BLP weak areas (SQE 2)

Question 1

What is the GM sandwich?

Answer 1

BM1: decide on issues at GM + resolve to convene GM
GM
BM2: directors informed how shareholders voted at GM. Authorise company sec or director to deal with PMMs.
PMM:
-File relevant docs at Companies House
-Update company’s records (minute books and registers)

Question 2

Sequence of meeting where WR? Where not available?

Answer 2

Shareholders available to vote:
BM1 (adjourned)
WR (shareholders sign/don’t sign WR)
BM1 (reconvened)
PMM

Shareholders not available:
BM1
WR (circulated to shareholders -wait for required approval (lapses after 28 days)
BM2
PMMs

Question 3

What is s171 - general duties of directors?

Answer 3

s171: Act within powers
-Duty to act with company’s constitution i.e. articles
-Not to use power for improper purposes - e.g. personal gain

Question 4

What is s172 - general duties of directors?

Answer 4

s172: Promote success of company (‘long term increase in value’ e.g. long-term consequences of decisions, employees interests, foster relationships, impact on environment + community, act fairly between members of company)

Question 5

What is s173 - general duties of directors?

Answer 5

s173: Exercise independent judgment (cannot blindly follow others without considering interests of company)

Question 6

What is s174 - general duties of directors?

Answer 6

s174: Reasonable care, skill and diligence
Reasonably diligent person with:
(1) general knowledge, skill + experience reasonably expected on someone in their role, and
(2) General knowledge, skill + experience of that director
Min standard - objectively expected of director in that position
Subjectively raised if director has any special knowledge, skill or experience

Question 7

What is s175 - general duties of directors?
When does this not apply?

Answer 7

s175: Avoid conflicts of interest

Does not apply when cannot ‘reasonably be regarded as likely to give rise to conflict of interest’ e.g.
1. transaction with company (between director and company)
2. Matter authorised by directors

Question 8

What is s176 - general duties of directors?

Answer 8

Not to accept benefits from third parties (directors cannot authorise an arrangement under this section)

Question 9

What is s177 - general duties of directors?

Answer 9

Declare interest in proposed transaction (before entering transaction - unless cannot be reasonably be regarded to give rise to conflict of interest).

Must make a declaration at a Board Meeting (BM1 - best practice) or in writing in advance of BM (must be sent to all other directors)

Question 10

How does s177 interact with MA14?

Answer 10

Director interest cannot vote on or count in quorum for board resolutions unless:
(1) disapplied by ordinary resolution
(2) Cannot reasonably be regarded as likely to give rise to conflict of interest
(3) Arises from a permitted cause

Question 11

What are remedies if a director is in breach of their duties?

What can shareholders do before breach?

What is ratification? Exceptions?

Answer 11

Company (not shareholders individually) has a claim against director

S174: damages
S171-173, 175-177: injunction,
setting aside of transaction,
restitution and account of profits, restoration of company property, damages

-Shareholders can approve breach of duties in advance (unless unlawful) - would need full disclosure by director so shareholders can make informed decision

Ratification - by OR (subject to anything in Articles which makes higher) ratify breach of director duties
-Exceptions - cannot ratify unlawful acts, and if director is shareholder - any votes to ratify their breach (including any person connected to them (spouse, child, parent or company they control) will be disregarded
(but their shares will still be considered as a whole when working out threshold to pass OR).

Question 12

What are the key principles of unfair prejudice?
1.Management?
2.Company policy?
3.Faith?
4.Claimant’s conduct?
5.LE?

Answer 12

1. Negligent or inept management of company will not amount to unfairly prejudicial conduct unless serious or repeated mismanagement which puts at risk value of minority shareholder’s interest
2. Disagreement as to company policy - not a basis for unfair prejudice
3. No need to show bad faith for conduct to be unfair
4. No requirement of claimant to have clean hands
5. Small private companies (quasi-partnerships) -shareholders LE that be involved in management of company

Question 13

Remedies of unfair prejudice and valuation?

Answer 13

Options include regulating future conduct of company,
requiring company to do or refrain from certain acts
Most common - purchase petitioners shares

Valuation:
-Behaviour of petitioner may be relevant e.g. previously rejected reasonable offer
-Unfair prejudice claims - expensive, time-consuming, complicated - negotiated settlement preferable
-If value of shares cannot be agreed - court’s encourage settling outside court by a binding third-party valuation

Question 14

When can a former partner be liable for a debt after they have left?

When can a non-partner? What is the effect?

Answer 14

• If a partner leaves, a third party can treat all apparent partners of the firm (ie before the departure) as jointly liable to pay any new debt incurred by the partnership UNLESS that third party has been notified of this change either by:
  o actual notice (s 36(1) PA 1890) - for those who have had actual dealings with the partner before departure; or
  o constructive notice by virtue of publication of the departure in the London Gazette (s 36(2) PA 1890) -for those who have not had actual dealings with the partner before departure.
• However, a former partner will not be liable for debts to any third party who did not know them to be a partner before they left.
  o No notice at all has to be given to such persons.

Non-partners not liable unless they held themselves out to be by:
(i) representation to 3rd party to effect that they are a partner
(ii) 3rd party’s action in response and
(iii) 3rd party’ state of mind (believing in rep)
Become liable for the partnership debt

Question 15

When will a partner bind a partnership without authority? Non-partner?

Answer 15

If content about binding partnership - will not be problematic as will not want to set aside the transaction - partners can ratify the acts expressly or just simply ratify by going ahead with transaction

If not content:

Partner’s unauthorised act will bind firm if:
Will bind if viewed objectively
-Act is for carrying on normal business of firm
-Act is for carrying such business in normal way

Not bind if:
-3rd party knew partner was not authorised
-3rd party did not know or believe that partner was a partner

Non-partner:
bind in apparent (ostensible) authority - where principal (firm) represents or permits representation to be made to a third party that a person has authority to bind firm
Once rep made to 3rd party, and relied upon, firm is bound

Question 16

Common provisions in partnership agreement

What is normal for:

Property?
Drawings/salary?
Decision making?
Retirement/expulsion?

Answer 16

1. Each partner deemed to own share in property belonging to partnership (each partner doesn’t have a right to a particular asset)
2. Allowed to take drawings of income profits (equally if not specified) - not entitled to salary
3. All decisions majority except unanimity for:
   -changes to nature of partnership business
   -introducing a new partner
   -varying rights and duties of partners
4. Cannot be expelled by majority vote (unless previously agreed a majority can do this)
   -partnership dissolved if no partnership agreement (if partner leaves/expelled)

Question 17

What are 4 main common changes when converting shelf company? including appropriate forms?

Answer 17

Name (special res filed at CH, fee, form NM01)
Reg office (Board res, Form AD01 filed at CH)
Articles (special res + amended articles filed at CH)
Members, directors + company secretary:
-shareholders - transferred using stock transfer form (member when entered on register of members)
-Appoint: Directors (Forms AP01), Secretary (AP03)
-Resign: Directors (TM01), secretary (TM02)

Question 18

Who can demand a poll vote?

Answer 18

Chairperson
Directors
2 or more entitled to vote on resolution
At least 10% of total voting rights

Question 19

Def of shadow director

Answer 19

A person in accordance with directions or instructions the director are accustomed to act

Question 20

What is wholly-owned subsidiary exemption? What does it apply to?

Answer 20

Approval by OR - not required by members of company which is wholly owned subsidiary of another company

Long-term service contracts
Substantial property transactions
Loans and related transactions

Question 21

Rule regarding director and vote on their own service contract? What about substantial property transactions? Loans and related transactions?

What about disclosures of other directors?

Answer 21

D can’t vote or count in quorum in relation to all 3 of these

Service contract - not required to declare interest (but usually do)

Other 2 - need to disclosure nature and extent of interest in transaction

Question 22

Long-term service contract:
-Procedural requirements for OR at GM? WR?

Answer 22

GM: memorandum setting out proposed transaction - available for inspection by members:
-not less than 15 days ending with date of GM
-at meeting outset
(min 15 days notice of GM needed therefore (inc. short notice) unless WR is used

WR: Memo must be sent to every eligible member at or before time proposed res is sent or submitted to that member

Question 23

Substantial property transactions:
Remedies?
Defences?

Answer 23

Where a SPT is entered into without shareholder approval, under s 195(2) CA 2006 the transaction is voidable at the instance of the company unless:
a. restitution is no longer possible,
b. the company has been indemnified for the loss or damage suffered by it, or
c. rights acquired in good faith by third party would be affected by the avoidance.

directors involved are liable to account to the company for any profits made and to indemnify the company for any loss incurred

Transaction can be affirmed by OR

Defences:
1. Between a company and a person connected with director, and director concerned showed they took all reasonable steps to ensure company’s compliance
2. Connected persons/directors who authorised transaction - show they had no knowledge of circumstances constituting contravention

Question 24

Loans and related transactions

Applies to who?
Exceptions?
Remedies?
Defences?
Procedural issues?

Answer 24

All companies - loans, guarantees or security
PLC only - Quasi loan, credit transactions

Exceptions:
* Section 204: Expenditure on company business (up to a maximum of £50,000);
* Section 205: Loans for defending proceedings brought against a director;
* Section 206: Loans for defending regulatory actions or investigations;
* Section 207: Minor and business transactions – loans or quasi-loans of up to £10,000 and credit transactions up to £15,000 do not require shareholder approval (and credit transactions on normal business terms (no limit);
* Section 208: Intra group transactions, and
* Section 209: Money lending companies (where the loan is made in the ordinary course of the business of the company).

Remedies and defences same as SPT(voidable unless restitution no longer possible etc), (all reasonable steps + no knowledge of contravention)
Wholly-owned subsidiary exemption
Holding company - if transaction between company + director of company’s holding company (or person connected to director), holding co will need to authorise by OR

Procedural (same as long-term SCs) - 15 day rule (except WR)

Question 25

Removal of directors:

Timeline if shareholders propose a removal resolution?

Timeline if shareholders have to serve s303 request and
-board cooperates
-board does not cooperate

Answer 25

Give notice to directors at least 28 clear days before GM - if board places removal res on agenda of GM, should give shareholders notice of GM (at least 14 clear days before GM)

If removal res not placed on GM, then s303 request option

If cooperate: call GM within 21 days, Gm not held later than 28 days after notice

If not cooperate: on 22nd day, shareholders (at least 1/2 in voting right of those submitted s303) can call GM within 3 months and not less than 14 clear days

Question 26

Derivative claims:

When can it be brought?
Against whom?
By who?
Court approval stages?

Answer 26

Negligence, default, breach of duty or trust by a director
Director (inc. shadow directors)
Shareholder (includes events which took place before becoming member)
Court approval:
Stage 1 - member has to prove they have a prima facie case (satisfied acting in accordance with s172, good faith, cause of action likely to be ratified by company)
Stage 2 - Detailed consideration. Court must have particular regard to view of members who have no personal interest, direct or indirect, in the matter

Then proceeds to trial

Question 27

What are the 6 types of share and rights attached to each?

Answer 27

Ordinary (right to vote, right to dividend, right to portion of surplus assets on winding up)
Preference (higher priority to dividend or surplus on winding up at fixed rate, usually non-voting)
Cumulative preference (right to dividend carried forward if not declared)
Participating pref shares (pref shares - get priority but then also entitled to surplus capital or dividend alongside ordinary shareholders)
Redeemable - can be redeemed back by company
Convertible.- can be converted to another type of share

Question 28

What are distributable profits for a dividend?

Answer 28

Accumulated realised profits less accumulated realised losses

Question 29

Administrative requirements on allotment (4 groups)?

Answer 29

Copies of resolutions to be sent to Companies House within 15 days:
-OR to grant authority to allot
-All SRs
-Amended Articles (if relevant)

Company forms to be sent to CH:
-return of allotment (form SH01) + statement of capital within 1 month
-change to PSCs (PSC01-PSC07)

Update company registers
-update register of members within 2 months
-Update PSC register

Share certificates:
-Must be prepared and sent to new shareholders within 2 months of allotment

Question 30

Buyback of shares:

What are the 2 way a company can purchase its own shares?

Procedure for share out of profits/proceeds of fresh issue?

Answer 30

Redemption of redeemable shares
Purchase of own shares (buyback)

Initial steps
-Check there is no limit in Articles on s 690 power to buyback shares
-Prepare accounts to check there are sufficient distributable profits
-Confirm shares are fully paid

Board Meeting
-BR to approve the draft contract
-BR to call a GM and approve form of notice / propose a WR
-Contract to be made available to shareholders:
- If GM: contract must be available for inspection at the company’s registered office for at least 15 days prior to and at GM
- If WR: circulate contract with WR

GM / WR
-Shareholders pass OR to approve contract.
-Holders of shares being bought are not eligible to vote.

Board Meeting
-BR to enter into the contract
-BR to appoint a director(s) to sign the contract

Post meeting matters
-File return, notice of cancellation & statement of capital within 28 days
-Keep copy of contract for 10 years
-Cancel shares, update register of members (and PSC register if applicable)

Question 31

Buyback:

Who can use buyback of capital?

Procedure?

What is a DSS and AR?

Answer 31

PRIVATE companies only!

Initial steps
-Check there is no limit in Articles on s 690 power to buyback shares or s 709 power to use capital to fund the buyback
-No earlier than three months before the directors prepare the statement of solvency, prepare accounts to ascertain available profits
-Confirm shares are fully paid

Board Meeting
-BR to approve the directors’ statement of solvency (‘DSS’ -must be made no earler than 1 week before GM) and the auditors’ report (‘AR’)
-BR to approve the draft contract
-BR to call a GM and approve form of notice / propose a WR
* Contract to be made available to shareholders:
- If GM: contract must be available for inspection at company’s registered office for at least 15 days prior to and at GM
- If WR: circulate contract with WR
* DSS and AR must be signed no earlier than one week before the GM or the passing of the WR

WR
Circulate WR with contract, DSS and AR.
* SR to approve payment out of capital and OR to approve contract.
* Holders of shares being bought back are not eligible to vote.

ALTERNATIVELY GM
-Shareholders pass OR to approve contract.
-Shareholders pass SR to approve payment out of capital.
-Holders of shares being bought are not eligible to vote.
* Contract, DSS and AR must be available at the meeting.

Following GM / WR
* Within 7 days: place notices in Gazette and national newspaper and file DSS and AR at Companies House.
* Within 15 days: file SR at Companies House.
* For five weeks after date of SR: creditors and shareholders have right to object. Copies of DSS and AR must be available for inspection at company’s registered office.

Board Meeting
* BR to enter into the contract.
* BR to appoint a director(s) to sign the contract.
* Payment out of capital must take place between 5-7 weeks after SR passed.

Post meeting matters
* File return, notice of cancellation & statement of capital within 28 days.
* Keep copy of contract for 10 years.
* Cancel shares, update register of members (and PSC register if applicable).

DSS = confirms company solvent and will remain so for 12 months after buyback (crim sanctions if no reasonable grounds)

AR = written statement of solvency confirming auditors not aware of anything to indicate directors opinion not reasonable

Question 32

Who can a claim for fraudulent trading be brought against?

What must be proved?

Remedies?

Answer 32

Any person
who is knowingly party to the carrying on of any business of the company
with intent to defraud creditors or for any fraudulent purpose

Actual dishonesty -
1) Director’s subjective state of knowledge
2) that D’s conduct was dishonest, applying objective standards of ordinary decent people

Remedies:
-Will be ordered to make such contribution to the company’s asset as the court thinks proper (should only reflect and compensate loss caused to creditors)
-Court can make a disqualification order
-Criminal sanctions can be imposed for those knowingly party to fraudulent trading (imprisonment up to 10yrs/fines)

Question 33

Wrongful trading

Who can it be brought by?
What is the 2 limb test which needs to be satisfied?
Defence?

Answer 33

Administrator or liquidator

Limb 1:
Gone into insolvent liquidation
1. At some time before the commencement of the winding up or involve administration,
2. the director knew or ought to have concluded that
3. there was no reasonable prospect that the company would avoid going into insolvent liquidation
(JUDGED ON THE BALANCE SHEET TEST ONLY!!)

Limb 2:
That the continued trading made the company’s position worse
Only if (2) and (3) are satisfied does limb 2 need to be considered

Defence:
‘Every step’ defence (took every step minimising potential loss to company’s creditors e.g. voicing concerns are board meetings, seeking independent financial and legal advice, taking advice on steps such as insolvency procedures or negotiating with creditors to restructure liabilities)

In determining whether D took every step to minimise potential loss, court will consider
(1) the general knowledge, skill and experience reasonably expected of a person carrying out same functions of director in question (objective)
(2) Actual knowledge, skill and experience of that particular director (subjective)
Then apply HIGHER of 2 standards

Question 34

Wrongful trading

Advice to directors?
Can a director escape liability by resigning?
Remedies?

Answer 34

Minimise claim:
1) Hold frequent board meetings to review company’s financial position and write up minutes of each meeting so there is a written record
2) take professional advice ASAP
3) make sure have up to date financial info available

NO

Remedies:
-Court can order that director make such contribution to the assets of the company as the court thinks fit (compensatory and not penal, can apportion liability between directors based on culpability)
-Discretion for disqualification order

Relief to relieve director by shareholders is not available

Question 35

For voidable transactions, definition of connected person and associates?

Answer 35

• ‘Connected persons’ with the company (s.249) – are directors (including shadow directors), associates of directors and associates of the company.
• ‘Associates’ of director/company (s.435) – include spouses, business partners, employees, relatives including brother, sister, uncle, aunt, niece, nephew, etc. (widely defined in s.435(8)), certain trustees, a company which is controlled by the director and a company which is itself associated with the company in question, where both are mutually controlled by some other company or person.

Question 36

Defence to TUV?

Sanctions?

Rules on subsequent purchaser?

Answer 36

1) The company entered into transaction in good faith and for purpose of carrying on its business
2) There were reasonable grounds for believing transaction would benefit company

Sanctions:

Discretion to award such order as it thinks fit to restore company to position had it not entered into transaction (common for counterparty to pay amount of undervalue)

Court should not prejudice subsequent purchaser provide they were acting in good faith and for value
-Rebuttable presumption not in good faith where subsequent purchaser:
(1)had notice of relevant surrounding circumstances, or
(2) Was connected or was an associate of company or party
-here burden of proof shifts to subsequent purchaser

Question 37

Elements of TUV?
Elements of preference?

Answer 37

TUV:
1) Gift/transaction at undervalue
2) relevant time (2 years ending with onset of insolvency)
3) Insolvent at time or became so as a result (cash flow/balance sheet) - presumed if connected

Preference:
1) Relevant time (6 months, 2 years (if connected))
2)Insolvent at time or became so as a result (cash flow/balance sheet)
3) Desire to prefer (subjective test - presumed if connected))

Question 38

Defence to preference?
Sanctions?

Answer 38

Absence of desire to prefer - desire to continue trading instead

Restore position had it not given preference - same with TUVs
Common is for preferred creditor to pay liquidator or administrator money it received from company

Question 39

How to call a short notice GM?

How does GM sandwich work here?

Answer 39

A majority in members who, together hold shares with a nominal value of not less than 90% of total nominal value of shares (can be > to up to 95% in Articles)

BM1 (adjourned) - resolve to convene GM, approve form of notice for GM and form of consent to short notice. Notice of GM and form of consent to short notice given to shareholders who indicate agreement for GM by signing form
GM
BM1 (reconvened)
PMMs

Question 40

Quorum for BM? Quorum for GM? Word where sufficient quorum?

How many directors does a ltd need? plc?

Answer 40

BM: min of 2 directors (unless Art provide otherwise)

GM: two shareholders (or 1 for single member companies)

Quorate

1
2

Question 41

What is a connected person for SPTs?

Answer 41

1. Members of the director’s family: spouse or civil partner, parents, children or step-children (s 253(2)).
   (a) Note that brothers, sisters, grandparents, grandchildren, uncles and aunts are NOT connected persons under CA 2006.
2. Bodies corporate i.e. companies in which the director (and others connected with them) holds 20% or more of the shares (s 254).
3. A business partner of the director or those connected with them (s 252(2)(d)).
4. Trustees of a trust the beneficiaries of which include the director or those connected with them (s 252(2)(c)).

Question 42

When is form PSC01 used?
PSC02?
PSC04?
PSC07?

Answer 42

New individual PSC
New relevant legal entity PSC (same as individual but corporate entities)
Change to individual’s details
Ceasing to be PSC - all entities

Question 43

What is a qualifying floating charge holder (QFC)?

Answer 43

Floating charge which
(i) together with any other security that holder of floating charge holds relates to whole or substantially the whole of company’s property and
(ii) doc which creates it provides that QFC holder has power to appoint an administrator

Question 44

What actually is the prescribed part fund?

Answer 44

Some money ring fenced (certain % of company’s net property - property not subject to fixed charge) which is reserved for unsecured creditors (does not go to floating charge holders)

Question 45

What are the steps required to allot new shares?

Answer 45

1. If share cap in Articles - need to remove by OR(!) - only relevant to pre-2006 companies
2. OR to allot unless private company with only one class of share (and proposing to allot same type of share)
   3.Disapply pre-emption rights by SR: needs to be done in any case where the new shares are not capped as to right to dividend and capped as to right to capital on a winding up
3. SR to amend Articles (if creating new class of shares)
4. Board resolution to allot: board resolution needs to be passed to approve the issue of the new shares (needs a simple majority by number of directors)

Question 46

What is a TDC?

Requirements?

Remedies?

Answer 46

Transaction defrauding creditors - voidable transaction

1. there has been a transaction at an undervalue; and
2. the intention or purpose of the transaction was to put assets beyond the reach of creditors of the company or otherwise prejudice their interests

No relevant time - more recent will be more likely though

Any order it sees fit

Question 47

When can floating charges be avoided?

When are new floating charges valid?

Answer 47

Created within 12 months preceding insolvency (or 2 years to connected person)

Company was insolvent (on cash flow or balance sheet basis) at time or became so as a result (not necessary if to connected!!)

If new money or fresh consideration is provided in return for floating charge being granted