Business Flashcards
1
Q
From what date does a company become a legal entity?
A
From the date the certificate of incorporation was issued
2
Q
Does the objects clause of an older company continue in force?
A
Yes, operating as a limitation on that company’s capacity unless and until the Articles of that company are amended to remove
3
Q
What is the difference between allotment and issuance of shares?
A
Allot: When a person acquires an unconditional right to be included in the company’s register of members in respect of those shares
Issued: once shareholder has actually been registered and title has become complete
4
Q
When are dividends paid?
A
Only payable by a company if it has sufficient distributable profits
5
Q
What’s the difference between allotting and transferring shares?
A
Allotment: a contract between the company and new/existing shareholder where company agrees to issue new shares in return for subscription price
Transfer: contract to sell existing shares between existing shareholder & purchaser
6
Q
What are the main features of a sole trader?
A
No set up costs
Not a separate legal entity
Unlimited personal liability
Complete privacy
No CH filing requirements
No formal structure
7
Q
What are the main features of a partnership?
A
No set up costs
Not a separate legal entity
Unlimited personal liability
Complete privacy
No CH filing requirements
Governed by PA 1890
8
Q
What are the advantages of incorporation?
A
- Limited liability
- Separate legal personality
- More finance options
- Credibility
9
Q
What are LLPs commonly used for?
A
Professional partnerships
Joint ventures
Investment schemes/structures
10
Q
What are the 2 ways to start a company?
A
- Incorporation from scratch
- Shelf company conversion
11
Q
What must be delivered to CH for incorporation from scratch?
A
(a) Memorandum
(b) Articles (if not using MA)
(c) Fee
(d) Form IN01
12
Q
What changes may need to be made, and how, for a shelf company conversion?
A
Name: special resolution of shareholders
Registered Office: board resolution
Articles: any amendments by special resolution
Members, directors & Company Secretary: new directors/secretary must be appointed BEFORE old ones resign
13
Q
What happens with pre-incorporation contracts?
A
If a director purports to enter a contract on behalf of a company not yet incorporated, director themselves is personally liable
Company, once incorporated, has no rights or obligations under contract, and they can’t ratify it
14
Q
What is the definition of a partnership?
A
A relationship between 2 persons or more carrying on a business with a view to making profit
15
Q
What are the advantages to a partnership?
A
Privacy
No filing requirements
No set up costs
16
Q
What are the requirements for an LLP?
A
- Partnership
- Registration at CH
- Certificate of Incorporation
17
Q
What rules and recommendation apply to LLPs?
A
Must be at least 2 formally appointed members at all times
At least 2 members must be designated members
Should have an LLP agreement
18
Q
How are LLPs treated for tax purposes?
A
Parters are taxed, not the LLP
19
Q
What is meaning of ‘nominal/par value’ share?
A
Minimum subscription price for that share
20
Q
What is a premium share?
A
Where a share is allotted/issued for more than nominal value, excess is premium
21
Q
What is ‘issued share capital’?
A
Amount of shares in issue at any time
22
Q
When is full legal title to shares achieved?
A
When a person’s name is entered in the register of members
23
Q
What is paid-up share capital?
A
Amount of nominal capital paid - amount outstanding can be demanded at any time
24
Q
What are ordinary shares?
A
Carry a right to vote in GMs, right to dividend and right to a portion of assets on winding up
Most common and default option
25
What are preference shares?
Preference as to payment of dividend and/or return of capital
26
What are cumulative preference shares?
If dividend is not declare for a year, the right to that amount is carried over and paid together with other dividends at a later date
27
What are participating preference shares?
Shareholders may participate in surplus profits or assets
28
What is the process a company should follow to issue shares?
1. Check if there's a cap on the number of shares that can be issued in the Articles - if there is, must be removed/modified
2. Check if directors need authority to allot - if private company w 1 class of shares & new shares are in that class, automatically allowed unless prohibited in Articles
3. Check if pre-emption rights must be applied
4. Check if new class rights must be created by special resolution
5. Directors pass board resolution to allot shares
29
What requirements are there on allotment of shares?
a) Copies of resolutions sent to CH within 15 days
b) Company forms sent to CH
c) Update company registers
d) Share certificates
30
What are the 2 types of dividend?
Final and Interim
31
What restriction regarding shares are there on private companies?
They're prohibited from offering shares to the public
32
Is a new partner automatically liable for debts incurred before they joined the partnership? What about after they retire if debts were incurred while they were partner?
No - for new partners
A partner will still be liable after they retire in respect of debts incurred by the partnership whilst they were a partner
If a partner leaves, a 3rd party can treat all apparent partners of the firm (i.e. before the departure) as jointly liable to pay any new debt incurred unless that third party has been notified of this change either by actual or constructive notice
33
What 2 methods are there for disapplying pre-emption rights?
1. General Disapplication: special resolution - disapplication in Articles
2. Private Companies with 1 class of share - disapplication by special resolution
34
What is a standstill agreement?
Where creditors agree not to enforce their rights or remedies for a certain period of time to give the company a breathing space to reach agreement with its other creditors
35
What's the difference between transmission and transferring of shares?
Transmission: automatic process on death or bankruptcy
Transferring: from existing shareholder to new one by sale or gift
36
What restrictions could there be in the Articles against shareholders transferring shares?
1. Directors power to refuse to register
2. Pre-emption Rights
37
What 2 types of transactions are financial assistance rule applicable to?
a) Acquisition or sale of shares
b) Issue of shares
38
What are the financial assistance rules?
Focus on target company and it's subsidiary
If target is a public company, neither it or its subsidiaries can give assistance.
If target is private, but subsidiary is public, the plc can't give assistance
39
What is the exception to the rules on financial assistance?
Purpose Exception: if principal purpose is not for purpose of acquisition, or purpose is only incidental part of larger purpose, can give assistance (rarely used)
40
What is the doctrine of maintenance of share capital?
A company is not usually permitted to return capital to its shareholders, to protect company creditors
41
What are the consequences of the doctrine of maintenance of share capital?
a) Dividends can only be paid out from distributable profits (not capital)
b) Company must generally not buy their own shares
42
When can a company buy its own shares?
1) Redemption of Redeemable Shares: details in Articles or determined by directors
2) Buyback of Own Shares: where company buys shares from existing shareholders
43
What 3 methods are there to buyback shares?
a) Distributable Profits: if not restricted in Articles; shares being purchased must be full paid up; company must still have issues shares after purchase (other than treasury/redeemable shares)
b) Proceeds of Fresh Issue of Shares
c) Capital: very limited, only for private companies, must first use any money available from 2 other methods
44
What is the procedure to follow for buyback out of profits/proceeds of fresh issue?
1. Check Articles for any prohibition
2. Verify distributable profits
3. Contract to buyback own shares (must be available for inspection of at least 15 days before GM, and at GM itself)
4. Contract approved by OR
45
What is the procedure for buyback out of capital?
1. Check no restrictions in Articles
2. Check if distributable profits available
3. Directors Statement of Solvency & Auditors Report prepared
4. Check accounts were prepared no more than3 months before directors statement
5. SR to approve within week of solvency statement
46
What notification requirements are there for buying back out of capital?
Within 7 days of passing SR, company must give notice to creditors
Can be done by notice in Gazette, national newspaper or in writing to creditors; or by filing director statement/auditor report at CH
47
What time limits are there on buying back out of capital?
Share purchase takes place no earlier than 5 weeks, and no more than 7 weeks, after date of SR
Within 28 days of shares bought, company must send return to CH and notice of cancellation, with statement of capital
48
What's the difference between a proposed and a declared dividend?
Proposed: directors have recommended final dividend, but not yet approved by shareholders
Declared: final dividend approved, constitutes an enforceable debt
49
What are the 2 categories of debt finance?
Loan Facilities: agreement between borrower & lender
Debt Securities: means by which company receives money from external sources
50
What are 2 types of loan facilities?
Overdraft: on demand facility, unsuitable for long-term borrowing
Term Loan: loan for fixed period, repayable on a certain date; lender can't demand repayment unless borrower in breach; lender receives interest
51
What are the main debt finance documents?
Term Sheet: statement of key terms of transaction agreed (not legally binding)
Loan Agreement: sets out main commercial terms of loan
Security Document: if loan is secured, a separate security document is needed
52
What are the 2 meanings of debenture?
1. Any form of debt security issued by a company
2. Name of particular document which creates a security (separate from loan agreement)
53
What is the main benefit of taking security?
It protects the creditor in case the borrower enters any formal insolvency procedures?
54
What are the 4 different types of security?
Pledge: security provider gives possession of asset until debt paid back
Lien: creditor retains possession of asset until debt paid back - arises by operation of law
Mortgage: security provider retains possession but transfers ownership to creditor
Charge: security provider retains possession & equitable proprietary interest created in favour of creditor (fixed or floating)
55
What is a fixed charge?
Creditor controls what security provider does with fixed charge assets
E.g. machinery and vehicles
56
What is a floating charge?
Floats over class of circulating assets; security provider free to dispose of assets as it wishes until crystallisation (where floating charge stops & fixes to assets)
Creditor can't be sure of value of secured assets
57
What is the procedure a company must follow regarding securities?
1. Security registered at CH within 21 days, starting day after date of creation of charge (either by lender or company)
2. Company must keep copy of very charge & instrument that amends charge available for inspection - failure to do so is an offence, liable to a fine
58
What is the effect of failing to register a security?
Charge is void against liquidator, administrator or creditor
Debt becomes immediately payable
59
What is the order of priority between creditors?
1. Fixed charge creditors
2. Preferential creditors
3. Floating charge creditors
4. Unsecured creditors
5. Shareholders
60
What is detailed on the profit and loss account?
Records income of a business minus expenses incurred through an accounting period (to arrive at a profit/loss)
Only income and expense entries from trial balance (income entries at top, expense deducted from income, profit/loss result at bottom)
61
What is detailed on the balance sheet?
Records position of business in respect of assets, liabilities and capital accounts on a given date
3 sections: assets, liabilities, capital
Top: net asset value (fixed assets + net current assets - long term liabilities)
Bottom: capital invested to achieve NAV
2 halves must always balance
62
What are year-end adjustments?
Transactions or modifications to account entries on the trial balance
63
What are Receivables?
Amount of money owed to the business
64
What are the 5 types of year-end adjustments?
Depreciations
Accruals
Prepayments
Bad Debts
Doubtful Debts
65
How does depreciation work as a year-end adjustment?
Deals with declines in value of fixed assets
2 Methods: Straight line (same charge every year, spreading depreciation evenly); Reducing Balance (expressed as % of reducing balance, where asset loses a lot of value in first few years e.g. vehicles)
Straight line used where service provided continues on consistent basis throughout life
66
What are accruals adjustments?
Where the company has benefitted from something but won't pay for it till next accounting period
Profit shown will be artificially high, if adjustment not made
67
What are prepayment adjustments?
When expense is paid but does not benefit until next accounting period
If not made, profits will appear artificially low
68
What are adjustments for bad debts?
Where a business knows with certainty that they'll never receive what's owed
Removed from Receivables Account
69
What are adjustments of doubtful debts?
Where business is providing for possibility that a debt may not be paid
Specific Doubtful: specific debtor in financial trouble
General Doubtful: market of debtor generally doing badly
Shown in Provision for Doubtful Debts in liability account and expense account of P&L
70
For partnership accounts, what statement is needed?
Profit Appropriation Statement (in bottom half of balance sheet): show capital correctly, recording how profits are divided between partners
71
What are 'drawings'?
Withdrawals by partners of profits
72
What 2 accounts do partners have?
1. Capital Account: for long term capital, representing original investment & can't be withdrawn
2. Current Account: capital that can be withdrawn at partner's discretion; records partner's share of ongoing profits & any drawings
Both categories as capital accounts (ALCIE)
73
How are profits divided amongst the partners?
a) Sums allocated to individual partners corresponding to any 'interest on capital' or 'salaries' due to them
b) Remaining profits distributed on agreed profit share ratio
74
What is an accounting reference date?
The last day of the month in which the anniversary of incorporation falls - company can change this
75
What are the filing requirements for a private company?
Company must file its accounts at CH within 9 months after end of relevant accounting reference period
(For public, its within 6 months)
76
What are the main differences with company accounts vs partnership/sole trader accounts?
1. Capital Accounts (bottom half of balance sheet): capital of a company consists of share capital, reserves & retained earnings
2. Tax: P&L account includes corp tax
3. Dividends: included as addition on Balance Sheet under Statement of Changes in Equity
77
What are consolidated accounts?
Companies with 1 or more subsidiaries must publish accounts for the group as well as their own annual accounts
78
What does the top and bottom half of the balance sheet show for company accounts?
Top: net asset value
Bottom: equity
(must equal)
79
What is the meaning of 'called up share capital'?
The aggregate amount/value of shares the company required shareholders to pay
80
What are 'reserves'?
The capital of a company in excess of called up value of share capital
81
What are the 2 types of reserves?
Capital Reserves - canNOT be distributed by way of dividend
Revenue Reserves (e.g. retained earnings) - CAN be distributed
82
What is the share premium account?
Difference between nominal share value and amount shareholders actually paid
It's a capital reserve - can't be distributed
83
What is 'revaluation reserve'?
It represents a notional profit to the company from the rise in value of the asset
This profit is unrealised until asset is sold
It's a capital reserve: not distributable as dividend unless asset sold and realises the profits
84
What is the general rule on how equity affects the balance sheet?
Both net asset value and total equity will change (i.e. both halves)
85
What is the general rule on how debt affects the balance sheet?
Net asset value doesn't change as a result of loan and equity doesn't change (top half sees some new figures but doesn't ultimately change)
86
What is the effect of issue shares (equity finance) on the balance sheet?
1. Increases cash (therefore, current assets) (top half) to show cash received
2. Increases share capital (bottom half) to show nominal value of issued shares
87
How is a price of a share calculated?
value of company / no of issued shares
88
What is the effect on the balance sheet of issuing shares greater than their nominal value?
Top Half: cash increase for amount paid shown in assets increase
Bottom Half: nominal amount of new shares shown by increase in share capital; premium per share shown in share premium account
89
How to calculate earnings per share?
Profit after tax / average number of ordinary shares in issue while profit generated
90
What is the effect of a loan (debt finance) on the balance sheet?
Top Half: liabilities increased by loan amount; assets (cash) increases by loan funds
Net assets therefore unchanged; total equity unchanged
91
What is gearing?
Ratio of debt to equity - higher the ration, the higher geared the company is
92
How is gearing calculated?
Longterm debt (non-current liabilities) / Equity (total equity) x 100%
93
What are the advantages of high gearing?
Can make bigger investments than if just using own resources
More advantages to shareholders as no share dilution & improves earnings per share (profits) for them
94
What are the risks of high gearing?
Seen as more of a credit risk as there's less equity to protect creditors
Will need to make more profit before interest & tax to meet demands for interest repayments
95
What directors duties are there?
S171: act within powers
S172: promote success of company for benefit of members as whole
S173: exercise independent judgement
S174: exercise reasonable care, skill & diligence
S175: avoid conflicts of interest
S176: not accept benefits from 3rd parties
S177: declare interest in proposed transaction
96
What is the s171 duty to act within powers?
Must act within constitution & exercise powers for purposes for which they were conferred
Directors in breach if they act w/o authority (Articles)
Must not use powers for improper purposes
97
What is the s172 duty to promote success of company?
Must act in good faith and have regard to other things e.g. employees
Success = increase in longterm value
They should ensure to keep board minutes of board decisions
98
What is the s173 duty to exercise independent judgement?
They must not fetter their discretion
Can rely on other advice but must make their own decision
99
What is the s174 duty to exercise reasonable care, skill & diligence?
It's assessed objectively (general care skill & experience of someone in that role) and subjectively (that specific director)
Minimum standard is that objectively expected of director in that role
100
What is the s175 duty to avoid conflicts of interest?
Direct or indirect interests
It's not breached where authorised by directors or transaction with the company (that are subject to s177)
101
What is the s177 duty to declare interest in proposed transaction?
Must declare nature and extent of interest BEFORE transaction is entered
Interest can be direct or indirect e.g. spouse or relative
The director cannot vote or count in quorum - this can be disapplied by OR
102
When does a director not need to declare interest under s177?
If they're not aware of transaction
If the interest can't reasonably be regarded as giving rise to conflict
103
What are remedies for breach of directors duties?
S174: damages
Everything else: injunction, setting aside transaction, restitution & account of profits, restoration of company property, damages
104
Can shareholders approve and/or ratify breaches of directors duties?
Yes (as long as not unlawful acts) as long as they are properly aware of details
105
What is voting by show of hands? And by poll?
Show of hands: 1 shareholder, 1 vote
By poll: 1 vote per share for each shareholder
106
Is voting done by poll or show of hands for written resolutions?
By poll
107
When can written resolutions not be used?
For removals of director or auditor
108
How much notice must be given for a GM?
14 clear days' notice
109
How many directors must be present for a board meeting?
2
110
How does voting take place on a board resolution?
By majority on show of hands
111
How much notice is given for board meetings?
Reasonable notice
112
What is the process of meetings to take place when a shareholder resolution is required?
1. BM to call GM
2. GM: shareholders vote
3. BM to put effect to shareholder vote
4. Post-Meeting Matters (Internal, filing at CH, record keeping)
113
What is the short notice procedure for a GM?
1. Majority in number of members who
2. Together hold shares of 90% or more
114
What is the procedure for written resolutions?
Passed when requisite majority of eligible members agree
It lapses after 28 days if not
BM required to propose use of WR & approve its form
115
What 3 transactions require shareholder approval? What type of resolution is needed?
Directors' Long Term Service Contracts
Substantial Property Transactions
Loans, Quasi-Loans, Credit Transactions & Guarantees/Provision of Security
Resolution: OR
116
What is a directors' long term service contract?
Where there is a guaranteed term in excess of 2 years
If director is also a director of any holding company, those shareholders must give approval
117
What are the consequences if a long-term service contract does not get approval?
Provision that governs the term is void
Contract deemed to contain a term entitling the company to terminate the contract at any time on reasonable notice
118
What is the exception to long-term service contracts needed shareholder approval?
Where members of a company is a wholly owned subsidiary of another company
119
What inspection rights are there for long-term service contracts?
Company must keep copy of all directors' service contracts available for inspection
120
What procedural issues arise for long-term service contracts?
Memorandum of contract must be made available for no less than 15 days before GM, ending with date of GM, and at GM itself
Therefore, min no. of 15 days notice required for GM (as opposed to 14)
121
What is a substantial property transaction?
An acquisition/disposal by a director (or connected person) of a substantial non-cash asset to/from the company
Approval must be given before the transaction, or after, where the transaction is made conditional on approval
122
What constitutes a 'substantial non-cash asset'?
Asset between £5,000 and £100,000 that is worth more than 10% of company's net asset value
Any asset £100,000 or more
123
What is a 'connected person' in the context of substantial property transactions?
Spouse, parents, (step) children
Companies the director holds 20% or more shares in
Business parter or those connected with them
Trustees of trust director is beneficiary to
124
What remedies are there for substantial property transactions?
Voidable unless:
- Restitution no longer possible
- Company's been indemnified
- Rights acquired in good faith by 3rd parties would be affected
125
Can a substantial property transaction be affirmed?
Yes, by OR
126
What are defences for a director, for substantial property transactions?
Director concerned took all reasonable steps to ensure compliance
For connected person: they had no knowledge
127
What are quasi-loans?
Where company pays off debt of directors on the understanding of reimbursement
128
What are credit transactions?
Any transaction entered into where company provides g/s to director on credit basis paid for at later date
129
What companies are restricted for loans, quasi loans etc.?
Loans, Guarantees or Security: all companies
Quasi-loans, Credit Transactions & Connected Persons: public companies & private companies associated with public companies
130
What exceptions are there to the rules on loans, quasi loans etc?
Minor business transactions: loans/quasi-loans up to £10,000; credit transactions up tot £15,000
Where members are wholly owned subsidiaries
Expenditure on company business (50k max)
Loans for defending director, or regulatory proceedings/investigations
Moneylending companies
131
What are the remedies for loans, quasi-loans etc?
Voidable unless:
- Restitution no longer possible
- Company's been indemnified
- Rights acquired in good faith by 3rd parties would be affected
132
Can loans/quasi loans etc be affirmed?
Yes, by OR
133
What defences are there for loans/quasi loans?
Director concerned took all reasonable steps to ensure compliance
For connected person: they had no knowledge
134
What is the procedure for disclosure for transactions under s177?
Directors must disclose nature and extent of interest to board
Written resolution can be used
15 days notice required (see long term contracts)
135
How can directors be appointed?
1. By OR
2. Decision of directors (more common)
Written contract of their employment must be kept at office for inspection
136
How many directors do private and public companies need respectively? How old must they be?
Private: min 1
Public: min 2
At least 16 years old
137
When are company secretaries required?
For public companies
138
How can directors be removed?
1. By OR (before end of contract)
2. Special notice of 28 days for removal resolution (by shareholders)
139
Can directors, who are also shareholders, vote to remove a director?
Yes
140
Can directors decide to put a removal resolution on GM agenda?
Yes
141
What happens if directors don't put removal resolution on GM agenda?
S303 request can be used
- Shareholders holding no less than 5% of paid up voting share capital can serve request for board to call GM
- Directors must call w/in 21 days
If directors fail, all or more than half of those who served request can call GM themselves
- GM must be called no less than 14 clear days notice, & held w/in 3 moths of s303 request
142
When the company receives notice of removal request, what must they do?
Send copy of notice to director concerned
143
What can a director whose subject to removal request do?
They can make representations in writing to be circulated to shareholders & read aloud at GM
Director has right to speak at GM
144
Why must the Articles be checked when trying to remove a director who is also a shareholder?
For Bushell v Faith clauses
Gives weighted voting rights (which mean OR likely won't be passed)
145
Can a director who is also a shareholder, be removed where there is a shareholders' agreement requiring unanimous approval?
Yes
OR still valid and director is removed
Director would have claim against other shareholders for breach of SA
146
How else can directors leave their post?
Resignation by notice
Automatic termination (e.g. disqualification)
Retirement by rotation
147
What minority shareholder protections are there?
1. Membership Rights under Articles - enforcement under S33 CA: members can sue for damages if rights under Articles infringed e.g. right to vote
2. Shareholder Agreements
3. Shareholders' Rights under CA 2006 e.g. derivative claims
148
What % is required to demand poll vote?
10%
149
What is a derivative claim?
Exercised by a shareholder on behalf of a company where directors have breached statutory duties - can also be brought against 3rd parties for knowing assistance
150
What is the procedure for a derivative claim?
1. Obtain court permission
2. If not dismissed, court considers certain criteria
151
What is a claim for unfair prejudice?
Claim by a shareholder that company is being run in such a way that they have suffered unfair prejudice
E.g. excessive remuneration; directors dealing with associated persons; non-payment of dividends
152
What are grounds for an unfair prejudice claim?
a) Affairs are or have been conducted in an unfairly prejudicial way
b) Actual or proposed act/omission of company would be so prejudicial
153
What would not be considered unfairly prejudicial?
E.g. negligent/inept mismanagement unless serious or repeated; company policy disagreements
154
What remedies are there for unfair prejudice?
Court grants such order as it thinks fit, most common being purchase of petitioner's shares
155
What is just and equitable winding up?
Right to bring petition to court for company to be wound up on grounds that it's just and equitable to do so
156
What are the 4 tests for insolvency?
1. Cash Flow: inability to pay debts as they fall due
2. Balance Sheet: liabilities greater than assets
3. Failure to comply with statutory demand for debt over £750
4. Failure to satisfy enforcement of a judgement debt
157
What obligations are there on directors in financial difficulty?
Must continually review financial performance, and recognise when company is in financial difficulties
158
What options do directors have when facing financial difficulties?
1. Do nothing (risk personal liability & breach of director duties)
2. Do a deal (informal or formal arrangement with creditors)
3. Appoint administrator
4. Request appointment of receiver
5. Put company into liquidation
159
What is a pre-insolvency moratorium?
A period in which creditors cannot take action to enforce debts, allowing breathing space for company to resolve situation
No creditor can enforce security
Stay of legal proceedings & bar on new legal proceedings
No winding up procedures can be brought
160
How long does a moratorium last?
20 business days
Can be extended by directors for another 20 business days
Further extensions possible up to max of 1 year with consent of creditors and/or court order
161
What 2 types of formal arrangements are there? What is their advantage?
1. CVA
2. Restructuring Plan
It's legally binding if requisite majorities approve
162
What is a CVA?
Creditors agree to part payment of debts or new timetable for repayment
It must be reported to court, supervised by Insolvency Practitioner
Can be used with administration/liquidation
163
What is the effect of a CVA?
Binding on all unsecured creditors but NOT secured/preferential creditors unless they unanimously consent
164
What is the advantage of a CVA?
Directors remain in control and company continues to trade
165
What is the requisite majority needed for a CVA to be passed?
75% in value of creditors (excluding secured creditors)
A simple majority of members
166
When can a creditor challenge a CVA?
Within 28 days of CVA's approval being reported to court on grounds of unfair prejudice
167
What is a restructuring plan?
Compromises creditors & shareholders, and restructures its liabilities so company can return to insolvency
Can only be used by companies that have or likely to encounter financial difficulty
Can be used alongside moratorium & by administrators/liquidators
168
What are the advantages of a restructuring plan?
Can compromise rights and claims of secured creditors/shareholders
Can be sanctioned by court to bind all creditors even where requisite majority isn't obtained
169
What is the requisite majority needed for a restructuring plan?
75% of each class
Court sanction also
170
What is administration?
Tries to rescue the company, and if not possible, achieve a better result for creditors then liquidation
Administrator acts in interests of all creditors
171
Who are the administrators?
Qualified insolvency practitioners
172
What are the statutory objectives of administrators?
Rescue company as going concern
Achieve better result for creditors than liquidation
Realising property to make a distribution to creditors
173
What are the 2 procedures available for administration?
1. Court procedure: on application to court, court appoints administrator -> Interim Moratorium -> Administration order
2. Out of Court procedure: either company or qualifying floating charge holder appoints administrator (most common)
174
What powers does an administrator have?
Carry on business (can remove & appoint directors)
take possession and sell property (for fixed and floating charges)
Take money on security
Execute documents in company name
175
Once appointed, what does an administrator have to do?
Has 8 weeks to produce report on their proposals for future of company
If rejected = liquidation
If accepted = scheme of arrangement; CVA
176
What time limit is there for adminsitration?
12 months (can get extensions)
During which a full moratorium takes place
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What is pre-packaged administration?
Where business and assets of a company are prepared for sale to selected buyer prior to entering administration
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What is receivership?
An individual enforcement procedure which only benefits appointing creditor
Fixed charge receivers are most common
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What is liquidation?
Business wound up and assets transferred to creditors and members
Company is removed from the register and dissolved
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What function do liquidators take?
They realise company assets
They determine identity of creditors and amount owed
They pay dividend to creditors
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What powers do liquidators have?
Close business and dismiss employees
Sell assets on piece-meal basis
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What are the 2 types of liquidation?
1 Compulsory
2 Voluntary
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What is compulsory liquidation?
A court-based process:
- application to court (creditor, company, directors, administrator, CVA supervisor, administrative receiver)
- court grants petition
- Official Receiver becomes liquidator until someone else appointed
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What are the grounds for compulsory liquidation?
Unable to pay debts
Just and equitable for company to be wound up
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What are the consequences of compulsory liquidation?
Automatic stay on proceedings
Employees and directors dismissed
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When does dissolution take place for compulsory liquidation?
3 months after notice by liquidator that winding up is complete
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What are the 2 types of voluntary liquidation?
1. Members: company resolves by SR to wind up (solvent company)
2. Creditors: company resolves it's advisable to wind up due to inability to carry on business (insolvent)
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What is the procedure for MVL?
1. Directors swear declaration of solvency
2. Members pass SR to place company into MVL & OR to appoint liquidator
3. Winding up starts when SR passed
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What is the procedure for CVL?
1. Shareholders pass SR to place company into CVL & OR to appoint liquidator
2. Within 14 days of SR: directors ask creditors to approve liquidator or nominate their own which takes precedence
3. Directors send statement of company affairs to creditors
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When does dissolution take place for voluntary liquidation?
3 months from liquidator's filing of final accounts & return
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What options do individuals have for personal insolvency?
1. Do nothing
2. Do a deal
3. Declare bankruptcy
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What 2 insolvency procedures are there for individuals?
1. Bankruptcy: collective procedure for collection, sale and distribution of assets to creditors
2. IVA: contractual arrangement under which debtors forms arrangement with creditors
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What 2 types of bankruptcy petitions are there?
1. Creditors' Petition: debtor unable to pay debts; must be for liquidated sum over £5k & debtor in England and Wales
2. Debtors' Petition: debtor unable to pay debts; accompanied by statement of affairs
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What happens upon a bankruptcy order?
a) Trustee appointed or Official Receiver until creditors appoint trustee
b) Bankrupt prohibited from:
- being involved in a company, obtaining credit over £500 w/o disclosing, deprived of ownership of property except reasonable domestic needs, giving gifts
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What must a bankrupt do?
Give information and assistance to trustee
Failure to comply: fines/imprisonment
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What is bankruptcy discharge?
Bankrupt automatically discharged after 1 year
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What is the effect of an IVA?
If approved by requisite majority, binds all creditors
Can last any length of time
Nominee becomes superviser
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What are the advantages of an IVA?
Moratorium available
Alternative to bankruptcy
Binds all unsecured creditors
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What are the disadvantages of an IVA?
Could last longer
Expensive
200
What is fraudulent trading?
Gives rise to civil and criminal liability
Brought against any person who is knowingly carrying on business to defraud creditors for fraudulent purposes
Actual dishonesty must be proven which is a very high standard! On subjective basis
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Who can bring a claim for fraudulent trading?
An administrator or liquidator
202
What are the remedies available for fraudulent trading?
Person ordered to make contribution to company assets
Where person is also a director, disqualification order is likely
Criminal sanctions: fine/imprisonment
203
What is wrongful trading?
Gives rise only to civil liability
Brought against director, by liquidator or administrator
Company must be in insolvent liquidation and, at some time before commencement, director knew/ought to have known, there was no reasonable prospect would avoid insolvency
Must be proved that, director allowed continual of trading and this worsened the company's position
Insolvency proven on balance sheet test
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What is a defence to wrongful trading claim?
Every step: director took every step to minimise potential loss (applying reasonably diligent person test)
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What is the reasonably diligent person test?
Look at objective and subjective standards, and apply higher of the two
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What are examples of evidence for every step?
Voicing concerns at regular board meetings
Seeking independent advice
Ensuring adequate, up-to-date financial info is available
Suggesting reductions in overheads
Consulting lawyer/insolvency practitioner
Not incurring further debt
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What remedies are there for wrongful trading claim?
Make contribution to company assets
Disqualification order for director
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What voidable transactions are there?
Transactions at an Undervalue
Preferences
Setting Aside a Floating Charge
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What is a transaction at an undervalue?
Loss of value from a company through gifts or significant inequality in consideration, when company is insolvent
Cash flow or balance sheet test
Brought by liquidator/adminsitrator
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What are the requirements for proving a TUV?
1. Transaction: gift or unequal consideration
2. Relevant Time: 2 years preceding insolvency (regardless of connected person or not)
3. Company insolvent at time or became insolvent because of it (where connected person, insolvency presumed)
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What is a defence to a TUV?
Where company acted in good faith and for purpose of carrying on its business
At time, there were reasonable grounds to believe transaction would benefit the company
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What remedy is there for a TUV?
Restoration order
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What are preferences?
Where company does something that puts a specific creditor in a better position in event of company going into insolvent liquidation
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What requirements are there for proving a preference?
1. Relevant Time: 6 months before insolvency, extended to 2 years for connected persons
2. Company insolvent at time or became so because of it (cash flow or balance sheet)
3. Company influenced by desire to prefer creditor: subjective test - if connected person, presumption there was such desire
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What is a defence to a preference claim?
Absence of a desire to prefer
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What remedy is there for a preference?
Restoration order
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What are the requirements to set aside a floating charge?
1. Relevant Time: floating charge created within 12 months before insolvency, extended to 2 years for connected person
2. Company insolvent at time of creation or became insolvent because of it (unless connected person) (cash flow or balance sheet tes)
218
When will a floating charge be valid?
Even if requirements are met, where 'new money' is provided to company in return for charge, it'll be valid
I.e. floating charge granted to secure repayment of new loan
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What is the effect of a floating charge being set aside?
Floating charge = void but not debt itself
Can also be voidable as TUV or preference
220
What is the remedy for setting aside a floating charge?
Restoration order
221
What is the order of priority for companies?
1. Liquidator's fees & expenses in realising fixed charge assets
2. Fixed charge creditors
3. Other costs & expenses of liquidation
4. Preferential debts: 1st Tier = employees; 2nd Tier = HMRC
5. Prescribed Part fund: set aside for unsecured creditors
6. Floating Charge creditors
7. Unsecured creditors
8. Interest on Unsecured Debts
9. Shareholders
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What is the order of priority for personal insolvency?
1. Secured creditors
2. Expenses of bankruptcy
3. Specially preferred creditors
4. Preferential creditors
5. Ordinary unsecured creditors
6. Statutory interst
7. Debts of a spouse
8. Surplus to bankrupt
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What are income receipts and capital receipts?
Income receipts: money received on regular basis
Capital receipts: money received from one-off transactions
224
What are income expenditure and capital expenditure?
Income expenditure: money spent as part of day-to-day trading
Capital expenditure: money expended to purchase capital asset or enhancing capital asset - one-off transactions e.g. purchase of machinery
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What are capital allowances?
Tax equivalent of depreciation - spreads cost of capital expenditure on certain capital items over a period of time
A proportion of capital expenditure is deducted from income receipts over a period of time
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What are 2 methods HMRC assesses/collects income tax?
1. Self-Assessment
2. Deduction at Source
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What chargeable persons are there for income tax?
Employees
Sole traders
Partners
Shareholders
Lenders
Debenture hodlers
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What is the difference between total income, net income and taxable income?
Total income: taxpayer's gross income from all sources
Net income: total income LESS available tax reliefs
Taxable income: net income LESS personal allowance
229
How does one calculate income tax?
1. Calculate Total Income
2. Deduct Available Tax Reliefs to get to Net Income: interest on qualifying loans; pension contributions
3. Deduct personal allowance = Taxable Income
4. Split Taxable Income into Non-Savings, Savings & Dividend Income
5. Calculate to determine if personal savings allowance available
6. Apply relevant tax rates (in correct order: NSD)
7. Add together amounts = Total Tax Liability
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What is the personal allowance for income tax?
£12,570
It's reduced by £1 for every £2 of net income over £100,000
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What Personal savings allowance is ther?
Savings: savings income taxed at 0% for first £1,000 (if taxable income within basic rate) or £500 (taxable income exceeds basic rate but not over £150,000)
- No savings nil rate for taxable income over £150,000
Dividends: no tax payable on first £2,000 of dividend income they receive
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What anti-avoidance legislation is there for income tax?
Taxpayer cannot reduce tax liability by making gifts of shares or lump sum
233
What are the requirements for CGT?
Chargeable Disposal
Chargeable Asset
Chargeable Person (disposals between spouses exempt)
Gives rise to Chargeable Gain
234
What are the 2 main instances where CGT is charged?
1. Sale of an asset
2. Gift of an asset during lifetime
235
Where a gift is made, what is deemed the 'consideration received' for CGT purposes?
Market value when received
236
Where there is a disposal between connected persons, what is deemed the 'consideration received' for CGT purposes?
Market value irrespective of sale proceeds
237
What is the calculation for CGT?
Total Chargeable Gain LESS Carried Forward/Across Losses LESS Annual Exemption
Then apply tax rate (either 10% or 20%)
238
How does one calculate the total chargeable gain?
Sale proceeds/market value LESS disposal expenditure LESS initial expenditure LESS subsequent expenditure
This basically means sale proceeds/market value LESS allowable expenditure
239
What is the annual exemption for CGT?
£12,300
240
What is Business Asset Disposal Relief?
Reduces CGT rate from 20% to 10% for gains on qualifying disposals
241
What are 'qualifying disposals' for BADR?
All or part of trading business
Assets in business that used to trade
Shares in a trading company or company that used to trade
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What are the requirements of BADR?
1. 5% of shareholding
2. Employee/director
3. Ownership of 2 years or more
4. Not used up lifetime allowance of £1m
5. Disposal within 3 years of company ceasing to trade - for 'used to trade'
243
What is investors relief for CGT purposes?
Reduces CGT to 10%, subject to limit of £1m, for investors in unlisted trading companies holding shares for at least 3 years continuously
Qualifying shares: fully paid ordinary shares issued for cash on or after 17 March 2016; individual (or connected person) is not an officer/employee of company
244
What reliefs are there that defer liability to CGT?
1. Rollover Relief: can elect to postpone CGT where business assets are sold and replaced, by rolling over gain into replacement asset
2. Hold-Over Relief: individual gives away business asset - CGT liability postponed until donee ultimately disposes of the asset, where TUV or gift
245
What is corporation tax payable on?
All income profits & chargeable gains of a body corporate that arise in its accounting period
246
What is the calculation for corporation tax?
Total Taxable Profits = Chargeable Gains + income Profits
then apply tax rate
247
How does one calculate chargeable gains for corporation tax?
Sale proceeds LESS allowable expenditure LESS indexation allowance LESS capital losses
248
How does one calculate income profits for corporation tax calculation?
Income receipts LESS deductible expenditure LESS capital allowances LESS trading losses
249
What is deductible expenditure?
Of income nature e.g. rent, wages, repairs etc.
250
What capital allowances are there for corporation tax, concerning plant and machinery?
1. Companies can deduct 18% of value of P&M from income receipts each year on reducing balance basis - value of P&M reduced by 18% = tax written down value
2. Annual Investment Allowance: enables companies to deduct 100% of expenditure on P&M up to £1m - normal capital allowance of 18% applied to balance above £1m
251
What relief to deferring corporation tax exists?
Rollover relief: if replacement asset is bought w/in 12 months before or 3 years after sale of old asset
252
What is straddling?
Where a company's accounting year doesn't coincide with financial year, the TTP of the accounting period must be apportioned between financial years and relevant proportions of TTP must be taxed
253
What is loss relief for corporation tax?
Trading losses set off against other taxable profits
Current Year Profits
Previous Year Profits
Future Trading Profits
Group Relief
254
What are the timing requirements for corporation tax self-assessment?
1. TTP of £1,500,000 or less: pay within 9 months and one day of end of accounting period (file tax return within 12 months)
2. TTP of over £1,500,000: pay in 4 instalments
255
How is dividend income received dealt with in regards to corporation tax?
General exempt so not included in TTP
256
Can capital losses be set off against capital gains? I.e. chargeable
Yes - can't be carried back but can be carried forward
257
What anti-avoidance legislation is there for corporation tax?
Close Companies
258
What are the requirements to be a close company?
1. 5 or fewer participants; OR
2. Any no. of participators who are also directors
Company is NOT a close company if shares are quoted, or controlled by one or more non-close companies
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What effects on taxation are there for close companies?
1. Loans to Participators (must be paid w/in 9 months and 1 day)
2. Distributions
3. Inheritance Tax implications
4. Transactions in Securities Rules
260
What is output and input tax?
Output tax: charged to clients
Input tax: VAT paid on g/s supplied to person/company
A VAT registered business can offset input tax against output tax it has charged & account for difference to HMRC
261
For standard rated products, how does one find the VAT element?
Multiply price by 1/6 (as price deemed to be VAT included)
262
What 4 types of VAT supply are there?
Standard Rated: 20% - charges on its outputs & recovers VAT on inputs
Reduced Rated: 5% - on limited supplies
Zero Rated: charges 0% on outputs but can still recover VAT suffered on inputs
Exempt: doesn't charge VAT but cannot recover VAT suffered either
263
When is registration for VAT compulsory?
Taxable turnover of over £85,000 in 1 year or less - must notify HMRC within 30 days of month
264
When is registration for VAT voluntary?
Taxable turnover of less than £85, 000
265
When is de-registration from VAT available?
Where value of future annual taxable supplies won't exceed £83,000
266
What VAT records must businesses keep?
1. VAT Invoice: for standard rate supply, must give client VAT invoice within 30 days of supply & keep copy
2. VAT Return: taxable businesses must submit one every 3 months to HMRC, within 1month & 7 days after end of VAT period
3. Special Schemes
