Business Flashcards
;When is a partnership formed? What act governs the relationship, how do they pay tax and what is the liability?
- When two or more people are carrying on a business with the view of a profit.
- The Partnership Act 1980 implies a partnership agreement that can be amended expressly
- The partners pay tax as self-employed individuals
- The partners have unlimited liability
- Partnerships, subject to separate partnership agreement, are entitled to equal participation in management and equal proft
- Quick and cost effective as no formalities to open
- Partnership can employ others
- Partnership will dissolve on death or bankruptcy of any partners
- Partnership is owned collectively by partners so cannot transfer without an agreement between the partners
- The partners individual interests cannot be transferred as this would dissolve the partnership
- BRIH: 100% on value of business and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
- Can get pension relief on contributions to PRIVATE pensions (subjkect to annual and lifetime allowance)
What are limited partnerships when are they used and what are the conditions?
- Rarely used, usually for only some venture capitalists or investment fund
- Must have atleast one general partner with unlimited liability
- Can have a general partner whose liability is limited to his initial capital contribution but must satisfy the conditions:
(a) must not control or manage the LP
(b) must not have power to make binding decisions on behalf of the LP
(c) cannot take out capital contribution for as long as the LP is in business - Like LLPs, must register with the Registrar of Companies prior to trading
What can a company be limited by, what liability does a shareholder have, when does a company have a separate legal personality and when can the corporate veil be pierced?
- Shares or guarantees but we only look at shares - must be limited by shares to be PLC. Guarantee - this is usually no profits where they guarantee the debts up to a certain amount e.g £1mil
- Shareholder’s liability only amount paid for shares or amount agreed to pay for shares
- Separate personality when incorporated (allowed to use company to manage risk and limit liabilities) - Solaman v A Solaman
- Can only pierce the corporate veil when have an individual as an existing legal obligation and it uses its company to evade its obligation of frustrate enforcement. Can only deprive individual (by piercing the veil) of the benefit it would have gained from using the company’s separate legal personality.
When can a member be held to be liable beyond the cost of their shares?
1. piercing corporate veil;
2. statutory offences; or
3. the court imposing a liability in tort
How are companies run?
- Shareholders provide the money and make big decisions affecting (importnat ones) and make decisions at general meetings
- Directors run the company and make the decisions at board meetings
- Can be both but must have different hats on
- Company Act 2006 calls shareholders members
How can a company be a public limited company? Advantages? Disadvantages?
Must satisfy the conditions in CA2006:
1. State it is a PLC in its constitution
2. Use PLC in its name (or public limited co), or the welsh equivalent
3. Minimum allotted share capital of £50k (authorised minimum)
4. each alloted share must be paid up:
(a) at least a 1/4 of its nominal value; and
(b) ALL of its premium
* Cannot start a company as a PLC, only when reaches certain size, reputation etc
What are the other requirements:
1. Can have 1 member like ltd co but this is rare
2. Minimum of 2 directors (unlike ltd which can have 1)
3. Must have a company secretary
4. There is a requirement to have AGM (annual general meeting) - this is not a requirement of a ltd company
5. CANNOT pass written resolutions (unlike ltd company)
6. Cannot commence business until have a receipt of certificate from the Registrar stating the nominal value of the company’s allotted share capital is not less than the authorised minimum being £50k
Advantages and disadvantages:
* Can sell shares to the public and raise money quickly
* Can join a stock market (London Stock Exchange Main Market or Alternative Investment Market [AIM]
* Private Co can only sell to connected individuals or certain others such as specialist investors who know the risks
* PLCs are more regulated to protect the public
MUST BE LIMITED BY SHARES TO BE A PUBLIC COMPANY
PLCs can be listed or unlisted, CA 2006 does not distinguish between the two
What are LLPs, benefits etc
- Partnerships with limited liability
- Implied agreement - Limited Liability Partnership Regulations 2001 but the LLP is formed under the Limited Liability Partnership Act 2000
- Taxed as partnership, must register with HMRC as self employed
- To become one must be atleast 2 or more members carrying on a lawful business with the view of a profit
- Must file series of documents with the Registrar of Companies, and pay the required fee. Eventually once registered the Registrar will issue a cdertificate of incorporation and they will come into existence on that day
- Can pay for more expensive same day registration
Internationally, companies have a higher status!
- Good if need to raise capital: members can provide capital or LLP can borrow in its own right
- Members are automatically entitled to equal participation and profit share, subject to there being an LLP agreement
- Costly and takes time to establish, ongoing disclosure and filing requirements
- LLP can employ others
- Stat procedure needed to open and close
- LLP will be unaffected the the bankruptcy or death of a partner
- LLP is an asset of the LLP, CANNOT be freely transferred and only the LLP can do this (separate legal personality)
- Members can transfer their interest but must consider restrictions in LLP agreement
- BRIH: 100% on value of business and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
- Can get pension relief on contributions to PRIVATE pensions (subjkect to annual and lifetime allowance)
- can get a floating charge over all its assets (companies can too)
What to consider for which business medium to use?
- If want to limit personal risk then LLP or business more appropriate
- If want to carry on business cost effectively and quickly then sole p or partnerships
- If the only risk is professional negligence claim, such as a lawyer, and have PI insurance then risk is not such an issue (this is why so many law firms can be a partnership)
Sole traders: continuity, transferability, business relief for inheritance tax and pension relief?
- Sole proprietorship ends on death or bankruptcy
- The business is an asset of the owner so can transfer freely
- BRIH: 100% on value of business and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
- Can get pension relief on contributions to PRIVATE pensions (subjkect to annual and lifetime allowance)
Private company limited by shares: ownership/management, funding, continuity, transferability, tax, profits, business relief for inheritance tax and pension relief
- unlike LLPs, members have NO auto right to participate in management or for dividends. Anything to the contrary must be stated in the articles of association or a shareholder’s agreement
- Costly and time consuming to establish, ongoing disclosure and filing requirements
- Members are automatically entitled to be directions subject to alternative agreement (think, AoA or SH agreement)
- Can employ others
- Unaffected by death of member or bankruptcy
- Cannot transfer as separate legal personality, company owns itself so must transfer itself
- Can transfer shares subject to restrictions in the articles
- Members can give capital for shares, company can borrow money in its own right or can raise money through selling shares but not to the public
- Co pays corp tax on profit, members taxed personally on dividends subject to dividend allowance
- Co pays corp tax on chargeable gains, members pay CGT if sell shares
- BRIH: 100% on value of business (but cannot be on stock exchange)and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
4. Can get pension relief on PRIVATE and companypension contributions (subjkect to annual and lifetime allowance)
What are the legislative offences which mean members or directors can be asked to contribute to the assets of a company in liquidation?
Only apply when wound up! Brought by liquidator or administrator
Fraudulent trading
director will be liable for fraudulent trading if, in the course of the company being wound
up, it appears that the company’s business has been carried on with:
(a)** intent to defraud** creditors of the company or creditors of any other person; or
(b) for any fraudulent purpose.
Need intend to defraud which is hard so usually use wrongful trading.
Wrongful trading:
Co gone into insolvent liquidation and a director of the company knew or ought to have known there was no reasonable prospect of avoiding liquidation.
However, a Court will not make an order if it can be shown that the director took every step with the view of minimising the loss to the companies creditors
Transactions defraud creditors
Can happen in 2 ways:
1. Person makes a gift to another person for no consideration; or
2. Transaction for consideration of significantly less value.
Need to do with intent to put assets beyond the reach of a person making or may make a claim or to prejudice their interests in making a claim.
- discretion of court
- hard to show intent so usually last resort
- no time limit so usually used as last resort
How can liability in tort be imposed on members or officers of a company for activities carried out by or through the company?
Duty of care - parent companies
In the case of Chandler v Cape a parent company, through its conduct, assumed a duty of care for the health and safety of the employees of its subsiduary company. It breached this duty of care and therefore was liable for damages.
Negligent misstatement - officers of co
Members, directors and employees can be held personally liable for negligent mistatement made against a claimant who transacted with the company if the following conditions are met:
- There was a reasonable reliance on the claimant on an assumption of personal responsibility by the employee, director etc
- The extent of the personal responsibility created a special relationship between the claimant and the employee, director etc
What do you need to know about board meetings?
- “Reasonable notice” must be given - need not be in writing. Depends for every company. MA.
2.Quorum is 2. Director not counted if proposed decision is concerned with an actual or proposed transaction with the company that the DIRECTOR IS INTERESTED IN. MA.
3.If the director has a personal interest in propose transaction, must declare the nature and extent to the board - this cannot be excluded as its the CA. Exceptions below:- cannot reasonably be argued as likely to give rise to a condlict
- other directors are aware
- concerns terms of a service contract that have been or are to be considered by the board
- Board resolutions passed by simple majority of those present. Chair gets a casting vote in the event of a tie.
- Can pass written resolutions rather than call board meeting (any method - no prescribed form) BUT MUST ALL VOTE UNANIMOUSLY
Rules on general meeting notice?
- Must be given to all members, directors and auditors if have them. Must be given in hard copy, electric form or website. Notice must set out:
1. Time and date
2. NAture of the nusiness to discuss
3. If a special res is propsoed, a copy of the proposed special res
4. State the SH’s right to appoint a proxy. - Minimum 14 days CLEAR notice must be given. Date deemed received does not count, date of meeting does not count. If notice sent by post or email deemed received date is 48 HOURS AFTER POSTED OR EMAILED. If handed to them then its just the same day.
- Quorum is 2 subject to articles - can’t be less than this. Shareholders not prevented from being counter if interested in matter. Only not counter if:
1. REsolution to buy back SH’s shares (could be voting in their own interests)
2. Ordinary resolution to ratify directors breach (where the director is also the SH)
How to pass an ordinary or special res? Who can demand a poll vote?
In a general meeting:
1. Ordinary res passed by over half of the votes at a general meeting
2. Special res - 75% of the votes at a general meeting
Poll vote can be demanded by:
(a) the chair of the meeting;
(b) the directors;
(c) two or more persons having the right to vote on the resolution; or
(d) a person or persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution.
Requirements for GM to be held on short notice?
A majority of the number of company shareholders, who together hold 90% of voting shares must content. For public companies, must be 95%.
Requirements for a written resolution?
- Sent to every eligible member entitled to vote, as at the circulation date
- Include following info: how to signify agreement and the deadline for returning the t solution (lapse date)
- In absence of info to the contrary,
Lapse date is 28th day follow circulation regardless of method of circulation (unlike notice of GMs). Expires on midnight 28th day. Doesn’t matter what day they received
How can the shareholders demand a general meeting / written res
Written res:
- usually board res for GM or written res
- shareholders with 5% or more of voting power than require a written res to be circulated
- can be reduced by articles but not increased
- can request a statement on resolution up to a thousand words on the subject matter
- company must circulated the written red and statement in 21 days of request
- shareholders who requested must pay company’s expenses
GM:
- SH with 5% of PAID UP CAPITAL of voting rights can request GM. Request must state general nature of the meeting
- 21 days for directors to call the GM
- notice of GM must be 14 clear days minimum but must also be no more than 28 days if in response to SH’s request
- total is therefore 7 weeks from request
Companies responsibility to keep records and issue yearly accounts?
Records
Companies must keep board minutes for every board meeting and minutes of every GM, record of written resolutions at registered office or SAIL. Can elect to keep these at central register at CH. must keep for 10 years
Accounts
- directors responsibility to ensure accounts produced for each financial year and are a true and fair view of the state of affairs of the company
- directors must prepare a directors report to accompany accounts unless:
(A) micro-entity: balance sheet of no more than 316k, turnover of no more than 632k and no more than 10 employees in one financial year; or
(B) small company: balance sheet 5.1 mil, turnover 10.2 mil and 50 employees in one financial year. - directors circulate accounts, directors report and auditors report (if have one) to every SH, debenture holder and anyone entitled to receive notice of GMs
- Ltd cos publish accounts 9 months after accounting reference period, a PLCs 6 months after
- newly incorporated companies can do it 3 months after account ref period ended
- confirmation statement due 14 days from anniversary of incorporation date
Who needs an auditor, who hires them, what if they resign
- small companies exempt
- dormant companies can file an abbreviated accounts and are exempt from audit
- auditor must be sufficiently qualified (certified or chartered accountant) and independent
- first directors usually appoint auditor first but then an ordinary res by SH appoints after
- ordinary res to dismiss auditor and need SPECIAL NOTICE (later on this is described)
- auditor can resign in writing
- regardless of reasons for auditor leaving it must send company written statement of reasons
Why have a SH agreement
- SH can only take action against company for matters directly related to their rights as a member e.g voting rights
- under SH agreement can take action for any breach against other signatories
- SH agreements cannot restrict the ways in which SH can vote in board meetings if they are also a director (can’t be in breach of directors duties)
Common SH clauses:
- Bushell v Faith clauses: weighted voting rights when voting if director should be removed from office of that director is also a SH
- non compete clauses
- restrictions of transferring shares
When is a company a subsidiary and a holding a holding ?
- One company holds the MAJORITY (i.e over 50%) of voting rights in another
- Other company is a member with the right to appoint and remove majority of its board
- Other company is a member and controls alone (pursuant to member agreement drafted) the right to control the majority of voting rights
- Company is a subsidiary of a company that is a subsidiary of another
- Wholly owned subsidiary of it has no members accept that of another company
What is a promoter?
- Promoter: set up the company and liable for contracts (e.g business premises) pre cert of corp (even if for business benefit), business idea, produce the corporation docs and become first member. Sometimes a solicitor sets up the company but they won’t be considered a promoter! Contracting party can waive personal liability of the promoter but very very unusual. More academic.
- Best to draft contract and sign on incorporation, for business premises agree a novation or assignment, so the promoter is liable until the company is incorporated and then the contract will be discharged and replace with identical one. OR can purchase a shelf company.
- Promoter owe duty of good faith, duties of disclosure and not making a secret profit
What to include on memo of association and application for incorp
- Memorandum of association used to be the external rule book and Articles of association used by internal rule book. Now with the CA 2006 memo is dormant, simply as the first subscribers names on it and sent along with the application form (IN01) to Registrar of Companies to register the limited company. Application must:
o State the proposed name
o If limited by shares or guarantees (shares usually for profit, guarantees for profit)
o Will the company be private or public, most start as private but can start as public
o Issue statement of shareholding or capital
o State proposed officers, directors and secretaries
o Statement of initial significant control
o Statement of intended address (must be in UK), can give notice to the Registrar for a change in registered address. This notice must be filed in 14 days of the change taking place!
o Statement of type of company and intended principle business activities
o Copy of proposed articles of association in single documents in numbered paragraph. Unless choosing Model Articles with no amendments, then no copy. Or if amendments just need to submit amended. If bespoke, issue the bespoke - Must sign the statement of compliance!
- Fee is attached and form submitted with the application
- Sometimes members will have a shareholders agreement (only bind those who sign!) Confidential and DOES NOT NEED TO BE FILED AT CH!
Limitations on company names?
- Limitations on companies name:
o Cannot be offensive or constitute a criminal offence
o Must have public limited co or ‘plc’ (or the Welsh equivalents)
o Must have limited or ‘ltd (or the Welsh equivalents)
o Charities by guarantee may not need limited
o Can’t have same name as other company
o Can’t have name that connects you with a government body or public authority unless approved by the secretary of state e.g “England, chartered, royal, national”
o Approval is required for sensitive or restricted words “board, charity, fund, insurance, trust”
o If name chosen specifically to make someone think its an existing business the personal responsible could be liable for the tort of passing off to the existing company (but they will need to prove their loss!)
How does a company change its name?
- Companies can change their name by:
o The means provided in the articles of association – a notice will be give to the Registrar along with a statement confirming it has been done in accordance with the articles!
o A special resolution can be passed in a general meeting (75%) OR the members representing NOT LESS THAN 75% of the total voting rights agreeing to a written resolution. Co give notice of change of name, by resolution, to the Registrar. Copy of the SPECIAL RESOLUTION must be given with the notice
o Passing a special resolution to change the name conditional on a specific event happening, must give notice of change of name by conditional resolution to the Registrar, copy of the special resolution and confirm satisfaction of the conditional resolution
o CH must be notified in 15 DAYS OF the RESOLUTION
o Registrar will issue a certificate of incorporation on change of name, new name effective from cert of incor - Webcheck on CH, it can show you if there are any similar names. Also check the tradesmark register!!
Where does a companies name need to be displayed?
- Company must display its registered name at its reg office and any other office it does business or keeps available for inspection company records
- Make sure it keeps its reg name on letters, notices, invoices, website etc
- Company letters, forms and website should contain the country it was registered in
- Where a single director is name they must all be named
- If a company does not comply with these naming requirements, It is a criminal offence (unless has a REASONABLE EXCUSE). All goes back to concept of being open that the company has limited liability
How to change a companies articles? What cannot articles do?
- SPECIAL RESOLUTION to change the articles!!! At least 75% of the shareholders:
o Charterhouse Capital 2015 – any change it the articles must be in the genuine interest of the company and not just the interest of some of the members
o Copy of the special resolution and the new or amended articles need to be sent to the Registrar in 15 days of the resolution - Change of articles takes effect from the date of the resolution EXCEPT when change is to do with the companies ‘objects’. Companies after CA deemed to have unlimited objects unless specified in articles. Companies formed before 1 Oct 2009 had objects incorporated into their articles
- The alteration of a companies articles cannot force a member to take shares or increase his liability to contribute to the companies share capital or to pay money to the company
- Although member can agree in writing to be bound
What is entrenchment and how does it work?
- Fail to comply with reporting actions, an offence of company and any officers in default
- CA 2006 allows companies to contain in articles provisions of ENTRENCHMENT. Some provs in articles may be amended or appeal only upon a specific procedure (even if more restrictive than for special resolutions.
- Need a SPECIAL RESOLUTION for entrenchment provision, special filing requirements:
o CH must be notified on CC01 (notice of restriction on companies articles) or CC02 (notice of removal of restriction on companies articles) within 15 days of any amendment taking effect;
o Copy of amended articles and members resolution must be filed with companies house;
o Statement of compliance confirming compliance with restrictions to change articles have been observed
What does co sec do, how to appoint, reporting requirements?
- Co sec appointed by directors, will have OSTENSIBLE (apparent) AUTHORITY to enter administration contracts on companies behalf
- But must have implied or actual to enter commercial contracts
- Private co need not have a sec but PLCs do
- Must keep a register of secretaries (names, addresses), available for inspection for any members at companies office for free
- Must in 14 days from person becoming (or ceasing) to be sec, or from 14 days of change in particulars on register:
o Notice to the Registrar with the date the change occurred
o If a new secretary appointed, include a statement that the secretary has consented to act in that capacity
What is an annual confirmation statement and when must it be filed?
- Annual confirmation statement (CS01) – file every year at CH confirm that all information at Ch is up to date (e.g register of significant control, statement of capital. Shareholder info etc)
- Must be filed even if no changes !
- Criminal liability to company and its officers if not filed
- Limited company needs to file annual accounts with the Registrar of Companies and a Company Tax Return with HMRC
What records must a company keep and where must they be kept?
- What company records must be kept:
o Register of members
o Register of directors
o Register of persons with significant control
o Register of secretaries
o Register of service contracts
o Register of indemnities - Must also keep records of:
o Resolutions
o Minutes of general meetings
o Contracts or memos relating to the purchase of own shares
o Documents relating to the redemption or purchase of own shares out of capital
o Register of debenture holders - More records:
o Reports to members of outcome of investigation by public company into interests in its shares
o Register of interests in shares disclosed to a public company
o Instruments creating charges
o Register of charges - Records should be held in the company’s registered office
- Private companies can elect to keep some of this info on the companies house register – if make this election then notify Registrar of any changes to their statutory registers
- A register of the directors dates of birth must be kept on a private register to protect their privacy
How can a private limited company execute a contract?
- Priv lim company can be executed by:
o 2 authorised signatories
o Director and witness
o Every director and secretary
o Affixing common seal (less common)
What is a share, what must it have, what is on a share certificate, when is SH legal owner?
- Share is an interest in the company measured by sum of money
- Shares are personal property and NOT real estate
- Each share must have a fixed nominal value
- Shares may be transferred in accordance with the companies articles
- Evidence of a SH’s title to the shares is a certificate under the common seal of the company (share certificate). The key info on share cert if:
o Name of SH
o Address of SH
o Number of shares held
o Class of shares - However, SH is not legally a member until their name is entered into the Register of Members (this is the legal proof)
Types of shares? Shareholders duties?
- Types of shares – company can have as many as they like with various conditions attached (will be in articles) but common types:
o Ordinary shares – no special rights
o Preferential shares – preferred dividends over other shares
o Cumulative preference shares – if not paid out this year will be carried over to a year of proft
o Redeemable shares – at option of company or SH, shares will be brought back by company - Can’t have just redeemable shares
- Shareholders have duty to pay for shares when called upon to do so
- Articles are a statutory contract that bind the members and company
- Company can enforce articles against members (e.g not paying up shares) and vice versa
Shareholder’s rights?
- Shareholders have a number of rights:
o Right (can’t be taken away) to remove directors
o Right (can’t be take away) to change articles
o Voting rights on issues that affect the whole company
o Receive notice of meetings and attend and vote meetings (or appoint a proxy to vote)
o SH right to transfer their shares subject to restrictions in articles- – articles allowed to restrict as they wish e.g to keep power in a family etc
o Directors have the power to refuse register of shares if partly paid and disapprove of SH (e.g don’t think have money to pay shares).
o If a company wants restrict who has power in a company, they will often have complex pre-emption provisions which means before a SH sells their shares they will have to offer to sell them to other shareholders
o When SH dies go to estate – company will except evidence of probate to establish rights or personal reps
o Rights to receive dividends, subject to declaration by directors – can only be paid out of profits ‘available for purpose’ i.e accumulated, realised profits. Directors need to be the one to approve, as they may want to use profits for other reasons (e.g interest on debenture). If a director illegally paid dividend, breach of fiduciary duty e.g may be liable to repay or account for profit. If member knows, or reasonable grounds, is liable to repay the dividend. Ignorance of law not defence!
o Bonus/salary income expense so set against taxable profits. Dividend paid out of after tax profits
o Right to receive annual accounts and reports of a private company in 9 months from the end of the account reference period (or earlier if filed earlier). Duty lies with the company who must send them to every member unless do not have current address
o Rights to share in the proceeds if the company liquidates, remaining assets after creditors have been paid (distribution of capital, then surplus capital).
o Statutory right to bring action against the directors
What needs to be on the register of members, who gets to see it, where must it be kept, when must it be updated?
- Register of members:
o Name, address of members
o Date became member and ceased to be member
o For companies with share capital, the register must include statement of shares held by each member and amount paid - If co has 1 member, then the register of members must state this!
- More than 50 members? Keep an index of members (unless the register dos anyway)
- Keep available the register of members at the registered address
- Notify Registrar where the register is kept (Sail location) and if it changes
- Must be available for inspection for general public or members (but public may need to pay fee whereas members must be free)
- Where a request is made, company must comply in 5 DAYS or apply to court to refuse if it believes its not for a PROPER PURPOSE. Notify the person.
- Keep register updated but do not need to immediately notify companies house of the changes (e.g transfer of ownership) as this should be reflected in the annual confirmation statement.
- Private company can keep register on companies house and doesn’t have to keep register of members (ceases if no longer a private company) or withdraws electrion
What needs to be on the register of PSC, who gets to see it, where must it be kept, when must it be updated?
- Register of people with significant control
- FCA regime (or companies with voting shares on overseas markets) excluded
- Significant control if:
o Holding (directly or indirectly) more than 25% of shares
o Holding (directly or indirectly) more than 25% of voting rights
o Holding (directly or indirectly) to remove or appoint majority of board
o Having right to exercise, or actually exercise, significant control or influence over the company
o Having right to exercise, or actually exercise, significant control or influence over a trust or firm with no legal personality which meets one of the above conditions - Companies must take steps to discover if anyone fulfils these conditions
- Name, address, date, which condition is met
- Record any changes in 14 DAYS OF CHANGE and must notify companies house IN A FURTHER 14 DAYS. Info is public on CH
Are the articles and special resolutions binding, what can be enforced aaginst the company by SHs? SH agreements?
- Effect of CA 2006
- Articles and spec res binds company and members (as a contract)
- Only membership rights can be enforced:
o Right to dividend
o Right to vote at meetings
o Right to share in surplus - Articles will only give rights to capacity as MEMBERS no other outside capacity (e.g right that a member will always get to be a director is NOT enforceable)
- Shareholder agreements:
o Can enforce all rights in shareholders against other signatories
o E.g certain matters can’t be carried out unless approved by minority shareholders
What are derivative claims?
- Derivative claims can be brought by a shareholder on behalf of the company against the director (or another) for damage caused by negligence, default or breach of trust. Not a personal right, it is exercised on behalf of the company:
o Must first bring a prima facie case to proceed (can be penalised on costs if vexatious)
o If successful, compensation goes to the company but the derivative shareholder should be recovered costs (but costs met by company too) - Allows SH to bring action (usually the directors would) so if directors refusing then SH can bring a derivative claim
- Claimant is the company
- Defendant is usually director but can be another
- Useful as often the board won;y want to bring a claim against a fellow director
Court MUST refuse at permission stage if:
1. Court will not allow claim if individual brining claim is not trying to promote the success of the company
2. Where cause of action arises from act/omission that has not occurred yet but has been authorited by the company
3. act/omission has occured but has been ratified by the company
Court must also take into account:
1. Is the SH acting in good faith
2. wherther past or future action authorisied and if not would it be likely to be authorised
3. Has company not decided to pursue claim
4. Does cause of action give rise to action member could pursue in their own rigjt
The legal costs of making an application to continue a derivative claim are met by the
applicant shareholder if permission to continue is refused. If permission to continue is granted, the company will meet all of the legal costs of the claim, as well as the other party’s legal
costs if the claim is unsuccessful
What is an unfair prejudice claim?
- Unfair prejudice claims, if affairs of company carried it (or are going to be) in a manner “unfairly prejudicial” to interests to some or all of the member, any member who has been prejudiced can apply to Court for relief. No need to show bad faith or conscious intent to be unfair
- Objective test for what is ‘unfair prejudice’
- If Court is satisfied unfair prejudice has taken place it can make any order that it sees fit including:
o Order regulating companies future conduct of its affairs
o Order not making any changes to its articles without court’s permission
o Authorising civil proceedings on companies behalf
o Requiring company to refrain from doing or continuing act complained of
o Other SH’s who caused unfair prejudice to purchase share’s of prejudiced SH (or company buy back) - Company’s affairs considered unfairly prejudicial:
o Failure to pay dividends in favour of directors giving themselves bonuses
o Failure to lay accounts before shareholders
o Delaying holding general meetings
o Altering articles to exclude pre-emptive provisions or vary voting rights
o Other directors giving themselves excessive remuneration - SH can recover damages on his behalf rather than from the company
- Sec of state may apply to Court for an order for fraud on the minority and wrongdoer control instead of a winding up petition. Must have received inspector report (require docs and information)
- Can be wound up by court if court considers it ‘just and equitable’ to do so. Even if still solvent!!:
o Happened when a company is intended to be run as a partnership and there are grounds for dissolving a true partnership (e.g shareholder excluded from managing business, or there is a deadline between the shareholders)
o Conduct of company’s affair is oppressive to some shareholderds
o Company formed or run for an illegal purpose
o Rare
What is the principle of reflective loss?
- Principle of reflective loss – SH cannot bring a claim for deduction in value of shareholding caused to the company by a wrongdoer . This is to prevent double recovery. Does not apply to ordinary creditor.
Written resolutions, requisition general meeting and poll vote?
Written res:
- Most decisions in private company made by written resolution
- Resolution passed when majority is met (automatically)
- Articles may state conditions on members voting right
- SH’s who have 5% or mroe of voting righs in company are entitled to require a written res
- auto passed when over half votes of all eligible members (or 75% at least for special res)
- Can reduce below 5% in articles but not increase
- SH can remand written res and can require statement of up to 100 words on subject matter
- Must be done in 21 days of requesr
- SH must pay companies expenses
Requisition general meeting:
- SHs representing 5% of the PAID UP CAPITAL of company as carries the right of voting at GMs (bit different to written res)
- Directors must call it in 21 days
- Max 28 days notice (7 weeks total for meeting from request)
- Poll: 1 vote for 1 share rather than a vote per person – general meeting
- If member not available for meeting can get a proxy
- -Provision in article will be void if it states that a poll cannot be validly demanded by either:
o Any 5 or more members having the right to vote on the resolution; or
o The holders of NOT LESS THAN 10% of the voting rights of all the members having the right to vote on the resolution - Notice of company resolutions:
o Circulate a notice of intention to propose a resolution to its members
o If a company has an auditor they must send copies or notify them of the contents of all proposed resolutions
o Delivery any special resolutions to companies house in 15 days of passing
What can shareholders give directors permission to do?
What decisions can employees make?
- EEnter contracts that benefit them personally (e.g buying prop from director) - SH cannot enter into contracts on behalf of the company, but can give permission!
- Employees can make decision in their job description
Can SH override a directors decision? What is an exec/non xec director. What is the chair?
Who appoints directors and when does a director cease to be a director? Registeration requirements for new director? If a SH is a director and a SH can they think about their own interests when voting?
- The company’s shareholders cannot override or retrospectively alter a decision, but they
do have prior veto over the directors’ actions in certain circumstances. For example, if the
directors want to enter into a substantial property transaction, the shareholders must first
approve this by ordinary resolution. - Exec director = appointed under a service contract, appointed to board
Non exec = no service contract, on companies house, no salary but directors fees for atending board meetings, also appointed to the board, company in public companies as oftena requirement to stop poor decision making by directors who are too heavily involved in decision to be objective. - Chair appointed by board, get casting vote in board meetings (and run them), chair general meetings, in PLCs often figureheard for dealing with SHs and outside company.
- De-facto director - someone acting as a director but nto appointed (carrying out the job of director)
Shadow director - someone in background with control over directors and not appointed (think lender or SH) - only governing majority of directors need to follow instructions
BOTH DEFACTO AN SHADOW subject to director duties, doesn’t matter that they haven’t been appointed
- First directors take office via the IN01 application, model articles lets the board or ordinary resolution appoint further directors (obviously board res is quicker but if having a GM or sending around a written res then may do it then)
- Cease to be director if bankrupt or too mentally or phsyically unwell to be director and may remain so for MORE THAN 3 months
- New human director noted on for AP01 and ifled within 14 days of appointment
- New corporate director AP02, also 14 day filing
- Add on register of directors
- If director and SH can only think about own interests when voting as a SH not a director
Types of director authority? Directors services contracts and types of resolution.
- Actual authority:
(a) Express - may be in service contract or following a conversation with the board
(b) Implied acual - not expressly said but has acted this way in past and not been prohibited - Apparent (ostensible) authority = principal (being the company) holds out to a third party that the director has authority (e.g they are called the “retail director” so seems like they have permission to enter retail contracts). Binding - company estopped from denying the authority
If don’t have actual (express or implied) or ostensible/apparent then binding on director personally
Directors service contracts:
- Board res if less than 2 years
- Ordinary res if over 2 years (but not if not a guaranteed term i.e have a notice period - 10 year contract with 1 year notice period is board res)
- If not ordinary res then the over 2 year guaranteed bit gets struck out but not the remainder of the service contract - terminaton would be on “rasonable notice”
- If only have 2 directors can’t approve service contract - director in question won’t be counted in quorum as personally interest. Either change quorum in articles by special res or temporarily suspend MA14 using MA14(3) which allows temp suspension - MA14 stops directors voting when personal interest
If ordinary res for service contract:
- Memorandum of proposed service contract must be availible for 15 DAYS before GM and at the GM
- If written res, memo of proposed contract must be circulated with written res
- Keep memo at reg office/SAIL for whole term PLUS 1 YEAR AFTER
- Availible for inspection by shareholder for free - must comply with request in 7 days
How to remove a director?
One way of a directorship ending is by resignation. If a director resigns, they must complete
form TM01 (if they are an individual), or form TM 02, if the director is a company, within
14 days of resignation
SH proposal to remove director by ordinary res
A shareholder wishing to propose a resolution to remove a director must give special notice of his intention to the company. On receipt of this special notice, the board of directors must call a general meeting of the shareholders of the company to consider the proposed resolution. This general meeting must take place no earlier than 28 days from the date the company received the special notice.
Notice of the general meeting is then sent to all shareholders and to the director in question - if practiceable then at same time as special notice but if not then 14 days before GM (e.g advertisement in newspaper). This director may make written representations in response to the proposal to remove him and, if practicable, the company must circulate these representations to the shareholders prior to the meeting. Special notice gives the director time to prepare and get legal advice
Director proposal to remove director by ordinary res
- to comply with ‘special notice’ just prepare a formal notice of intention to propose ordinary res and keep at reg office or SAIL for inspection
- Then tell director straight away
- Bushell v Faith clause - may be in article and gives a director (who is also a share holder) additional voting power at GM when considering if remove him
CANNOT REMOVE DIRECTOR BY WRITTEN RESOLUTION
What are the directors duties? Remedies for breach of duty? How to ratify breach? What is s182?
The duties are owed to the company itself, not the creditors or shareholders.
Fiduciary duties:
- Director to act within his powers (i.e act in the companies constitution and for the intended purpose) s171
- Promote the success of the company - SUBJECTIVE TEST so hard to prove, director need only show they genuinely thought they were acting in the companies best interests consider s172:
(a) consequences of decisions in the long run
(b) companies employees
(c) business relationships
(d) impact on the community and environment
(e) reputation of the company
(f) the need to act fairly between members - Duty to exercise independant judgment (not negated by acting within the companies constitution or in accordance with agreements entered into by the company) s173
- Duty to exercise reasonable skill and care (akin to negligence) s174:
(a) Objective standard i.e reasonable director
(b) Any special skills e.g finance director would have accountancy skills - subjective - Duty to avoid conflicts of interest s175:
* If company chose not to take advantage of the matter is irrelevant
* It is important to note that the duty does not apply to a conflict of interest arising in relation
to a transaction or arrangement with the company – for this section to apply, it must relate to
a contract in which the company is not involved
* No breach of not likely to give rise to a conflict
* No breach if authorised by directors (will not count in vote to authorise any infringement even if MA14 has been disapplied!)
* This means that a board resolution authorising the breach or potential breach is enough to protect the director in question from a claim for breach of duty under this section. - Duty to not accept benefits from third party s176
* if take benefit still breach even if don’t give favourable terms as a result - Duty to declare interest in proposed transaction s177
* relates to contracts company IS A PARTY TO
* Declare nature and extent of interest - cannot exclude this
* Must be BEFORE company enters transaction - no precribed form
* Normal exceptions: directors aware, not give rise to conflict, director isn’t aware of arrangement, if concerns terms of directors contracts
Remedies:
Enforce like any normal fiduciary breach:
1. Account for profits
2. Equitable compensation for companies loss
3. Recission of contract entered into as a direct or indirect result of a breach
4. Injunction to prevent further breaches
5. Restoration of property transferred as a result of breach of duty
6. For s174- negligence damages
Ratify breach:
- Ordinary res
- Director’s vote does not count even if SH
- If ratified then didn’t breach
- Connected SH vote does not count in GM
s182:
* If a director is interested in a transaction ALREADY ENTERED INTO BY COMPANY
* Need to inform of interest as soon as reasonably practiceable
* Doesn’t apply if already declared under s177
* More formal notice: must be made at a meeting of the directors or by notice in writing sent to all directors or by general notice of interest given at board meeting
* Criminal offence punishable by time whereas s177 is only civil
Claims made against directors of insolvent companies?
Wrongful trading
Company can order director to contribute if:
1. Company in insolvent liquidation or admin
2. Person was a director at the time
3. Director knew, or ought to have known, there were no prospects of avoiding liquidation
Defence: Took every step with view to minimising potential loss to creditors
Standard expected:reasonable diligent person of (a) general knowlege of director (objective) and (b) special skills of director (subjective)
Minimising risk:
- legal legal or professional accountant advice at **first sign **of trouble
- Limit spending of company
- Check accounts reguarly
- Make record of own actions
Brought by the liquidator or administrator and only on insolvency
Fraudulent trading
- Intent to defraud creditors so hard to prove
- Criminal conviction
- Wrongful and fraudulent trading often brought together
Misfeasance
Misfeasance is **breach of any fiduciary or other duty by directors. **Under s 212 IA 1986, during the course of the winding up of the company, directors may be ordered to contribute to the company’s assets by way of compensation in respect of the misfeasance. They may also be ordered to repay, restore or account for any money or property or any part of it that has been misapplied in breach of duty
Loans to directors? what authorisation is needed etc
- Must have authorisation by way of ordinary resolution
- If the director getting a loan is also a director of a holding company then the hold co must also pass ordinary res
- 15 days before GM memo of written res must be avaiilible for inspection at reg office
- If written res send memo with it
Exceptions:
1. Expenditure on company business up to £50,000
2. Defending civil or criminal proceedings in relation to the company or related company
3. Defending onself against regulatory proceedings in investigation
4. Minor and business transactions any relevant transaction does not exceed £10,000
- No ordinary res? VOIDABLE
- Director, and any other that authorised, are jointly and severally liable to company for the loss (indemnify)
- Transaction mostly likely voided by insolvency practitioner
- The transaction can be affirmed in a reasonable time by ordinary resolution and then no longer voidable
Substantial property transactions? What are they, how to authorise and exceptions to authorisations, effects of breach
What is a SPT:
1. A director or someone connected
2. Buys or sells something to the company
3. Which is a NON CASH ASSET (as loans are delt with differently)
4. Of substantial value
- If want to do a SPT then need ordinary resolution authority
- If director or connected person is director of holding company then must also be approved by ordinary res of holding company
Who is connected:
Member of director’s family
1. Spouse/civil partner
2. Child or stepchild
3. Parents
4. Someone in enduring relationship as their partner; and
5. Child of enduring relationship
Company in which director (or connected person):
1. Owns atleast 20% of the companies shares; or
2. Entitled to control 20% of the companies voting power at a general meeting
(if I was a director of company A and bought a house worth 110k from company B. I have 10% share in company B and so does james. We add them together to create 20% so it is an SPT).
What is substantial:
- Auto if OVER £100k
- More than £5,000 AND more than 10% of net asset value - can find net asset value on balance sheet, essentially the companies assets less liabilities
Exceptions to needing an ordinary res:
1. A SPT when a company is a wholly subsid of another company
2. transaction between company and a person in his character as a member of the company
3. Transaction between holding company and its wholly owned subsid
4. Transactions between 2 wholly only subsids of same holding comp
Effects of breach:
* voidable if don’t get permission
* May have to account for profit or indemnify for loss
* Inc director of co or its holding company who enered the transaction, who authorised the transaction, any person who entered and is connected to director
Payment for loss of office?
When a directorship ends, the director will often receive payment. Sometimes the director
will be legally entitled to a payment under the terms of their service contract. Sometimes the
director will be entitled to compensation for unfair or wrongful dismissal or discrimination. The
company must pay those sums because it is under a legal obligation to do so. However, any payments of £200 or more other than those to which the director is legally entitled can only be paid with the prior agreement of shareholders by ordinary resolution (s 217 CA 2006).The requirement to obtain an ordinary resolution applies not only to payments to a director but also to:
* payments to past directors;
* payments to a person connected with a director;
* payments to any person at the direction of, or for the benefit of, a director or a person
connected with a director
Just like with loans to directors (or services contracts) memo of proposed payment availible 15 days before GM or sent with written resolution.
Includes shadow director
Other liabilities of directors?
There are numerous other ways directors can be held liable in connection with their office. The
most significant ways are listed below:
1. Failure to maintain company records is an offence punishable by a fine (s 1135 CA
2006). If the records in question are accounting records, the director(s) in default can be
imprisoned for up to two years (s 389).
2. There are also specific offences relating to the failure to file certain documents at
Companies House. For example, failure to file a special resolution or a memorandum
setting out its terms at Companies House within 15 days of it being passed is an offence
punishable by fine (s 30 CA 2006).
3. Liability for financial records (s 463 CA 2006). Directors face potential criminal and civil
liability for breaches of the law regarding their responsibility for the company’s accounts
and related reports, for example, compensation for loss resulting from any misleading or untrue statement in the directors’ report.
4. Liability for breach of health and safety legislation, namely the Health and Safety at Work Act 1974. Directors can be imprisoned for up to two years and fined up to £20,000 for
breaches of this legislation. If somebody dies due to management failure, directors can
be liable for the common law offence of gross negligence manslaughter.
5. Bribery – the scope of the Bribery Act 2010 is wide and it is easy to see how seemingly
innocent behaviour could be caught by it without the director in question realising.
6. Making political donations without shareholder approval.
7. Civil and criminal liability under environmental legislation, for example the Environmental
Protection Act 1990.
What can directors be disqualified for? What is the effect? What factord go against or aid them?
2 - 15 year disqualification (length depends on behaviour to do with offence and previous behaviour):
1. indictable offence conviction
2. Persistently breaching company legislation
3. Fraud on winding up
4. Faiure to file notices or documents required (summary conviction)
5. Unfit director of an insolvent company (most common)
6. A finding of unfitness after an investigation
7. Fraud/wrongful trading
8. Breach of competition law
2 years - breach of fiduciary duties and failing to file notices
15 years - seeking money from investors for an insolvent company
Most common: unifit director of insolvent company (consider, misfeasance, extent of failure to comply with CA, transactions at undervalue or or preferences)
Factors that will count against a director:
- Using tax money as working capital (trading on crown money)
- Excessive director remuneration
- Recklessly trading whilst insolvent
In favour:
- took legal/account advice at first sign of trouble
- personal financial investment into company
Effect of disqualification order:
- Need leave from Court to be director or manage company
- Rare to get
- May get leave if: director not dishonest, business profitable and unlikely to be insolvent, other directors can chec up on him
- Contravene? 2 to 5 years in jail
- If disqualified then the director is personally liable for the debts of the company managed whilst disqualified
What are the ways a company obtains finance? What are the 3 ways that shares can change hands?
Finance types:
1. Shareholders give money or property for shares = equity finance
2. Borrow money to expand or run company = debt finance
Shares changing hands:
1. Allotting new shares, selling to existing on new SH, issue share certificate and put on register of members (consideration can be property)
2. Transfer, SH sells or gives shares to another SH or someone new
3. Buyback, where company buys back some of its shares (reverse of allotment)
Lots of statutory restrictions on allotment and buyback to stop SHs who have invested a lot being annoyed by change in power
Difference between alloting and issuing shares? What are the 3 things to consider when alloting new shares?
Allotting =person acquires right to be included on reg of members, new shares transferred and paid for and board resolution has been passed to register the transfer
Issue = new SH been added to register of members
Questions:
1. Are there constitutionary restrictions on allotments (something in the articles)
- More relevant for companies incorporated pre October 2009 - i.e when CA 2006 came into effect. All memos of association used to contain upper limit called Authorised Share Capital, when CA came into effect all the memos move to the articles. If Articles haven’t been chanced since CA came into effect ASC will still be in articles.
- To changed, don’t have to use a special res like normal, can use ordinary res under the transitional regulations - exception to rule re special res
- Copy of ordinery res must be FILED at CH
- Post Oct 2009 may have an upper limit if articles so check but don’t have to have one - to change will need special res
- Do the directors have authority to allot the shares
Can be SH or board decision depending on the company:
(a) private company with 1 class of shares incorporated after CA 2006 - if have 1 type of shares before and after allotment then need only be board res decision (power under s550 of CA 2006)
(b) private company with 1 class of shares incorporated before CA 2006 - need an ordinary resolution to activate s550
Power under s550 can be restricted or removed in articles!
(c) public or private companies with one than 1 class of shares before OR after allotment - need ordinary resolution according to s551. The ordinary res must state (i) max number of shares may allot (b) date the authority will expire and cannot be more than 5 years from date of the ordinary res - once expired can extend by another ordinary res for another 5 years. OR: articles may give authority and state (i) max number can allot (ii) date it will expire and can’t exceed 5 years from company incorporation
s551 - another exception to amending articles withotu special res. The ordinary res must be filed at CH
- Are there pre-emption rights?
What are pre-emptive rights, when are they incorporated can they be excluded and what do they mean?
Are there pre-emption rights?
- s561 - if allotting ordinary shares that give a right to vote (or shares which can be converted to ordinary shares) must first offer to current SHs on same or more favourable terms
- Must offer SHs the proportion of shares (as resonably practiceable) so they can keep same power in company. if I have 2 shares James has 1 and Nala has 1, before offering 4 shares to Archie must first offer 2 to me, 1 to James and 1 to Nala
- Basically first right of refusal
- Consider - if I have 60% of shares of company then I need to be offered 60% of new shares
- Offer must: (i) state period for acceptance (ii) offer cannot be withdrawn before expiry and (iii) must be atleast 14 days. Only if do not accept can offer to others
When don’t pre-emption rights apply:
1. To bonus shares;
2. Consideration of whole or part is not cash
3. Doesn’t apply if being allotted or transferred due to employee share scheme
Pre-emption rights in articles:
1. Private company cna exclude but PLC cannot (either generally or re specific allotments) - before advising on premption rights CHECK ARTICLES HAVEN’T EXCLUDED THEM (only Ltd)
2. Can amend article by special res
3. Model articles are silent so have stat pre-emption for allotment of ordinary shares but nothing else inc transfer
4. Often s561 pre-emption rights excluded in articles so they can have a more tailored approach i.e maybe 21 days instead of 14
Can disapply pre-emptive rights by special resolution in different ways depending on company:
1. private co with 1 type of shares incorp after Otober 2009 - SHs pass special resolution under s569 (same type of companies thar can have directors allotting shares under s550)
- PLCs or Ltds with more than 1 type of share - don’t have authority under s550 need to pass ordinary res under s551 (as above). if the ordinary res gave (1) general authority to allot then s570 allows the company to remove pre-emption by passing a special resolution (will last as long as directors authority under s551 i.e no longer than 5 years unless extend) or if ordinary res gave (2) authority to allot in relation to a specific allotment, can use special resolution but conditions must be met s571:
(i) Special resolution must be recommended by the directions; and
(ii) Before proposing the special res, the directors must make a written statement that (a) gives reasons for the recommendation 9b) the amount the puchaser will pay and (c) director’s justification for the amount.
It is an offence to knowingly or recklessly authorise or permit the inclusion of any matter that is misleading, false or deceptive in a material particular in the directors’ written statement (s 572 CA 2006).
Make sense just to pass ordinary res for general authority rather than specific allotment to avoid procedure in s571. Any company can use s571 (but why would they want to) need not be more than 1 share type or PLC.
When must shareholder’s pay for shares? What are premiums on shares?
- If MA21 applies then upfront
- If MA21 disapplied can partly pay but must pay when contractually obliged or when Co wound up
- If company does well then may have premium for share. I.e nominal value is £1 but may be transferred or allotted of £1.50 - allotted at a premium!
- The excess consideration must be recorded in a seperate share premium account on the company’s balance sheet - will be treated as share capital
Process for allotting new shares?
- Prepare minuts for every general meeting and board meeting and keep availible for inspection at reg office or SAIL
Process:
- All special resolutions to be filed at CH in 15 days and the following ordinary resolutions must be filed in 15 days
(a) Ordinary res removing ASC under transition arrangements for pre Oct 2009 company
(b) Ordinary res activating s550 in old company
(c) Ordinary res authorising directors to allot under s 551 - Forms to send to CH:
(a) Return of allotment and statement of capital (Form SH01) in 1 month of the allotment
(b) Forms if new person with sig control or change of percentage band or person ceasing to have significant control (register amended in 14 days of change and then filed in further 14 days) - Amend the companies register:
(a) Amend reg of members in 2 months
(b) Amend PSC if necessary (amend in 14 days of the change) - prepare share certificates in 2 months of allotment
How to transfer shares and are there any statutory restrictions?
- No statuorty pre-emptive rights but check articles for bespoke ones
- Nothing in CA 2006 to restrict but often restrictions in the articles
- Articles cannot restrict a shareholder seller shares
- However, MA26 gives the board discretion to not admit someone on the register of members i.e if don’t think can pay. This would make them only the beneficial owner of the shares and not the legal owner. This means if a GM was held on the legal owner could go but must vote in accordance with the beneficial owner’s wishes). Dividends will be paid to the legal owner but they must pay to the bene.
How are shares transferred:
1. transferor complete stock transfer form and give to transferee with the share certificate
2. if shares over £1,000 have to pay 0.5% stamp duty rounded UP to nearesr £5. Minimum stamp duty is £5. No stamp duty if gift!!!!!!!
3. transferee then send share cert and stock transfer form to company
4. Company send new share cert in their name in 2 months
5. Company must enter their name on register of members in 2 months
6. Notify the registrar of ownership change in the annual confirmation statement
Transmission of shares is an automatic process whereby:
* if a shareholder dies, their shares automatically pass to their personal representatives (PRs); or
* if a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy.
Under MA 27, the trustee in bankruptcy and the PRs do not become shareholders of the company, but they are entitled to any dividends declared on the shares
What is maintenance of share capital?
Principles of company law that share capital fund cannot be reduced as creditor’s look to the fund for payment of debts owed. This means paid up share capital cannot be returned to SH and owed share capital cannot be reduced.
Consequences:
1. Can’t pay dividends out of capital
2. Company must not purchase its own shares
Exceptions:
1. Company can buy back shares if used correct process
2. Company can purchase its own shares pursuant to Court order to buy back shares of unfairly prejudiced minority SHs
3. Company can return capital to SHs after payment of debts on winding up
Directors must consider if buying back shares is good for company and use skill and care pursuant ot s174 of CA 2006. Buying back means less capital for creditors and reduction in profits. companies can often justify buyback on
the basis that it is better for the company in the long run to buy out a disgruntled shareholder than continue to work with them in an unproductive way, especially if that shareholder is also a director and their resignation was conditional on the company buying back their shares.
How does a company buy back is shares?
There are stock market puchases and off-market purchases. Focus on later as this is what limited companies use.
Strict requirements under CA 2006 to buy back shares:
1. Artcles cannot forbid it
2. Shares must be fully paid up
3. The company must pay for the shares at the time of purchase
4. Must be paid out of distributable profits (bottom half of a companies balance sheet) or proceeds of freshly issued shares
5. Shareholders must pass an ordinary resolution authorising the buyback contract
6. Company of buyback contract or summary must be availible for inspection 15 days before GM, or issued with written resolution
7. Copy of contract or memo at reg office / SAIL for inspection for 10 years starting with date of buyback
Procedure:
1. Check no restrictions in articles and confirm there are profits to buy back and shares are paid up
2. Board meeting: approve draft terms, decide finance method and resolve to call GM or propose written res
3. Contract/memo for inspection 15 days before or sent with written res
4. Written res sent to authorise buyback and holders of shares CANNOT vote, or GM to pass ordinary res and SH can vote but res is invalid if passed because of their vote. Contract must be availible at GM
5. Keep board and GM minutes for written resolutions for 10 years
6. if passed, board meeting to resolve entering the contract and one or two directors given authority to enter contract
7. After completion: file purchase of own shares and notice of cancellation of shares within 28 days of completion.
8. Keep copy of contract at reg or SAIL for 10 years
9. Cancel the shares and update reg of members and PSC if required
Buyback of shares out of capital conditions:
Private companies can buyback out of capital unless articles restrict it. PLCs cannot. Ltd must first exhaust distributable profits. Means shares will be brought partly with profits and partly capital.
Conditions:
1. Directors statement of solvency no sooner than 1 week before GM and stating it will remain solvent for 1 year following buyback. If do, seller of shares and directors may have to contribute to financial loss of company and directors can face criminal sanctions for making statement without reasonable grounds.
- Statement must have audiotr’s report appended stating they do not know of anything to suggest the director’s statement is unreasonable
- Special resolution to authorise buyback from capital in addition to an ordinary res for the buyback
- Statement of solvency and auditors report must be availible to members, if written res must send with it. If GM then statement and report must be at GM. If not complied with then special res ineffective
- In 7 days of the SR being passed must put a notice in the London Gazette stating SH approved buyback out of capital. State that creditors have 5 weeks following SR to apply for order preventing buyback out of capital. Publish equivalent notice in national newspaper where comp is registered or give a notice to each creditor.
- File statement & auditor’s report at CH at same time, or before, notice in London Gazette and the newspaper
- Statement & auditor’s report availible for inspection at registered office or SAIL from time company publoshes first notice until 5 weeks after passing of special res as this is how long creditors have to apply for an order.
- If no creditor objects, board resolution can be passed to enter into the buyback contract. Pay no earlier than 5 weeks after SR but no later than 7 weeks. Essentially have 2 weeks after the 5 week period for creditors objecting as expired.
What are dividends?
SH make money in two ways:
1. Increased value of shares
2. Dividends
The latter is only paid if the comany has distributable profits avaiible for the purpose. Shown on bottom hafl of balance sheet (under profit/loss reserve).
If made no profit in a year, can use profit from a previous year if it wishes.
MA30 - directors who recommend dividends and how much. SHs then pass an ordinary resolution to approve this (i.e “declare” it).
What are the types of debt finance?
Two types:
1. Loans
2. Debt securities
- Check if allowed to borrow under articles
- MA don’t place restrictions
- If pre Oct 2009 company also check memorandum of association
- MA 3 gives director authority but if don’t have model articles check no restrictions
- Equity finance tightly controlled by CA 2006 whereas debt finance is contract law
- Check for restrictions in partnership agreements for partnerships borrowing money (can only change by unanimous vote)
Types of loans
(a) secured = lender gives loan for security (e.g property) or (b) unsecured. Higher interest for unsecured.
Overdraft facility
- Max amoutn agreed by bank in advance
- Uncommitted facility (payable on demand so bank can require payment at any time with no notice)
- Won’t in practice demand unless company in financial trouble
- Compound interest meaning unpaid interest is added to capital and pay interest on it
Term loans
In a term loan, the business borrows a fixed amount of money, usually from a bank, for a specified period (ie term), at the end of which it must all be repaid. The borrower must also pay interest at regular intervals. Term loans are typically used by a business to purchase a capital asset, such as land, building or machinery. Usually secured.
A term loan may allow the business to draw down, that is, take out, the loan all in one go, or to take it in instalments on, or by, agreed dates. The advantage of taking the money in instalments is that this will reduce interest payments. the bank can only request repayment under the terms of the contract and not on demand. Bilateral or syndicated.
greater certainty than an overdraft, which is repayable on demand, and the borrower has greater control because the bank can only request repayment under the terms of the contract. The disadvantages are the time and expense in negotiating and agreeing all the legal documentation for such a loan and the fact that, once repaid, the money cannot then be re-borrowed by the business
Revolving credit facilities
the bank agrees to make available a maximum amount of money to the business throughout the agreed period of the revolving credit facility. During the lifetime of the facility, the business can borrow and repay money. Interest is payable at regular intervals. The business is also able to reborrow amounts that it has already repaid, so long as it does not exceed the overall maximum figure. They are useful for businesses whose income is not evenly distributed throughout the year. Securd or unsecured but usually secured. Bilateral or syndicated.
very flexible means of borrowing money and it is possible to reduce the total amount of interest payable
by reducing borrowings. The disadvantages of a revolving credit facility for the business are the time and expense in negotiating and agreeing all the legal documentation for the loan and the high fees that are charged.
The facility agreement will set out the agreed repayment schedule for the loan. It may provide for repayment:
(a) of the whole loan in one go at the end of the term (a ‘bullet’ payment); or
(b) in** equal instalments **over the term of the loan (‘amortisation’); or
(c) in unequal instalments, with the final instalment being the largest (‘balloon repayment’).
Interest:
- may be ‘floating’ and altered at intervals
- default interest if payments missed (consider: penalty clauses)
Debenture
A debenture is not a separate type of debt finance. It has more than one meaning under the common law and the CA 2006, but is generally used to describe a loan agreement in writing between a borrower and a lender that is registered at Companies House. It gives the lender security over the borrower’s assets. Only companies and LLPs can enter into debentures; sole traders and general partnerships cannot
Common covenants in facility agreements:
Express covs:
Covenants on the following matters are also commonly included, again to ensure that there will be sufficient money to repay the loan:
(a) Limitation of dividends. Companies must ensure that dividends and other distributions to shareholders do not exceed a specified percentage of the net profits.
(b) Minimum capital requirements. The business must ensure that current assets exceed current liabilities by a specified amount of money or a specified percentage.
(c) No disposal of assets, or change of business. The business must not dispose of assets without the lender’s consent, or change the scope or nature of the business.
(d) No further security over the assets. The business must not create any further security over the whole, or any part, of the undertaking without the lender’s consent (a ‘negative pledge’ clause, see 5.17.8).
(e) Provision of information on the business, for example, annual accounts
Implied covs:
- Trade usage e.g right for bank to charge compound interest
- Court has limited power to imply terms only if they “go without saying”
- Court won’t imply term that is not consisent with express term
Debt finance v equity finance
Check table 5.1 of business law manual
Type of debt security? Who can give debt security? What to consider? Do you have to file the instrument? What assets may be secured.
Sole traders and general partnerships cannot grant floating charges, only fixed charges. These must be registered at HM Land Registry if they are over land. LLPs can grant floating charges as well as fixed charges and the registration process is similar to that for companies.
- Check for restrictions in articles (no restrictions in MA) - post CA 2009 presumed ‘unrestricted objects’ unless in articles.
- Company pre October 2009 - the objects of the company were set out in its old-style memorandum of association, and on that date became part of its articles. If the company’s articles have not been updated to take account of the CA 2006, the memorandum must be checked to see that there is no restriction on the company granting security.
- If restrictions, SH must pass special resolution to change and give director’s authority to enter security contract. MA 3 gives this.
Filing: Under s 859I of the CA 2006, the Registrar of Companies must include a certified copy of the instrument creating the charge in the register, which is open to inspection by any person. File instrument in 21 days of its creation.
From the register, the lender will be able to discover:
(a) the date of creation of any existing charge;
(b) the amount secured;
(c) which property is the subject of the charge; and
(d) who holds that charge (ie who can enforce the charge).
If the lender is proposing to take a charge over land held by the company, it should also conduct a search at Land Registry to check the company’s title to the land and to see if any pre-existing charges have been registered. Similarly, if a charge is to be taken over intellectual property rights such as a trademark, the lender should check the company’s title to the intellectual property at the Intellectual Property Office. Lender should also conduct winding up search to chck for insolvency procedures.
Virtually all assets that a company (or LLP) might own may be offered as security for its borrowings. For example, they may grant security over:
(a) land, whether freehold or leasehold, and fixtures and fittings;
(b) tangible property, such as machinery, computers and stock;
(c) intangible property, such as money in a bank account, debts owed, any shares they own in other companies and intellectual property rights
3 main types of security:
1. Mortgage
2. Fixed charges
3. Floating charges
What is a mortgage? Fixed charged?
- Mortgage: transfers ownership (usually of land but also generally high value security such as air craft) to lender (except with land), allows immediate possession which is reserved if not paid, title transferred back when money repaid
- What is a charge? does not transfer legal ownership from the chargor (the borrower) to the chargee (also known as the charge holder) (the lender) and does not give the chargee the right to immediate possession of the property (different to a mortgage in this way - ownership doesn’t transfer)
Fixed charge:
- taken over property such as machinery and shares owned by the company/LLP in other companies
- New fixed charge over each asset
- Borrower will not be able to dispose of asset without charge holder’s permission
- Require borrower to keep asset in good condition
- goes into receivership or liquidation, the fixed charge holder will have the right to sell the asset and be paid out of the proceeds of the sale before other creditors
- can have more than 1 fixed charge over same asset - first charge holder can sell and pay proceeds
Floating charge? When does it crystallise?
Charge over group of assets rather than 1 like fixed charge and mortgage. Don’t need lender’s consent to deal with assets in normal course of business. 3 aspects:
- Equitable interest over class, or whole, of companies/LLPs assets (such as stock);
- Assets are changing constantly; and
- Company/LLP does does not need lender’s permission to deal with the assets in the ordinary course of business UNTIL THE CHARGE CRYSTALLISES.
When does charge crystallise?
- Company/LLP ceases to trade;
- Goes into liquidation;
- Goes into administration; or
- Any other event defined in the charging document.
On crystallisation the floating charge becomes a fixed charge and chargor cannot deal with assets anymore.
Assets are defined generally such as ‘companies whole stock’.
What are book debts?
Money owed to company LLP - can be subject of a fixed charge and floating charge. Floating charge if the book debts vary over time. Fixed charge if:
- charge holder had control over both the debts and proceeds once they were paid.
- e.g lender allowed company/LLP to collect book debts but then must pay over to charge holder once collected.
If chargor was able to use the collected debts for business use then this suggests a floating charge.
What takes priority, fixed or floating charge? Preferential creditors?
Generally fixed charge over the same assets. some creditors take preference over assets with a floating charge but NOT fixed charge. Considered later.
Sometimes liquidators and administrators of insolvent company can apply to set aside floating charge.
When must a charge be registered to give constructive notice to creditors? What is the process?
21 days of its creation (inc weekends and bank holidays). Limited power for Court to extend. Even if app sucessful will only have priority from date registered. Court has power to rectify any statement or notice delivered to Registrar for inaccurate details.
- File statement of particulars (usually form MR01) and cert copy of the charging documbets and pay fee
- Registrar register cahrges and includes cert copy of the charge on the register & gives one to person who lodged charge (the charge holder)
- MR01 and cert copy of charge will be on public register
- Delivered on time? Charge valid against creditors and insolvency practitioners
- Charging document and MR01 should be availible for inspection at reg office or SAIL - failure to do so is a criminal offence but doesn’t affect the validity of the charge
- If fixed charge over land then register at land reg
What is the priority of charges set by law under s859A of CA 2006?
The below list is based on the fact all charges were registered correctly with 21 days of their creation:
- Fixed charge or mortgage ranks over floating charge over same asset, even if floating charge was created first
- More than one registered fixed charge/mortgage the one CREATED first (NOT REGISTERED FIRST) takes priority. However, if not registered correctly in 21 days then it does not take priority. Even if Court extends time for registering it would only be from the date of registration
- More than one floating charge over same asset then over of CREATION (provided both properly registered)
What is subordination and negative pledge?
Subordination - creditors of a company can agree to vary the order of priority (known as subordination and agreement is deed of priority).
Negative pledge - as floating charges rank behind fixed they usually contain a negative pledge clause to stop the creation of fixed charges or mortgages over the same asset. If subsequent lender takes charge over same asset and has ACTUAL KNOWLEDGE of the negative pledge then the fixed charge will be subordinate to the floating charge.
Neggy pledge clause disclosed by completion a section of the charge particualrs form (M01) that is issued to companies house. Will be included in cert copy of the charging doc as well.
Just being on CH not enough for actual knowledge but if the lender does search CH then this will be enough for actual knowledge. Subsequent charge holder may be liable for tort of inducing breach of contract.
Way for subsequent fixed charge/mortgage lenders to avoid this? include covenants in the charging document that state there is no previous charge which are subject to neggy pledge clause. If this is not the case, the company will be im breach of its covenants in the charging document and the lender can terminate.
When is a partnership formed? Factors to decide?
More than 1 person carries on business in common with the view of a profit.
- Who makes the decisions
- Whose names on title deeds
- How are profits split
Just agreeing to work together is not sufficient. Come into effect when start carrying out business.
2 factors to consider: are they carrying on business in common with view of profit and are both people a partner (consider factors)
Does partnership agreement overide Partnership Act? what form does it need to be in.
Yes but certain sections of the PA cannot be overridden. No particular form - could be verbal or even implied by conduct (e.g a partner has acted in a certain way over a period of time and no one has objected).
What can’t be overriden? s1 & 2 which are when a partnership comes into effect (common business with profit & rules for determining existence). Also sections re liability for third party debts.
Key provisions of partnership agreements and the Partnership Act 1890 (PA)?
- even if have commencement date they will come into existence on date they carried on business in common with view for profit
- if start before commencement dated PA provisions will apply in mean time
- if carry on in business after expiry of partnership agreement but do not enter a new agreement it is an implied term that partners are on the same terms as before
- PA says partners MAY take part in management. So any agreement should state if working full time, part time etc ussually clause to say “dedicate whole time and attention” or something similar. In the absence of express clause will be hard to argue partner should work more
- If want to expel a partner for failure to carry out duties then set them out clearly with responsibiites in agreement.
- All decisions made by majority under PA except 3:
1. Adding new partner
2. Changing nature of business
3. Changing terms of agreement - responsibilites for certain deciisions will be delegated to partner or employee (e.g finance partner)
- Can add more decisions by unanimous vote
- Set out capital contributions of partners and if need to contribute more
- Under PA partners equally share in capital & profits of partnership so amend in agreement if not the case. May be case law that says can get capitqal return in line with capital contribution (inferred by course of conduct)
- If want to pay interest on partners capital contributions should say in the agreement
- Provision for how share profits (i.e after deduction of salaries and interest on capital). under PA shared equally but usually in line with how much a partner works.
- How will they share losses? Under PA they share them equally.
- Income profits known has drawings, set out prov in agreement for how much partner can draw down. Include prov for if having a salary
- Expulsion - under PA cannot expel even by unanimous vote unless express agreement
- Dissolution i.e partnership ending although doesn’t necessarily mean stop trading. Even if remainder of partners on same terms still different partnership. Under PA 1 partner leaving, dies, is bankrupt, fixed period expires means the partnership is dissolved. Set out circumstances under agreement. Under PA under partner can leave at any time by giving notice to other partners (immediate effect).
- Dissolve automatically if something happens which makes it unlawful for busness to be carried on cannot be disapplied
When can partners apply to the court for issolution under s35 PA? Effect of dissolution?
- A partner permenantly becomes incapable of performing their part of the partnership contract
- partners conduct prejudicial to partnership
- Partner willfully or persistently breaches partnership agreement
- partnership can only be carried on at a loss
- Court thinks that, for other reasons, just an equitable to dissolve.
Better to include express provisions for expelling partners than rellying on s35.
Effect of dissolution:
- unless all partners agree, partnership assets must be sold (or partnership sold as going concern) and the outgoing partner receives their share
- outgoing partner can insist partnership sold under s39 so others do not have option to just pay partner his share and carry on with business (without express agreement) - need partial dissolution clause
- PA: outgoing partner gets interest at 5% per annum on share until paid
- Allow time in PA to pay the partner their share
Goodwill? Distribution of proceeds of sale?
Goodwill is a business’ reputation and value of its clients and contacts, when business sold as going concern part of purchase price will be for the goodwill.
Commonly 2 years profit is taken as value of goodwill. If assets sold individually (rather then business as a going concern) goodwill not counted. If agreement includes time to find a buyer for business as going concern then more likely to sell as going concern and get goodwill value.
Distribution of proceeds of sale under PA as follows but can be varied:
1. Creditors (short fall by partners)
2. Partners who have lent money get repaid including interest
3. Partners then paid the share of the capital to which they are entitled
4. Surplus then shared between partners
All of the partners, unless they are bankrupt, have authority to act in winding up the business’s affairs (s 38 PA 1890). If any of the partners are bankrupt or deceased, the trustee in bankruptcy or personal representative can also make such an application.
Restraight of trade clauses and responsibility under PA 1980?
Restraint of Trade
- None implied in PA 1980
- These clause are only enforceable if:
o Protect legitimate business interests; and
o No wider than necessary to protect interest inc geographically and scope. - Includes: non-compete, no solicitation and no dealing clauses
- Non-compete: prevent former employer competing, non-solicitation: can’t solicit (approach directly) business from partners, non-dealing: can’t enter contracts with clients, former clients, employees of partnership etc even if you are approach. Onerous!!!
Responsibility under PA 1980
Common law duty of utmost fairness and good faith towards one another. Specific duties in PA under this principle:
1. Completely open about relevant information re partnership;
2. Account to firm for profits made without others consent concerning partnership;
3. Must not compete with firm (carrying on business in competition without consent, otherwise pay over profits);
4. Bear share of loss to firm in accordance with terms of agreement;
5. Indemnify fellow partners who have borne more than their share of liability/expenses re firm.
When is firm liable to third parties (think types of authority a contract can be entered into with)?
- Contract or deed entered with actual authority:
a. Express actual authority – expressly given one of partners permission;
b. Implied actual authority – impliedly given authority if all partners involved in running business it will be implied each partner has authority to sell products in normal course of business. Can be implied through course of dealing. - Apparent authority – may be liable even if there is a limit on a partners authority under s5 PA 1980 if:
a. Business is of kind carried out by the firm;
b. Transaction is one for which a partner in such a firm would usually have the authority to act;
c. Other party to transaction did not know they didn’t have authority; and
d. Other party deals with a person they know (or believe) to be a partner.
A and B are objective (what would reasonable person think) and C and D are subjective of what third party thought.
Whilst partnership would be liable, the partner who acted beyond authority would need to indemnify the partnership.
Under s 10 PA 1890, the firm is liable for any wrongful act or omission of a partner who acts in the ordinary course of the firm’s business or with the authority of their partners (negligence).
Partners liability for debts before they have left the partnership, if they have retured and how to avoid liability for future debts when a partner retires. What is holding out?
- Jointly liable before leaving partnership – under PA. Jointly and severally liable due to Civil Liability (Contribution) Act 1978. Personal liability – if risk of claim is covered by insurance (e.g law firms will have PI insurance and a negligence claim is the biggest risk) then personal liability is not that risky.
- In a novation agreement, a retiring partner will be released from an existing debt, by entering into a contract with the creditor and the other partners, and possibly an incoming partner. If no new incoming partner, must have fresh consideration or must be executed as a deed. Different to indemnity as creditor would not be party to indemnity so its not binding on them and can still sue partner. NA usually for loans etc not one off debts
- Partners remain liable for existing debts but they will escape liability for any debts entered into after they had left the partnership as long as they comply with the requirements of s 36 PA 1890, which are:
a. Give actual notice to anyone firm has dealt with (i.e notify directly);
b. Anyone not dealt with gets notice by way of a notice in the London Gazette (or Edinburgh, Belfast etc in Scotland/NI). Acts as a notice to the whole word;
c. No notice required if bankruptcy or dead. Estate of dead or bankrupt NOT liable for partnership liabilities incurred AFTER death of bankruptcy!!!
- When working out if liable for the debt, consider if the debt occurred before or after the partner left
- HOLDING OUT: if creditor has relied on representation from partnership that person was a partner (holding out) may be able to hold that person liable. For example, leaving name on letter head. Or can be oral (described person as partner) or referred to on website etc or by conduct. Can be made by that person or by another with knowledge of the person
- Holding out can occur for a retired partner or someone who was never a partner of the firm
- Creditor will need to show:
o Person held themselves out or allowed themselves to be held out as a partner
o Creditor relied on the representation
o Gave credit to the firm AS A CONSEQUENCE
Then can sue for debt owed by firm.
Retired partners should check notice has been placed in gazette, all previous contacts have been written to and her name removed from letterhead and website.
- Usually when they leave, a partner will “leave in” the bank money for their share of the outstanding debts incase partnership gets sued for debt incurred before they left. May still have to pay third party but may have contractual right to be reimbursed (if in PA)
- Alternatively, they could try to claim an indemnity under s 24(2) of the PA 1890 on the basis that they have incurred liabilities in the ordinary and proper conduct of the business of the firm
Who can a creditor sue? Insolvency and what tax needs to be paid?
Who can a creditor sue?
1. The partner or partners contracted with (privity of contract);
2. Anyone who was a partner at the time debt incurred – partner can claim indemnity;
3. Can sue all partners in firms name (Anyone who was a partner at the time when the debt was incurred is jointly liable to satisfy the judgment (under ss 9 and 17 PA 1890 and the Civil Liability (Contribution) Act 1978 – even if they have now left!)
Insolvency
- Can be wound up as an unreg company
- Can use rescue procedures available to companies such as voluntary arrangements
- Partners can be made bankrupt
Tax
- Pay VAT, NI and income tax/corporation tax depending on if company partner or individual
Relevant regulations and Acts for LLPs?
- Limited Liability Partnership Act 2000
- LLP Regulations 2001 provides default contract like PA
- Limited Liability Partnerships (Application of the Companies Act 2006) Regulations 2009 states that certain sections of the CA 2006 applies to LLPS
Legal requirements of LLPs
- At least 2 members and 2 designated members who file stuff at CH
- If members reduces to 1, and this carries on for more than 6 months, they become jointly and severally liable for firm’s debts incurred DURING THE 6 MONTH PERIOD onwards
- Incorp: file LL IN01 at CH with fee. Need not file the partnership agreement. Cert of reg will be issued by CH
- Name must end in LLP or Welsh equivalent. Unless names just partner names then similar restriction to company names
- Name must be put outside PoB and stationary must state name, address and co number
- All partners can agree to change name or whatever procedure set out in agreement
Power and responsibility of designated members?
Similar powers to directors.
Under LLPA, CA and Insolvency Act 1986, various responsibility for admin and legal matters:
1. Signing and filing annual accounts with Registrar
2. Appointing, removing and paying auditors
3. Filing annual confirmation statement
4. Sending notices to Registrar of Co (e.g if a member leaves or joins the LLP)
5. Winding up LLP.
DM must carry out duties with the core fiduciary duties all members owe to the LLP. DMs also owe a duty of reasonable care and skill to the LLP.
Insolvency Act 1986 regime applies, to members can be liable for misfeasance wrongful/fraudulent trading and may have to contribute to assets of LLP. The Company Directors Disqualification Act 1986 applies to members of an LLP.
Duties of members in LLPs
- Mutual rights and duties are governed by agreement, any matter not agreed is governed by LLP Regulations 2001
- Embers ow fiduciary duties to LLP and its agents:
o Duty of good faith
o Duty to account for any money received on behalf of LLP
o Duty to render true accounts and provide full information concerning the LLP - Members are agents, limits can be placed on authority (like with partners) orally or in writing
- May still be liable to third party if had apparent authority (same as general partnership, i.e business is kind carried out by partnership, member would usually have authority, third party didn’t know, third party thought member)
Charges, and what to do when there is a change in membership
Charges
- Can issue debentures and grant fixed and floating charges like companies (general partnerships can only grant fixed)
- Need to keep register of charges and copy of every charge requiring registration at reg office. Creditors allowed to inspect reg free of charge
Change in membership
- Governed by the LLP agreement
- If new member deliver notice to Reg of Companies notifying them of the new member within 14 days of appointment
- Similar form to notice for a new director
- When leave, file notice in 14 days
Default terms under LLP Regs 2001?
- Share equally in capital and profits of LLP (can amend by agreement). No default position on losses obviously because LL (just risk capital contributions and any loans to LLP)
- Every member may take part in management (can vary). No model articles equivalent
- Ordinary matters of LLP can be decided by majority. Changing nature of business and terms of the membership agreement must be unanimous
- Leaving – give REASONABLE NOTICE to other members – cannot be expelled unless there is clause in agreement. If want bankruptcy of member to automatically cause termination of that person’s membership then must state it in the agreement.
What is the formula for calculating trading profits?
- Trading profits or losses = Chargeable receipts – deductible expenses – capital allowances
Income v capital profits?
- Income profits (e.g trading income or rental income)
- Capital profits (e.g increase in value of office building)
- Income profits paid via income tax if sole trader or partner
- Income and capital profits paid for companies by corp tax
- Business must produce accounts for accounting period – usually 12 months to show profit or loss
What are chargeable receipts and deductible expenditure?
- Chargeable receipts are income from sale of goods and services from trade (NOT capital in nature)
- Deductible expenditure – income in nature, incurred wholly and exclusively for the trade. CANNOT be excluded by statute (e.g client entertainment and leasing cars with emissions over certain amount are excluded by statute).
- Income in nature – if incurred so business can sell item at profit then income. If reoccurring (utility bills for example) then income. Expenditure on items helping business to trade (e.g office building) = capital (NOT deductible)
- Wholly & exclusively for trade = i.e eating out when away is not wholly and exclusively for trade as person would have eaten anyway
- Common deductibles:
o Salaries (as long as not excessive for services person carries out)
o Rent on commercial premises
o Utility bills
o Stock
o Contributions to pension schemes
o Interest on payment borrowings
Can capital profits be deducted for chargeable receipts? What is a written down allowance?
- Capital not deductible for calculating trade profits e.g cannot deduct for cost of plant and machinery
- To make up for this, business get a capital allowance to encourage investing in essential machinery and plant
- Plant: whatever apparatus business people use to carry on their business. This includes all goods and chattels which they keep for permanent use in their business, but not stock in trade. E.g computers
- Capital assets usually reduce in value over time. Businesses therefore get an 18% writing down allowance
- WDA: 18% of the value of the business’s plant and machinery (valued at start of financial year) will be deducted from chargeable receipts when calculating trade profit. All plant and machinery is pooled and 18% of this pool is used.
- The lower value (with the 18% deducted) is called the ‘written down value)
What is the annual investment allowance?
- AIA is £1million until March 2024
- “Fresh qualifying” expenditure
- Group companies only get 1 AIA (but allocated within group however)
- If machinery costs more than £1,000,000 business will be entitled to WDA on the surplus (but don’t get WDA on the £1mil)
What is full expensing
- Companies only
- Replace super deduction
- Can deduct 100% of the asset (uncapped) from chargeable receipts
- When asset is disposed of a balancing charge is applied equal to 100% of the disposal value to increase the trading profits
- AIA in addition full expensing
- AIA will be used where the asset is refurbished or second hand. Full expensing will be for brand new.
- Don’t get WDA on the asset
Info on trading loss reflief for unincorp businesses?
The types of trading loss relief for unincorp businesses will be set out in the next 6 slides.
- Only for unincorp businesses – companies trading loss relief is at Chapter 11
- If calculating a trading profit shows a loss, can deduct the trading loss from other income
- If there is more than 1 available then business can choose. If there is still a loss after using one then unabsorbed losses can be relieved under another provision
- Partners decide individually on reliefs for their own losses
- MUST APPLY FOR RELIEFS – they are not automatically applied
- Start-up loss relief (early trade losses relief):
a. Loss in first 4 years of business;
b. Carried back to 3 years immediately prior to the year of the loss (from previous employment etc). So will be claiming money back from HMRC.
c. Set against earlier years BEFORE later years
d. Claim for relief must be made on or before the first anniversary of 31 January following end of tax year in which loss is assessed
e. LOSE PERSONAL ALLOWANCE
- Carry-across/one-year carry-back relief for trading losses generally
a. Losses from accounting period are considered losses of the tax year when accounting period ENDs;
b. There are four options for carry-across/one-year carry-back relief. Losses can be:
i. Set against TOTAL INCOME from the same year; OR
ii. Set against TOTAL INCOME from year before year of the loss (end of accounting period year); OR
iii. Set against total income from the year of less, and the balance being set against the year before loss; OR
iv. Set against the total income from the year before the loss, and the balance then set against the year of the loss.
c. I.e can decide if you use the year before, or current year, first. This makes a different as the loss is set against TOTAL INCOME meaning you will lose your personal allowance for that year.
d. Claim relief on or before first anniversary of 31 Jan following end of tax year.
e. LOSE PERSONAL ALLOWANCE
- Set off against capital gains
a. Trading losses can be set off against chargeable gains in the SAME tax year for CGT purposes
b. Used when carry-across/1 year carry-back relief has been applied but not all the loss has been absorbed
c. Claim relief on or before first anniversary of 31 Jan following end of tax year.
d. Unusual relief as income loss set against capital gain
- Carry forward relief
a. Carry forward a loss for a tax year and set it off against subsequent profits
b. Earlier years first
c. Can be carried forward indefinitely until loss exhausted
d. Notify HMRC of intention to use relief no more than 4 years after end of tax year when loss was incurred
e. RETAIN PERSONAL ALLOWANCE – this relief nay be able to stop you entering next tax bracket. Only good if you do end up making a profit in future years
- Carry back of terminal trading loss
a. If loss incurred in the final 12 months of a business can be carried across and set against trading profits in final tax year. Can have a loss and a profit as other sources of income connected to the trade, but are not profits of the trade, are treated as trading profits. E.g rental income of commercial building.
b. Then carried back whats left 3 years before year of loss until all absorbed or 3 year limit reached.
c. Can’t be applied to non-trading income or capital gains.
d. Claim must be made no more than four years after end of tax year to which claim relates.
e. NO CAP ON AMOUNT
- Carry-forward relief on incorporation of business
a. If incorp the business by transferring it to a company WHOLLY or MAINLY in return for shares, trading losses not relieved can be carried forward and set against income from received from company
b. Income includes salary or dividends (any order you choose!)
c. Wholly or mainly: at least 80% or more of the consideration must be shares
d. Losses can be carried forward indefinitely but must notify HMRC of intention to claim no more than four years after end of tax year of loss
e. NO CAP
Caps on relief?
- Start-up relief and carry cross/carry back relief subject to cap
- Cap: £50,000 or 25% of tax-payer’s income
- Cap doesn’t have big impact has only applies to income from sources other than the trade which produced the loss
VAT?
- 20% on value of goods and services ‘output tax’
- Business deducts from output tax any VAT it has paid on goods or services ‘input tax’
- Difference between the two is paid to HMRC
- Charged on:
o Supply of goods and services
o Made in the UK
o That is a taxable supply
o Made by a taxable person
o In the course of a business - Must be VAT registered if taxable supplies in the preceding months exceed £85k. If make less can chose to reg
- Includes disposing of a business or any of its assets
- Price deemed to include VAT unless stated otherwise
- Anyone VAT reg submit tax return to HMRC, pay VAT it owes within 1 month from end of each quarter in respect of taxable supplies made in that quarter
- Pay output tax less input tax
- If input tax exceeds output tax, then will receive a REBATE
- 0 rated supplies: books, certain food and water. Can reclaim VAT from HMRC.
- Exempt supplies (insurance) can’t register or reclaim
- Partnership can reg for VAT in name of business (unlike other taxes)
- Failure to comply with VAT legislation can lead to a range of criminal and civil penalties, as well as being required to pay any unpaid tax with interest.
