Business Flashcards

Question 1

Q

4.1 NATURE & FORMATION OF COMPANIES

A company doesn’t exist until it registers at Companies House until then…

Answer

A

o The people preparing to bring the company into existence are promoters
o promoters are personally liable for contracts they enter on behalf of the company = ‘pre-incorporation’ contracts
o Promoters remain liable after the company is formed unless the ‘pre-incorporation’ contracts’ are novated in the name of the company.

Question 2

Q

4.2 NATURE & FORMATION OF COMPANIES

Shelf Company

Answer

A

o A company registered, usually by solicitors, which has never traded.
o Enables a promoter to set up a company quickly.

Question 3

Q

4.3 NATURE & FORMATION OF COMPANIES

To incorporate a company =
A Promoter must submit what filings with Registrar of Companies at Companies House.

Answer

A

i. Memorandum of association
ii. Application for registration
iii. Relevant fee
iv. Bespoke articles (only if model articles don’t apply)

Question 4

Q

4.4 NATURE & FORMATION OF COMPANIES

Application for registration includes:

Answer

A

i. Proposed name of the company
o can’t be same as an existing company
o must end in Limited / Ltd
o can’t suggest a connection to Government or local authority.
ii. Location of Registered Office
iii. Details of company business
iv. Limited by shares or guarantee
v. Capital and initial shareholdings
vi. Proposed officers / directors
vii. PSC’s
viii. Compliance with CA 2006

Question 5

Q

4.5 NATURE & FORMATION OF COMPANIES

If the registrar finds the documents are in order

Answer

A

o = they will issue a Certificate of Incorporation.

Question 6

Q

4.6 NATURE & FORMATION OF COMPANIES

A company comes into existence on what date?

Answer

A

o the date specified on the Certificate of Incorporation.

Question 7

Q

4.7 NATURE & FORMATION OF COMPANIES

Articles of association

Answer

A

Every company is required to have articles of association
o = company’s constitution
o = serve as a contract between the company and shareholders, and shareholders with each other.

Question 8

Q

4.8 NATURE & FORMATION OF COMPANIES

If directors don’t adhere to articles…

Answer

A

o = they breach their duty to the company
o An injunction can be obtained to prohibit prospective breaches
o Damages can be sought from directors

Question 9

Q

4.9 NATURE & FORMATION OF COMPANIES

Shareholders only have the right to enforce article provisions relating to:

Answer

A

o their membership rights.

Question 10

Q

4.10 NATURE & FORMATION OF COMPANIES

A company can amend its articles by…

Answer

A

o special resolution
= not less than 75%

Question 11

Q

4.11 NATURE & FORMATION OF COMPANIES

how can shareholders make certain articles more permanent?

Answer

A

Shareholders may vote to entrench certain articles…
o = to amend requires additional conditions beyond the 75%.
o Entrenched provisions can be included in original (bespoke) articles but Registrar must be notified on filing.

Question 12

Q

4.12 NATURE & FORMATION OF COMPANIES

A provision purporting to prevent amendment of a company’s articles

Answer

A

o Will be ineffective.

Question 13

Q

4.13 NATURE & FORMATION OF COMPANIES

If the shareholders make an alteration that no reasonable person would consider to be for the benefit of the company:

Answer

A

o a shareholder who did not vote in favour of the alteration can challenge it in court.
o That an amendment adversely affects minority shareholders is not sufficient grounds for objection if the alteration is made in good faith in the interests of the company.

Question 14

Q

4.14 NATURE & FORMATION OF COMPANIES

Corporate Veil

Answer

A

General rule
= members will not be personally liable for obligations of the company

o once the company is incorporated, it must be treated like any other independent person with rights and liabilities appropriate to itself.
o The limited liability of the shareholders is the consequence of incorporation

Question 15

Q

4.15 NATURE & FORMATION OF COMPANIES

Piercing the corporate veil

Answer

A

o Very limited circumstances to pierce the corporate veil.
o looking beyond the separate personality of a company to fix liability on the shareholders.
o Applies when the company form is being used to:
 carry out a fraud
 avoid existing obligations
o e.g. a business owner transfers all their assets to a company to keep them out of the hands of a creditor.

Question 16

Q

COMPANIES – DIRECTORS AND OFFICERS

5.1 Directors’ general authority (MA3)
+
Directors may delegate (MA5)

Answer

A

Director’s responsible for day-to-day management of the company

Directors’ general authority (MA3)
o the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.

Directors may delegate (MA5)
the directors may delegate any of the powers which are conferred on them under the articles

Question 17

Q

COMPANIES – DIRECTORS AND OFFICERS

5.2. Directors – minimum requirements:

Answer

A

o Private company must have at least 1 director
o Public company must have at least 2 directors
o Must be at least 16-years old
o Initial directors are recorded in the registration documents

Question 18

Q

COMPANIES – DIRECTORS AND OFFICERS

5.3 Appointment of Directors

Answer

A

Under Article 23.2:
Any person who is willing to act as a Director and is permitted by law to do so, may be appointed to be a Director:
(a) by ordinary resolution; or
(b) by a decision of the Directors

o must notify Registrar of Companies within 14 days of any new directors / change of director details.
o all directors (executive and non-executive), must signify consent to the appointment by signing form APO1

Question 19

Q

COMPANIES – DIRECTORS AND OFFICERS

5.4.1
De facto director

Answer

A

De facto director
o acts as a director, claims to be a director but was never appointed.

Question 20

Q

COMPANIES – DIRECTORS AND OFFICERS

5.4.2 Shadow director

Answer

A

Shadow director
o sb who influences other directors but does not claim to be a director and has not been appointed as a director.

Question 21

Q

COMPANIES – DIRECTORS AND OFFICERS

5.5.1 Executive directors

Answer

A

Executive directors
o responsible for the day-to-day running of the company and are employees of the company

Question 22

Q

COMPANIES – DIRECTORS AND OFFICERS

5.5.2 non-executive directors

Answer

A

Non-executive directors
o usually consultants and take more of a supervisory role overseeing the activity of the executive directors

Question 23

Q

COMPANIES – DIRECTORS AND OFFICERS

5.6 Nominee directors

Answer

A

o a director appointed to the board to represent the interests of a particular stakeholder, usually a shareholder.
o A nominee director must still act in the best interests of the company.

Question 24

Q

COMPANIES – DIRECTORS AND OFFICERS

5.7.1 Director powers under model articles

Answer

A

Directors’ general authority
o Directors are responsible for the management of the Company’s business, for which purpose they may exercise all the powers of the Company.

o Power to exercise all of the powers of the company except where the articles specifically provide otherwise.
o Appointment or removal of a director or auditor

Question 25

Q

COMPANIES – DIRECTORS AND OFFICERS

5.7.2 Removal of Directors - MA18

Answer

A

A person ceases to be a Director as soon as

a) by virtue of CA 2006
b) a bankruptcy order is made against that person;
c) a composition is made with that person’s creditors generally in satisfaction of that
person’s debts;
d) they are certified as having become **physically or mentally incapable **of acting as a director and may remain so for more than three months;
(f) Director gives notice of resignation

Question 26

Q

COMPANIES – DIRECTORS AND OFFICERS

5.7.3 / 21
Appointment + Removal of Directors

BY SHAREHOLDERS - SUMMARY

Answer

A

Shareholders can appoint and remove Directors by Ordinary Resolution.

o shareholders can remove a director *with or without cause** by simple majority vote
= Ordinary Resolution

o General rule = shareholder right to remove a director cannot be overridden / excluded in Articles.

o Exception Bushell v Faith clause weighted voting to a director who is also a shareholder.

o However an executive (employed) director who is removed from office may have a claim for compensation under the law of unfair (statutory) and wrongful (contractual) dismissal

o Special Notice to adopt a resolution to remove a director must be given
+ Copy of the notice must be given to the director [at least 28 days before the meeting]
+ Director must be given a right to respond in writing and orally at the meeting

Question 27

Q

COMPANIES – DIRECTORS AND OFFICERS

5.7.2 Removal of Directors - MA18

SHAREHOLDER - PROCEDURE

Answer

A

S.168 CA 2006
1. A company may by ordinary resolution at a meeting remove a director
2. Special notice is required

S.169 CA 2006
1. the company must send a copy of the notice to the director [at least 28 days before the meeting]

S.159 CA 2006
o Disqualified person not to be appointed as director
o A director may be disqualified for misconduct
o e.g. for conviction of an indictable offence

Question 28

Q

COMPANIES – DIRECTORS AND OFFICERS

5.7.3
Appointment + Removal of Directors

BY DIRECTORS

Answer

A

Directors can appoint Directors

Board of Directors cannot remove a director unless there is a special provision in the company’s Articles

The only other grounds for removal of a Director are if:
o “a bankruptcy order is made against them” or
o “a composition is made with that person’s creditors”; or
o Certified as physically or mentally incapable
o Disqualified for misconduct
e.g. for conviction of an indictable offence
o the “Director gives notice of resignation”.

Question 29

Q

COMPANIES – DIRECTORS AND OFFICERS

5.8. Decision-making – 3 types of decisions:

Answer

A

DIRECTOR DECISIONS
 Day-to-day decisions
 Directors make decisions collectively in board meetings = BOARD RESOLUTIONS
DIRECTOR DECISIONS REQUIRING SHAREHOLDER APPROVAL
 e.g. to fundamentally change aspects of the company
SHAREHOLDER DECISIONS
 Decisions reserved for the shareholders e.g. to change company articles.

Question 30

Q

COMPANIES – DIRECTORS AND OFFICERS

5.9. Directors are agents of the company

Answer

A

o and can bind the company in contract
o or to tort liability.

Question 31

Q

COMPANIES – DIRECTORS AND OFFICERS

5.10

Director authority

Answer

A

o An individual director has actual authority granted to that director by board resolution.
o As a director has no power to bind the company except when the directors act as a board, apparent authority should not arise often.
o apparent authority may arise if the board honours 3 contracts with a supplier, then a director is likely to have apparent authority to enter a 4th contract.

Question 32

Q

COMPANIES – DIRECTORS AND OFFICERS

5.11.

Execution of documents by directors:

Answer

A

o Either by affixing their seal or by signatures of either:
 2 directors, or
 1 director and a secretary, or
 1 director signed in the presence of a witness who attests their signature.

Question 33

Q

COMPANIES – DIRECTORS AND OFFICERS

5.12. Director duties

Answer

A

o Fiduciary duty to act in good faith and in the best interest of the company
o Duty to act within powers
o Duty to promote success of the company
o Duty to exercise independent judgement
o Duty to exercise reasonable care, skill and diligence
o Duty to avoid conflicts of interest
o Duty not to accept benefits from 3rd parties
o Duty to declare NATURE & EXTENT of interest in a proposed transaction

Question 34

Q

COMPANIES – DIRECTORS AND OFFICERS

5.12. A director has a common law fiduciary duty

Answer

A

to act in good faith and in the best interest of the company as a whole.

Question 35

Q

COMPANIES – DIRECTORS AND OFFICERS

5.13. If the company is insolvent / on the brink of becoming insolvent the directors must consider or act in the interests of

Answer

A

of the creditors = the duty to shareholders is displaced.

Question 36

Q

COMPANIES – DIRECTORS AND OFFICERS

5.14
Duty to exercise reasonable care skill and dilgence…

Answer

A

that would be exercised by a reasonable diligent person with:
o The general knowledge, skill and experience that reasonably may be expected of a person carrying out the duties of a director
(objective)
o The general knowledge, skill and experience the director in question actually has
(subjective)

Question 37

Q

COMPANIES – DIRECTORS AND OFFICERS

5.15
Duty to exercise independent judgement:

Answer

A

o However this does not prevent them taking independent advice from experts as long as the director makes the final decision.

Question 38

Q

COMPANIES – DIRECTORS AND OFFICERS

5.16
Duty to avoid conflicts of interest

Answer

A

However, no duty is breached if:
o The conflict relates to a transaction with the company itself and the board knows the director has an interest;
o The situation is not likely to give rise to a conflict, or
o The matter has been authorised by the directors after receiving full disclosure
=
o A director has a duty to disclose their interest in proposed or existing transactions

Question 39

Q

COMPANIES – DIRECTORS AND OFFICERS

5.16
Director controls

Answer

A

o Substantial Property Transactions
o Director Loans
o Director Service Contracts

Question 40

Q

COMPANIES – DIRECTORS AND OFFICERS

5.16
Director controls
o Substantial Property Transactions

Answer

A

i. A director, in their personal capacity, or someone connected with a director
ii. Buys from or sells to the Company
iii. A non-cash asset
iv. of substantial value
Either more than £100,000
Or more than £5,000 and contract value exceeds 10% of company assets.

Question 41

Q

COMPANIES – DIRECTORS AND OFFICERS

5.16
Director controls
Director Loans

Answer

A

o A director cannot obtain a loan from the company
o unless the transaction is approved by the board by ordinary resolution
Exception
o if expenditure on company business up to £50k

Question 42

Q

COMPANIES – DIRECTORS AND OFFICERS
Director controls
Director Service Contracts

Answer

A

o Directors typically have service contracts.
o A director cannot count towards the quorum on a vote regarding service contracts.
o The board can determine what constitutes fair compensation.
o Company cannot enter into a LONG-TERM SERVICE CONTRACT = more than 2 years unless authorised by shareholders by Ordinary Resolution

Question 43

Q

COMPANIES – DIRECTORS AND OFFICERS

17 Calling Director meetings

Answer

A

o Under the Model Articles (unamended), any director may call a meeting of the directors by giving REASONABLE NOTICE of the meeting to the other directors.
o The notice need not be in writing, but must indicate the proposed date, time, and location and it must be given to each director.
o A meeting may be by telephone or other electronic means, so long as the directors can communicate with each other.

Question 44

Q

COMPANIES – DIRECTORS AND OFFICERS
Quorum of director meetings:

Answer

A

Under the Model Articles (unamended) at least 2 directors must attend a meeting for the meeting to be valid.

Question 45

Q

COMPANIES – DIRECTORS AND OFFICERS
Approval of director resolutions:

Answer

A

o Simple majority vote of the directors
o OR directors can pass written resolutions without a meeting if all the directors approve (unanimous approval).

Question 46

Q

COMPANIES – DIRECTORS AND OFFICERS
Approval of director resolutions:

Answer

A

o Simple majority vote of the directors
o OR directors can pass written resolutions without a meeting if all the directors approve (unanimous approval).

Question 47

Q

COMPANIES – DIRECTORS AND OFFICERS

24 - Accounts

Answer

A

All companies must prepare accounts
Large companies must hire an auditor to prepare the company accounts.
* annual turnover greater than 10million
* + more than 50 employees

Question 48

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.1 Shareholders are members of the company

Answer

A

= Provide financial backing for the company

Question 49

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.3. Shares can be divided into classes

Answer

A

Ordinary Shares
Preference Shares
o Have enhanced rights over Ordinary shares as set out in Company Articles.
o eg. may forego voting rights in exchange for greater financial returns
eg. guaranteed dividends

Question 50

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.3. Shareholders rights

Answer

A

Shareholders have rights to:
o dividends
o remove a director
o submit derivative claims
o seek an injunction
o unfair prejudice claims
o apply for Just and Equitable Winding Up Petition
o apply for injunction
o inspect director service contracts & register of members

Question 51

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.3. Shareholders rights %

Answer

A

o 100% = pass all resolutions
o 75% = pass special resolutions
o over 50% = pass ordinary resolutions
o 25% = block special resolutions
o 10% = demand a poll vote
o 5% = circulate written resolution to call a general meeting.

Question 52

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.4 Register of Members

Answer

A

o Every company must keep a register of members
o Any transfer / allotment of shares must be registered as soon as practicable
longstop 2-months

Question 53

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.4 Share Certificates

Answer

A

o All shareholders have the right to receive a share certificate
o Companies must issue share certificates within 2 months of the transfer / allotment of shares

Question 54

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.4 PSC Register

Answer

A

Any shareholder who owns more than 25% of shares must appear on the PSC Register

Question 55

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.2 / 6.4

Dividends

Answer

A

o A company may pay dividends to its shareholders
o Dividends may only be paid from profits available for the purpose
o Directors decide whether there are profits available for paying dividends:
o Directors will recommend a dividend for approval by the shareholders
o Approval by the shareholders requires ordinary resolution (more than 50%)
o Shareholders can approve a smaller dividend than recommended but not a larger one

Question 56

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.5

Unlawful dividends

Answer

A

If an unlawful dividend is distributed to the shareholders
o a shareholder who has reason to know it was unlawful is liable to repay it
o A dividend is unlawful if it’s paid out of funds other than profits available for the purpose (such as paid in capital)

Question 57

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.6 - Shareholder Powers & Rights:

Answer

A

o Derivative Claims
o Unfair Prejudice Claims
o Just and Equitable Winding Up Petition
o Right to Inspect Director Service Contracts
o Right to Inspect Register of Members

Question 58

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.6 - Derivative Claims

Answer

A

A shareholder who believes a director has or is about to breach a duty owed to the company
o May apply to the court to bring a DERIVATIVE CLAIM against the director.

The court will dismiss a derivative claim if:
i. the claim doesn’t show a prima facie case for the relief sought, and
ii. unless the claim promotes the best interests of the company.

Question 59

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.7 Unfair Prejudice Claims

Answer

A

If a minority shareholder feels that a company’s affairs are being conducted in a manner which is unfairly prejudicial to that shareholder:
o They can petition the court for a remedy.
o Usual remedy is buying the minority’s interest at a fair value.

Question 60

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.8 - Just and Equitable Winding Up Petition

Answer

A

Any shareholder can apply to have the company wound up if the company is solvent:
o If the shareholder can show it is just and equitable to do so.

Question 61

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.9 Matters requiring shareholder approval by ordinary resolution.

Answer

A

o Appointment or removal of a director or auditor
o Adoption of the annual accounts + reports of directors and auditors
o Approval of a declaration of dividends
o Approval of director’s decision to allot shares
o Approval of substantial property transactions
i. = directors with a personal interest
ii. Either more than £100,000
iii. Or more than £5,000 and contract value exceeds 10% of company assets.
o Ratification of a director’s breach of duty
o Entering a service contract with a director for more than 2 years.
o Making a loan to a director
o Giving a director a payment for loss of office.

Question 62

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.9a
what is a substantial property transaction?

Answer

A

i. A director, in their personal capacity, or someone connected with a director
ii. Buys from or sells to the Company
iii. A non-cash asset
iv. of substantial value
Either more than £100,000
Or more than £5,000 and contract value exceeds 10% of company assets.

Question 63

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.10. Matters requiring shareholder approval by special resolution
= ABCD

Answer

A

ABCD
A Changes to the company’s Articles of association
B Buy back company shares
C Changes to Company’s name
D Disapply pre-emption rights

Question 64

Q

COMPANIES - SHAREHOLDERS /
MEMBERS

6.11. If a resolution affects information filed at Companies House, what is the deadline to file changes at Companies House?

Answer

A

If a resolution affects information filed at Companies House, a copy of the changes must typically be filed at Companies House within 14 days.

Answer 65

A

Right to Inspect
o Director Service Contracts
o Register of Members

Answer 66

A

o Through the issuance of EQUITY (that is, ownership interests; shares) or
o through the issuance of DEBT (that is, loans or debt securities such as bonds).

Answer 67

A

o SHARE ALLOTMENT
o SHARE TRANSFER
o SHARE BUY BACK

Answer 68

A

o When a company creates shares and gives them to an existing shareholder or new shareholder in return for payment
o Company will then issue a share certificate
o The money received on account of the nominal or par value becomes a company’s share capital = a fund of money that cannot be returned to the shareholders.

Answer 69

A

o When a shareholder sells or gives existing shares to an existing or new shareholder
o The right to make such a transfer is governed by the articles.
o Model Articles for Private Companies grant directors absolute power to refuse a transfer of shares.

Answer 70

A

When the company buys back some of its own shares from one or more of the shareholders

the total number of shares of the company decreases
=
the shares bought back are cancelled

Answer 71

A

Generally, the directors have the power to allot additional shares by board resolution PROVIDED THAT:
i. The company has only one class of shares and
ii. There is no restriction removing this power in the articles (model articles have no restriction).

o In all other situations the directors must seek permission from the existing shareholders through an ORDINARY RESOLUTION.

Answer 72

A

Directors will determine the price and number of shares to allot + will resolve to allot the shares.
o Generally shares are issued in exchange for cash (but may accept property for shares).
o Under model articles, the full value of the shares must be paid to the company on allotment.
i. If the shares have a nominal or par value, the money received on account of that value will be added to the company’s share capital.
ii. Any amount received over the nominal value is known as a PREMIUM.
o Although this amount still is share capital, the premium must be recorded separately in a share premium account.

Answer 73

A

When a company proposes to issue additional shares in exchange for cash, unless its articles provide otherwise (the model articles do not):
o those shares must first be offered to the existing shareholders so that they have the opportunity to maintain their proportional share of ownership and voting strength in the company (the pre-emption right).
i. The shares must be offered on the same terms as would be offered in the open market;
ii. The existing shareholders must be given at least 14 days to accept;
iii. Pre-emption right doesn’t apply to shares issued for non-cash consideration;
iv. Pre-emption right may be disapplied by special resolution.

Answer 74

A

Model Articles give directors power to decide how much money to borrow on behalf of the company.

Answer 75

A

i. UNSECURED LOAN
= a promise to repay the money borrowed.

ii. SECURED LOAN
= a promise to repay
+ right of lender to take property if not repaid.
1. Mortgage
2. Fixed Charge
3. Floating Charge
4. NEGATIVE PLEDGE

**NB. Charges and mortgages must be registered at Companies House within 21 days of their creation

Answer 76

A

i. UNSECURED LOAN
= a promise / contract to repay the money borrowed.
e.g. A debt security is effectively an IOU, it is not secured.

Answer 77

A

ii. SECURED LOAN
= a promise to repay + right of lender to take collateral/property if not repaid.
1. Mortgage
2. Fixed Charge
3. Floating Charge
4. NEGATIVE PLEDGE

**NB. Charges and mortgages must be registered at Companies House within 21 days of their creation

Answer 78

A

1. Mortgage
a. title to the asset is transferred to the lender (mortgagee), and
b. mortgagee has right to take possession in the event of default.
c. asset cannot be disposed of without the consent of the holder of the charge, in this case the bank
d. = will prevent borrower from selling the property without the bank’s consent
e. = in practice consent is unlikely to be granted unless the loan is repaid or refinanced.

Answer 79

A

2. Fixed Charge

a. Loan secured by an interest in an asset that the company will hold for a long time (such as machinery or shares)
b. = allows the charge holder to sell the asset if the company defaults on the loan.
c. The charger must create a separate fixed charge over each asset.
c. asset cannot be disposed of without the consent of the holder of the charge, in this case the bank
d. = will prevent borrower from selling the property without the bank’s consent
e. = in practice consent is unlikely to be granted unless the loan is repaid or refinanced.

if granting a fixed charge on a lease:
*check ability to assign / can it be assigned with landlord’s consent?
*check remaining term / value of lease for assignment

Answer 80

A

3. Floating Charge
a. Loan secured by an interest in a group of assets that change regularly (such as inventory)
b. Borrower is allowed to dispose of property – such as stock – which is subject to the floating charge as long as it does so in the ordinary course of its business.
c. The floating charge will automatically catch any newly-acquired property falling within its scope e.g. new purchases of stock.
d. if the company defaults on the secured loan = the charge CRYSTALISES on the assets on hand
e. Crystallising the floating charge automatically converts it into a fixed charge over all assets within its scope which are then owned by the company.
f. The effect will be that the company can no longer sell those assets without the bank’s consent.
= That might prevent it from continuing in business.
= We need to check exactly what the documentation provides about default and crystallisation.

Answer 81

A

A floating charge ranks behind a later fixed charge or mortgage over the same asset
PROVIDED THAT the later fixed charge is properly registered.

To prevent this from happening
= it is normal to include a NEGATIVE PLEDGE in floating charge documentation
=
an UNDERTAKING not to create any later security over company assets without the lenders consent

If a subsequent lender takes a charge over the same asset
+ has ACTUAL KNOWLEDGE of a negative pledge
=
then the subsequent lender’s fixed charge will be subordinate to the original floating charge.

Answer 82

A

A negative pledge is important, because it prevents the borrower from creating any new security without the bank’s agreement.

This becomes relevant if the company needs to raise finance in future + wishes to borrow from a new lender
= If, as is likely, the new lender also requires security, the company can only grant security if the bank consents.

In practice, the two lenders are likely to agree a DEED OF PRIORITY
whereby one lender (generally the second lender) agrees that the security rights of the other lender (likely to be the first lender) will take priority.

Answer 83

A

The existence of a negative pledge is disclosed by submitting:
A MR01 form
+ Certified Copy of the Charging Document
to Companies House

If the subsequent charge holder conducts a search of the company’s records at Companies House
= it will find the certified copy of the charging document
= ACTUAL KNOWLEDGE of the negative pledge
= it will NOT HAVE PRIORITY over the floating charge

To protect itself from such a situation:
the agreement for the subsequent charge **should contain a covenant **by the company that there are no earlier charges which are subject to a NEGATIVE PLEDGE.

If this is not true
= the company will be in breach of the agreement
= it may be terminated immediately

Answer 84

A

o Fixed charges over the same asset take priority in date order of their creation.
o Floating charges over the same assets take priority in date order of their creation
o A fixed charge will take priority over a floating charge over the same asset, even if the floating charge was created before the fixed charge.

Answer 85

A

Companies are separate legal entities that cannot directly take decisions
= must act through resolutions of the directors and shareholders

DIRECTOR ONLY DECISIONS:
o day-to-day operations
“HYBRID” DECISIONS REQUIRING SHAREHOLDER APPROVAL BY ORDINARY RESOLUTION:
o when the directors have a financial interest in the decision
DECISIONS REQUIRING SHAREHOLDER APPROVAL BY SPECIAL RESOLUTION:
o significant / extraordinary decisions
FILING REQUIREMENTS
o Registered Office TBC
o Companies House within 14 days of decision/resolution

Answer 86

A

o Register of members
o Register of directors
o Register of secretaries
o Register of charges against the company’s assets
o Register of PSCs

Answer 87

A

o At least 10 years.

Answer 88

A

o At least a year beyond the term of the contract.

Answer 89

A

o Annual Confirmation Statement.
i. Confirms that the information at Companies House is up to date
ii. CRIMINAL OFFENCE to fail to file the confirmation within 14 days of the end of the company’s review period.

o Annual Accounts:
i. Private companies must send no later than nine months after accounting reference period.
ii. Public companies must send no later than six months after accounting reference period.
iii. Must include a balance sheet and a profit and loss statement giving a true and fair view of the company’s financial year
iv. The directors must approve the accounts verifying that a true and fair view of the company

Answer 90

A

o Annual directors’ report
i. which names the directors
ii. + states the amount (if any) that the directors recommend should be paid by way of dividend.

o Annual strategic report
i. To give members a balanced and comprehensive view of the development and performance of the company’s business
ii. + assess performance of the directors.

Answer 91

A

o Registered company name
o Part of the UK where the company is registered
o Company’s registered number
o Company registered office
o If company displays the name of one director = it must disclose the name of every director.
o A change in name requires approval by special resolution of the members.

Answer 92

A

o Name of the partnership
o Name of each member of the partnership
o The partnership’s business address

Answer 93

A

o The individual’s business name,
o Their real name if it is different to the business name, and
o The business’s address

Answer 94

A

Insolvency indicates a person or business is unable to pay their debts.

Answer 95

A

NEGOTIATION
An Individual Voluntary Arrangement IVA
BANKRUPTCY

Answer 96

A

Negotiating with a creditor for MORE TIME or a REDUCTION in what must be paid
NB. such agreements might not be binding for lack of consideration

Answer 97

A

= a number of creditors agree to accept a reduced amount of money and payment at a different time

A debtor may not draft an IVA on their own = must instruct an INSOLVENCY PRACTITIONER

INSOLVENCY PRACTITIONER will:
1. Have the debtor prepare a statement of affairs
2. Apply to the bankruptcy court for an INTERIM ORDER
= prevents creditors from filing a bankruptcy petition
3. Prepare a REPORT advising whether there is a:
realistic chance of making a PROPOSAL WHICH WILL BE ACCEPTABLE TO THE CREDITORS
+ CALL A MEETING of the creditors to review

Answer 98

A

APPROVAL OF AN IVA requires:
o approval of the creditors owed at least 75% of the unsecured debt owed by the debtor

IF APPROVED…
i. IVA becomes binding on all ordinary unsecured creditors
ii. Preferential creditors + Secured creditors ARE NOT BOUND unless they agree to the proposal
iii. The insolvency practitioner will supervise and implement the plan

Answer 99

A

If the debtor fails to comply with the IVA or provided false or misleading information:

INSOLVENCY PRACTITIONER or any creditor party to the IVA may PETITION FOR DEBTOR’S BANKRUPTCY

Answer 100

A

BANKRUPTCY= Judicial process in which the bankrupt debtor’s assets are passed to a TRUSTEE IN BANKRUPTCY
+ Trusteee in bankruptcy liquidates the assets
+ uses the money from the liquidation to pay off as many of the debtor’s debts as possible.

Answer 101

A

*Debtor’s creditors must stop chasing after the debtor
* Debtor will be discharged from most of their debts after one year

Answer 102

A

i. THE BANKRUPT DEBTOR
can apply online for a bankruptcy order
ii. DEBTOR’S UNSECURED CREDITORS OWED £5,000+
can submit a petition for a bankruptcy order
iii. JUDGEMENT CREDITOR
can seek to execute on the judgment
iii. THE SUPERVISOR OF AN IVA
can petition for a bankruptcy order if the debtor is in default of the IVA

Answer 103

A

One or more of the debtor’s unsecured creditors owed at least £5,000 can submit a PETITION FOR BANKRUPTCY ORDER.

The application must PROVE THAT THE DEBTOR IS INSOLVENT by showing:
o CURRENT DEBT + DEBTOR DOES NOT HAVE THE FUNDS TO PAY
Evidenced by STATUTORY DEMAND FOR PAYMENT;
o FUTURE DEBT + DEBTOR HAS NO REASONABLE PROSPECT OF BEING ABLE TO PAY
Evidenced by STATUTORY DEMAND FOR PROOF OF ABILITY TO PAY.

Answer 104

A

If debtor owes a judgment debt of more than £5,000
= Creditor can seek to execute on the judgment;
if the attempt fails
= DEBTOR WILL BE DEEMED INSOLVENT

Answer 105

A

iii. The supervisor of an IVA can petition for a bankruptcy order if the debtor is in default of the IVA

Answer 106

A

An official receiver is appointed who will act as the TRUSTEE IN BANKRUPTCY
unless the creditors seek to appoint their own nominee

Answer 107

A

Most of the debtor’s property will automatically vest in the trustee
Bankrupt is entitled to keep:
i. Things needed for day-to-day living
ii. Tools required for their job
iii. Their salary

Answer 108

A

During bankruptcy proceedings, the bankrupt may not:
i. Apply for credit over a prescribed amount
ii. Act as a company director
iii. Be a partner
iv. Trade under another name

Answer 109

A

Trustee pays creditors in following order:
**i. Costs of the bankruptcy **
ii. Preferential debts
including employee wages for four months
money owed to HMRC for VAT, PAYE, and National Insurance contributions
iii. Ordinary unsecured creditors
iv. Postponed creditors (spouse or civil partner)

Answer 110

A

A bankrupt who has caused the bankruptcy by their own dishonesty, negligence, or recklessness is considered ‘culpable’
= can be subject to a court bankruptcy order for up to 15 years

Answer 111

A

i. If the partnership is at will
=no fixed term agreed for the duration of the partnership:
* it will be dissolved on the bankruptcy of the partner
+ the partner’s share of assets will be turned over to the trustee

ii. If the partnership is for a specified term or undertaking
* it will continue
+ the remaining partners will usually purchase the insolvent partner’s interest

Answer 112

A

If the bankrupt is a member of an LLP, they can’t participate in management of the LLP

Answer 113

A

the partnership is wound up using the same processes as for bankruptcy

Answer 114

A

it is wound up in the same way as a company

Answer 115

A

Receivership
Restructuring plan
Administration
Company Voluntary Arrangement (CVA)
Moratorium
Voluntary Liquidation
Compulsory Liquidation

Answer 116

A

If a creditor has taken a charge over a company’s fixed assets
= the agreement usually provides that if the company defaults,
the creditor can appoint a receiver to take the charged asset and sell it to pay off the obligation.
i. No proof of insolvency is needed
ii. Receiver’s duties are owed to SECURED CREDITOR ONLY and not to any other potential creditor

Answer 117

A

allows companies to restructure their debts with the sanction of the court,
IF APPROVED BY
those owed at least 75% in value of the unsecured debt

Answer 118

A

Procedure which enables an INDEPENDENT ADMINISTRATOR
to run, reorganise, and/or sell the company as a going concern
1. Administrator acts in the interests of the CREDITORS AS A WHOLE
2. A company can go into administration through a formal court hearing
or by the company by filing certain papers with the court
3. The court can make the order only if the court is satisfied that the order is:
LIKELY TO ACHIEVE A BETTER RESULT FOR THE COMPANY’S CREDITORS THAN LIQUIDATION

Answer 119

A

i. similar to an IVA, which seeks to rescue the company
ii. Process is started by the directors who make a written proposal to the creditors
+ nominate an insolvency practitioner to supervise the CVA
iii. 75% or more in value of the unsecured creditors must agree to the CVA for it to be implemented

Answer 120

A

i. can be sought whilst the company seeks to implement any of the above devices
ii. The moratorium is a court order which halts most actions by creditors to enforce their rights
iii. The directors of the company will appoint an insolvency practitioner as a ‘MONITOR’
MONITOR oversees the company’s affairs and ensure that it is likely that the moratorium will result in a RESCUE OF THE COMPANY as a going concern.
iv. The directors remain in charge of running the business

Answer 121

A

Members’ Voluntary Liquidation (‘MVL’):
1. Members and directors control the process from start to finish
2. Only available if the company is solvent
but the individuals involved in running the company wish to wind it up

Creditors’ Voluntary Liquidation (‘CVL’)
1. Started by the directors but then taken over by the creditors
2. Usually commenced because the directors are advised that the company is insolvent
+ if they continue trading
= they could be personally liable for the debts of the company through fraudulent or wrongful trading
3. The directors resolve that the company is insolvent and should be placed into liquidation
+ the members pass a SPECIAL RESOLUTION to start the liquidation

Answer 122

A

o A creditor who can show that the company is unable to pay its debts
= can petition for the company to be wound up (compulsory liquidation).
o Liquidator is appointed to collect assets and sell them to pay off the company’s debts
o Debts are paid in the following order:
i. Expenses of winding up
ii. Preferential debts, such as employee wages and holiday pay due in the last four months
iii. Debts secured by floating charges in order of priority
iv. Unsecured debts
v. Shareholders

If there is not enough money to fully satisfy all the creditors at one level
= the debts rank and abate equally

Answer 123

A

o when a debtor does something that intentionally puts a creditor in a better position on liquidation than they otherwise would have been.
o Trustee in bankruptcy has the power to claw back a preference paid within 6-months of the onset of insolvency (2-years if the preferred creditor is a connected person)
o Onset of insolvency
- Company compulsory liquidation = the date of presentation of the petition
- CVL = the date the company enters liquidation
- Administration = the date the company files a Notice of Intention to Appoint an Administrator
or the date when it enters administration, whichever is earliest
- Individual = date of the presentation of the bankruptcy petition

Answer 124

A

o A transaction at undervalue occurs when an asset is given away or sold for significantly less than market value.

Answer 125

A

Board Meeting 1 = 2 resolutions
i. resolution to approve decision
+
ii. resolution to call shareholder meeting, or,
iii. circulate written resolution for shareholder approval

2. Shareholder Vote
o if they vote to pass
= the resolution is passed.

3. Director follow-ups
i. EITHER Filing Requirements
at Registered Office or Companies House within 14 days or,
ii. Board Meeting 2.
to deal with admin e.g. adopt a resolution to appoint 2 directors to execute a contract / lease.

Answer 126

A

consider:
1. Notice
2. Quorum
3. Interest
whether any directors have an interest in a transaction
4. Resolutions
what resolutions are actually going to be passed
5. Filing requirements
At registered office or Co’s Hse within 14 days.

Answer 127

A

Directors have one vote each on board resolutions, which require a majority to pass
Directors must declare any personal interests:
1. Declared interests must be minuted including DIRECTOR NAME + NATURE + EXTENT of their interest
If a director is personally interested, they may not be able to vote or count towards the quorum
The company can get shareholder approval to SUSPEND THE PERSONAL INTEREST PROVISIONS if needed to pass a resolution.

Answer 128

A

Provisions that deal with declaring interests and not being able to vote and count towards the quorum DO NOT APPLY to shareholder voting.
o except in specific situations like ratifying a director’s breach or approving a share buyback.
The standard way of voting is on a show of hands
= fine if it’s a non contentious matter
However, if it’s a contentious matter
= somebody might call for a poll vote
= weighted on the number of shares
only applies to shareholders present and voting:
= PR’s / Trustees in bankruptcy cannot vote until they are registered as members.

Answer 129

A

Identify OBJECTIVE e.g.
- change the articles
- issue shares
- appoint a director, etc.
Determine whether board resolution OR members resolution.
Confirm process:
Board Meeting 1
- Resolve to do everything you can e.g. - change registered office
- enter into a contract
(1. approve contract)
(2. resolve to enter into contract + authorize directors to sign).
(3.1 If shareholder approval is needed, the board will first resolve to approve the contract, then
3.2 the shareholders will approve it, and then
3.3 the board will resolve to enter into the contract.
If doing a written resolution, the board will resolve to circulate the written resolution, then the shareholders will pass the resolution, and then the board will reconvene to resolve to do the final things.

Answer 130

A

Shareholder meetings are called by the board who resolve to call a general meeting

2. Notice Requirements
1. company name,
2. date/time/place of the meeting, and
3. the wording of any resolutions to be voted on

3. Who can vote
* Shareholders can appoint proxies to attend / vote on their behalf
* Only the shareholders who actually attend and vote at the meeting are counted.

4. Ordinary / Special Resolutions
* Ordinary = more than 50%
* Special = 75% or more

Answer 131

A

The majority of shareholders in number must agree to the short notice.
The shareholders agreeing to the short notice must hold at least 90% of the ordinary voting shares.

If these two requirements are met, the shareholders can sign a consent form agreeing to the short notice period

Answer 132

A

Shares can be transferred from one shareholder to another, but the company does not receive any money from the transfer.
The directors must resolve to register a new shareholder as a member.
Company articles may give the directors discretion to refuse to register the transfer of shares.
Some companies have restrictive transfer articles that place conditions on who shares can be transferred to.
= check the company’s articles and get the directors’ view before transferring shares to avoid the transfer being refused.

Answer 133

A

1. Written resolutions
o FASTER as don’t require the 14-day notice period for a general meeting
o Passed as soon as threshold met:
- More than 50% of shares for ordinary resolution
- 75% of shares or more for special resolution
o cannot be used to dismiss a director

2. Or general meeting
o Advantages at least you know you’re going to pass that day.

Answer 134

A

the resolution wording
voting instructions = how they approve a resolution (sign and return etc.)
return address, and
lapse date (28 days unless the articles say anything different)

Answer 135

A

o If a partnership is bound
= all the partners are individually bound and the creditor can pursue any partner for the full debt = jointly and severally liable
o A partner can bind the partnership if they have:
- actual authority (stated in the partnership agreement) or
- apparent authority (what a reasonable person would expect).
* If a partner binds the partnership without authority, they may be in breach of the partnership agreement = have to indemnify the other partners for any losses.
* The creditor’s knowledge of the partner’s authority and status as a partner are also relevant in determining if the partnership is bound.

Answer 136

A

unless they agree to something different.

NB. Partners can change most provisions in the Partnership Act, except for the definition of whether they are in a partnership.

Answer 137

A

Contributions
Payment / Profit Share
Obligations
Restrictions - competing businesses
Termination = Amend provision to terminate on death.

1. How long is the partnership going to continue?
2. Can people resign from it / be expelled from it?
o under Partnership Act partnership dissolved if one partner leaves / dies / insolvent
o = ALWAYS CHANGE as you want the choice not for it to automatically dissolve.
3. What are the provisions if somebody leaves?
o Provisions for remaining partners to buy out a departing partner + continue
4. Obligations
o e.g. working hours
5. Restrictions
o Competing businesses
6. Profit sharing arrangements
o Under Partnership Act = equal shares regardless of contributions
o = Do you want to share profits according to contributions?

Answer 138

A

1. Check is there a partnership agreement that governs the situation?
o E.g. grounds for expulsion or decision-making processes?
2. Does the decision require unanimous agreement or just a majority decision?
o Change in the nature of the business,
o Change in the terms of the agreement,
o Bringing in a new partner,
3. How many partners have you got?
4. Consider options for an aggrieved partner:
o E.g. leaving the partnership (notice period, getting paid back, etc.)
* Exiting Partner
o = Can you negotiate a better settlement for exiting partner?
* Remaining Partner
o = can remaining partners buy out departing partner?
o Can they actually replace their time?

Answer 139

A

1. Check partnership agreement
o What does it say about leaving the partnership??
o When can you leave?
o Who do you have to serve notice on?
o What’s the time limits to serve notice?
o When would you get your capital?
2. If no provisions about retirement
o = negotiate a retirement clause / exit?
3. If no agreement, the only option under the Partnership Act is for all partners to agree to the departure,
o = unlikely if a partner is being expelled.
4. NUCLEAR OPTION
o Dissolving the partnership entirely is an option if no agreement can be reached
Conclusion
Important to have clear provisions in the partnership agreement to avoid difficult negotiations when somebody want to leave

Answer 140

A

they remain liable for debts incurred when they were a partner.
They will not liable for future debts if a) served notice to existing creditors, and b) placed advert in London Gazette.
Departing partner can get an indemnity from the remaining partners, but only worth anything if the partners have the money to pay you back.

Answer 141

A

i. GIVE ACTUAL NOTICE notice to existing clients / creditors
ii. PUBLISH A NOTICE in the London Gazette for future creditors
iii. REMOVE NAME from website, letterhead, and list of partners at the premises.

Answer 142

A

Determine:
i. when the debt was incurred and
ii. whether proper notice was given to avoid liability.

Brainscape's Knowledge GenomeTM

Business Flashcards

Brainscape's Knowledge Genome^TM