiring the directors to call a GM to consider the issue.
The board does not need to put this on the agenda of a GM to be considered.
The board does not need to put this on the agenda of a GM to be considered.
Correct
Correct
A company secretary has received a letter of complaint from one of its shareholders. The shareholder, who owns 5% of the shares, is unhappy that the company has not dealt with a breach of duty by one of the directors who has involved his wife in the breach. The director’s wife is not a director.
Which of the following statements represents the correct advice about a claim under s 260 CA 2006 by the shareholder?
The shareholder can bring a claim against the defaulting director and his wife.
The claim will be brought against the company as a body corporate.
The claim will be brought by the shareholder in their personal capacity.
It will not be possible to include the wife in the action as she is not a director.
The shareholder must bring the claim against all of the directors who will be jointly and severally liable under s 260 CA 2006.
The shareholder can bring a claim against the defaulting director and his wife.
correct
A company secretary has received a letter from one of its former shareholders threatening to bring a derivative claim under s 260 CA 2006. The shareholder sold all their shares 12 months ago to the company.
The claim relates to a one-off breach of duty by two of the directors that happened 18 months ago.
The company issued shares this week to a new shareholder.
Which of the following statements represents the correct advice about a potential claim under s 260 CA 2006 by the shareholder?
It is not possible for anybody to bring a claim under s 260 CA 2006 as the claim has not been brought as soon as is practicable.
The complaining shareholder will be able to bring a claim if they can prove the default happened at a time when they held shares in the company.
The complaining shareholder will not be able to bring a derivative claim because they are no longer a member.
The new shareholder can bring a claim if they join a shareholder who was a member at the time of the default into the action.
The new shareholder will not be able to bring a derivative action because they were not a shareholder at the time of the alleged default.
The complaining shareholder will not be able to bring a derivative claim because they are no longer a member.
Correct
Correct
Which of the following is the correct definition of a derivative claim?
A claim brought by a member in respect of a wrong done to the member personally.
A claim brought by a member in respect of a cause of action vested in the company seeking relief on behalf of the company.
A claim brought by a member seeking for the company to buy their shares.
A claim brought by a member seeking for the company to be wound up.
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
You act for a shareholder in a company which was incorporated five years ago with unamended model articles. There were originally three equal shareholders who, until recently, were the only three directors. There is a shareholders’ agreement but it does not contain any provisions dealing with the voting on any removal of a director. Over the years more shareholders have invested and so your client’s shareholding is now 20%.
Two weeks ago, your client was removed from the board by an ordinary resolution. She no longer wants to be part of the company. Which of the following claims is the most appropriate claim she could bring?
Unfair prejudice under s 994 CA 2006.
No claims are open to her as being removed as a director and being a shareholder are separate roles.
Breach of the shareholders agreement for removing her as director.
Breach of membership rights under s 33 CA 2006.
Derivative action under s 260 CA 2006.
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.
Which of the following is the most common remedy that the court will order in a claim for unfair prejudice?
An order that the company pays damages to the petitioner to reflect the diminution in value of their shareholding.
An order that the company be wound up.
An order regulating the conduct of the company in the future.
An order that the company or the other shareholders purchase the petitioner’s shares.
An order that the company or the other shareholders purchase the petitioner’s shares.
Correct
Correct.
Which of the following correctly summarises the requirements for a successful claim for unfair prejudice?
The petitioner must show that the directors have acted outside of the articles.
The petitioner must show that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to all of the members.
The petitioner must show that the company is insolvent.
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.
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
A company is looking to issue some new shares to an outside investor. The shares will have the following rights attached to them:
· The holder shall receive a preference as to dividend of 5% of the nominal value per annum.
· On winding up, the holder shall receive as a preference the nominal value of the share, if there is sufficient capital to pay.
· The right to the preference dividend is cumulative.
· The holder shall have no right to any other dividend or any return on capital.
· The shares carry no rights to vote.
Which of the following statements best describes the shares?
5% non-cumulative preference shares.
5% preference redeemable shares.
5% cumulative preference shares.
5% participating cumulative preference shares.
5% ordinary shares.
5% cumulative preference shares.
correct
A company is looking to issue some new shares to an outside investor. The shares will have the following rights attached to them:
· The holder shall receive a preference as to dividend of 4% of the nominal value per annum.
· On winding up, the holder shall receive as a preference the nominal value of the share, if there is sufficient capital to pay.
· The right to the preference dividend is not cumulative.
· The holder shall have the right participate in the general dividend and return on capital.
· The shares carry no rights to vote.
Which of the following statements best describes the shares?
4% non-participating preference shares.
4% participating non-cumulative preference shares.
4% non-participating non-cumulative preference shares.
4% redeemable shares.
4% participating cumulative preference shares.
4% participating non-cumulative preference shares.
When does a shareholder acquire full legal title to new shares that the company has issued to the shareholder?
On payment for the shares.
When they acquire the unconditional right to be included in the company’s register of members in respect of those shares.
When they receive their share certificate.
When the company notifies Companies House that the shares have been issued.
When their name is entered into the company’s register of members.
When their name is entered into the company’s register of members.
Correct
Correct
A company has two shareholders, A and B. A wishes to transfer all of their shares to B. B will pay market value for the shares of £15,000.
Which of the following statements is correct about the transfer of shares proposed?
The company will need to be party to the transfer agreement.
No stamp duty is payable as this share transfer is not caught by the legislation.
Legal title will pass to B on execution of the stock transfer form.
Both A and B will need to sign the stock transfer form.
Stamp duty of 0.5% of the value of the transfer will be payable be B.
Stamp duty of 0.5% of the value of the transfer will be payable be B.
Correct
Correct
When does a shareholder acquire full legal title to shares that are transferred to them from an existing shareholder?
When they have paid the stamp duty payable or confirmed that the transfer is exempt from stamp duty.
When they receive their share certificate.
When the stock transfer form is executed.
On payment for the shares.
When their name is entered into the company’s register of members.
When their name is entered into the company’s register of members.
Correct
Correct. See section 112(2) CA 2006.
In which one of the following circumstances is a stock transfer form required to transfer the shares to the new shareholder?
When a shareholder dies and their shares are passed to their personal representatives.
When an existing shareholder of the company gifts their shares to a family member during their life.
When a shareholder is made bankrupt and their shares are passed to their trustee in bankruptcy.
When a company issues new shares.
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.
A private limited company, which was incorporated in September 2018, currently has an issued share capital of £1000 made up of 1000 £1 ordinary shares. The shares are held equally by five shareholders.
The company now wishes to issue 150 £10 2% preference shares to an outside investor. The preference shares entitle the shareholder to receive only a fixed dividend of 2% per annum, with no right to share in any surplus profits. The shareholder is only entitled to the return of the nominal value of the shares on winding up of the company.
The company has Model Articles with one amendment; this new preference share has already been included in the Articles.
Which of the following statements represents the best advice to the company about the resolutions required for the proposed share allotment?
The company will need a special resolution from the shareholders to disapply pre-emption rights.
The company will need an ordinary resolution from the shareholders to give the directors authority to allot the shares.
The company will not need any shareholder resolutions, only a board resolution to allot.
The company will need a special resolution to amend the articles.
The company will need a special resolution from the shareholders to give the directors authority to allot the shares.
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??
A company is proposing to issue shares to a new shareholder. The shares will give the shareholder the right to a fixed dividend of 2% of the nominal value of the shares in preference to the other shareholders with no other right to share in any surplus profits. In respect of capital return on a winding up the shareholder will receive firstly, as a preference, the nominal value of the share and then the shareholder will rank pari pasu with the ordinary shareholders if there is any surplus capital.
Which of the following statements best describes the shares and any resolutions required as a result of them?
The company will need a special resolution to disapply pre-emption rights because the shares are equity securities.
The company will not need to disapply pre-emption rights because these shares will not dilute the current shareholdings.
The company will not need to disapply pre-emption rights as the shares are not equity securities.
The company will need unanimity from its shareholders to agree to disapply the pre-emption rights because the shares are equity securities.
The company will need an ordinary resolution to disapply pre-emption rights because the shares are an equity security.
The company will need a special resolution to disapply pre-emption rights because the shares are equity securities.
correct
You act for a company incorporated under the CA 1985. The company has an issued share capital of 1000 £1 ordinary shares and an authorised share capital of £2000. The company wishes to issue a further 1000 £1 ordinary shares to an outside investor.
The company has not passed any shareholder resolutions which would be relevant to this question.
Which of the following statements represents the correct shareholder resolutions that the company would need to issue these shares?
A special resolution to disapply pre-emption rights only.
An ordinary resolution to remove the cap, an ordinary resolution to give the directors authority to allot the shares and a special resolution to disapply pre-emption rights.
An ordinary resolution to remove the cap and an ordinary resolution to give the directors authority to allot the shares.
An ordinary resolution to remove the cap and a special resolution to disapply pre-emption rights.
An ordinary resolution to give the directors authority to allot the shares and a special resolution to disapply pre-emption rights.
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!!
EvansLtd is acquiring the entire issued share capital inPMR Ltd.Evans Ltdis a wholly owned subsidiary ofEvansClothingPlc. PMR Ltd has awholly owned subsidiary, PMMRPlc.
Evans Ltd is taking out a bank loan to finance the acquisition. The bank will require security in respect of the loan over the assets of Evans Ltd, Evans Clothing Plc, PMR Ltd and PMMR Plc.
Whichof the following statements is correct in respect ofprohibited financial assistance?
A - All ofthe security options fall within the prohibited financial assistance regime
B - Only the security from Evans Clothing Plc and PMMR Plc is caught by theprohibited financial assistance regime
C - Only the securityfrom PMR Ltd and PMMR Plc are caughtby the prohibited financial assistance regime
D - Only the security fromPMMR Plciscaught by the prohibited financial assistance regime
E - Only the security from PMR Ltd iscaught by the prohibited financial assistance regime
D - Only the security fromPMMR Plciscaught 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!
A company (the ‘Buyer’) is looking to purchase the entire issued share capital of a private limited company (the ‘Target’). The Target is a wholly owned subsidiary of a PLC. The Buyer is proposing to fund the acquisition partly with a loan from the bank. In return for the loan, the bank requires security over the assets of the Target, the parent company and the Buyer.
Which of the following statements is correct in respect of prohibited financial assistance?
Both the security of the Target and its parent are caught.
All of the security options fall within the prohibited financial assistance regime.
Only the security from the Target company is caught by the prohibited financial assistance regime.
Only the security from the parent of the Target company is caught by the prohibited financial assistance regime.
None of the security options fall within the prohibited financial assistance regime.
None of the security options fall within the prohibited financial assistance regime.
Correct
A company (the ‘Buyer’) is looking to purchase the entire issued share capital of a private limited company (the ‘Target’). The Target has two wholly owned subsidiaries: one of which is a PLC and the other is a private limited company. The Buyer is proposing to fund the acquisition wholly with a loan from the bank. In return for the loan, the bank requires security over the assets of the Target, both of the Target’s subsidiaries and the Buyer.
Which of the following statements is correct in respect of prohibited financial assistance?
The security offered by all four companies is caught by the prohibited financial assistance regime.
None of the securities will be caught because the target is private.
Only the security proposed by the Plc subsidiary is caught by the prohibited financial assistance regime.
The security offered by the target itself will be caught by the prohibited financial assistance regime.
The security offered by the Target and both of the subsidiaries are caught by the prohibited financial assistance regime.
Only the security proposed by the Plc subsidiary is caught by the prohibited financial assistance regime.
Correct
Correct
A company (the ‘Buyer’) is looking to purchase the entire issued share capital of a public limited company (the ‘Target’). The Target has two wholly owned subsidiaries: one of which is a plc and the other is a private limited company. The Buyer is proposing to fund the acquisition wholly with a loan from the bank. In return for the loan, the bank requires security over the assets of the Target, both of the Target’s subsidiaries and the Buyer.
Which of the following statements is correct in respect of prohibited financial assistance?
The security offered by the Target and both subsidiaries will be caught by the prohibited financial assistance regime.
All of the security offered by all four companies will be caught by the prohibited financial assistance regime.
The security offered by the Target and the PLC subsidiary will be prohibited financial assistance but not the other companies.
Only the security offered by the PLC subsidiary will be caught by the prohibited financial assistance regime.
Only the security offered by the target will be caught by the prohibited financial assistance regime.
The security offered by the Target and both subsidiaries will be caught by the prohibited financial assistance regime.
Correct
A company has a class of redeemable shares which it is looking to redeem. Where will the terms of redemption of those shares be set out?
The company must draw up a contract setting out the terms on which it will redeem the shares. This must be approved by an ordinary resolution of the shareholders.
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.
The terms on which redeemable shares may be redeemed are determined at the time that the shares are issued. They are set out in a contract signed by the company and the shareholders.
The terms on which redeemable shares may be redeemed are determined at the time that the shares are issued and set out in a shareholders’ agreement.
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
Which of the following best summarises the principle of maintenance of capital?
The share capital of a company is represented in the bottom half of the balance sheet. These sums may never be released to shareholders.
The share capital of a company is seen as a permanent fund available to its creditors. Companies are never permitted to return capital to shareholders.
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.
The share capital of a company is seen as a permanent fund available to its creditors. Buybacks are only allowed for private limited companies and then only in limited circumstances.
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
A private limited company with unamended Model Articles and four shareholders with equal shareholdings is seeking to buyback its shares from one of its shareholders. The company does not have sufficient distributable profits to fund the buyback and is also not able to fund the buyback out of the proceeds of a fresh issue of shares. The company therefore wishes to use capital to fund the buyback. What shareholder resolution(s) will be necessary in order to approve this buyback?
A special resolution to approve the terms of the contract for the buyback and a special resolution to approve the payment out of capital.
An ordinary resolution to approve the terms of the contract for the buyback only.
An ordinary resolution to approve the terms of the contract for the buyback and a special resolution to approve the payment out of capital.
A special resolution to approve the payment out of capital only.
An ordinary resolution to approve the terms of the contract for the buyback and an ordinary resolution to approve the payment out of capital.
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
A taxpayer runs an antiques shop and owns a portfolio of shares. Last week:
a) The shop sold a painting and a grandfather clock;
b) The taxpayer sold 15% of their share portfolio.
Which of the following statements represents the correct statement about whether the above amount to income or capital receipts?
All of the receipts will be capital receipts.
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.
All of the receipts will be income receipts.
The sum received from the sale of the painting will be capital a receipt and the sums received from the sale of the share portfolio and the grandfather clock will be income receipts.
The sums received from the sale of the painting and the grandfather clock will be capital receipts and the sum received from the sale of the share portfolio will be an income receipt.
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
A taxpayer has the following receipts in the current tax year:
a) £10,000 from the sale of an oil painting inherited from their mother 3 years’ ago;
b) £5,000 from the sale of shares in XYZ plc;
c) £7,500 as an annual dividend from the shares they own in ABC Limited.
Which of the following statements represents the correct statement about whether the above amount to income or capital receipts?
All of the receipts are income receipts.
All of the receipts are capital receipts.
The receipts from the sale of the oil painting and shares in XYZ Plc are capital receipts and the dividend is an income receipt.
The receipt from the sale of the oil painting is a capital receipt and the receipts from the sale of the shares in XYZ Plc and dividend are income receipts.
The receipts from the sale of the oil painting and shares in XYZ Plc are income receipts and the dividend is a capital receipt.
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
A taxpayer who runs a printing business as a sole trader has the following expenditure in the current tax year:
a) £15,978 for heating and lighting of business premises;
b) £6,500 for an advertising campaign;
c) £17,000 on a new printing press machine.
Which of the following statements correctly identifies whether these expenses represent income or capital expenditure?
The expenditure on heating and lighting is income expenditure. The expenditure on the advertising campaign and the new printing press machine is capital expenditure.
The expenditure on heating and lighting and the advertising campaign are capital expenditure. The expenditure on the new printing press machine is income expenditure.
The expenditure on heating and lighting and the advertising campaign are income expenditure. The expenditure on the new printing press machine is capital expenditure.
All of the expenditure is income expenditure.
All of the expenditure is capital expenditure.
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.
A taxpayer is a partner in a small catering business. The following information relates to their income and other related tax affairs for the current financial year.
· Trading profits for tax purposes £73,000
· Savings related income £2,250
· Receipt of £5,000 from the sale of a painting
· Dividend on shares in ICR Plc £1,000
· Contributions made by the taxpayer into a personal pension scheme £5,000
· Interest on a loan the taxpayer took out to inject further capital into the business £3,500 per annum
What is the taxpayer’s net income?
£71,250
72,750
£76,250
£67,750
£67,750
correct
Incorrect
72,750
Incorrect. You may have included the sale of the painting which is a capital receipt.
A man is to receive a cash dividend of £35,000 in the current tax year. He has other taxable income of £26,225 (all of which is non-savings income).
Which one of the following options is the correct amount of tax payable to HMRC by the man on the dividend he receives?
(round down your figures to the nearest pound at each stage of your calculation)
£8,768
£11,137
£8,943
£11,812
£2,887
£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.
A taxpayer has received £5,000 in respect of interest on a savings account they have with an online bank. They already have taxable income (which is all non-savings income) of £35,000. The current basic rate tax threshold is £37,700.
Which of the following statements represents the correct amount of tax the taxpayer should pay on the interest?
£1,460
£1,000
£900
£1,360
£1,800
£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
A taxpayer is a shareholder of XYZ Ltd, a trading company. XYZ Ltd was incorporated in 2004 and the taxpayer has held her shares in XYZ Ltd since incorporation and has worked for the company since that time. The taxpayer owns 1500 of the 2000 shares in issue. She would like to sell 200 of her shares to her friend for £225,000.
All shares in XYZ Ltd are ordinary voting shares and all were issued in 2004 at £1.50 per share. All shares carry an entitlement to profits and assets available for distribution to shareholders on a winding up. The taxpayer did not incur any incidental acquisition costs. The legal fees for the taxpayer to transfer title in the shares to her friend have been estimated at £900.
What is the capital gains tax that would be payable onthis disposal? Ignore any other gains/losses the taxpayer may have made in the current, or any previous, tax year and consider any applicable relief.
£21,150
£22, 380
£21,240
£21,180
We cannot say as we do not know her income.
£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
A taxpayer has a taxable chargeable gain on the sale of some shares which the taxpayer had as an investment in ABC Ltd, a private limited company which is currently trading. The taxpayer bought the shares nine years ago on the incorporation of the company. The taxpayer is not an employee or officer of ABC Ltd.
The taxpayer held 10% of the shares and sold them all in this tax year.
Which of the following statements represents the correct advice concerning the taxation of the chargeable gain?
The taxpayer will not benefit from Business Asset Disposal relief because the sale of shares is not something to which the relief applies.
The taxpayer will not benefit from Business Asset Disposal relief because not all of the criteria are met.
The taxpayer will benefit from Business Asset Disposal relief because all of the criteria are met.
The taxable chargeable gain will all be taxed at 20%.
We do not have enough information to establish if Business Asset Disposal Relief is available.
The taxpayer will not benefit from Business Asset Disposal relief because not all of the criteria are met.
correct
A taxpayer is disposing of a tea shop business on which they have made a significant gain since purchasing the shop in 1994. They are working out which expenditure they will be able to deduct from the consideration to reduce their tax liability. Which one of the following pieces of expenditure is NOT an allowable expenditure for capital gains tax purposes?
Solicitor’s fees on dealing with the sale.
Replacement of roof tiles to the shop following a storm in 2006.
The cost of an extension to the café area of the tea shop to allow more customers in.
The surveyor’s fees incurred when they purchased the shop in 1994.
The original cost of the business in 1994.
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.
Business Property Relief is available on which type of taxation?
Inheritance Tax
Capital Gains Tax
Income Tax
Corporation Tax
VAT
Inheritance Tax
Correct
Which type of chargeable transfers is Business Property Relief applicable to?
PETs only
LCTs only
PETs and LCTs but not death
Only transfers on death
PETs, LCTs and death
PETs, LCTs and death
Correct
Which of the following is NOT a qualifying business asset for Business Property Relief purposes?
Shares in an unquoted company.
A business or interest in a business eg business of a sole trader or partnership.
A business consisting wholly or mainly for making or holding investments.
Shares in a quoted company.
Land or buildings, machinery or plant owned by transferor but used for business purposes by either a company of which the transferor has control, or a partnership of which the transferor was a partner.
A business consisting wholly or mainly for making or holding investments.
Correct
A person is a partner in a small catering business. The following information relates to their income and other related tax affairs:
Trading profits for tax purposes £73,000
Savings related income £1,800
Gift of a painting from their grandmother £5,000 (market value)
Dividend on shares in a listed company £1,000
Contributions made by the person into a personal pension scheme £5,000
Interest on a loan the person took out to inject further capital into the business £3,500
What is the person’s Net Income?
£72,300
£54,800
£75,800
£67,300
£70,800
£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.
A person has taxable income of £45,000. In the same tax year, after the deduction of their annual exemption, they have chargeable gains of £15,000. They have no capital losses for capital gains tax (CGT) purposes. The basic rate tax band for the relevant tax year is £0 - £37,700. The two rates of CGT for the relevant tax year are 10% and 20%.
Based on the above information, what is the person’s CGT liability?
£270
£3,000
£1,500
£540
£5,250
£3,000
Correct. The 15,000 chargeable gain is taxed at 20%.
A person has a taxable income of £200,000. They recently made a taxable chargeable gain of £270,000 on the sale of the shares of an engineering company which they founded 10 years ago. The person held the shares since the incorporation of the company and was a director for the whole of that period, retiring at the date of disposal of the shares. The shares represented a 10% shareholding in the company. The person has not previously made any chargeable gains.
Will the person be able to claim any tax relief on this gain?
No tax reliefs are available. Business Assets Disposal Relief will not apply since the person has now retired as a director of the company.
Business Assets Disposal Relief will apply to reduce the capital gains tax payable from 20% to 10% of the value of the gain.
No tax reliefs are available. Business Assets Disposal Relief will not apply since the person had only a 10% shareholding.
Business Assets Disposal Relief will apply to reduce the income tax payable from 20% to 10% of the value of the gain.
Business Assets Disposal Relief will apply. The person will not pay any capital gains tax on the gain.
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.
A person owns shares in a private limited company. The shares are not in an ISA. In the 2022/23 tax year the person receives a dividend of £3,000. The person’s only other source of income in the tax year is their salary. Their taxable income, including the dividend, is £43,000.
The personal allowance for 2022/23 is £12,570.
The basic rate tax band of 8.75% for 2022/23 applies to dividend income up to and including £37,700 with the higher rate of 33.75% applicable from 37,701 to £150,000. The dividend allowance is £2,000.
How much tax will the person pay on their dividend income?
£262
£337
£1012
£400
£0
£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%.
A person disposed of only one chargeable asset in the 2022/23 tax year, which was sold for £100,000. They bought the asset ten years ago for £45,000 with acquisition costs of £5,000. There was no subsequent expenditure before sale. The annual exemption for 2022/23 is £12,300. Sale costs were £2,700. The capital gains tax (‘CGT’) rate for basic rate taxpayers in 2022/23 is 10%, and for higher rate taxpayers it is 20%.
The person’s Taxable Income for 2022/23 was £50,000.
How much capital gains tax will the person have to pay on the disposal of the asset?
£15,750
£3,500
£7,540
£7,000
£9,460
£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.
You are advising an executive director of a private company limited by shares (with unamended Model Articles) in respect of the upcoming general meeting agenda item of his removal from the board of directors by the shareholders.
Your client is not only a director, but he is also a minority shareholder in the company with 10% of the company’s issued share capital. All of the shareholders in the company previously signed a shareholders’ agreement which included the following clause: ‘The shareholders shall, for as long as they hold shares in the capital of the company, procure that the company shall not without the prior written consent of all shareholders remove any director.’
In light of the above, which of the following statements represents the advice you would give?
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.
Your client can not be removed as a director of the company as he is an employee of the company in his role as an executive director. As an employee of the company his position as a director is entrenched. If he was removed as a director, this would automatically also end his employment and breach his employment contract.
Your client can not be removed as a director. The shareholders’ agreement requires unanimous consent for the removal of a director and your client will not vote in favour of his own removal.
Your client can be removed as a director of the company by the shareholders passing an ordinary resolution. As your client has an interest in his own removal, he will not be able to vote against his removal in the general meeting. If removed, your client could bring a claim for breach of contract against the other shareholders who voted in favour of his removal.
Your client can be removed as 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 company.
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.
You act on behalf of an individual shareholder with a minority shareholding (10% of the company’s shareholding). The client has recently been unwillingly removed as a director of the company and dismissed as an employee of the company. Your client has been a shareholder in the company for 3 years (since the company was incorporated). The other 3 shareholders in the company are also the only directors in the company. The company is a small private company limited by shares (with unamended Model Articles).
Which of the following actions is both available to your client and most likely to be successful based on the information available?
Your client should bring a claim under s 33 Companies Act 2006 for breach of their membership rights. The most likely remedy is damages.
Unfortunately there is no action that your client can take in these circumstances.
Your client should bring a petition for the just and equitable winding up of the company.
Your client should pursue a derivative action on behalf of the company. The remaining directors of the company are likely to have breached their directors’ duties by deciding to dismiss your client as an employee.
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.
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.
The shareholders of a company are dissatisfied with the performance of one of the directors of the company and wish for the director to be removed. The board of directors as a whole is loyal to the underperforming director and is unlikely to take any action to remove them. The company has unamended Model Articles.
What notices and/or requests should the shareholders immediately send to the board in order to ensure that the director is removed as quickly as possible?
A request for the directors to circulate a written resolution to the board.
A special notice of the proposed resolution for removal.
A request requiring the directors to call a general meeting.
A special notice of the proposed resolution for removal and a request requiring the directors to call a general meeting.
A special notice of the proposed resolution for removal and a request for the directors to circulate a written resolution.
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).
A is a company director. Shareholders holding 7% (the ‘Shareholders’) of the share capital of the company have served notice on the company board of directors (the ‘Board’) of intention to remove A as a director. The next general meeting is due to be held in exactly one calendar months’ time. The company has articles in the form of unamended model articles.
Which of the statements below provides the best advice to the Board concerning the resolution to remove A as a director (the ‘Resolution’)?
The Board has 28 days in which to decide whether to put the Resolution on the agenda of the next general meeting.
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.
The Shareholders have not given sufficient notice to move the Resolution for the upcoming general meeting, therefore the Board do not need to put the Resolution on the agenda for this general meeting.
The Shareholders do not represent sufficient of the voting rights of the company to have the right to call a general meeting to move the Resolution.
The Board can refuse to put the Resolution on the agenda of the next general meeting.
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.
You are acting on behalf of a private company limited by shares (currently with unamended Model Articles). The 4 individual shareholders of the company are also the only 4 directors of the company. The board of directors wish to consider ways to prevent any director being removed against their will. The board has consequently asked for ways to prevent the removal of directors taking place without the prior written consent of all of them.
In light of the above, where, if anywhere, is the most appropriate place for a provision dealing with this issue to be set out?
The company’s articles of association.
A shareholders’ agreement or the company’s articles of association.
The contract of employment of each director.
A shareholders’ agreement.
Nowhere is appropriate for this provision as the provision is contrary to the CA 2006 and so is legally unenforceable.
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.
For VAT purposes, how are supplies of domestic heating and power rated?
Zero rated
Standard rated at 25%
Exempt
Standard rated at 20%
Reduced rated at 5% VAT
Reduced rated at 5% VAT
Correct
Correct
A VAT registered business makes a supply of printer cartridges to a law firm and the contract between them states nothing about VAT.
What is the correct position with regards to VAT payable on the price of the supply of paper?
No VAT will be payable as the parties have not expressly agreed to it.
The supply of the printer cartridges will be reduced rated for VAT.
The price of the supply of the printer cartridges is deemed to be exclusive of VAT.
The supply of printer cartridges will be exempt from VAT.
The price of the supply of printer cartridges is deemed to include the VAT.
The price of the supply of printer cartridges is deemed to include the VAT.
Correct
Correct
A small business makes soap using oils purchased from a supplier for £500 plus VAT. They then sell the soap for £5000 plus VAT.
How much VAT will the soap maker send to HMRC?
£900
£100
£1100
£0
£1000
£900
Correct
Correct.
XYZ Ltd, a manufacturer of scientific equipment, intends to update its production line facilities this year and will shortly pay £345,000 to a supplier of used machine tools.
XYZ Ltd has asked you to advise on how capital allowances can apply in calculating its tax liability in coming years. XYZ Ltd has already used the whole of its annual investment allowance for this year. Its accounting year matches the financial year (1 April - 31 March).
Taking the current financial year as “Year 1”, and assuming that the applicable rates remain the same, which of the following figures is the capital allowance available to XYZ in Year 3?
£41,756
£62,100
£50,922
£190,222
£231,978
£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.
During its last financial year, ABC Ltd purchased freehold office premises at a cost of £160,000. In order to do this, it took out a loan, on which it paid interest of £10,500 during the year.
The premises were refitted a few years ago, but the décor is fairly traditional so ABC Ltd had the existing fittings ripped out and improvements made to bring the décor into line with ABC’s modern image, at a cost of £14,000.
Whilst the improvements were being made, ABC Ltd rented temporary premises on a short-term lease, paying £35,000 in rent. In the rented premises, there was little space for client entertainment so ABC Ltd took some of the company’s clients out to races, hiring a box and paying for a top-notch caterer to provide canapés and champagne, at a total cost of £8,000.
ABC Ltd had trading receipts of £555,000 in the relevant financial year and other deductible expenditure in the sum of £105,000. It made no disposals of chargeable assets during the year.
What is ABC Ltd’s TTP for the year?
£76,855
£404,500
£390,500
£244,500
£396,500
£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.
In the financial year a company has trading receipts of £2,212,500 and deductible expenditure of £596,000. It also disposes of a chargeable asset, making a chargeable gain of £610,000. The company has expenditure qualifying for the full annual investment allowance of £1,000,000 during the year and is entitled to additional capital allowances of £12,600.
What is the company’s corporation tax liability for that financial year (rounding down your calculation to the nearest pound)?
£420,641
£230,641
£233,035
£1,213,900
£423,035
£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
XYZ Ltd is a close company.
It has made a loan of £28,000 to a participator who is also a director of the company.
Which of the following statements concerning the tax treatment of the loan is correct?
The participator must pay income tax on the loan at the rate of income tax payable in dividends by a higher rate tax payer.
The company must pay corporation tax at a rate of income tax payable in dividends by a higher rate tax payer.
The company must pay corporation tax at a rate of income tax payable in dividends by a basic rate tax payer.
The participator must pay income tax as if they had received a dividend.
There are no tax implications as the loan is below the threshold required.
The company must pay corporation tax at a rate of income tax payable in dividends by a higher rate tax payer.
Correct
ABC Ltd has 7 directors: A, B, C, D, E, F and G.
A and B each own 35% of the shares in the company and the remaining 30% are owned by other individuals (not the other directors).
Which of the following statements concerning whether ABC Ltd is a close company represents the best analysis?
ABC is a close company only because it is under the control of five or fewer participators.
ABC is a close company only because it is under the control of any number of participators who are also directors.
It is not possible to say whether ABC is a close company as we do not know who the other shareholders are.
ABC is not a close company on either test.
ABC is a close company on both tests.
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.
A company has a Total Taxable Profit of £1,340,000 for the tax year ending 5 April 2021.
Which of the following statements best describes how the company must pay its tax liability to HMRC?
The company will calculate its tax liability and pay HMRC in four instalments over the course of the next two accounting periods.
The company will calculate its tax liability and pay HMRC within 9 months of the end of the accounting period.
The company will calculate its tax liability and pay HMRC within 9 months and one day of the end of the accounting period.
The company will calculate its tax liability and immediately pay HMRC any tax which is due.
The company will calculate its tax liability and pay HMRC in two instalments over the course of the next two accounting periods.
The company will calculate its tax liability and pay HMRC within 9 months and one day of the end of the accounting period.
Correct
A private interior design company specialises in penthouse apartments and loft conversions. During its last financial year, the company purchased freehold office premises at a cost of £160,000. In order to do this, it took out a loan, on which it paid interest of £10,500 during the year. The company refitted the premises, which were not in keeping with its design criteria, at a cost of £14,000. Whilst the improvements were being made, the company rented temporary premises on a short-term lease, paying £35,000 in rent. The company also incurred business entertainment expenses of £8,000.
The company had trading receipts of £555,000 in the relevant financial year and other deductible expenditure in the sum of £105,000. It made no disposals of chargeable assets during the year.
What is the company’s TTP for the year?
£244,500
£390,500
£76,855
£396,500
£404,500
WS7 consolidate
client entertainment expenditure is not deductible for tax purposes.
A woman makes some soy wax from plants grown in her greenhouse and sells it to a candle making company for £2,000 + VAT. The company makes some candles with it and sells all the candles made with the wax to a distributer for £4,000 + VAT. The distributor sells the candles to a retail outlet for £5,500 plus VAT.
How much VAT will be sent to HMRC as a result of the above transactions?
£1,100
£300
£1,900
£5,500
£2,300
£1,100
Correct. The amount in each transaction that is paid to HMRC is the difference between the input tax and the output tax.
A private limited company started trading in February two years ago. It has chosen the calendar year as its financial year, so its first accounting period ended on 31 December of the year in which it commenced trading. During this first accounting period, the company made a trading loss of £50,000 in September. The company made no chargeable gains or losses during this first accounting period.
In its second accounting period, which ended on 31 December the following year, the company made a trading profit of £25,000. The company made no capital gain or losses during the second accounting period.
Can the trading profit of £25,000 made in the second accounting period be set off against the trading loss of £50,000 from the first accounting period?
No, because a trading loss can only be set off against trading profits from an earlier accounting period.
No, because a trading loss can only be set against trading profits or chargeable gains in the same accounting period.
No, because the company was not carrying on business for a full 12 month period before the accounting period in which the trading loss was incurred.
Yes, because there were no trading profits or chargeable gains in the first accounting period to offset the £50,000 trading loss.
Yes, because no trading or capital losses were incurred in the first accounting period.
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.
You have a corporate client which sold some land in September 2019 for £175,000, making a chargeable gain of £25,000. In November 2018, it bought some machinery for £60,000. In October 2021, the client buys new premises for £250,000.
Which statement below represents the best advice to the client regarding the applicability of tax reliefs?
The client can add the chargeable gain of £25,000 onto the purchase price of the premises to reduce any chargeable gain arising from a future sale of the premises.
The client can deduct the chargeable gain of £25,000 against either the cost of the machinery or the premises which will help it to reduce the amount of corporation tax it has to pay.
The client can deduct the chargeable gain of £25,000 from the price of the premises only to give a new base cost for the premises of £225,000
The client cannot deduct the chargeable gain of £25,000 against the price of the premises as the premises was not purchased within 12 months before the sale of the land.
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.
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).
Which of the following accounts is a liability in the books of a sole trader’s business?
Bank interest charges
Cash at bank
Drawings
Insurance
Bank overdraft
Bank overdraft
Correct
Correct
incorrect
drawings
Incorrect. These are a withdrawal of capital.
Which of the following is a tangible fixed asset of a printing business?
Cash at bank
Trade debtors
Printing machinery
A patent
Petty cash
Printing machinery
Correct
Correct
Which one of the following statements about business accounting is correct?
An expense account does not include spending on long-term assets.
The profits of a business which have been retained in a sole trader’s business over the years are an asset account.
Capital is the money generated by the business.
To be defined as a fixed asset the asset must be owned for over a month.
Every business must match its accounting period to the tax year.
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.
Which of the following is the label for the final figure (at the end) of a profit and loss account?
Gross profit
Net profit
Total income
Total expenses
Cost of sales
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’.
Which one of the following statements is correct?
A profit and loss account is prepared exclusively by using the income and expenses accounts of the business.
Accountants usually prepare the profit and loss account directly from the book-keeping ledgers of the business.
All income entries from the trial balance are put at the top of the profit and loss account.
Lighting and heating expenses for a business premises would not feature on a profit and loss account.
A profit and loss account relates to the tax year of a business, which is recorded in the heading for the account.
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.
Which one of the following statements is correct?
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.
The premises and equipment owned by a business would be shown in the expenses section of a profit and loss account.
The ‘net profit’ figure on a profit and loss account will not appear on the balance sheet of the business.
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.
In order to calculate the ‘net profit’ figure on a profit and loss account, the accountants of the business will carry out the following formula: Sales – cost of sales = net profit
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.
Your client sets up a restaurant business and introduces capital of £10,000. The business then obtains a long term loan of £6,000 to purchase fixed assets. After these transactions, which of the following is the net asset value figure for the business?
£6,000
£16,000
£10,000
(£6,000)
£4,000
£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.
Which one of the following statements is correct?
The net current assets figure on a balance sheet is calculated by deducting all current liabilities from all fixed assets.
A loan which is due to be repaid by a business in exactly one year is classed as a current liability.
The net current assets figure on the balance sheet gives an indication of how much cash the business could make available at short notice.
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.
Fixed assets such as equipment, machinery and stock are held in the business long term.
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.
A business sells its freehold premises for £100,000. What will the effect be on the balance sheet of the business?
Fixed assets (premises) will decrease by £100,000. Current assets (cash) will increase by £100,000.
Fixed assets (premises) will decrease by £100,000. Capital (drawings) will increase by £100,000.
Current assets (premises) will decrease by £100,000. Current assets (cash) will increase by £100,000.
Current assets (premises) will decrease by £100,000. Current liabilities (cash) will increase by £100,000.
Fixed assets (premises) will decrease by £100,000. Capital (at start of year) will increase by £100,000.
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.
Which one of the following statements best describes depreciation calculated using the straight-line method?
There will be a different charge for depreciation every year.
It would most likely be used where an asset is likely to lose a large part of its value in the first few years of ownership.
It spreads the depreciation charge evenly over the life of the asset.
If plotted on a graph, the depreciation calculation would be plotted as a curved line.
More depreciation is charged in earlier years.
It spreads the depreciation charge evenly over the life of the asset.
Correct
The following is an extract of the trial balance of a sole trader:
Equipment, at cost - £100,000
Provision for depreciation, equipment - £14,000
The sole trader has decided that the equipment should be depreciated at 10% per annum using the straight-line method.
What would the accumulated depreciation at the end of the year be?
£8,600
£24,000
£22,600
£14,000
£10,000
£24,000
Correct
what is the provision for depreciation? and why does it get factored in?
The following is an extract of the trial balance of a sole trader
Vehicles, at cost - £50,000
Provision for depreciation, vehicles - £8,000
The sole trader has decided that the vehicles should be depreciated at 20% per annum using the reducing balance method.
What would the depreciation charge for the year be?
£33,600
£18,000
£8,400
£10,000
£16,400
£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.
Which one of the following statements is correct in relation to accruals and prepayments?
On the balance sheet an accrual is recorded as a current asset and a prepayment as a current liability.
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.
If the business has paid for something but not yet received the benefit, then the profit of the business will be artificially high.
If the business received the benefit of something but has not yet paid for it, then the profit of the business will be artificially low.
A prepayment is made when an expense for the year has been incurred but not charged against profit. An accrual is made when an expense for the year has not been incurred but has been charged as an expense this year.
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
The trial balance of a partnership reads as follows:
Electricity - £7,000
At the end of the financial year, the business decides to make an accrual of £770.
Based on this information, what will the adjusted electricity expense be in the Profit and Loss account?
£7,000
£770 current liability.
£6,230
£770 current asset
£7,770
£7,770
Correct
incorrect
£770 current liability.
Incorrect. This would be the entry on the balance sheet.
A business has recorded £30,000 for rent in its trial balance.
At the end of the year, the business recognises that half of the sum actually relates to next year’s rent.
Which of the following statement best describes the adjustment that the business should make?
A prepayment of £30,000.
A prepayment of £15,000.
An accrual of £30,000.
No adjustments are necessary.
An accrual of £15,000.
A prepayment of £15,000.
Correct
The following is an extract from the trial balance of a business:
Receivables - £72,000
Bad Debts - £2,400
Provision for doubtful debts - £1,000
At the end of the year it is decided to make a general provision for doubtful debts of 1%. There are no other bad debts.
What will the provision for doubtful debts be at the end of the year?
£720
£696
£280
£1,720
£3,120
£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.
The following is an extract from the trial balance of ABC Trading:
Receivables £102,000
Provision for doubtful debts £6,000
At the end of the year it is decided to write off £7,000 as a bad debt due to the insolvency of a customer. In addition ABC Trading will make a general provision for doubtful debts of 3%.
What will the P&L account record?
£7,000
£2,850
£10,150
£4,060
£3,850
£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.
The following is an extract from the trial balance of ABC Trading:
Receivables £41,000
Bad debts £1,000
Provision for doubtful debts £750
At the end of the year it is decided to write off a further £1,500 as a bad debt due to the insolvency of a customer. In addition ABC Trading will make a general provision for doubtful debts of 1%.
What is the increase or decrease in the provision for doubtful debts at the end of the year?
Increase of £355
Increase of £395
Decrease of £355
Decrease of £395
Increase of £1,500
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.
Which one of the following statements is correct in relation to “drawings”?
Drawings will usually be a fixed amount each year.
Drawings are withdrawals of profit by the partners of a partnership.
Drawings are appropriations of profit by partners which never need to be repaid.
Drawings are payment made to partners in lieu of salary.
Each partner will take the same drawing.
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.
Which statement best describes a “profit appropriation statement”?
A profit appropriation statement is a way of working out the distribution of profits in a partnership.
Using a profit appropriation statement, profit will be paid first, before salary and interest.
All partners must receive a salary after a profit appropriation statement is drawn up.
Interest is the last thing to be paid on a profit appropriation statement.
A profit appropriation statement appears in the balance sheet.
A profit appropriation statement is a way of working out the distribution of profits in a partnership.
correct
Which of the following is correct in relation to a partnership balance sheet?
The top half is different to that of a sole trader; the bottom half is the same.
The balance sheet of a partnership shows the combined capital position of all the partners.
Both halves of the balance sheets are different for a sole trader and partnership.
Both halves of the balance sheet are the same for a sole trader and partnership.
The top half is similar to that of a sole trader; the bottom half is different.
The top half is similar to that of a sole trader; the bottom half is different.
Correct
Correct
What is the Statement of Changes in Equity?
Addition to the profit and loss account that shows share capital reserves.
An addition to the balance sheet that shows share capital reserves.
An addition to the profit and loss account which shows profits brought forward plus current year profit (less dividends paid).
An addition to the balance sheet which shows profits brought forward plus current year profit (less dividends paid).
An addition to the balance sheet that only shows dividends paid.
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).
Which of the following statements is correct in relation to how companies’ financial statements deal with tax?
The Statement of Changes in Equity includes a statement of the tax the company should pay on its profits.
Both the Profit and Loss Account and the Balance sheet will include a statement of the tax the company should pay on its profits.
The balance sheet of a company includes a statement of the tax the company should pay on its profits.
The Profit and Loss Account of a company includes a statement of the tax the company should pay on its profits.
None of the financial statements will include a statement of the tax that the company should pay.
The Profit and Loss Account of a company includes a statement of the tax the company should pay on its profits.
Correct
What is the impairment of receivables on a company balance sheet?
The provision for doubtful debts.
The record of assets of a company.
The amount of money owed to the company by third parties.
The record of bad debts of a company
The liabilities of the company.
The provision for doubtful debts.
Which of the following statements is correct in relation to the share premium account?
The share premium account appears on the top half of the company’s balance sheet.
The share premium account is a revenue reserve.
Companies will only use a share premium account if a company issues shares other than ordinary shares.
The share premium account represents the difference between the nominal value of the share and the amount the shareholder paid.
The share premium will increase as the market value of the company increases.
The share premium account represents the difference between the nominal value of the share and the amount the shareholder paid.
correct
A company’s share capital is £100,000. Which of the following statements correctly explains what this means?
The nominal value of the shares including premium is £100,000.
The shareholders have paid £100,000 excluding premium to the company for their shares.
The nominal value of the shares excluding premium is £100,000.
The shareholders have paid £100,000 including premium to the company for their shares.
There has been no premium paid on the shares.
The shareholders have paid £100,000 excluding premium to the company for their shares.
correct
Which of the following statement about reserve accounts is correct?
Retained earnings is a type of capital reserve.
Revenue reserves can be distributed to shareholders by way of dividend.
The share premium account is an example of a revenue reserve.
A company is not permitted to distribute revenue reserves to shareholders.
Capital reserves can be distributed to shareholders by way of dividends.
Revenue reserves can be distributed to shareholders by way of dividend.
Correct
Which one of the following statements represents the correct advice about dividends?
Dividends are always paid after the year end.
Dividends will be recorded in the profit and loss account.
Dividends can only be paid out of profits generated in the current financial period.
Dividends are paid before the company is taxed.
Dividends are paid out of profits generated in the current or previous accounting period.
Dividends are paid out of profits generated in the current or previous accounting period.
Correct
Correct
Which one of the following statements about interim and final dividends on ordinary shares is correct?
If a company has paid an interim dividend it cannot also pay a final dividend.
Both interim and final dividends constitute debts of the company.
Final dividends are made after the financial year end and interim dividends are paid during the financial year.
Shareholders need to approve the payment of final and interim dividends.
Both final and interim dividends are paid after the financial year end.
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.
If a company decided to make a 1:10 bonus issue of shares using retained earnings, which of the following statements concerning the balance sheet is correct?
The current liabilities on the top half of the balance sheet would increase and the retained earnings would decrease.
The cash on the top half of the balance sheet would decrease and the share capital would increase.
Nothing would change on the balance sheet.
The share capital would increase and the retained earnings would decrease.
The share capital would increase and the current liabilities on the top half of the balance sheet would decrease.
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.
Which one of the following is a type of debt security?
An overdraft
A fixed charge
A preference share
A term loan
A bond
A bond
Correct
Which of the following is the best definition of a “representation” in a loan agreement?
A promise to do or not do something, or to procure that something is done or not done.
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.
A statement of fact as to legal and commercial matters made on signing the loan agreement
A statement by the borrower that it is financially secure and will be able to pay the interest and capital on the loan when due.
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
Which one of the following is NOT a debenture?
A term loan
A bond
A document which creates a security
A debt security issued by a company
A term loan
Correct
Correct. This is not a debenture.
A limited company is a manufacturer of microchips. It is taking a loan of £20,000 from a bank, repayable over 5 years. Which of the following would be the most likely package of security for the bank?
A fixed charge over the microchips and a floating charge over the machinery that makes the microchips.
A fixed charge over both the microchips and the machinery that makes the microchips.
A floating charge over both the microchips and the machines that makes the microchips.
A floating charge over the microchips and a fixed charge over the machinery that makes the microchips.
A fixed charge over the machinery that makes the microchips only.
A floating charge over the microchips and a fixed charge over the machinery that makes the microchips.
A limited company is a manufacturer of microchips. It is taking a loan of £20,000 from a bank, repayable over 5 years. Which of the following would be the most likely package of security for the bank?
A fixed charge over the microchips and a floating charge over the machinery that makes the microchips.
A fixed charge over both the microchips and the machinery that makes the microchips.
A floating charge over both the microchips and the machines that makes the microchips.
A floating charge over the microchips and a fixed charge over the machinery that makes the microchips.
A fixed charge over the machinery that makes the microchips only.
A floating charge over the microchips and a fixed charge over the machinery that makes the microchips.
correct
A company has entered a loan agreement with a bank for a £250,000 loan. In return the company has granted fixed and floating charges in favour of the bank.
The charges were not registered within 21 days. What are the most likely implications of the failure to register?
The company will be liable to a fine for non-registration.
The fixed charge will rank ahead of any subsequent fixed charge even where the later charge is duly registered.
The bank will be liable to a fine for non-registration.
The charges are void against any liquidator or creditor of the company.
The charges are void against any liquidator or creditor of the company.
Correct
Correct.
Which one of the following correctly describes the effect of crystallisation of a floating charge?
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.
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. The borrower is still able to deal with those assets but must ensure that the total amount of the assets is not reduced.
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, becoming a fixed charge.
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
ABC Ltd is about to issue 100 £1 ordinary shares at a price of £2 per share.
Which of the following best describes the effect on ABC Ltd’s balance sheet?
Share capital will increase by £200; share premium account will not change.
Share premium account will increase by £200.
Share capital will increase by £100; net assets will increase by £100.
Share capital will increase by £100; share premium account will increase by £100.
Retained earnings will increase by £200; net assets will increase by £200.
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.
A company is taking out a 5-year term loan for 40,000 to buy some new machinery.
Which of the following represents the correct statement about the financial implications for the company?
The net assets will increase.
The company will be more highly geared as a result of the loan.
Taking out a loan will reduce earnings per share.
Both the net assets and total equity will increase as a result of the loan.
The company will reduce its gearing by taking out a loan instead of issuing shares.
The company will be more highly geared as a result of the loan.
Correct
A company which has a share capital of £10,000, takes out a long term loan for £5,000. The company has no other loans. Which one of the following correctly represents the gearing of this company?
20%
50%
5%
2%
0.5%
50%
Correct. Gearing is calculated by the formula “Long term debt divided by total equity”.
MR01
Form MR01detailing:
- 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;
A company takes advice on an employment dispute and incurs legal fees of £5,000 but has not yet been invoiced for that work by the end of its financial year. The company’s business accounts for the said financial year are being drawn up.
Which of the following statements is correct?
The balance sheet will not balance owing to the sum of £5,000 having not been paid yet.
The legal fees are a prepayment and if not reflected in the business accounts then the company’s assets will be overstated by £5,000 in the balance sheet.
The legal fees are a prepayment and if not reflected in the business accounts then the company’s profits will by understated by £5,000.
The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be understated by £5,000 in the balance sheet.
The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be overstated by £5,000 in the balance sheet.
The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be overstated by £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.
A company raises £200,000 through an issue of 100,000 £1 ordinary shares at a price of £2 per share fully paid in cash.
Which of the following statements best describes the effect of the share issue on the company’s balance sheet?
Cash increases by £200,000; share capital increases by £100,000 and the share premium account increases by £100,000
Current assets increase by £200,000; share capital increases by £100,000 and the share premium account increases by £100,000
Net assets and total equity increase by £200,000
Cash increases by £200,000 and share capital increases by £100,000
Current assets and total equity increase by £450,000
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.
A company raises £800,000 by way of a 3-year term loan and uses these funds to purchase some new machinery at a cost of £800,000.
Which of the following statements describes the net impact of these transactions on the company’s Balance Sheet?
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.
Increase in non-current liabilities by £800,000; increase in cash/cash equivalents by £800,000; increase in non-current assets by £800,000; increase in Net Asset Value by £800,000.
Increase in 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.
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.
Increase in non-current liabilities by £800,000; decrease in cash/cash equivalents by £800,000; increase in non-current assets by £800,000; decrease in Net Asset Value by £800,000.
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.
A private limited company runs a car dealership and is seeking to borrow £1,000,000 by way of a loan from a bank. The bank is considering the security that it should consider taking from the company to secure the loan. The most valuable category of assets owned by the company is the vehicles which it has for sale on its forecourt.
What would be the most appropriate form of security interest for the bank to take over the vehicles?
A floating charge because the vehicles are a type of fluctuating asset.
A charge by way of legal mortgage because the vehicles are a type of property.
A pledge, because this is the most secure form of security the bank can take.
A debenture because this is the most comprehensive form of security the bank can take.
A fixed charge because the vehicles are a type of permanent asset.
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.
A private company incorporated in 2016 with unamended Model Articles wishes to raise money for working capital purposes by borrowing from a bank. The bank will take security for the loan over the company’s assets. No changes have been made to the company’s articles since incorporation.
Which of the following best describes the procedure to be followed to ensure the bank has effective security?
The company is unable to grant security for this loan as it would breach the financial assistance rules.
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.
The company will need to approve the granting of security in respect of the loan to the bank by shareholder resolution.
The security document will need to be registered at Companies House within 21 days from the date of creation of the security.
The loan agreement will need to be registered at Companies House within 21 days beginning with the day after the date of signing of the loan agreement.
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.
Which one of the following companies would NOT be considered to be insolvent?
A company which has liabilities which exceed its assets.
A company which has failed to comply with a statutory demand for £500.
A company which is unable to pay its debts as they fall due.
A company which has failed to comply with a statutory demand for £800.
A company which has failed to satisfy enforcement of a judgment debt for £500.
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.
Why must directors ensure that they take urgent and advice and action when a company is in financial difficulty?
Because otherwise they risk being in breach of their directors’ duties under CA 2006. However, directors will not be personally liable due to the doctrine of limited liability.
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.
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.
Which one of the following is true in relation to the option of directors of a company facing insolvency?
The company could enter into a CVA, which is an informal arrangement between a company and its creditors.
The directors could consider obtaining a pre-insolvency moratorium by filing specified documents at court
Due to the risk of being in breach of directors’ duties, the directors should not take any further action in relation to the company.
The company could enter into a Restructuring Plan. The advantage of this is that no court sanction is needed so it is relatively cheap and quick to obtain.
The directors could enter into a standstill agreement, which is an agreement between the company and the directors to do nothing.
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.
Which one of the following is true in relation to CVAs?
A company can only enter a CVA once a court order is made sanctioning the arrangement.
Whilst the CVA is supervised by a licensed insolvency practitioner, the directors of the company remain in control of the business.
CVAs must be approved by more than 50% of creditors only.
CVAs must be approved by more than 50% of creditors and 75% of shareholders.
A CVA once approved is binding on all of a company’s creditors.
Whilst the CVA is supervised by a licensed insolvency practitioner, the directors of the company remain in control of the business.
correct
Which one of the following correctly sets out the approval requirements for a Restructuring Plan?
The Plan must be approved by 75% in value of each affected class of creditors and shareholders.
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.
The Plan must be approved by 75% in value of the total of all creditors and shareholders.
The Plan must be approved by 75% in value of unsecured creditors and over 50% of shareholders.
The Plan must be approved by 75% in value of the total of all creditors and shareholders. However, the court may sanction the Plan even if the relevant approvals have not been obtained.
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
Which one of the following statements is correct regarding the appointment of an administrator by the directors of the company ?
The directors can file a notice of appointment at court without giving any notice to any QFCHs.
The directors can only appoint an administrator by obtaining a court order.
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.
The directors must file a notice of intention to appoint an administrator at court and serve this on any QFCH 10 business days before they file the notice of appointment to appoint an administrator.
The directors will have to make a separate application to court to obtain an interim moratorium.
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
Which one of the following is possible during an administrative moratorium?
A supplier can enforce their retention of title clause and take back the goods that have been supplied but not paid for.
A creditor can institute legal proceedings against the company without the permission of the court.
A landlord can forfeit the company’s lease of its head office.
A QFCH can appoint its own choice of administrator.
A QFCH can appoint its own choice of administrator.
Correct
Which one of the following statements regarding a fixed charge receiver is correct?
A fixed charge receiver is appointed under the Law of Property Act 1925.
A fixed charge receiver is an agent of its appointor.
A fixed charge receiver is appointed pursuant to a court order.
A fixed charge receiver owes its duties primarily to its appointor.
A fixed charge receiver can only be appointed if the company has a floating charge which is created before 15 September 2003.
A fixed charge receiver owes its duties primarily to its appointor.
correct
Which one of the following procedures requires the company to be solvent?
Compulsory liquidation
Creditors’ voluntary liquidation
Members’ voluntary liquidation
Administration
Company Voluntary Arrangement
Members’ voluntary liquidation
Correct - this can only be used when the company is solvent.
Which one of the following correctly describes the consequences of the court granting a compulsory winding up order on the employees and directors of the company?
All employees will be automatically dismissed; the directors lose their powers but remain in office under the supervision of the liquidator until the winding up is complete.
There are no immediate consequences on the employees, although once the winding up is complete they will be dismissed. The directors lose their powers but remain in office under the supervision of the liquidator until the winding up is complete.
All employees will be automatically dismissed; the directors lose their powers and are automatically dismissed from office.
The directors lose their powers but remain in office under the supervision of the liquidator until the winding up is complete. The liquidator will look to make cost savings and may make some employees redundant immediately. The remaining employees will remain until the winding up is complete.
All employees will be automatically dismissed; the directors lose their powers and are automatically dismissed from office.
correct
Which one of the following is correct regarding Creditors’ Voluntary Liquidation?
The creditors will pass an ordinary resolution to put the company into liquidation and a special resolution to appoint a liquidator.
If the shareholders and creditors disagree on the choice of liquidator, a court order will need to be obtained to appoint a liquidator.
The shareholders will pass a special resolution to put the company into liquidation and an ordinary resolution to nominate a liquidator.
If the shareholders and creditors disagree on the choice of liquidator, the shareholders’ choice of liquidator prevails.
The shareholders will pass a special resolution to put the company into liquidation and an ordinary resolution to nominate a liquidator.
Correct
Which one of the following best describes the order of priority on insolvency?
The proceeds of an insolvent estate should be divided up in the following order of priority: (1) preferential creditors; (2) other costs and expenses of the liquidation; (3) fixed charge creditors; (4) liquidators fees of realising fixed charge assets; (5) prescribed part fund; (6) floating charge creditors; ( (7) unsecured creditors; (8) interest; (9) shareholders.
The proceeds of an insolvent estate should be divided up in the following order of priority: (1) prescribed part fund (2) preferential creditors; (3) other costs and expenses of the liquidation; (4) fixed charge creditors; (5) liquidators fees of realising fixed charge assets; (6) floating charge creditors; (7) unsecured creditors; (8) interest; (9) shareholders.
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.
The proceeds of an insolvent estate should be divided up in the following order of priority: (1) fixed charge creditors; (2) liquidators fees of realising fixed charge assets; (3) other costs and expenses of the liquidation; (4) prescribed part fund; (5) floating charge creditors; (6) preferential creditors; (7) unsecured creditors; (8) interest; (9) shareholders.
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
Which of the following are preferential creditors of a company in the order of priority?
Employees
Creditors with floating charges
Creditors with fixed charges
Shareholders
Trade creditors
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.
Which of the following best describes the creditors of a company that may benefit from the prescribed part fund?
Unsecured creditors and shareholders.
Unsecured creditors only.
Unsecured creditors and floating charge holders.
Unsecured creditors, employees (if they are owed monies over and above the preferential amount), floating charge holders and shareholders.
Unsecured creditors, employees (if they are owed monies over and above the preferential amount) and shareholders.
Unsecured creditors, employees (if they are owed monies over and above the preferential amount) and shareholders.
correct
Which one of the following statements correctly describes the voting thresholds on an IVA?
An IVA must be approved by all secured creditors and more than 75% in value of unsecured creditors.
An IVA must be approved by more than 50% in value of all creditors.
An IVA must be approved by more than 75% in value of all creditors.
An IVA must be approved by more than 75% of creditors who are present and voting.
An IVA must be approved by more than 50% of creditors who are present and voting.
An IVA must be approved by more than 75% in value of all creditors.
correct
Which one of the following is a ground for the presentation of a bankruptcy petition?
The debtor owes more than £2,000 and has not paid this sum by the due date.
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.
The debtor is unable/has no reasonable prospect to pay its petition debts which are for more than £1,000.
The creditor believes that the debtor is likely to become unable to pay its debts in the near future.
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.
Which one of the following is correct in relation to the ‘relevant time’ for the transaction to have taken place where a trustee in bankruptcy is seeking to bring a claim for a transaction at an undervalue?
The ‘relevant time’ for a trustee in bankruptcy to bring a claim for a transaction at an undervalue is within 2 years preceding the date of the bankruptcy petition.
The ‘relevant time’ for a trustee in bankruptcy to bring a claim for a transaction at an undervalue is within 2 years preceding the date of the bankruptcy petition if the individual is not an associate of the bankrupt and within 5 years of the date of the bankruptcy petition if the transaction did take place with an associate of the bankrupt.
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.
The ‘relevant time’ for a trustee in bankruptcy to bring a claim for a transaction at an undervalue is within 2 years preceding the date of the bankruptcy petition provided the transaction did not take place with an associate of the bankrupt.
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.
A private limited company has been put into insolvent liquidation. At the time of the liquidation, the company had a number of unsecured creditors and 5 employees who are owed £1000 each in respect of wages for work carried out in the two months prior to the liquidation.
From where will the employees recover the wages they are owed?
From funds for the preferential and unsecured creditors
From funds for the unsecured creditors
From the prescribed part fund
From funds for the preferential creditors and the prescribed part fund
From funds for the preferential creditors
From funds for the preferential and unsecured creditors
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.
A private limited company is in liquidation. The company granted a floating charge to a supplier over stock on 13 March 2008. This charge was registered at Companies House on 20 March 2008. The company also granted a floating charge to its lender to secure an overdraft facility on 14 March 2008 which was registered at Companies House on 17 March 2008. There are no fixed charge holders and all sums due to HMRC have been paid. There are two employees with claims for unpaid salary. The liquidator has realised all the company’s assets. There will be insufficient sums to pay unsecured creditors in full.
Which statement best describes the order in which the liquidator should distribute the monies after payment of their costs?
(1) Preferential creditors (2) set aside the prescribed part (3) the supplier (4) the lender (5) the unsecured creditors.
(1) Set aside the prescribed part (2) the lender (3) the supplier (4) the unsecured creditors.
(1) Set aside the prescribed part (2) the supplier (3) the lender (4) the unsecured creditors.
(1) Preferential creditors (2) the supplier (3) the lender (4) the unsecured creditors.
(1) Preferential creditors (2) set aside the prescribed part (3) the lender (4) the supplier (5) the unsecured creditors.
(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.
A private limited company is in financial difficulty. An unsecured creditor issued a winding up petition two days ago and the company has today received notice that an administrator has been appointed by the bank which has a floating charge over substantially all of the assets of the company.
What will be the impact of the administration on the winding up petition issued by the unsecured creditor?
The winding-up petition proceedings would continue, as the petition was issued prior to the administration.
The winding-up petition proceedings would continue but could be stayed at the discretion of the administrator.
The winding-up petition proceedings would be stayed and would require the consent of the administrator or the court to continue.
The winding-up petition proceedings would be stayed, but the unsecured creditor could appoint its own administrator to consent to the proceedings continuing.
The winding-up petition proceedings would be stayed but the creditor could issue could proceedings for recovery of the debt.
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.
The liquidator of an insolvent manufacturing company wishes to make payments to various parties following the collapse of the company. A bank has a fixed and floating charges over the assets of the company. There are several employees who are owed a small amount in unpaid salaries, as well as a number of unsecured trade creditors. HMRC is also owed money for outstanding PAYE contributions.
Which statement best describes the order in which the liquidator should distribute the monies after payment of their costs?
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.
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 – HMRC followed by the employees (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.
The bank will receive payment from the fixed charge fund. The floating charge assets are then sold and distributed as follows (1) preferential creditors – HMRC followed by the employees (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.
The fixed and floating charge assets are sold and distributed as follows (1) the bank (2) preferential creditors – the employees followed by HMRC (3) set aside the prescribed part (4) the unsecured creditors, who will benefit from the prescribed part fund as well as any remaining floating charge assets.
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.
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.
You act for a private limited company in financial difficulty which is thinking about proposing a company voluntary arrangement to its creditors (the CVA Proposal). The company has one secured creditor, which is a bank, plus a number of general unsecured creditors.
The client seeks your advice as to who will need to approve the CVA Proposal and the effect of the CVA Proposal if it is approved.
Which one of the following is the correct advice?
The CVA Proposal, if approved by a simple majority of creditors and a simple majority of shareholders, will bind all the unsecured creditors and the bank.
The CVA Proposal, if approved by 75% in value of creditors and a simple majority of shareholders, will bind all the creditors, including the bank.
The CVA Proposal, if approved by 75% in value of creditors and a simple majority of shareholders, will bind all the unsecured creditors. The bank will not be bound since a CVA Proposal is not able to compromise loans made by banks.
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.
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.
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.
Which one of the following correctly sets out the persons against whom a claim for fraudulent trading can be brought?
Any person who is knowingly party to the carrying on of any business of the company with an intent to defraud creditors.
The directors of a company who are knowingly party to the carrying on of any business of the company with an intent to defraud creditors.
The directors of a company, including past directors, who were knowingly party to the carrying on of any business of the company with an intent to defraud creditors.
Any person who is knowingly or recklessly party to the carrying on of any business of the company with an intent to defraud creditors.
The directors of a company who are knowingly or recklessly party to the carrying on of any business of the company with an intent to defraud creditors.
Any person who is knowingly party to the carrying on of any business of the company with an intent to defraud creditors.
Correct
Who may bring a claim for fraudulent trading?
A liquidator or administrator.
A liquidator only.
A liquidator, administrator or any creditor.
Any person who can show loss caused by the alleged fraudulent trading.
An administrator only.
A liquidator or administrator.
Correct - see s 213 and s 246ZA IA 1986.
Which one of the following best describes what must be established for a successful claim for fraudulent trading against a director?
That the director breached their duties at a time when the company was insolvent.
An intent to defraud creditors which involves actual dishonesty, assessed on a subjective basis.
An intent to defraud creditors which involves actual dishonesty and has resulted in all of the company’s creditors being defrauded.
That the director was incompetent or negligent at a time when the company was insolvent.
An intent to defraud creditors which involves actual dishonesty, assessed on an objective basis.
An intent to defraud creditors which involves actual dishonesty, assessed on a subjective basis.
Correct
Which one of the following is correct in relation to a claim for wrongful trading?
A claim may be brought by a liquidator or administrator of the company against any person who was a director at the relevant time where the company continued to trade whilst it was insolvent.
A claim may be brought by a liquidator or administrator of the company against any director of the company where the director has been in breach of their statutory directors’ duties.
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.
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 but it must be shown that there was an intent to defraud creditors.
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
Which one of the following is the best description of the reasonably diligent person test?
The court applies the ‘reasonably diligent person’ test in order to determine whether the director took every step to minimise the potential loss to the company’s creditors.
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.
The reasonably diligent person is an objective test – the court will consider the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by the director in question.
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.
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
Which one of the following best describes the ‘point of no return’ referred to in the wrongful trading legislation?
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).
The point at which the company enters into insolvent liquidation or administration.
The time before the commencement of the winding up or insolvent administration when the company was in fact insolvent on the balance sheet test.
The time before the commencement of the winding up or insolvent administration when the company was in fact insolvent on the cash flow test.
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
Company A sold a van at half-price to a company controlled by a close friend of its managing director, six months before Company A’s winding up petition. Company A is now in liquidation. Which one of the following claims might the liquidator seek to bring to recover the money paid?
Preference
Transaction at an undervalue
Avoidance of floating charge
Transaction defrauding creditors
Transaction at an undervalue
correct
A floating charge was granted to a bank four months prior to the onset of insolvency to secure a company’s existing overdraft of £10,000. At the same time the bank increased the overdraft facility to a maximum of £25,000, which the company drew on fully. Which one of the following correctly describes the validity of the floating charge?
The floating charge is valid only for the existing overdraft of £10,000.
The floating charge is invalid entirely.
The floating charge is valid for the entire £25,000 since new consideration was granted.
The floating charge is invalid for the existing overdraft of £10,000 but valid in respect of the additional £15,000 of ‘new money’.
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’.
1 week prior to going into insolvent administration, Company A paid off in full one of its unsecured creditors, a company controlled by Company A’s Chief Executive Officer, whilst debts to other creditors remained unpaid.
Which one of the following claims is the administrator most likely to bring to recover the money paid from the recipient?
Transaction defrauding creditors
Transaction at an undervalue.
Preference
Wrongful trading
Preference
correct
Company D has a loan with ABC Bank which is secured by a fixed charge over certain assets of Company D. It also has a £20,000 overdraft with ABC Bank which is unsecured.
ABC Bank agrees to increase Company D’s overdraft facility from £20,000 to £30,000. This is on condition that Company D grants it a floating charge to secure the whole of the overdraft, to be taken over all assets not covered by the fixed charge. The floating charge is registered at Companies House. What advice would you give to ABC Bank about the validity of the floating charge if Company D goes into administration 3 months after the floating charge was created?
A. 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. If the administrator is successful, the floating charge will only be valid to secure £10,000 and not the full amount of £30,000.
B. 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. If the administrator is successful, the floating charge will only be valid to secure £20,000 and not the new increase to the overdraft of £10,000.
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.
D. 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. If the administrator is successful, the floating charge will not be valid, and the overdraft will be unsecured.
E. 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. If the administrator is successful, the floating charge will not be valid, but the overdraft will be secured by the existing fixed charge that the bank has.
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
InRe 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 inDevaynes 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
A private limited company is in insolvent administration. 3 days before the administrator was appointed, one of the company’s directors transferred a delivery van from the company to themselves for no consideration. The administrator has applied to court for an order that the director pay the company for the van.
Which of the following statements best explains whether or not the administrator is likely to obtain the remedy sought?
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.
The administrator is likely to obtain the remedy sought, provided that it can prove that the company was insolvent at the time or became so as a result. The company has entered into a transaction at an undervalue at a relevant time.
The administrator is likely to obtain the remedy sought if it can be shown that the transaction was carried out with an intent to defraud creditors.
The administrator is unlikely to obtain the remedy sought. Although the company has entered into a transaction at an undervalue at a relevant time with a person connected to the company, the most likely remedy that the court will order will be an order for disqualification of the director.
The administrator is likely to obtain the remedy sought. The transaction is a voidable preference 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.
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).
A private limited company has gone into liquidation. Upon reviewing the company’s accounts, the liquidator has discovered that the company had been trading at a time when the directors knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation. The continued trading caused substantial further loss to the company.
What is the most likely action that the liquidator may take against the directors?
The liquidator may bring a claim against the directors for breach of directors’ duties.
The liquidator may bring a claim against the directors for fraudulent trading.
The liquidator may bring a claim against the directors for negligence.
The liquidator may bring proceedings for disqualification of the directors.
The liquidator may bring a claim against the directors for wrongful trading.
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.
A private limited company had an overdraft with a bank which as at three months ago stood fully drawn at £500,000. The company became unable to meet its debts as they fell due and therefore requested that the bank extend the overdraft to £750,000. The bank agreed to do this on the basis that the company granted a floating charge over all of the assets of the company to secure the whole overdraft amount of £750,000. The additional £250,00 was advanced and the floating charge granted at the same time two months ago. The floating charge was duly registered at Companies House. One month ago, the company was put into liquidation.
Will the floating charge be effective security for the overdraft?
The floating charge will be invalid against the liquidator in respect of the full £750,000 at the point at which it is granted.
The floating charge will be invalid against the liquidator in respect of the full £750,000 until the overdraft is repaid and redrawn at which point it will be valid security for the monies redrawn.
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.
The floating charge will be valid security for the existing £500,000 at the point at which it is granted and will be invalid against the liquidator in respect of the additional £250,000.
The floating charge will be valid security for the full £750,000 since it has been properly registered.
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.
A private limited company went into insolvent administration last month, following the presentation of a creditor’s petition. Twelve months ago, the company had repaid a sum of money loaned from one of its directors. Under the terms of the loan agreement, the loan was not due to be repaid until three months later. The company was insolvent on the cash flow test at the time of this transaction.
Will the administrator be able to challenge the payment made by the company to its director?
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.
The administrator will not be able to challenge the transaction as a voidable preference unless it can be shown that in making the repayment, the company had a desire to prefer the director.
The administrator will not be able to challenge the transaction as a voidable preference unless it can be shown that the company was insolvent on the balance sheet test at the time of the transaction or became so as a result of the transaction.
The administrator will not be able to challenge the transaction as a voidable preference since it took place over six months ago.
The administrator may challenge the transaction as a voidable transaction at an undervalue since it took place within the relevant time and there will be a presumption of insolvency due to the director being connected to the company.
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
Twelve months ago, a company sold some equipment to one of its directors for £125,000. At the time of the sale, the equipment had a market value of £200,000. Two months ago, the company went into insolvent liquidation.
What is the most likely claim that the liquidator would bring against the director who received the equipment?
A claim to set aside the transaction as a transaction defrauding creditors.
A claim for fraudulent trading.
A claim to set aside the transaction as a transaction at an undervalue.
A claim to set aside the transaction as a preference.
A claim for wrongful trading.
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.
1
Client A and Client B want to set up an office solutions business. Their main concern is the ability to raise finance quickly and easily. Client A would prefer not to disclose how much profit the business is making. Client B has just bought a new home and wants to ensure they have limited liability as they do not want to lose their assets if the business fails.
Which business structure is most suitable for client A and client B?
Select one alternative:
Traditional partnership
Sole trader
Limited liability partnership
Public limited company
Private limited company
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.
A private limited company (‘the Company’) proposes to pay off the bank overdraft of a director of its holding company (which is also a private limited company) on the understanding that the director will pay the Company back over time. There are no other companies associated with the Company. Which statement best explains the nature of this transaction and whether shareholder approval is required?
Select one alternative:
This is a quasi loan to a director of the Company’s holding company. Shareholder approval is not required.
This is a credit transaction for the benefit of the Company’s director. Shareholder approval is not required.
This is a quasi loan to a director of the Company’s holding company. Shareholder approval is required.
This is a credit transaction for the benefit of a director of the Company’s holding company. Shareholder approval is required.
This is a quasi loan to a person connected to a director of the Company. Shareholder approval is not required.
This is a quasi loan to a director of the Company’s holding company. Shareholder approval is not required.
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.
A private limited company which was incorporated on 23 May 2002 has an issued share capital of £30,000 ordinary shares of £1 each. The shares are owned equally by two shareholders. The company has agreed to issue 10,000 £1 preference shares to a new shareholder for £25,000. These preference shares grant a right to the holder to claim a fixed dividend, no right to participate in surplus profits and no right to a return of any surplus capital on winding up. In 2014, the company adopted Model Articles with one amendment to the chairperson’s casting vote.
What shareholder resolutions will be required to issue the preference shares?
Select one alternative:
An ordinary resolution to grant the directors authority to allot the preference shares and a special resolution to amend the articles to include the new class of shares.
An ordinary resolution to grant the directors authority to allot the preference shares; a special resolution to disapply pre-emption rights and a special resolution to amend the articles to include the new class of shares.
An ordinary resolution to grant the directors authority to allot the preference shares and a special resolution to amend the articles to remove the cap on the company’s share capital.
A special resolution to disapply pre-emption rights and a special resolution to amend the articles to include the new class of shares.
An ordinary resolution to amend the articles to remove the cap on the company’s share capital; an ordinary resolution to grant the directors authority to allot the preference shares and a special resolution to amend the articles to include a new class of shares.
An ordinary resolution to grant the directors authority to allot the preference shares 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.
The shares in a public company incorporated in 2011 are now being sold to another public company. The buyer is taking out a bank loan in order to fund the share purchase and the bank is seeking security over the assets of the buyer and the buyer’s holding company and security over the assets of the target company.
Can the companies involved provide the required security?
Select one alternative:
The target company is able to provide the requested security, but both the buyer and the buyer’s holding company are prohibited from providing security since this constitutes unlawful financial assistance.
None of the requested security may be given since these constitute unlawful financial assistance.
The buyer’s holding company is able to provide the requested security but both the buyer and the target company are prohibited from providing security since this constitutes unlawful financial assistance.
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.
All of the requested security may be given since none of these constitute unlawful financial assistance.
Both the buyer and the buyer’s holding company are able to provide the requested security, however the target company is prohibited from providing security since this constitutes unlawful financial assistance.
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.
A private limited company has four shareholders. The majority shareholder has 88% of the ordinary voting shares of the company and three other shareholders have 4% of the ordinary voting shares of the company each. The board of directors wishes to call a general meeting of the shareholders using the short notice procedure.
What is the minimum number of shareholders who would need to consent to the calling of a general meeting using the short notice procedure?
Select one alternative:
The majority shareholder and one of the minority shareholders.
The majority shareholder and two of the minority shareholders.
All the shareholders.
The majority shareholder alone.
The three minority shareholders.
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.
Three friends enter into a business venture together with a view to making profit whereby one of them invests 50% of the capital and the other two invest 25% each. They do not seek legal advice and have not entered into any written agreement or taken any further steps.
Which of the following best describes whether the three friends have formed a partnership?
Select one alternative:
A partnership has not been formed because the friends invested unequal amounts into the business.
A partnership has been formed as the friends are in business together with a view to making a profit.
A partnership has been formed as the friends have invested capital into the business together.
A partnership has not been formed because there is no written partnership agreement.
A partnership has not been formed because the friends have not registered a partnership at Companies House.
A partnership has been formed as the friends are in business together with a view to making a profit.
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.
You act for a company. There are four shareholders of the company:
- Person A (45%)
- Person B (20%)
- Person C (5%)
- Person D (30%)
Person D is also one of the directors of the company. The company is a private limited company with unamended Model Articles and no shareholders’ agreement. Persons A, B and C have been unhappy with Person D’s work as a director of the company. On the agenda for the next general meeting is a shareholder vote for the removal of Person D as a director.
All four shareholders of the company plan to be present and voting at the company’s upcoming general meeting on the proposed removal of Person D as a director.
Will the shareholders be able to pass the removal resolution?
Select one alternative:
Person D will not be able to count in the quorum or vote on the removal resolution at the General Meeting since they have an interest. Persons A, B and C will therefore be able to pass the ordinary resolution to remove Person D as a director.
Person D will not be able to count in the quorum or vote on the removal resolution at the General Meeting since they have an interest. Persons A, B and C will therefore be able to pass the special resolution to remove Person D as a director.
Person D may vote against their removal at the General Meeting. It will not be possible for Persons A, B and C to achieve the necessary majority to pass the special resolution to remove Person D as a director at the General Meeting.
Person D may vote against their removal at the General Meeting. It will not be possible for Persons A, B and C to achieve the necessary majority to pass the resolution to remove Person D as a director at the General Meeting, since unanimity is required.
Person D may vote against their removal at the General Meeting. However, Persons A, B and C will be able to achieve the necessary majority to pass the ordinary resolution to remove Person D as a director at the General Meeting.
Person D may vote against their removal at the General Meeting. 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.
8
A company incorporated in 2015 with unamended model articles is planning to enter into a service contract with one of its directors. The draft contract stipulates a term of one year with the option for the director only to renew the contract for a further two years. There is also a clause allowing the company to terminate the contract at any time on giving 3 months’ notice.
Does the proposed service contract require prior shareholder approval?
Select one alternative:
Yes, because the contract could potentially run for more than two years.
No, because approving service contracts falls under the director’s general authority to manage the company’s business.
No, because the service contract’s ‘guaranteed term’ is three months.
No, because the service contract has an initial term of under two years.
Yes, because any contract between a company and one of its directors requires prior approval by ordinary resolution.
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.
Your client wants your advice in respect of the changes that need to be made to their recently purchased shelf company. The shelf company is a private company limited by shares with unamended Model Articles. The client wishes to change the following as swiftly as possible:
- The name of the company;
- The board of directors of the company (removing all current directors and appointing your client and another director to the board); and
- The shareholders of the company (so that your client becomes the sole shareholder).
What resolutions will be needed to effect these changes?
Select one alternative:
A board resolution would be needed to change the company name. A board resolution would be needed to appoint the new directors, followed by an ordinary resolution to remove the old directors. A board resolution would be needed to approve the share transfer and the entry of your client’s name into the Register of Members.
A special resolution would be needed to change the company name. Board resolutions (one board resolution to accept the resignations of the old directors, followed by one board resolution to appoint the new directors) should be used to change the directors of the company. A board resolution would be needed to approve the share transfer and the entry of your client’s name into the Register of Members.
A board resolution can be used to change this company’s name. Board resolutions (one board resolution to appoint the new directors, followed by one board resolution to accept the resignations of the old directors) should be used to change the directors of the company. An ordinary resolution would be needed to approve the share transfer, along with a board resolution to enter your client’s name into the Register of Members.
A special resolution would be needed to change the company name. Board resolutions (one board resolution to appoint the new directors, followed by one board resolution to accept the resignations of the old directors) should be used to change the directors of the company. A board resolution would be needed to approve the share transfer and the entry of your client’s name into the Register of Members.
A special resolution would be needed to change the company name. An ordinary resolution should be passed to appoint the new directors, followed by an ordinary resolution to remove the old directors. A board resolution would be needed to approve the share transfer and the entry of your client’s name into the Register of Members.
A 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.
Three people have recently set up a business together making and selling handmade greetings cards. They have not yet taken any legal advice or entered into any formal or informal partnership agreement. They each contributed capital to the partnership when the business was set up, but in unequal amounts. They come to you for advice as to whether they will need to enter into any formal agreement.
In the absence of any express agreement, what entitlement, if any, do the partners have to share in the profits of the partnership or to receive a salary?
Select one alternative:
Each partner is entitled to a share in the profits of the partnership in proportion to his or her capital contribution, and to draw a reasonable salary.
Each partner is entitled to share equally in the profits of the partnership but has no right to a salary.
Each partner is entitled to share equally in the profits of the partnership and to draw a reasonable salary.
No partner has a right to a share in the profits of the partnership or to a salary.
Each partner is entitled to a share in the profits of the partnership in proportion to their capital contribution but has no right to a salary.
Each partner is entitled to 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.
The board of directors of a private limited company incorporated in 2014 with unamended Model Articles plan to sell some machinery which is owned by the company to the son of one of the directors. The company has three directors who are all also shareholders in the company. The son is not a director or a shareholder in the company.
The agreed sale price of the machinery will be £95,000. The sale price has been independently valued at the same price. The company’s latest audited accounts state the net asset value of the company as £900,000.
Does the sale of machinery require shareholder approval?
Select one alternative:
Yes, because the company’s directors are all also shareholders in the company.
Yes, because the transaction involves the sale and purchase of machinery whose value exceeds 10% of the company’s asset value. The director’s son is a connected person.
No, because the transaction involves the sale of an asset at independently assessed market value.
No, because the transaction falls under the directors’ general authority to manage the company’s business.
No, because the transaction is with the son of one of the directors rather than with one of the company’s directors themselves.
Yes, because the 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.
A recently incorporated company has two directors who are also the two equal shareholders in the company. A few days prior to the date of incorporation of the company, one of the directors signed a lease for new office space to be used by the company “as director for and on behalf of the company”.
Is the lease binding on any of the parties?
Select one alternative:
The lease is not binding on any party.
The lease is binding on the company as it has subsequently been validly incorporated.
The lease is binding on the shareholders.
The lease is binding on the company and the director who signed the lease on the company’s behalf.
The lease is not binding on the company but will be binding on the director who signed the lease on the company’s behalf.
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.
A group of five entrepreneurs wish to set-up and run a business with the following objectives:
- each investor has limited liability for the entire duration of the business;
- a flexible management structure is adopted; and
- set-up costs and formalities are kept to a minimum.
Would setting up this business as a Limited Liability Partnership (LLP) meet the entrepreneurs’ requirements?
Select one alternative:
Yes, as unlike a limited company, an LLP is not required to file documents at Companies House, apart from change of name and change of registered office.
No, as a ‘general partner’ will need to be appointed, who will have unlimited liability for the debts of the LLP, with the remaining partners having the benefit of limited liability.
Yes, as all members of an LLP will enjoy limited liability for the entire duration of the LLP regardless of any changes to the composition of the members.
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.
No, as there needs to be a formal Members’ Agreement drawn up which needs to be filed at Companies House.
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.
A minority shareholder with 5% of the shares in a company is very concerned about the company’s current financial situation which has gone from bad to worse due to serious financial mismanagement by the company’s finance director over a period of several years. The other shareholders in the company are all directors and are unwilling to either remove the director or to bring a claim against them.
The minority shareholder would like the other shareholders or the company to purchase their shareholding at the market value, but the other shareholders have indicated they are not willing to do this.
What claim could the minority shareholder bring in these circumstances?
Select one alternative:
The shareholder could bring an action for unfair prejudice against the finance director.
The shareholder could bring an action for unfair prejudice against the company.
The shareholder could bring an action for unfair prejudice against all the directors.
The shareholder could bring a derivative action against the company.
The shareholder could bring a derivative action against the finance director.
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.
The company has four shareholders (A, B, C and D) who each own 25% of the shares of the company. Two of the shareholders (C and D) are also directors of the company. The company has unamended Model Articles.
A and B are not happy with one of the directors (C) and wish to remove them as a director. D is uncertain whether to support any resolution to remove C. There is a shareholders’ agreement in place which all four shareholders have signed which states that shareholders must vote unanimously to remove a director.
Will the shareholders be able to remove C as a director?
Select one alternative:
A and B would be able to pass an ordinary resolution to remove C. C would have no claim under the shareholders’ agreement in these circumstances.
A and B would be able to pass an ordinary resolution to remove C, but C will likely have a claim under the shareholders’ agreement against those shareholders that voted to remove them.
A, B and D would be able to pass an ordinary resolution to remove C, but C will likely have a claim under the shareholders’ agreement against those shareholders that voted to remove them.
A, B and D would be able to pass an ordinary resolution to remove C. C would have no claim under the shareholders’ agreement in these circumstances.
A, B and D will not be able to remove C as a director since unanimity is required to pass this resolution.
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).
Shareholders, unhappy with the performance of a company director (the ‘Director’), have served valid notices under sections 312 and 303 of the Companies Act 2006 to move an ordinary resolution to remove the Director (the ‘Resolution’). The Director is not a shareholder in the company.
What rights does the Director have in respect of the proposed Resolution?
Select one alternative:
The Director may not speak at the general meeting at which the Resolution is moved. However, they may make written representations which can be circulated and read out at the general meeting in which the Resolution is moved.
The Director is not entitled to vote against their own removal at the general meeting in which the Resolution is moved since they have a conflict of interest.
The Director is neither entitled to speak, nor have written representations circulated and read out at the general meeting in which the Resolution is moved.
The Director is entitled to vote against their own removal at the general meeting in which the Resolution is moved.
The Director is entitled to speak and have written representations circulated and read out at the general meeting in which the Resolution is moved.
The Director 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.
A private limited company incorporated in 2015 has articles in the form of unamended Model Articles.
The company has 5 directors and 8 shareholders, each with an equal shareholding. The 5 directors are all also shareholders.
The company is planning on changing its name and is seeking advice as to how this can be achieved. All of the shareholders and directors are available to attend the necessary meetings. What type of resolution is required, and who will need to vote to pass the resolution?
Select one alternative:
This decision requires a special resolution and any 6 shareholders will need to vote in favour.
This decision requires an ordinary resolution and any 4 shareholders will need to vote in favour.
This decision requires a special resolution and any 7 shareholders will need to vote in favour.
This decision requires a board resolution and any 3 directors will need to vote in favour.
This decision requires an ordinary resolution and any 5 shareholders will need to vote in favour.
This decision requires a special resolution and any 6 shareholders will need to vote in favour.
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.
A private limited company (‘A’), which operates hotels, is currently refurbishing one of its properties and considering whether or not to purchase furniture from another company (‘B’). All directors of Company A intend to attend a board meeting tomorrow to discuss this matter and pass all relevant board resolutions. The articles of association of Company A are in the form of unamended Model Articles and its board comprises three directors, two of whom are unaware that the third owns 33% of the issued share capital of Company B.
What is the best advice to the director of Company A who owns shares in Company B?
Select one alternative:
The director should sell their shares in Company B because they have a duty to avoid any actual or potential conflict between their own interests and those of Company A.
The director should disclose their shareholding to the other directors at the board meeting because they are indirectly interested in this transaction.
The director should disclose their shareholding to the other directors at the board meeting because Company B qualifies as one of their ‘connected persons’.
The director should not attend the board meeting tomorrow to avoid incurring personal liability for procuring a transaction to which Company A is party and in which they have a personal interest.
Provided the director discloses their shareholding to the other directors at the board meeting, they may vote on the board resolution to enter the transaction.
The director should disclose their shareholding to the other directors at the board meeting because 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.
An individual wants to acquire 45% of the voting shares in Company A from another company. The individual already owns the remaining 55% of the voting shares in Company A. The individual instructs his solicitor to advise him on the purchase and to draft and negotiate the necessary documentation.
Neither the solicitor nor their firm is authorised by the Financial Conduct Authority to carry on ‘regulated activity’ as defined in the Financial Services and Markets Act 2000 and related secondary legislation.
Which of the following statements correctly explains why the solicitor can advise the individual on the sale?
Select one alternative:
The solicitor can act because the individual is buying more than 25% of the voting shares in Company A.
The solicitor can act because the shares together with the shares already owned by the individual is more than 50% of the voting shares in Company A.
The solicitor can act because FSMA 2000 does not apply as shares in private companies are not specified investments.
The solicitor can act because FSMA 2000 does not apply as giving this advice is not a specified activity.
The solicitor can act because giving this advice to the individual is incidental and arises out of the provision of professional services to the individual.
The solicitor can act because the 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.
A solicitor recently acted for a client in relation to the sale of a property portfolio. The client is now considering how to invest the sale proceeds. The client would like the solicitor to explain the key differences between bonds and shares. Neither the solicitor nor their firm is authorised by the Financial Conduct Authority to carry on a regulated activity.
Can the solicitor give the explanation requested?
Select one alternative:
Yes, because although bonds and shares are specified investments, giving generic advice on the differences between bonds and shares is not a specified activity.
No, because bonds and shares are specified investments and neither the solicitor nor their firm are authorised by the FCA.
Yes, because such advice is incidental and it would arise out of or be complementary to the provision of legal services to the client.
No, because such advice is not a necessary part of the provision of legal services by the solicitor to the client.
Yes, because bonds and shares are not specified investments so the solicitor would not be breaching the general prohibition against carrying on a regulated activity.
Yes, because 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.
A private limited company went into liquidation following the presentation of a creditor’s petition. Nine months ago, the company had repaid a sum of money loaned from one of its directors. Under the terms of the loan agreement, the loan was not due to be repaid until three months later.
What is the most likely claim that the liquidator would bring against the director?
Select one alternative:
A claim to set aside the transaction as a transaction defrauding creditors.
A claim for fraudulent trading
A claim to set aside the transaction as a transaction at an undervalue.
A claim for wrongful trading.
A claim to set aside the transaction as a preference.
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.
In January 2022, a private limited company gifted computer equipment worth £5,000 to one of its directors. In March 2023, the company went into liquidation.
Can the liquidator challenge the transaction?
Select one alternative:
The liquidator has grounds to challenge the gift as a transaction at an undervalue because it took place within the relevant time and is an undervalue transaction provided that the liquidator can prove insolvency.
The liquidator has no grounds to challenge the gift because although this is an undervalue transaction which took place within the relevant time, the value of the transaction is not significant.
The liquidator has grounds to challenge the gift as a preference because it was a transaction with a connected person therefore a desire to prefer is presumed.
The liquidator has no grounds to challenge the gift as a preference because, although it was a transaction with a connected person therefore a desire to prefer is presumed, the transaction took place over 12 months ago.
The liquidator has grounds to challenge the gift as a transaction at an undervalue because it took place within the relevant time and is an undervalue transaction. There is no need to prove insolvency.
The liquidator has grounds to challenge the gift as a transaction at an undervalue because it took place within the relevant time and is an undervalue transaction. There is no need to prove insolvency.
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.
A private company enters into a loan agreement with a bank to borrow £500,000 for working capital purposes. As security for the loan, the bank takes a debenture over the company’s assets and a personal guarantee from the company’s managing director.
Which of the following correctly lists the documentation that will need to be sent to Companies House to ensure the bank has valid security?
Select one alternative:
Form MR01; a certified copy of the loan agreement; a certified copy of the debenture; a certified copy of the personal guarantee; and the relevant fee.
Form MR01; a certified copy of the debenture; a certified copy of the personal guarantee; and the relevant fee.
Form MR01; a certified copy of the loan agreement; a certified copy of the personal guarantee; and the relevant fee.
Form MR01; a certified copy of the debenture; and the relevant fee.
Form MR01; a certified copy of the loan agreement; a certified copy of the debenture; and the relevant fee.
Form MR01; a certified copy of the debenture; and the relevant fee.
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
A private company operates a VAT registered business selling cleaning equipment to other businesses. The company enters into a contract with a hotel for the sale of cleaning products. The contract is silent on VAT.
Which of the following statements correctly describes the VAT position on the supply of the cleaning products?
Select one alternative:
The supply of cleaning products is exempt from VAT.
The supply of cleaning products is standard rated and is deemed to be exclusive of VAT.
The supply of cleaning products is reduced rated and is deemed to be exclusive of VAT.
The supply of cleaning products is standard rated and is deemed to be inclusive of VAT.
The supply of cleaning products is reduced rated and is deemed to be inclusive of VAT.
The supply of cleaning products is standard rated and is deemed to be inclusive of VAT.
Correct. A price is deemed to be VAT inclusive unless the contract for the supply of goods states otherwise. So, the stated consideration paid for the products includes any VAT payable. The cleaning products are standard rated.
A company raises £400,000 by way of a 5-year term loan and uses these funds to purchase some new machinery for £400,000.
Which of the following statements describes the net impact of these transactions on the company’s balance sheet?
Select one alternative:
Increase in current liabilities by £400,000; no change on cash/cash equivalents; increase in non-current assets by £400,000; no change in Net Asset Value.
Increase in non-current liabilities by £400,000; no change on cash/cash equivalents; increase in non-current assets by £400,000; no change in Net Asset Value.
Increase in non-current liabilities by £400,000; increase in cash/cash equivalents by £400,000; increase in non-current assets by £400,000; increase in Net Asset Value by £400,000.
Increase in non-current liabilities by £400,000; decrease in cash/cash equivalents by £400,000; increase in non-current assets by £400,000; decrease in Net Asset Value by £400,000.
Increase in current liabilities by £400,000; no change on cash/cash equivalents; increase in current assets by £400,000; no change in Net Asset Value.
Increase in non-current liabilities by £400,000; no change on cash/cash equivalents; increase in non-current assets by £400,000; no change in Net Asset Value.
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.
A private limited company raises £600,000 through an issue of 300,000 £1 ordinary shares at a price of £2 per share fully paid in cash.
Which of the following statements best describes the detailed effect of the share issue on the company’s balance sheet?
Select one alternative:
Current assets increase by £600,000; share capital increases by £300,000 and the share premium account increases by £300,000.
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.
Current assets and equity increase by £600,000.
Cash increases by £600,000 and share capital increases by £600,000.
Net assets and total equity increase by £600,000.
Cash increases by £600,000 which increases current assets by £600,000; share capital increases by £300,000 and the share premium account increases by £300,000.
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.
A private limited company has a Total Taxable Profit of £1,100,000 for the tax year ending 5 April 2022.
Which of the following statements best describes how the company must pay their tax liability to HMRC?
Select one alternative:
The company will calculate their tax liability and pay HMRC within 9 months of the end of the accounting period of the accounting period.
The company will calculate their tax liability at the end of the accounting period and immediately pay HMRC any tax which is due.
The company will calculate their tax liability at the end of the accounting period and pay HMRC in four instalments over the course of the next two accounting periods.
The company will calculate their tax liability at the end of the accounting period and pay HMRC in four instalments over the course of the next accounting period.
The company will calculate their tax liability at the end of the accounting period and pay HMRC within 9 months and one day of the end of the accounting period.
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.
A person disposed of only one chargeable asset in the current tax year, which was sold for £100,000. They bought the asset ten years ago for £45,000 with acquisition costs of £5,000. There was no subsequent expenditure before sale. The annual exemption for the relevant year is £12,300. Sale costs were £2,700. The capital gains tax (‘CGT’) rate for basic rate taxpayers is 10%, and for higher rate taxpayers it is 20%.
The person’s Taxable Income for the current year was £50,000.
How much capital gains tax will the person have to pay on the disposal of the asset?
Select one alternative:
£3,500
£7,000
£9,460
£15,750
£7,540
£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.
An employee of a company with unamended model articles sells his shares in the company and makes a taxable chargeable gain of £25,000. The employee has held the shares for 5 years and the shares represent a 3% shareholding in the company. The employee has a taxable income of £160,000. The employee has not previously made any chargeable gains.
What tax relief will the person be able to claim on this gain?
Select one alternative:
Business Assets Disposal Relief will apply because the person is an employee and they have held the shares for 5 years.
Business Assets Disposal Relief will apply because the person has not previously made any chargeable gains.
No tax reliefs are available. Business Assets Disposal Relief will not apply as the person only has a 3% shareholding in the company.
No tax reliefs are available. Business Assets Disposal Relief will not apply as the person is an additional rate taxpayer.
No tax reliefs are available. Business Assets Disposal Relief will not apply as the person is not a director of the company.
No tax reliefs are available. Business Assets Disposal Relief will not apply as the person only has a 3% shareholding in the company.
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.
A person has taxable income of £45,000. In the same tax year, after the deduction of their annual exemption, they have chargeable gains of £15,000. They have no capital losses for capital gains tax (CGT) purposes. The basic rate tax band for the relevant tax year is £0 - £37,700. The two rates of CGT for the relevant tax year are 10% and 20%.
Based on the above information, what is the person’s CGT liability?
Select one alternative:
£540
£3,000
£1,500
£5,250
£270
£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.
A company granted fixed and floating charges to a bank to secure a term loan. The charges were properly registered at Companies House. The company has defaulted on the loan. The company owes unpaid wages to its employees for the last month and large amounts to various unsecured trade creditors. The company has no outstanding sums due to HMRC. The company goes into insolvent liquidation. The proceeds of the sale of the fixed charge assets are insufficient to pay the money owing to the bank in full.
In what order will the liquidator apply the money realised by the sale of the floating charge assets?
Select one alternative:
The Bank will be paid first. A prescribed part fund will be set aside. The employees are then paid. The remaining funds together with the prescribed part fund will be divided amongst the unsecured creditors.
The Bank will be paid first. The remaining funds will be divided amongst the employees and the unsecured creditors.
The Bank will be paid first. The employees are then paid. The remaining funds will be divided amongst the unsecured creditors.
The employees will be paid first. The Bank will be paid next. The remaining funds will be divided amongst the unsecured creditors.
The employees will be paid first. A prescribed part fund will be set aside. The Bank is then paid under its floating charge. The remaining funds together with the prescribed part fund will be divided amongst the unsecured creditors.
The 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.
A company granted a floating charge to a bank last year in return for a term loan of £100,000. The floating charge has not been registered at Companies House.
Which of the following statements most accurately sets out the effect of the failure to register the floating charge?
Select one alternative:
The floating charge is void against any creditor of the company. The debt due from the company to the bank is immediately payable.
The floating charge is void against a liquidator, administrator and any creditor of the company.
The debt due from the company to the bank is immediately payable.
The floating charge is void against any administrator of the company.
The floating charge is void against a liquidator, administrator and any creditor of the company. The debt due from the company to the bank is immediately payable.
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.
A company is in financial difficulty and one supplier has issued proceedings for an unpaid debt. The company has a term loan and an overdraft from a bank, secured by fixed and floating charges. The bank has threatened to appoint an administrator. The company wishes to apply for a pre-insolvency moratorium.
What effect would the pre-insolvency moratorium have on the actions by the supplier and the bank?
Select one alternative:
The proceedings brought by the supplier would continue but could be stayed at the discretion of the court. No administration procedure can be commenced by the bank whilst the pre-insolvency moratorium is in force.
The proceedings brought by the supplier would continue, as they were issued prior to the pre-insolvency moratorium coming into force. However, the bank would be unable to appoint an administrator whilst the pre-insolvency moratorium is in force.
The proceedings brought by the supplier would be stayed and no administration procedure can be commenced by the bank whilst the pre-insolvency moratorium is in force.
The proceedings brought by the supplier would be stayed. However, the pre-insolvency moratorium will not prevent the bank from appointing an administrator.
The proceedings brought by the supplier would be stayed, but the supplier could issue a winding-up petition provided the correct procedures were followed. The pre-insolvency moratorium will not prevent the bank from appointing an administrator.
The proceedings brought by the supplier would be stayed 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.
A private limited company is seeking to raise finance by way of a loan from its bank.
The board of directors is seeking advice as to the effect on the gearing of the company and the earnings per share of raising the further finance through taking a loan.
Which one of the following is the best advice for the board?
Select one alternative:
Taking out a further loan would increase the company’s gearing and increase the earnings per share.
Taking out a further loan would reduce the company’s gearing but have no effect on the earnings per share.
Taking out a further loan would increase the company’s gearing and reduce the earnings per share.
Taking out a further loan would have no effect on the company’s gearing and no effect on the earnings per share.
Taking out a further loan would increase the company’s gearing but may have no adverse effect on the earnings per share.
Taking out a further loan would increase the company’s gearing but may have no adverse effect on the earnings per share.
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.
A company took a five-year term loan from a bank of £100,000. The bank was granted a fixed charge to the bank over the company’s plant and machinery and a qualifying floating charge over all its assets.
The amount now outstanding under the loan is £50,000. The company is in financial difficulty and has missed a scheduled loan repayment to the bank. The bank now wishes to take action to recover the £50,000 owed to it.
The company has the following assets:
Plant and machinery with a value of £65,000
Book debts and cash in bank with a value of approximately £55,000
What would be the most appropriate action for the bank to take to recover the £50,000 owed to it?
Select one alternative:
Appoint an administrator
Appoint a fixed charge receiver
Request the company to enter into a restructuring plan
Request the company to enter into a CVA
Appoint a liquidator
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.
A private limited company has been put into insolvent liquidation. At the time of the liquidation, the company had a number of unsecured creditors and 3 employees who are owed £1000 each in respect of wages for work carried out in the two months prior to the liquidation.
From where could the employees recover the wages they are owed?
Select one alternative:
From funds for the preferential creditors and the prescribed part fund
From funds for the preferential and unsecured creditors incorporating the prescribed part fund
From funds for the unsecured creditors
From funds for the preferential creditors
From funds for the prescribed part
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.
A private limited company has 10 shareholders who are all individuals and who each own 10% of the issued share capital. 5 of the shareholders also make up the board of directors of the company. The company has agreed to make a loan to one of the shareholders in the amount of £20,000 and seeks your advice in connection with the tax consequences of making this loan.
Which of the following statements most accurately describes whether the company is a close company?
Select one alternative:
The company is a close company because it is under the control of five or fewer participators who are also directors of the company.
The company is not a close company because it not under the control of five or fewer participators.
The company is a close company because it is under the control of five or fewer participators.
The company is not a close company because it is not under the control of (1) five or fewer participators nor (2) any number of participators who are also directors.
The company is not a close company because it is not under the control of any number of participators who are also directors.
The company is 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’.
A private company sold premises in October last year for £250,000 making a chargeable gain of £50,000. In June this year, the company bought some fixed plant and machinery for £400,000. The company seeks your advice as to whether any tax relief is available on the chargeable gain.
Which statement below represents the best advice to the company?
Select one alternative:
The company cannot claim rollover relief on the gain made on the sale of the premises since this is not a qualifying asset for rollover relief.
The company can deduct the chargeable gain of £50,000 made on the sale of the premises from the price of the plant and machinery to give a new base cost for the plant and machinery of £350,000.
The company cannot claim rollover relief on the gain made on the sale of the premises since the purchase of the plant and machinery did not take place in the same year.
The company cannot claim rollover relief on the gain made on the sale of the premises since the assets are not of the same type.
The company cannot claim rollover relief on the gain made on the purchase of the plant and machinery since this is not a qualifying asset for rollover relief.
The company can deduct the chargeable gain of £50,000 made on the sale of the premises from the price of the plant and machinery to give a new base cost for the plant and machinery of £350,000.
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.
A private limited company in financial difficulties sold one of its delivery vans to the brother of one of its directors last week for £10,000, in order to try to realise some cash to pay urgent outstanding invoices. The market value of the van was £20,000.
The company has today gone into administration.
What is the most likely claim that the administrator may bring in relation to the sale of the delivery van?
Select one alternative:
A preference claim against the directors of the company who authorised the sale
An intention to defraud creditors claim against the directors of the company who authorised the sale.
A preference claim against the brother of the director who received the van.
A transaction at an undervalue claim against the directors of the company who authorised the sale.
A transaction at an undervalue claim against the brother of the director who received the van.
A transaction at an undervalue claim against the brother of the director who received the van.
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.
A company takes legal advice on a property sale and incurs legal fees of £3,000 but has not yet been invoiced for that work by the end of its financial year. The company’s business accounts for the said financial year are being drawn up.
Which of the following statements is correct?
Select one alternative:
The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be overstated by £3,000 in the balance sheet.
The balance sheet will not balance owing to the sum of £3,000 having not been paid yet.
The legal fees are a prepayment and if not reflected in the business accounts then the company’s assets will be overstated by £3,000 in the balance sheet.
The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be understated by £3,000 in the balance sheet.
The legal fees are a prepayment and if not reflected in the business accounts then the company’s profits will by understated by £3,000.
The legal fees are an accrual and if not reflected in the business accounts then the company’s assets will be overstated by £3,000 in the balance sheet.
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.
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.
A woman is the sole shareholder and director of a newly incorporated private limited company. She signed an agreement to lease business premises on behalf of the new company two days before the company’s certificate of incorporation was issued.
Who will be liable to pay the rent under the lease agreement?
Select one alternative:
The lease agreement will be voidable at the instance of the new private limited company.
The woman and the new private limited company will be jointly liable to pay the rent under the lease agreement.
The lease agreement will be void as the company was not incorporated at the time the lease agreement was entered into.
The new private limited company will be solely liable to pay the rent under the lease agreement.
The woman will be solely liable to pay the rent under the lease agreement.
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.
Partner A and Partner B set up a business as a firm of architects three years ago. At the time, Partner B signed a two-year van leasing agreement on behalf of the partnership to rent a van for use by both partners. The leasing agreement ended last year. The partnership failed to pay the final instalment under the leasing agreement.
Two months ago, Partner C joined the partnership. There is no formal partnership agreement.
Which of the following statements represents the correct position with regards to the liability of the partnership for the overdue payment?
Select one alternative:
The partnership is liable for the payment.
Partner B is solely liable for the payment.
All three partners are jointly and severally liable for the payment.
Partner A and Partner B are jointly liable for the payment.
Answered and correct
All three partners are jointly liable for the payment.
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.
A person is planning to set up a new company for the running of their business. The person wishes to set up the company as a private company limited by shares with unamended Model Articles. The person will be the only shareholder and director.
Which of the following correctly lists the documentation that the person will need to send to Companies House to incorporate the new company?
Select one alternative:
The Memorandum; a copy of the company’s Articles of Association; and the incorporation fee for Companies House.
The application for registration (Form IN01); the Memorandum; a copy of the company’s Articles of Association; and the incorporation fee for Companies House.
The application for registration (Form IN01); the Memorandum; the statement of the company’s proposed officers; and the incorporation fee for Companies House.
The application for registration (Form IN01); a copy of the company’s Articles of Association; and the incorporation fee for Companies House.
The application for registration (Form IN01); the Memorandum; and the incorporation fee for Companies House.
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.
The company is planning to give a loan to one of its directors and would like this to be approved by the shareholders by way of ordinary resolution as quickly as possible. All of the shareholders are in agreement about the loan and all are available to vote.
What is the best advice to the board of directors of the company about the procedure to follow in order to obtain shareholder approval for the loan as quickly as possible?
Select one alternative:
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 50% of the total voting rights sign it.
The board should seek approval from the shareholders to hold a general meeting on short notice. The consent of shareholders holding at least 75% of the shares and a majority in number (at least three of the four shareholders) will be required.
The board should call a general meeting on full notice so that all the shareholders have an opportunity to vote.
The board should seek approval from the shareholders to hold a general meeting on short notice. The consent of shareholders holding at least 90% of the shares and a majority in number (all 4 shareholders) will be required.
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.
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.
Three individuals incorporated a business five years ago as a private limited company with unamended Model Articles. The individuals were all directors and equal shareholders in the company. Following a dispute, one of the individuals was removed as a director against their will and dismissed as an employee of the company.
The individual would like to bring a claim against the company to seek redress. What would be the best claim for this individual to bring and why?
Select one alternative:
The individual should pursue a derivative action on behalf of the company because the other directors are likely to have breached their duties in dismissing the individual as an employee.
The individual should bring a claim for breach of their membership rights.
The individual should pursue a claim for unfair prejudice because the company is likely to qualify as a quasi-partnership.
The individual should bring a petition for the just and equitable winding up of the company.
The individual should pursue a claim for unfair prejudice because the company is being mismanaged.
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.
A private limited company (Company A), which is a wholly owned subsidiary of a private limited holding company (Company B), is planning to give a loan of £35,000 to one of the directors of Company B.
What shareholder approvals are required for this transaction?
Select one alternative:
Both companies A and B will need to seek shareholder approval by special resolution.
Company A will need to seek shareholder approval by ordinary resolution.
Company B will need to seek shareholder approval by ordinary resolution.
Both companies A and B will need to seek shareholder approval by ordinary resolution.
Neither company will need to seek shareholder approval.
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.
A private limited company was incorporated in 2016 with unamended Model Articles. The company currently has only ordinary shares of £1 each in issue. The company wishes to issue preference shares to a new shareholder which carry a right to participate in the ordinary dividends declared by the company in addition to its preferential dividend right.
What shareholder resolutions will be required to issue the preference shares?
Select one alternative:
An ordinary resolution to give directors authority to allot the shares, an ordinary resolution to disapply pre-emption rights, a special resolution to amend the articles.
An ordinary resolution to give directors authority to allot the shares, a special resolution to disapply pre-emption rights, an ordinary resolution to amend the articles.
An ordinary resolution to disapply pre-emption rights, a special resolution to amend the articles.
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.
A special resolution to disapply pre-emption rights, a special resolution to amend the articles.
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.
A private company runs a business selling commercial vehicles. It is seeking to borrow £250,000 by way of a loan from a bank for expansion purposes. The bank is considering the security that it should consider taking from the company to secure the loan. The most valuable category of assets owned by the company is the vehicles which it has for sale.
What would be the most appropriate form of security interest for the bank to take over the vehicles?
Select one alternative:
A floating charge.
A charge by way of legal mortgage.
A lien.
A fixed charge.
A pledge.
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.
A solicitor, who is acting for a company in a contract negotiation with a supplier, receives an email from the supplier’s solicitor, which appears to have been intended for the supplier but sent to the the company’s solicitor in error.
Which of the following statements best describes how the company’s solicitor should respond?
Select one alternative:
The solicitor should not read the email and should not tell the client about it, as it could unfairly prejudice the negotiation.
The solicitor should not read the email and should return the email to the supplier’s solicitor, as the email was sent by mistake.
The solicitor should read the email and make their client aware of its contents, as a solicitor has a duty to make their client aware of all information material to the client’s case.
The solicitor should read the email as it could help them succeed in the negotiation and a solicitor has a duty to act in best interests of each client.
The solicitor should explain the situation to their client and ask their client to give them permission in writing not to disclose the information in the email, as it could unfairly prejudice the negotiation.
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.
You completed your training contract three years ago and you are now working for a different law firm. One of the partners asks you to assist them with a long-standing client who is purchasing a factory. You go to the meeting and recognise the client. When you were a trainee solicitor you worked on a personal injury case where an employee was injured in a factory. You acted for the employee. The client who is purchasing the factory was the employer.
What should you do?
Select one alternative:
There is a conflict of interest and your firm will no longer be able to act for the client purchasing the factory.
There is no conflict of interest but you cannot be involved with the purchase of the factory.
There is no conflict of interest and your firm can act for the client and you can be involved with the purchase.
There is a conflict of interest and you should tell the partner that you cannot be involved in the purchase of the factory.
There is no conflict of interest and you do not owe any duty to your former client because you now work for a different law firm.
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.
A private limited company made a trading profit and a capital loss in its current accounting period. In the previous accounting period, the company made a chargeable gain.
Which statement best describes how the capital loss can be used to reduce the company’s corporation tax liability in the current accounting period?
Select one alternative:
The capital loss can be set off against chargeable gains in the previous accounting period and any remainder can be carried forward and set off against chargeable gains in subsequent accounting period.
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.
The capital loss can be set off against the trading profits in the current accounting period and any remainder can be set off against the chargeable gain in the previous accounting period.
The capital loss can be set off against the trading profits in the current accounting period and any remainder can be carried forward and set off against chargeable gains in subsequent accounting periods.
The capital loss can be set off against any chargeable gains made in the previous accounting period and then any remainder can be set against any income profits or chargeable gains in subsequent accounting periods.
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.
A person has total income for the 2020/2021 financial year of £53,000. In the 2020/2021 financial year, the person has made pension contributions of £3,000 and paid interest of £400 on a qualifying loan.
What deductions need to be made to calculate the person’s taxable income figure?
Select one alternative:
The interest of £400 and the personal allowance of £12,500.
The pension contributions of £3,000 and the personal allowance of £12,500.
The pension contributions of £3,000, the interest of £400 and a personal allowance of £12,500.
The pension contributions of £3,000 and the interest of £400.
A personal allowance of £12,500.
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.
A private company has four shareholders who each own 25% of the shares. The shareholders are also the directors of the company. Last year, the company loaned £25,000 to one of the shareholders. The company has now decided to write off that loan.
Which one of the following statements best explains the tax position for both the company and the shareholder?
Select one alternative:
When the loan is written off there will be no tax implications for the company or the shareholder.
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.
When the loan is written off, the tax paid by the company to HMRC will be refunded to the company.
When the loan is written off, the shareholder must reimburse the company for the amount of tax paid by the company to HMRC.
When the loan is written off, the shareholder will be deemed to have received a dividend equal to the amount of the loan written off.
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.
A director of a private company, which is currently trading, sells their shares in the company and makes a taxable chargeable gain. They owned 6% of the ordinary voting shares in the company which they bought 18 months ago. The director is a higher rate taxpayer.
Which one of the following statements correctly describes the director’s capital gains tax liability?
Select one alternative:
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.
The taxable chargeable gain will be taxed at 10% because the director will benefit from investors’ relief.
The taxable chargeable gain will be taxed at 20% because, although the director satisfies the criteria for business asset disposal relief, they are a higher rate taxpayer.
The taxable chargeable gain will be taxed at 10% because the director is a higher rate taxpayer.
The taxable chargeable gain will be taxed at 10% because the director will benefit from business asset disposal relief.
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.
You act for a private limited company in financial difficulty. The company is thinking about proposing a company voluntary arrangement to its creditors (the CVA Proposal). The company has a bank loan worth £100,000 which is secured by way of fixed and floating charges, and a number of general unsecured creditors.
The company seeks your advice as to the effect of the CVA Proposal if it is approved by the requisite majority of the company’s creditors. Can the CVA Proposal bind the unsecured creditors and the bank?
Select one alternative:
The CVA Proposal, if approved by the requisite majority of creditors, will bind all the creditors, including the bank.
The CVA Proposal, if approved by the requisite majority of creditors, will bind those creditors who approved it only.
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.
The CVA Proposal, if approved by all the unsecured creditors, will bind all the creditors, including the bank.
The CVA Proposal, if approved by the requisite majority of creditors, will bind all the unsecured creditors. CVA Proposals cannot bind secured creditors such as banks.
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.
A private limited company went into insolvent liquidation last week. The liquidator is examining the accounts of the company and has discovered that three weeks ago the company had paid one of its suppliers in advance of the due date of the invoice for raw materials used in the business. Further enquiries have revealed that one of the directors of the supplier in question is the husband of one of the company’s directors.
Will the liquidator be able to challenge the payment made by the company to the supplier?
Select one alternative:
The liquidator will not be able to challenge the transaction unless they can prove that in making the payment, the company had an intention to defraud creditors.
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.
The liquidator will be able to challenge the transaction as a voidable preference since it took place within the relevant time. It will be presumed that the company was influenced by a desire to prefer the creditor and that the company was insolvent at the time of the transaction or became so as a result of it.
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 influenced by a desire to prefer the creditor.
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 influenced by a desire to prefer the creditor and that the company was insolvent at the time of the transaction or became so as a result of it.
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.
One of the directors of a private limited company which is in financial difficulties seeks your advice as to their position. The company has several trade debts which are outstanding, which it cannot pay due to cashflow issues. One of the unpaid suppliers has been putting pressure on the company to pay and has threatened to take further steps if the outstanding invoice is not settled.
The director is very concerned about the company’s finances and has discussed their concerns with the board, suggesting that the company needs to ensure that it does not incur any further indebtedness, that cost cutting measures should be explored and that a full auditor’s report should be urgently requested. The director tells you that the other board members do not share their concerns and seem to believe that the financial problems are merely temporary and that the company will be able to trade out of them. The company is currently continuing to trade and is currently negotiating a high value order with one of its regular customers.
The director wants your advice as to what they should do to protect themselves from any personal liability should the company go into insolvent liquidation. What advice would you give the director?
Select one alternative:
Provided that the director is not knowingly party to the carrying on of the business of the company with intent to defraud creditors, they need not be concerned about any personal liability.
The director should ensure that they take every step to minimise losses to creditors. This means that the company should immediately cease trading and financial and legal advice should be sought.
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.
The director need not be concerned about any personal liability. The company is a separate legal person from its members and directors, and the doctrine of limited liability will protect the director from any personal liability.
The director should resign from the board immediately to ensure that they minimise their personal liability.
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.
Different legal forms of business
sole trader
partnership
llp
private and unlisted public companies
key considerations when forming a business
costs
risk
structure
formalities
privacy
finance
tax
principal differences between a private and public company
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
two key principles of company law which make a company such an attractive business medium for many investors
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
partnerships – formation
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
partnerships – liability of partners
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
partnerships – tax
the partners each individually pay income tax on their share of profits to HMRC
the partnership agreement
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
limited liability partnerships (LLP)
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
the company’s constitution
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
the company’s constitution – articles of association
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
formation of a company
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
company decision making
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
shareholder voting – show of hands and poll votes at GM
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
company meetings
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%
company meetings – the GM sandwich
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
the role of directors vs shareholders
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
what is a director?
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
appointment of directors
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
the rights and remedies of shareholders – removal of a director by the shareholder
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
the general duties of director CA 2006
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
transaction with directors
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
Director’s long-term service contracts
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.
Substantial property transactions
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)).
Loans, quasi-loans and credit transactions
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.
Short notice GMs
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.
Post-meeting — dealing with documentation
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.
the rights and remedies of shareholders
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
the rights and remedies of shareholders – derivative claims
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
the rights and remedies of shareholders – unfair prejudice
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.
the rights and remedies of shareholders – just/equitable winding up
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
equity finance
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
allotment, transfer and transmission of shares
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.
the procedure for allotment of shares
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)
STEP 1: Any cap on the number of shares that may be issued?
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 byordinary 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 2006will 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, byspecial resolutionunder s 21(1) CA 2006.
Per s617(2)(a) CA 2006, each time a company issues shares, its share capital increases automatically.
STEP 2: Do the company’s directors need authority to allot?
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.
STEP 3: Must pre-emption rights be disapplied on allotment?
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 byspecial resolution.
STEP 4: Must new class rights be created for the shares?
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 aspecial resolutionof the shareholders under s 21 CA 2006 (except if removing a cap transferred from a company’s authorised share capital in its memorandum).
STEP 5: Directors must pass a board resolution to allot the shares
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.
Administrative requirements on allotment
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
Financial assistance
assistance must be being given; and
the assistance must be financial in nature.
Financial assistance is covered by the rules whether it isdirect(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 givenfor the purposeof 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
Financial assistance – conditional exceptions
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).
Financial assistance –the “purpose” exceptions
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.
buyback of shares
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.
buyback of shares – the doctrine of maintenance of share capital
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
Buyback out of profits and/or proceeds of a fresh issue of shares
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
Buyback out of capital (PRIVATE companies only)
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 buybackand 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
Redemption of redeemable shares
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.
income vs capital
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
assessment of tax
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
summary of income tax calculation
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
summary of capital gains tax calculation
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.
capital gains tax – reliefs
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
inheritance tax – business property relief (BPR)
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
corporate taxation – the VAT charge
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
output v input tax
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
VAT – types of suppy
standard rated: 20%
reduced rated: 5%
zero rated: 0%
exempt
VAT Terminology
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
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.
standard rated: 20%
reduced rated: 5%
zero rated: 0%
exempt
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.
corporation tax is payable on
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%
calculation of TTP
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
close companies
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
double entry book keeping, ledgers and the trial balance
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
the contents of a profit and loss account
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
the contents of a balance sheet – NAV and Capital
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
year end adjustments
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
partnership accounts
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
company accounts
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
share capital and reserves
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
company’s balance sheet – top half
the BOTTOM portion of the balance sheet shows what is referred to as TOTAL EQUITY or EQUITY AND RESERVES
dividends
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
what is debt finance?
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
security
pledge
lien
mortgage
fixed charge
floating charge
guarantee
fixed charges
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
floating charges
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
effect of equity and debt finance on the balance sheet
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
gearing
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%
meaning of insolvency
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
options for a company facing financial difficulties
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
insolvency – informal and formal arrangements
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
statutory objectives of administration
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
receivership
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
types of liquidation
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
the statutory order of priority
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
personal insolvency
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
fraudulent trading
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
wrongful trading
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
voidable/antecedent transactions
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?
voidable transactions – transactions at an undervalue
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
connected person / associate
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.]
voidable transactions – transactions defrauding creditors
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
voidable transactions – avoidance of floating charge
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
voidable transactions – preferences
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
Two individuals want to start a business together and their main concern is to limit their personal liability. They are choosing between a traditional partnership and an LLP. They are both going to be active in the running of the business. They do not want to spend a lot of money in the set up of the business but they need the ability to raise some finance in the future.
Which of the following represents the best advice to this client for their business?
The individuals should incorporate an LLP because it is not necessary to have a partnership agreement, which will save costs.
The individuals should trade as a partnership as they will have limited liability for debts.
The individuals should incorporate an LLP because they will enjoy limited liability.
The individuals should incorporate an LLP because it will be cheaper than starting a traditional partnership.
The individuals should trade as a partnership because it will be cheaper.
The individuals should incorporate an LLP because they will enjoy limited liability.
Correct
Two months ago a couple set up an LLP through which to operate their business. They had been trading as a traditional partnership before the incorporation of the LLP.
Which of the following best describes the change in taxation?
There is no change in taxation; the LLP is treated as a partnership for taxation purposes.
The partners will now need to pay corporation tax, instead of income tax.
The LLP will pay corporation tax and the partners will continue to pay income tax.
Both the LLP and the partners will pay income tax.
The partners will pay income tax on their dividends from the LLP instead of their earning from the partnership.
There is no change in taxation; the LLP is treated as a partnership for taxation purposes.
correct
