Business Flashcards
When buying shares in a private limited company, what steps must be done?
Seller executes stock transfer form and gives it to buyer.
Buyer’s solicitor sends form and stamp duty fee to HMRC.
Buyer sends executed and stamped stock transfer form to the company requesting registration of shares.
Transfer of shares must be reported on the next annual confirmation statement to Companies House.
Are restraint of trade clauses enforceable?
Usually they are prima facie void and unenforceable.
The clause must go no further than necessary to protect the legitimate interest of the one relying on the clause.
The clause must also be reasonable in the public interest.
What did Home Counties Dairies v Skilton say about restraint of trade clauses?
Based on the facts of the case, a 1 year restriction on selling to former clients was acceptable. However, a geographical restriction was not.
Note: This does not mean all geographical restrictions will be void. It will depend on the facts of each case and a small geographical restriction could in some cases be valid.
Is a shareholder of a private limited company able to ask for a copy of the register of members?
Yes, unless the request is not made for a proper purpose.
Note: members can exercise this right without charge. Others (i.e., members of the public) may have to pay a prescribed fee.
What are designated members and how many must a limited liability partnership have?
An LLP must have at least 2 designated members.
They perform administrative duties that secretaries/directors would perform in a company.
What is a “salaried member” in an LLP?
The individual’s contribution to the LLP is less than 25% of the expected disguised salary payable by the LLP.
Note: LLPs do not pay corporation tax. Each partner pays income and CGT on their shares.
For an alteration to a company’s articles of association to be effective, what must occur?
A special resolution (75%).
The change must be in the best interests of the company as a whole.
What is the Duomatic principle?
Anything the members of a company can do by formal resolution in a general meeting can also be done informally if there is unanimous consent.
When can a solicitor used the Article 67 RAO exclusion (reasonably necessary) when arranging a share transfer in a company associated with a property transaction they’re working on?
It is a necessary part of their other work (the property transaction)
AND
The solicitor’s overall fee for their work does not include separate remuneration for the share transfer.
Does a non-director shareholder have a duty to disclose their interest in a proposed transaction?
No, the duty to disclose an interest in a proposed transaction relates to directors.
What are the professional conduct implications of a fee-sharing arrangement?
The solicitor and his firm must disclose the fee sharing arrangement with the client.
In personal injury, the firm cannot keep any commission, and must account to the client for it.
How can an insolvent LLP bring its business activities to an end?
Creditors Voluntary Litigation
They must publish a notice in the London Gazette, submit a copy to Companies House, and hold a creditor’s meeting.
What types of companies are specifically excluded from applying for statutory moratoriums?
FInancial Services Firms, e.g., banks/insurance companies.
Companies which are party to capital market arrangements of over £10million.
When is a “demands and needs” statement required and what is it?
Before a contract of insurance is taken out for a client, a firm must take reasonable steps to ensure the contract is suitable for the client’s demands and needed.
Must provide the client with a statement confirming the contract is consistent with their demands and needs.
Can you set off VAT paid for purchasing items for non-business activities? (e.g., items given away at charity events)
No, VAT is charged in the futherance of any business carried on by that person.
Charity events are not business activities as they should involve getting paid in some form.
When must a solicitor apply enhanced client due diligence?
- Where the transaction is complex
- Where the transaction is unusually large
- Where there are unusual patterns of transactions
- Transactions have no apparent economic/legal purpose
If a client wants to challenge a bill of costs by way of detailed assessment, what is the timeframe they must do this within?
The client must make an application within 1 month of receiving the solicitor’s bill.
If an application is made between 1 to 12 months of receiving the bill, the court has the discretion to allow the application.
What needs to be submitted to the Registrar of Companies to register a new company?
The application form (form IN01) and articles of association (if not using MAs).
Model articles and shareholder agreements do not need to be submitted.
To initiate a creditor’s bankruptcy petition, what must be shown?
A bankruptcy petition can only be presented if it exceeds £5,000.
You must show the debtor is unable/has no reasonable prospect of paying.
In creditor’s bankruptcy petition, what must be shown to prove a debtor is “unable to pay”?
Debtor is unable to pay if the creditor has served a statutory demand (debt must exceed £750) and 3 weeks have lapsed
or an attempt at execution of the judgment debt has not worked.
If you sign a contract purporting to sign on behalf of a company which has not yet incorporated, who is bound by the contract?
Only the person who signed the contract (personally), not the company.
When is shareholder approval needed when directors want to dispose of a non-cash asset?
If a director, director of the holding company, or connected person wishes to acquire/dispose of a substantial non-cash asset, an ordinary resolution is needed.
Substantial means over £100,000, or the sale/purchase of an asset worh over 10% of the company’s net asset value (NAV).
If a company has model articles and wants to amend them, what must be filed with the Registrar of Companies?
The shareholder resolution to adopt new articles and the new articles.
If 3 people go into business together, invest equal amounts and agree to share profits equally, have they established a partnership?
Yes, because they are in business together and intend to make a profit.
If the nominated officer in your firm makes a suspicious activity report to the NCA, when can you resume working on the matter?
If you are authorised to do so by the NCA, or if 7 working days have passed since the disclosure to the NCA
What are the 4 ways in which trading losses can be set off against taxable profits for corporation tax purposes?
- Current Year Profits
- Previous Year Profits - carry back remaining losses against taxable profits from the previous accounting year (claim must be made within 2 years)
- Future Trading Profits - can use carried forward losses aginst profits up to £5m each period. If over £5m profit, carried forward losses can relieve max 50% of unrelieved profits
- Group Relief
What 3 things should be sent to the Registrar of Companies to incorporate a private company limited by shares?
Form IN01 (Application to register a company)
Memorandum of Association
Prescribed Fee
& Articles if MAs not adopted
What information is included in the application form IN01 to incorporate a private company limited by shares?
Proposed Company Name
Type of Company (Ltd)
State Principal Business Activities
Registered Office Details
Proposed Articles of Association
Details of First Directors and Secretary
Statement of Capital and Initial Shareholdings
Statement of Initial Significant Control (PSCs)
Statement of Compliance with Companies Act 2006
Election to keep information on a central register with the Registrar instead of private registers (optional)
What should be sent to HMRC when incorporating a private company?
Register for Corporation Tax
- Happens automatically if incorporation is done online at Registrar, otherwise application to HMRC must be made within 3 months.
Decisions taken in a partnership are by a majority except in 3 situations which require unanimity. What are these 3 circumstances?
- Changing the nature of the business
- Introducing a new partner
- Changing the terms of the partnership agreement
What 2 forms of notice must a partner give when retiring from the partnership?
Actual Notice - Directly inform clients
Constructive Notice - Notice in the London Gazette to 3rd Parties
What is “holding out” and what will happen to a partner if they are found to be doing this?
They do/act as if they’re still a partner with credit going to the firm and this is relied upon by someone.
If they are holding out, they can still be liable for the firms’ debts as if they are a partner.
What 11 things should a partnership agreement include?
Commencement Date
Partnership Name
Capital Contributions
How Profit and Loss is Shared
Limits on Withdrawals of Profit
Place/Nature of Business
Ownership of Assets
Partner Workloads/Preventing Conflicts
Partner Roles
Decision Making
Duration/Restrictions on Dissolving the Partnership
What must be filed with the Registrar of Companies to incorporate a limited liability partnership?
Form LLN01
- Proposed Name
- Registered Office
- Designated Members (perform administrative functions)
- Member Details
- Statement of Initial Significant Control
- Statement of Compliance
- Election to keep information on central register instead of private statutory registers (optional)
The Prescribed Fee
What are the 5 steps to allotting new shares?
(Cats and Dogs Nibble Bones acronym)
Cap? - Is there a cap on the number of shares which may be issued?
Authority to Allot - Do directors have the authority to allot?
Disapply Pre-Emption Rights - Any that need disapplying?
New Class of Shares - SR required to create new class
Board Resolution - Directors pass BR to allot new shares
If a company has a cap on the number of shares that may be issued, how can this cap be removed when allotting new shares?
Companies Incorporated under CA 1985 = Ordinary Resolution, even though it involves changing articles, removing the authorised share capital (ASC) requires an OR
Companies Incorporated under CA 2006 = Special Resolution, Under MAs & CA 2006, there is no automatic cap. If a cap is included, an SR is required to remove it.
File the resolution at Companies House.
When will directors need authority to allot shares and how must they get this authority?
S.551 CA 2006 - If they have more than 1 class of shares, they need automatic authority to allot via OR
S.550 CA 2006 - If they have only 1 share class, directors have automatic to allot shares of the same class
What are pre-emption rights and what are their effect when allocating new shares?
Pre-Emption Rights = Rights of First Refusal
Equity Securities must be first offered to existing shareholders in proportion to their existing shareholdings before being offered to others.
They prevent shareholders from having their shareholding diluted.
What are the 4 main instances in which pre-emption rights can be disapplied?
Where directors have general authority to allot…
- They can get power from SR or articles
Private Companies with only 1 share class
- They can get power from SR or articles
Private Companies can permanently exclude pre-emption rights through articles
Specific Disapplication of Rights by SR
- Directors write to shareholders with reasons, amount paid to company from the allotment and justification for the amount
If a company wishes to create a new class of shares when alloting shares, what must be done?
New provisions must be entered into the articles dealing with rights attaching to those shares (SR required).
What 6 things must be sent to Companies House after allotting new shares? (Up to 6)
- Copies of Resolutions within 15 days
- S.551 ORs granting authority to allot
- All SRs on misapplication of pre-emption rights/amending articles
- Amended articles if a new share class created/articles amended
- Form SH01 within 1 month
- Persons of Significant Control Forms
What is the form PSC01 used for?
Notice of an individual with significant control.
What is the form PSC02 used for?
Notice of an entity with significant control.
What is the form PSC04 used for?
Change of details of individual with significant control.
What is the form PSC07 used for?
Notice of PSC no longer being a PSC.
What 3 things should be done internally following an allotment of shares?
- Update register of members within 2 months
- Update PSC register if necessary
- Prepare and send share certificate to new members within 2 months
What is the procedure for the payment of a dividend in a private company?
- Check profits are available
- Directors decide under MAs whether to declare dividend
- Directors make recommendation to GM to pay dividend
- Members must pass OR to pay recommended dividend - cannot pay more than the recommended amount.
What is the procedure for buyback of shares out of distributable profits/proceeds of a fresh issue of shares?
BM1 - GM - BM2 - PMM
Pre-BM - Check articles do not prevent buyback, shares are fully paid and distributable profits are available
BM1
- BR to approve draft contract and call GM/propose WR
- Display contract at registered office for 15 days/circulate with WR
GM/WR
- OR to approve buyback (holders of shares being bought cannot vote)
BM2
- BR to enter contract and authorise directors to sign
PMM
- File return of own shares (SH3) and cancellation of own shares (SH06). Cancel shares, update members register and PSC register.
In what order are the 3 types of income taxed for income tax purposes?
Never Squash Doughnuts acronym.
Non-Savings Income
Savings Income
Dividend Income
What are the tax rates for dividend income?
£0 - £500 = 0%
£501 - £37,700 = 8.75%
£37,701 - £125,140 = 33.75%
£125,140+ = 39.95%
What is the 7 step process to calculating income tax?
- Calculate Total Income
- Deduct Tax Reliefs - Interest on qualifying loans/pension contributions
- Split income into 3 types (NSD)
- Calculate if personal savings allowance is available
- Apply relevant tax rates to NSD income
- Add together amounts of tax
What are the requirements for Business Asset Disposal Relief to apply (to CGT)?
All/Part of a Trading Business - trading business owned for at least 2 years.
Assets in a Business that Used to Trade - Assets were used in the business when it ceased to trade, assets disposed within 3 years of the business ceasing trade, business owned for minimum 2 years.
Shares in a Trading Company - TB owned for at least 2 years, disposer was an officer/employee owning 5% ordinary shares.
Shares in a Company that Used to Trade - Shares owned for at least 2 years before company ceased trading were an officer/employee with 5% ordinary shares.
What are the requirements for investors relief to apply?
Fully paid, ordinary shares issued after March 2016.
Company is trading/holding company of a trading group.
No shares are listed.
Shares held continuously for 3 years since April 2016.
Individual has never been a connected person/officer/employee since shares were issued.
Directors have general duties under S.171-177 CA 2006. What are these 7 general duties?
S.171 = To act within powers
S.172 = To promote the success of the company
S.173 = To exercise independent judgment
S.174 = To exercise reasonable care, skill, and diligence
S.175 = To avoid conflicts of interest
S.176 = To not accept benefits from 3rd parties
S.177 = To declare interest in a proposed transaction/arrangement
What does the general director duty to act within its powers entail?
To act in accordance with the company’s constitution
To only exercise powers for the purposes for which they are conferred
What should directors consider when taking decisions for the company to act in accordance with their duty to promote the success of the company?
Company Reputation
Interests of Stakeholders
Possible Impact/Consequences of their Actions
The Need to Act Fairly as between Members
If a director breaches their duties, what recourse is available by the company?
Restoration of Transferred Property
Equitable Compensation
Account of Profits
Rescind a Contract
Injunction to Prevent Continuing/Anticipated Breach
When a service contract for a new director is proposed, when will shareholder approval be needed?
OR required where it has a minimum guaranteed term of 2 years.
How is a chairman of the board appointed, and what does the chairman get?
Appointed by a board resolution
They get a casting vote in the event of a deadlock (extra vote)
If directors want to be able to appoint alternative directors for themselves, what must be done?
Shareholders must pass a special resolution to change articles to allow this
Explain the key features of a sole trader (status, liability, tax, registration)
One individual selling goods who owns the business.
No incorporation or registration with Companies House, unlimited liability, regulated only by laws that affect trading (such as SoGA 1979).
Must register for self-assessment with HMRC if earning over £1,000; must also register for VAT if annual turnover exceeds £90,000
Liable for income tax and CGT (and VAT if applicable).
Advantages:
- Very easy, quick, and cheap to create
- Freedom to run as individual sees fit
- Sole-decision maker
- All profits belong to the owner
- Nothing on Companies House
Disadvantages:
- Unlimited liability for debts and court action
- Unable to raise finance easily (cannot issue shares)
- Lacks the status of a company (only really suitable for really small businesses)
Explain the key features of a partnership (status, liability, tax, registration)
Two or more individiuals running a business together with a view of profit.
No incorporation (no separate legal personality) or registration at Companies House.
Unlimited Liability (partners can be sued individually) and joint and several liability (creditors can seek remedy from one or all partners).
Regulated by the Partnership Act 1890 and any partnership agreement.
The “nominated partner” needs to register for self-assessment with HMRC to send the partnership’s tax return; register for VAT if over £90,000.
Each partner pays income tax on profits made (and CGT if they sell assets). Must register at HMRC as self-employed (if earning over £1k).
Advantages:
- Very easy, quick, and cheap to set up
- Freedom to run as owners see fit
- Support of joint decision making
- Privacy
- All profits belong to the partners
Disadvantages:
- Unlimited Liability for debts and financing issues (cannot issue shares)
- Decision-making can be tiresome - may require the agreement of all partners
- If there is no written agreement, it must be governed by PA 1980
- Lack of status of unincorporated firms
Explain the key features of a company limited by shares (status, liability, tax, registration)
A company, the ownership of which is through shares.
Incorporated (registered at Companies House), takes effect from the date of the Certificate of Incorporation.
Needs at least one director and one shareholder.
Limited Liability - Only liable up to the amount originally invested in the company.
Regulated by the Companies Act 2006 (and the Articles of Association).
Liable to Corporation Tax and VAT (if applicable).
Advantages:
- Limited Liability for debts (only up to the amount subscribed for shares unless any amount unpaid on the shares)
- Shareholders can determine the running of the company and the articles of association
- Finance raising options (e.g., giving fixed/floating charges, issuing shares)
- Status
Disadvantages:
- Must register to set up (and costs and delay associated with this)
- Public Information
- Formalities and Administrative Burdens (e.g., on directors to file annual accounts and confirmation statements) and Directors must ensure compliance with duties and CA 2006
- Costly to run
- Obligations to comply with under the CA 2006 and the Economic, Crime, and Corporate Transparency Act 2023
Explain the key features of a Limited Liability Partnership (status, liability, tax, registration)
A partnership (two or more individuals) that has registered as an LLP.
Incorporated, so must register at Companies House and takes effect from the date of registration.
You need two or more individuals as members; the LLP has separate legal personality.
Limited Liability - Only liable up to amount originally invested.
Regulated by the Limited Liability Partnership Act 2000/Regulations and the partnership agreement. If no PA; LLPA 2000 applies.
Individual partners are taxed on profit as income tax; the sale of a share or assets is taxed by CGT (LLP itself is not taxed except VAT). Must register at HMRC as self-employed (if earning over £1k) and for VAT if annual turnover exceeds £90,000.
Advantages:
- Tax Benefits - LLP itself is not subject to corporation tax
- Limited Liability for debts
- More freedom to run as owner sees fit - agreement can be very flexible
- Finance raising options (e.g., giving floating charges) and status
Disadvantages:
- Must register to set up (and costs associated with this)
- Public Information
- Formalities and Administrative Burdens
- Costly to run
What are the ways a company can be incorporated?
2 ways:
- Set up a new company.
- Use an shelf company.
How do you incorporate a company from scratch?
Fill in an IN01 form which contains the following information:
- Type of company being registered (private or public)
- Company name. If a private limited company, must have limited or Ltd after the name; cannot be the same name as one in use; cannot be a prohibited word or linked to monarchy or government or have computer code in it
- Principal Business Activity
- Which Articles the company will be using (Model Articles, amended, or new)
- Registered Office (must be an “appropriate” office - one where the company is notified of any deliveries)
- Registered email address
- Statement of Capital and Shareholders; total number of shares, nominal value, types of shares, shareholders and their respective shares and if they are fully paid. Each initial shareholder must be identified.
- Director setails and cosec details (if applicable). Directors must be identified
- PSC (person who owns more than 25%) identity should be verified.
Articles of Association: draft own, amend the Model Articles, or use the Model Articles.
Memorandum of Association: Shows who the shareholder(s) investing in the company are and confirmation that they wish to be shareholders. Signed by the subscriber(s).
Pay CH fee (£12).
Registrar issues a Certificate of Incorporation and the company is given a registration number it has for its life. Company takes effect from the date stated on the certificate.
Are they any post-incorporation steps to take (company)?
The company should hold a board meeting to do the following if necessary:
- To elect a chair of the board
- To report on the incorporation of the company
- To choose a company bank account
- To choose an accounting reference date (the last day in the company’s financial year - usually 31st December) - file an AA01 at Companies House to change the date
- Select an auditor (unless the company is exempt because it is too small)
- Approve company records
- VAT registration (if applicable)
- Enter into insurance arrangements
- Choose the company seal
A separate shareholders meeting can be also held to approve the directors’ employment contracts by ordinary resolution
What is the procedure for converting a shelf company (Model Articles)?
- Boarding Meeting 1 - The directors of the shelf hold BM. They appoint the new directors and resign. The new directors can then vote to transfer the shares to the new owners (and appoint a cosec and chair if required).
- General Meeting - Shareholders vote to change the company name by Special Resolution.
- Board Meeting Reconvened or a New One is held - Directors report on shareholder vote, then vote to change registered office, the accounting reference date, appoint auditors (if necessary) and direct a director or Cosec to deal with post-meeting matters.
Minutes of the BM and GM will need drawing up, Company’s Member Register will need updating. Old shares will need cancelling and new share certificates must be issued.
Note: before any director is appointed their identity must be verified and Companies House must be notified of the new appointment, the fact their identity is verified, and their personal details (e.g., residential address) within 14 days. A director CANNOT act if not verified.
Identity of any new PSC will need to verified and CH must be informed of the change within 14 days.
To deliver a document to CH, the person delivering it on behalf of the company must have their ID verified and a statement confirming that with their filing.
Several filings (ID verified individuals only) must be made at Companies House to show:
- Change of Name (with a copy of the special resolution authorising this) = NM01 form (filed with the SR).
- The passing of the SR (file within 15 days).
- The change of the accounting reference = AA01
- Change of registered office = AD01 (14 days)
- File the change of PSC at CH (within 14 days)
- Shareholder changes can be updated in the company’s next Confirmation Statement
- Resignation (TM01) and Appointment (AP01) of new directors and/or company secretary (AP03) (within 14 days)
How do you set up an LLP?
File an LL IN01 form which contains:
- Name of the LLP
- PSC details (of a person who owns or controls more than 25%)
- Registered Office Address
- Names and Addresses of the two members (if only 2)
- Names of the two designated members (can be the same people as the members).
- Statement that incorporation requirements have been complied with
- Fee (£40)
Companies House will issue a Certificate of Registration.
Main Points to Remember:
- There should be an LLP agreement by which the LLP is governed
- There must be at least two members to form an LLP. There must be at least two designated members (can be the same 2 if only a 2 member LLP) who are responsible for sending accounts and other documents to Companies House as well as dealing with tax registrations
- The LLP must submit annual accounts to CH and an annual confirmation statement. Must also keep accounting records
- A member of the LLP binds the LLP unless acting without authority and the counterparty knows it
Explain Limited Liability
It means the shareholder or LLP partner is only liable to the amount they invested originally (unless the shareholder has any amount unpaid on the shares).
Known as the corporate veil - cannot be pierced to personally pursue members for debts of the company.
What are the directors?
A company is a separate legal personality that is owned by the shareholders, it can enter into contracts and borrow money etc.
But it still needs humans to run it - Directors make the day-to-day decisions for the company.
They also have an agency relationship with the company, entering into contracts on the company’s behalf.
They are answerable to the shareholders - who actually own the company.
What is the doctrine of maintenance of share capital?
The share capital the shareholders put into the company belongs to the company, not to the shareholders.
It cannot be returned to the shareholders but must stay in the business (it can still be used by the business to purchase assets etc).
This is so that creditors can at least get soemthing if the business goes into debt, even if it is minimal.
CA 2006 - There are ways it can be paid out to shareholders, but this requires a special procedure that must be followed, otherwise the law will be broken.
What does having separate legal personality mean with respect to a company?
The company is separate from its owners, known as a ‘legal person’.
The company can own property and enter into contracts in its own name (e.g., employees of the company enter into a contract with their owners).
A company can borrow money and grant security over its assets - creditors can only go after the assets.
Can sue or be sued.
Can last forever until it is wound up - shares live on after death and directors can be replaced.
Taxed via corporation tax.
What are the articles of association of a company?
Each company must have an Articles of Association (AoA).
Rulebook of the company - They contain the rules by which the company should be governed, e.g., how many votes you need to make a decision or when shareholders should be consulted by the directors.
Two important things to know about AoA:
- The AoA must not conflict with overriding (mandatory) provisions of CA 2006
- There are Model Articles that any company can use - these are the standard default articles contained in the CA 2006
What are the main resolutions and procedures of the CA 2006 that cannot be amended or removed by the Articles of Association?
- Quorum for a General Meeting - If the company is a single-member company: must be 1 member. If more than one member, AoA can dictate the quorum (or if it does not, 2 members are a quorum)
- Amendment of AoA - Must be by special resolution, cannot be changed to board resolution in AoA
- Removal of Directors/Auditors - AoA cannot remove the right to vote out a director or auditor by ordinary resolution
- Director/Auditor cannot be removed by a written ordinary resolution - It must be by ordinary resolution passed at a general meeting
- Any provision of the AoA which prevents the shareholders from making a decision by written resolution (save for the exemption above) is void
- A buyback of shares out of capital or a reduction in share capital must be approved by special resolution
- To re-register as a public company, a private company use a special resolution
- The shareholders’ right to have a general meeting called via shore notice
- The articles cannot raise the threshold required to demand a poll vote (10%)
- The right of a member(s) with a 5% stake to call a GM or demand a WR be circulated
IF THE ARTICLES TRY TO ALTER THE ABOVE, THOSE PROVISONS ARE INVALID
What does a company’s constitution comprise of?
- Certificate of Incorporation
- Statement of Capital and any subsequent statement each time the company issues shares
- Articles of Assocation
- Shareholder Resolutions
- Shareholders’ Agreement
How do companies execute documents?
In accordance with CA 2006:
- For simple contracts, a director can sign
- For deeds, you need 2 directors or 1 directors and 1 company secretary or 1 director and a witness.
What happens if a director signs before the company has been incorporated?
The individual will be personally liable for that deed or contract.
To avoid this, could include a provision in the contract stating that the individual’s responsibility ends and transfers to the company on incorporation.
What are the requirements to be a public limited company (plc)?
- You must have PLC after the company name
- The articles must state that it is a public limited comapny and be suitable for a plc
- The share capital of the company (the amount invested by shareholders) must be a minimum of £50k and must be paid up at least 25% of their nominal value with premium all paid
How can a company become a plc?
A company can register as a plc on incorporation.
A private company can also register as a plc.
To register as a PLC from a Ltd, the shareholders mut pass a special resolution (75%) to:
- Re-register the company as a PLC - done via an RR01 form
- Change the name of the company to have PLC after it
- Change the Articles to be suitable for a PLC
You then submit to Companies House:
- RR01 form (to show a re-registration of private to public company)
- Revised Articles
- The Special Resolution
- The fee
- Financial Documents (balance sheet, statement from auditors and valuation of any shares allotted for non-cash consideration between the date of balance sheet and resolution)
The registrar will issue a certificate; PLC takes effect from the date of the certificate
What are the key features of a company secretary?
A private company is not required to have a company secretary but many in practice will, to deal with administrative matters.
A public company must have a company secretary.
CoSec can be an individual or a company (if a company is secretary, a human will act on behalf of that company as secretary).
The secretary can be removed at any time by the directors by board resolution - CH must be informed within 14 days.
Common Duties of CoSec are:
- Write up minutes of BM and GM
- Keep the company registers up to date
- Send necessary filings to CH (provided that CoSec’s ID has been verified)
CoSecs are appointed:
- On incorporation (IN01), the secretary takes office when the company is incorporated; or
- After incorporation (e.g., shelf companies) via board resolution. CH must be informed (by sending a form of appointment by a verified individual) within 14 days of appointment
What are the key features of a company’s auditors?
Directors of every company must prepare accounts for each financial year.
Unless exempt on account of being a small company, every company must appoint an auditor each financial year and the auditor must produce a report given to shareholders which states whether the auditors believe the accounts have been prepared properly, in line with the requirements of the CA 2006 and give a true and fair view of the company.
- The directors can appoint the first auditor of the company. The shareholders then appoint the auditor each financial year by OR.
- An auditor may be removed from office at any time by the shareholders using ordinary resolution and the same procedure as removing a director (i.e., requiring special notice to hold a general meeting). A written resolution, as for the removal of a director, cannot be used for the removal of an auditor
- The AoA can have an extra right for the board to remove an auditor, but cannot remove the shareholder right to do so by OR at a GM
- An auditor can resign by written notice to the company’s registered office
How can directors be appointed?
Appointment of a director can be:
- On incorporation by Form IN01: they are automatically directors once the certificate of incorporation is issued
- After incorporation via either a BR or OR under the model articles - CH must be informed within 14 days of appointment and any new director must have their ID verified (and when CH is informed, a statement confirming their ID has been verified must be given).
A private company must have at least one director; a public company must have two.
Directors act via majority decision at board meetings or unanimously without meeting (via written resolution).
Directors also appoint a chairperson (by board resolution). The chair is also a director, they will lead the board and general meetings and in board meetings has a casting vote in the event of a deadlock.
On incorporation, the subscribers must confirm that the ID of the director has been verified. Director cannot act without this.
On appointment of future directors, CH must be notified witin 14 days and details about the director must be provided to CH with a verification statement - failure to do so is an offence
How can a director be disqualified and what are the grounds for disqualification?
The court has discretionary power to disqualify a director under the Company Directors Disqualification Act 1986.
The period of disqualification ranges from 2 to 15 years, during which the director is not allowed to be a director of a company or be involved in the management or formation of a company.
Breach of disqualification is a criminal offence and the director can be personally liable for the company’s debts.
Grounds for Disqualification are:
- Conviction of an Indictable Offence
- Persistent breaches of company legislation
- Fraud on a winding up
- On summary conviction for a filing or notice default
- Being an unfit director of insolvent companies; i.e., responsibility for the company’s insolvency or taking part in voidable transactions
- Disqualification after investigation
- Fraduluent or wrongful trading
- Breach of competition law
How can a company remove a director?
A director can be removed by ordinary resolution held at a general meeting.
Cannot use the written resolution procedure to remove a director.
The director, if a shareholder, can also vote at the general meeting against their removal (and they may have Bushell v Faith rights)
The articles of association may contain an extra right for the board to remove a director (not contained in the Model Articles)
What’s the procedure to remove a director?
A member must send a S.312 special notice to the board requesting a general meeting to vote to remove a director. Must be sent at least 28 days before the proposed general meeting.
NOTE - If the GM is called by the directors before the 28 clear day period, any OR passed is still valid.
The board can choose to ignore this notice. Therefore, if the member (or group of members) has at least a 5% stake, they should also send a S.303 notice with the S.312. This gives the directors 21 days to call a GM.
If the board chooses not to hold a GM even after receiving the S.303, the shareholder(s) (or any shareholder among the group that sent in the S.303 with more than a 50% of the total voting rights among them) can do as soon as 21 days have passed from receipt of the S.303 (so, on the 22nd day), with 14 days clear notice.
The S.303 therefore gives shareholders the right to call a general meeting even if the directors refuse to do so.
What protections can a director have against removal?
All directors have S.149 rights - The director concerned must be sent a copy of the special notice immediately after being received by the company from the shareholder(s). The director has a right to make written representations to the company and speak at the general meeting.
The director may also have Bushell v Faith rights if these are in the articles of association. These give the directors weighted votes if there is a shareholder vote on their removal (and the director is a shareholder).
Directors may have rights under their employment contract
Directors may have rights under a shareholders’ agreement
What is the S.171 duty under the Companies Act 2006?
Duty to act within powers.
Directors must act in accordance with the company’s constitution and only exercise their powers for proper purposes. This means they cannot breach the AoA.
What is the S.172 duty under the Companies Act 2006?
Duty to promote the success of the company for the benefit of the members as a whole.
Director has a fiduciary duty to act in the best interests of the company.
Director must consider the following factors when exercising this duty:
- Likely consequences of any decision in the long term
- Interests of the company’s employees
- Need to develop the company’s business relations with suppliers, customers, and others
- Impact of company’s operations on the community and environment
- Desirability for the company for maintaining a reputation for high standards and conduct
- The need to act fairly between members of the company
Subjective Test - Court considers whether D honestly believed they were promoting the success of the company for the benefit of the members as a whole?
Success for the Benefit of the Members as a whole = Increasing the value of teh shareholders’ investment (i.e., the prices of the shares) by strengthening the company
What is the S.173 duty under the CA 2006?
Duty to exercise independent judgment.
Directors must act independently in their decision-making.
Cannot fetter their own discretion by for example entering into a contract which makes them vote a certain way (unless the AoA authorises this).
What is the S.174 duty under the CA 2006?
Duty to exercise reasonable care, skill and diligence.
The test:
1. Objective - Would a reasonably competent director have done the same?
2. Subjective - Has the director breached this duty with regard to any special knowledge they personally have?
What is the S.175 duty under the CA 2006?
Duty to avoid conflicts of interest.
A director must make no profits out of the company using information obtained by his position to his advantage.
Exclusions:
- A contract between the director and the company for a transaction (i.e., company selling/buying to/from a director)
- The directors authorise the conflict of interest by BR
- The situation cannot reasonably be regarded as giving rise to a conflict of interest
If a director does breach this duty, they must account for all profits made (unless the company authorises them to keep the profits).
What is the S.176 duty under the CA 2006?
Duty not to accept benefits from third parties.
A director must not accept a benefit from a third party by reason of their being a director (e.g., corporate hospitality, unless approved in the AoA or by shareholders).
What is the S.177 duty under the CA 2006?
Duty to declare interest in proposed transaction or arrangement with the company.
If a director is in any way directly or indirectly involved in a proposed transaction with the company, they must declare that interest to the other directors before entering into the transaction.
If they do not do so, any contract the company enters into with the director will be voidable. Declaration can be made at the BM before the company enters into the contract.
If a director makes this declaration, they cannot vote at the BM to approve the contract and cannot be counted as part of the quorum UNLESS the articles state they can.
No requirement to make declaration if the directors are already aware of the interest before or at the time of entering into the contract or if the contract is the director’s own employment contract.
What are the consequences of a breach of a director duty?
S.124 - Director must pay damages
For all other damages, director must account for any profits, return any property, and pay damages; the contract may be rescinded, and an injunction may be ordered against them.
How can liability be avoided for a breach of director duties?
S.175 conflict of interest can be ratified by a board resolution (director who breached cannot be part of the quorum or vote).
All other breaches can be ratified by an ordinary resolution. Can be written or at a GM. If the director is a shareholder, their vote does not count (unless unanimous consent is used). Shareholders must all be fully informed of the facts and nature of the breach.
What is a “substantial property transaction” under CA 2006?
Where:
A director or their associate of a company or its holding company
- Associate = A member of the director’s family; OR a company in whcih the director or member of their family owns 20% or more shares: this can be cumulative, e.g., the director and the family member each own 10%
Buys or sells to the company
A non-cash asset = something other than cash
Of “substantial value”
- Automatically substantial if over £100k; OR worth more than £5k and more than 10% of the company’s net asset value
What is required for a “substantial property transaction”?
Shareholders’ Ordinary Resolution (can be via GM or WR)
Procedure under MAs:
- BM1: Director makes S.177 declaration. Board votes to hold GM/use WR to get shareholder vote (director can vote and form part of quorum here)
- Shareholders vote by OR: GM or WR
- BM2: Board votes to enter contract. Director cannot vote or form part of quorum.
What is the effect if no OR is passed for an SPT?
The transaction is voidable; and all the parties to the transaction, along with any directors who approved it, must pay back to the company any profits made or losses suffered.
What is required for a loan from a company to its directors?
The company needs to pass an ordinary resolution. If the director is also a director of a holding company, that company needs to pass an OR.
A memorandum setting out the terms of the loan must be made available for inspection at the company’s registered office for 15 days before the general meeting at which the OR passes and at the GM itself. If it will be passed by written resolution, the memorandum must be sent out with the WR to the members.
OR is not required where:
- The loan is £50k or less and is being used for company expenditure
- The money is being used to defend the company in civil or criminal proceedings
- The money is being used to defend a director in regulatory proceedings
- Minor business transactions worth £10k or less
What is the effect of not complying with the loan-to-director requirements?
The loan is voidable.
The director (and any director who approved it) must hand over any profits and cover any company loss.
If the OR is not passed initially, the company can affirm by passing it at a later stage meaning the loan is no longer voidable.
How does a company approve a director’s long term service contract?
Usually, the board can appoint directors.
However, if the contract is to have a “guaranteed term” that is or may be more than two years it must be passed by ordinary resolution of the members.
The “guaranteed term” is or may be more than two years if:
- The period is more than two years, the director controls how long it is, and the company cannot terminate during this period or can only do so in limited circumstances;
OR
- If the notice can be given by the company, that notice period is more than two years;
OR
- The aggregate of the period of the contract that cannot be terminated by the company and the notice is more than two years.
The contract must be made available to members with any WR for 15 days before and at the GM to vote on the contract. If it is being passed as a WR, it must be sent to the shareholders with the WR.
Failure to pass the resolution means that, if the contract is entered into, there is no guaranteed term, and the company can terminate via reasonable notice.
How does a company approve a director’s payment for leaving their position?
If the payment is more than £200, it must be approved by ordinary resolution by the members.
How does someone become a shareholder of a company?
To officially be a member of the company, you must:
- Agree to become a shareholder of a company;
AND
- Your name must be entered in the register of members.
Use one of the following methods:
- Subscribe to the Memorandum of Association on incorporation
- Buy shares from the company
- Buy shares from existing shareholders
What is a “Person of Significant Control”?
A “Person of Significant Control” means any individual or company that:
- Owns more than 25% of the shares in the company (of any class);
OR
- Owns more than 25% ordinary shares (voting rights);
OR
- Has the right to appoint or remove a majority of the board of directors in the company;
OR
- Has the right to exercise, or does exercise, significant influence or control over the company
What are obligations in respect of a PSC?
Companies House needs to be kept up to date on any changes to a company’s PSC register (which is kept at CH and publicly available) after incorporation. In addition, the company must verify the identity of every PSC and confirm to CH that it has done so.
A company must inform CH of any change in PSC within 14 days of confirming that change.
However, if the company is large and/or a public company, it can be difficult to know whether there are any PSC changes. Therefore there are notification requirements on PSCs themselves and the company to make sure the register is kept as up to date as possible:
- A company has a duty to take reasonable steps to find out and confirm their PSCs, and that includes sending notces to people they suspect are PSCs or even third parties who may know
- Within one month of becoming a PSC, if a company does not know of the change, the PSC must send notice to the company with the required information
- If the company knows of any changes to the PSC register they must take any steps to find out what those changes are as soon as reasonably practicable or at least within 14 days of the change
What are the sources of a shareholder’s contractual rights?
The Articles of Association - Under CA 2006, this is a contract between the shareholders and the company and the shareholders themselves. Contract for membership rights (e.g., right to vote and dividend). Must abide by the contract.
A shareholders’ agreement (if present) - A private contract entered into by the shareholders. Can deal with personal rights not enforceable under the AoA (e.g., shareholders’ right to appoint a director). Breach of Shareholders’ Agreement = Breach of Contract.
Name the statutory rights any shareholder is entitled to
- The right to vote (at a GM or by WR)
- The right to receive notice of general meetings
- The right to receive a dividend (provided that profit is available for the purpose)
- The ability to make an unfair prejudice claim
- The ability to make a wind-up application
- Information Rights, including receiving a share certificate on purchasing shares or after the transfer of shares within two months of getting the share(s), to receive constitutional documents if requested, to receive the accounts every year, and to inspect minutes of general meetings, company registers, and certain other documents
- Right to make a derivative claim
What is an unfair prejudice claim and when is it mostly used?
A claim a shareholder can make when they or a group of members feel unfairly prejudiced against by other shareholders.
Mostly used when there has been a failure to pay dividends and/or the directors are being excessively remunerated.
Reasonable man test used - would a reasonable person deem the behaviour to be as such?
Remedy is usually a buyout by the company of the prejudiced shareholders’ shares; the claim can also be resolved/dismissed early by the shareholders making a reasonable offer to purchase the minority shareholder’s shares.
What is a derivative claim and when is it mostly used?
A claim by any shareholder in the company’s name (brought by the minority shareholder on behalf of the company, with the company as the claimant) for wrongs committed against the company (usually a breach of duty by a director, where D is the director).
Shareholder must apply to the court for permission to bring the claim. The court will only grant permission if it is satisfied that the claim promotes the success of the company; the shareholder is acting in good faith; and any director’s breach of duty has not been ratified/authorised by the company’s board or shareholders (via OR).
What extra rights does a shareholder with at least a 5% share in the company have?
Shareholders owning at least 5% can:
- Request the directors hold a general meeting or, if the directors refuse, hold one themselves (via a S.303 notice) or ask the court to order one.
- Right to circulate a written resolution - They can circulate a WR which can then be voted on by shareholders with a written statement of no more than 1,000 words.
- Right to circulate a written statement before a GM - This will not be voted on but will circulate the shareholders views on a matter. The right can be exercised by a shareholder owning 5% or more or 100 shareholders holding at least an average of £100 of paid up share capital.
What extra rights does a shareholder with at least a 10% share in the company have?
Right to demand a poll vote at a general meeting.
Poll Vote = Vote by hand, where every shareholder has one vote for every ordinary share held.
What extra rights does a shareholder with at least a 26% share in the company have?
The ability to block a special resolution.
You need 75% to pass a special resolution - if the shareholder therefore holds 26%, they can prevent one from being passed.
What extra rights does a shareholder with at least a 51% share in the company have?
The ability to pass an ordinary resolution if others try and pass it.
You need 50.01% to pass an ordinary resolution.
What extra rights does a shareholder with at least a 75% share in the company have?
The ability to pass a special resolution.
What is a “proxy” and how are they appointed?
A person appointed by a shareholder to vote on their behalf (and possibly speak on their behalf) at a general meeting.
Appointed by notice delivered to the directors.
What is the unanimous consent method for a shareholder decision?
Shareholders can unanimously consent to a decision without the need for a general meeting or resolution.
What are the two main types of shares?
- Ordinary Shares - Give shareholders ownership in the company. Gives them the right to vote and receive dividends from company profits.
- Preference Shares - Not units of ownership. Cannot vote but do get a fixed amount of dividend (a % amount of their total shares) whe declared out of profits. This must be paid before any ordinary shareholders get their dividend amounts.
What is a cumulative, participating preference share?
Cumulative = Entitled to any missed dividends plus the current year’s dividends
Participating = Entitled to dividends of ordinary shareholders and the fixed dividend amount of the preference shares
How should a company decision be approached?
- At BM1, check: do you need an ordinary resolution or a special resolution to be passed?
If not, pass a board resolution using a majority vote (remember: WR unanimous consent procedure could be used under MAs).
- If an SHR resolution is needed, you will need to call a general meeting (with 14 clear days’ notice) or circulate a written resolution (unless UA procedure used).
- The shareholders pass the resolution.
- Once resolution is passed, the board will need to reconvene or hold another BM to record the shareholders’ vote, pass any other necessary board resolutions and deal with any post-meeting matters.
How can a director (board) resolution be passed (under the MAs)?
Majority (50.01%) vote at board meetings;
OR
Unanimous (100%) consent without a meeting (a written resolution).
Who can call a board meeting?
Any director can call a board meeting by giving notice of the date, time, and place of such a meeting to the other directors.
What notice needs to be given for a board meeting?
Reasonable notice must be given.
What is reasonable will depend on the facts, e.g., if the directors often travel or work abroad, the notice may need to be longer.
What are the rules on the quorum for a board meeting?
1 Director - Quorum is 1
2 or more Directors - Under the MA, the minimum quorum is 2. This means that there must be at least 2 directors for the meeting to go ahead.
The minimum quorum can be amended by the AoA.
How do directors vote at a board meeting?
By show of hands - you need a majority (50.01%) to pass a resolution.
Chairperson will have a casting vote if there is a deadlock.
The vote will be to:
- Make a decision; and/or
- Approve sending a notice to the shareholders of a general meeting to vote on the directors’ proposal or to circulate a written resolution
How does a board meeting end?
A board meeting is either;
Closed - If there is going to be a time gap of more than one day between the directors sending out a decision to shareholders and the shareholders voting on that decision (such as if a GM is required with no short notice). In that case, BM1 is closed and BM2 is scheduled to take place after the shareholder vote.
OR
Adjourned - If the shareholders’ vote will take place on the same day, meaning the directors will reconvene on the same day. Used with short notice and written resolutions.
How long do board minutes need to be kept? Do they need to be filed at Companies House?
Board minutes must be in writing and kept for 10 years by the company at the registered office. They do not need to be filed at CH.
Chairperson should sign the minutes to show they are valid.
Shareholders have a right to inspect the minutes without charge.
How is a general meeting called?
Directors call a GM via a board resolution.
Directors approve the notice to send out to members either at a board meeting or via unanimous consent.
Alternatively, a shareholder with 5% stake (or a group representing 5%) can request the directors to call a GM and, if the directors refuse, call one themselves.
What is the notice period for a general meeting?
Notice needs to be given at least 14 clear days before the GM.
Clear = Do not count the day the notice is given and the day of the meeting.
CA 2006 - A document is deemed to be received 48 hours after being sent by post or email.
E.g., GM is held 17 days after notice is given.
Notice sent on 1st July, GM held 18th July.
What are the requirements for the GM notice under CA 2006?
Notice must be given to every shareholder and director.
Auditors must also receive notice.
Notice must be given in hard copy, or electronic forms (if the shareholder consents to receipt of email) or be published on the company website (if permitted).
The notice must contain:
- The time, date, and place of the meeting
- The general nature of the business to be dealt with
- A statement of rights to appoint a proxy
- The full text of any special resolution proposed at the meeting
How can a company agree to short notice for a general meeting?
To agree to shorter notice, a 2 stage test must be passed:
- A majority in number of the shareholders (51% of the actual shareholder number of people) must agree to the short notice;
AND
- The majority in number must hold a minimum of 90% of the voting shares (can be higher in the AoA).
Note - CANNOT be used for the removal of directors (requires 28 days’ notice).
What is the quorum for a general meeting?
Single-Member Company - Quorum is 1
2 or more Members - Quorum is 2
Can be higher in the AoA
Do conflict of interest issues affect shareholder votes?
In general, no; a shareholder can vote on matters that they have an interest in and do not need to make a declaration.
The exceptions to this rule are:
- When you have a buyback of shares, in which case, the shareholder whose shares are being purchased should not vote at a GM
- A shareholder director cannot vote to ratify their own breach of duty - does not apply if using unanimous consent
How do shareholders vote at a general meeting?
- Show of Hands - Every shareholder has one vote;
OR
- Poll Vote - Each shareholder has one vote for every share they hold.
Note - Under the MAs, a poll vote must be taken if demanded by:
- The chairperson of the GM
- The directors (via board resolution)
- Any two shareholders
- Any shareholder(s) holding 10% shares.
Can be demanded at any time, including after a show of hands. Poll vote will override a show of hands.
What resolutions can shareholders pass?
Ordinary Resolution - Passed by a simple majority of those present at the GM
Special Resolution - At least 75% of members present at the GM by show of hands or voting rights if poll
- Removal of Director or Auditor must be by OR
- Changing AoA must be by SR
- Buyback of shares out of capital or a reduction in share capital requires an SR
- Re-registering as a public company requires a SR
When can the written resolution procedure not be used?
By a public company;
OR
To remove a director;
OR
To remove an auditor.
Who must receive the written resolution?
WR must be circulated to all “eligible members” and the auditors.
Eligible Members = Defined as a shareholder who is entitled to vote on the “circulation date”
Circulation Date = The date on which the resolution is first sent to the eligible member
What is the deadline for passing a written resolution?
The WR must be passed before the end of 28 days (NOT CLEAR DAYS) beginning on the circulation date or it will lapse.
Can be shorter or longer in the AoA
When must a special resolution be filed by?
You have 15 days from the date of the resolution passing to file it at CH.
If the SR is passed via WR, the WR must be kept at the registered office for at least 10 years.
If passed at a GM, the minutes of the GM must be kept at the registered office for at least 10 years.
The amended AoA must also be filed at CH with the SR (within 15 days of being amended).
What is equity finance?
A way that a company can raise money by issuing new shares.
In return for issuing shares, the company will receive cash, known as the share capital.
This share capital makes up the funds available to run the business, such as to pay rent or buy machinery.
What is the nominal value of a share?
The minimum subscription or purchase price for that share - in other words, the lowest amount an investor may pay to purchase the shares.
Most shares have a nominal value of £1. You cannot issue a share at a discount to its nominal value.
What is the premium on a share?
This is an amount above the nominal value that represents the profit that a company makes when issuing a share.
What is a company’s share capital?
The total value of all issued shares, including the nominal value and premium.
Under the maintenance of share capital doctrine, this share capital cannot be distributed to shareholders - it must be maintained in the business.
What is the process of alloting new shares if a private company has only ordinary shares?
- Check AoA for any restrictions - SR if there are (none contained in MAs)
- Disapply pre-emption rights by SR (at GM or via WR) - AoA can disapply them
- Pass BR to allot the shares
- Deal with admin - Minutes/WRs kept for 10 years; file SR at CH within 15 days; file a statement of capital within 1 month; inform CH of any PSC change within 14 days; issue new share certs and update members’ register within 2 months
What is the process for allotting new shares if it is a public company or has more than one class of shares?
- Check AoA for any restrictions (SR to amend if they are any) - MAs will not contain any restrictions
- You need to pass an OR to grant authority to allot - the OR must state the number of shares that can be alloted and the expiry date of the authority to allot, which must be no more than 5 years
- You (may) need to pass an SR to disapply pre-emption rights - only if the shareholders want to, you can offer to existing shareholders (and the AoA can disapply such rights)
- Pass an BR to authorise the allotment
- Deal with Admin - File SR, file the OR (both within 15 days), statement of capital at CH within one month, inform CH of any PSC change within 14 days, keep minutes/WR for 10 years, amend register of members, and issue new share certificates within 2 months
What is the process for a transfer of shares between shareholders (using the MAs)?
- Buyer pays for shares and stamp duty. Sends stock transfer form to the company.
- BR passed to authorise transfer.
- Admin: New member entered into register members and share certificate issued within 2 months. CH notified in annual confirmation statement.
What are the two days distributable profits can be given to shareholders?
- Dividends
- Buyback of Shares
The directors must check the accounts to ensure there are distributable profits, to do either:
- Dividends are either interim (paid during the financial year by directors via board resolution) or final (declared after the end of the financial year, which is approved by the shareholders via ordinary resolution (under MAs)).
- For buyback out of profits, the contract under which the shares are bought must be approved by ordinary resolution and the shares must be fully paid (note: the shareholders whose shares are being bought should not vote).
What is the process for a buyback of shares out of share capital (under the MAs)?
- Check the account to make sure there are no distributable profits. Accounts cannot be more than 3 months old - if there are distributable profits, these must be used first.
- Directors prepare and sign statement of solvency and an auditor produces a report confirming it. Directors hold a board meeting to call a GM/use a WR - The SoS must be signed no earlier than 1 week before the GM/WR. Report + SoS must be made available at the GM or circulated with the WR; the contract must be available at least 15 days before and at the GM or circulated with the WR.
- Shareholders pass an SR approving the buyback out of capital, and OR approving the contract under which the shares are being bought - If shareholder whose shares are being bought vote passes the OR, it is void.
- Within a week following the SR, notice must be published in the Gazette and in appropriate national newspapers that a payment out of the company’s capital has been made. On the same day, a copy of the auditor’s report and director solvency statement must be filed at CH - Report and SoS must be available at registered office for 5 weeks after GM/WR.
- Directors hold a second BM approving the contract and directing someone deals with admin - within 28 days of purchase send statement of capital, notice of cancellation of shares. File SR within 15 days. Amend company info (member register); inform CH of any PSC change within 14 days. Keep records of minutes/WR for 10 years.
What are the alternatives to buyback out of capital if a private company wants to reduce share capital?
- Buyback of a small amount
- Reduction of share capital procedure
For buyback of a small amount:
- Provided the articles authorise it, a private company can use capital to buyback shares via ordinary resolution only (meaning no SR and notificiation requirements) if the amount of the purchased does not exceed the lower of:
- £15,000; or
- 5% of the company’s share capital (total nominal value - share premium is excluded)
Reduction of share capital procedure means that share capital is reclassified as distributable profits. Directors must still prepare a statement of solvency and the shareholders must approve by SR.
What are the consequences of an unlawful distribution?
Both the directors and shareholders could be personally liable to the company to pay back the distribution if they knew or ought to have known that the distribution was unlawful.
How does a company borrow money under the MAs?
Directors can borrow money via board resolution; there is no need for any shareholder resolutions.
Explain the key features of an overdraft
- A contract between a bank and the company which allows the company to overdraw on its current account.
- A temporary loan for everyday purposes.
- It is an “uncommitted facility”, which means that it is payable on demand. This means that the bank may demand the loan be paid immediately - there is no need for notice.
- The company pays a fee for the overdraft facility and interest on the amount overdrawn.
Explain the key features of a term loan
A fixed sum is borrowed for a fixed period and repayable on a certain date.
Interest is payable on the amount borrowed at regular intervals.
Typically used by companies for acquisitions (assets like land e.t.c.). Can be bilateral (between lender and borrower) or syndicated (between the borrower and multiple lenders).
The lender is unable to recall the loan until the end of term (e.g., if the term is five years the lender won’t be able to demand repayment till the end of the 5-year term) unless the borrower has breached the loan agreement.
The amount borrowed is either repayable in one lump sum at the end of the term (a bullet repayment) or during the term (amortisation).
The terms of the loan are contained in a document called a facility/loan agreement.
Explain the key fatures of a revolving credit facility
The bank agrees to make a maximum amount available (known as the committed amount) to the company for a specified period.
The company can borrow however much it likes up to the maximum amount and repay the amount borrowed at the end of an interest period. The company can re-borrow amounts it has repaid as long as it never goes beyond the maximum.
The bank will receive interest on the amount borrowed and a commitment fee for having the maximum amount available at all times.
They are normally secured, and the document that contains its terms is called a facility agreement. Can be bilateral or syndicated.
Explain the key features of a debt security
Debt securities are financial instruments issued by a company to raise money.
Issued to investors who buy the instrument.
The company will sell the debt security to an investor. The company receives cash, and the investor receives a promise to repay with interest - basically an IOU.
Bonds are the most common type of debt security - a company issues a bond and then promises to repay the amount on the bond at the bond’s repayment (or maturity) date, plus interest.
Bonds are traded by investors. Whoever holds the bond at maturity gets repaid the full amount on the bond. Bonds are traded on the capital markets.
How does a company grant security under the MAs?
The directors can decide to grant security - there are no restrictions on this in the MAs.
What is a mortgage?
Except for land (which is technically a charge by way of legal mortgage, S.87 LPA 1925), a mortgage involves the transfer of legal title to the lender.
The mortgage (and a land charge) gives the lender the right to immediate possession of the asset if the borrower fails to repay the loan. Once the loan is repaid, the legal title is transferred back to the borrower, or, in the case of land, the charge is lifted, and the mortgage is discharged.
What is a fixed charge?
It is an equitable proprietary interest over the asset held by the lender.
Grants the lender control over the asset - the borrower cannot sell the asset without the lender’s consent and must keep the asset in good condition.
If the borrower goes into receivership or liquidation, the lender has the right to sell the asset and recoup the proceeds to pay off the outstanding amount of the loan before any claimants.
This is a right of first claim - the lender with the fixed charge gets the proceeds first, as much as needed to recoup the loan.
What is a floating charge?
Secures a group of assets that constantly changes, such as stock.
The three main features of a floating charge are:
- An equitable charge over the whole class of a company’s assets, e.g., stock;
- The assets subject to the charge are constantly changing (e.g., stock being bought and sold); and
- The company retains the freedom to deal with the assets in the ordinary course of business until the charge ‘crystallises’ - this means that the company defaults or becomes insolvent.
When does a fixed charge risk being a floating charge?
All about the “control” the lender has over the asset.
To be a valid fixed charge, the lender must have full control: the borrower must ask permission for any use or change to the asset.
What are the rules of priority between fixed and floating charges over the same asset?
- Fixed Charges always take priority over Floating Charges (even if the floating charge is registered or created earlier).
- Fixed and Floating Charges both take priority over each other according to the date of creation (not registration).
What are the rules on the registration of security?
Failure to register the charge within 21 days of the security being granted results in the loan being immediately repayable and the security being void against an administrator, liquidator and crediot (meaning they can take the company’s asset free of that security). In the event of insolvency, the holder of the void charge is an unsecured creditor.
To register the charge, you must file at CH:
- The Debenture (document containing the security) or Mortgage Deed
- Form MR01
- Pay the fee
If a charge is taken over land, it must also be registered at the Land Registry.
The Debenture and MR01 form must be kept at the company’s registered office for inspection.
What options does an unsecured creditor have for an unpaid debt?
- Try and enter into informal discussions with the company. This could include coming up with a payment plan or proposing a CVA to the directors
- Serve a statutory demand for a debt in excess of £750, wait three weeks to see if the company will pay then apply to the court with a winding-up petition to put the company into liquidation. The court will grant liquidation.
NOTE - If a statutory demand has been served, no additional evidence of insolvency is required to be produced.
NOTE - The creditor does not have to wait 3 weeks or even serve a SD, but if they do and the company does not repay, the court will grant the petition on the grounds the company is insolvent.
- Sue the company and if the company does not satisfy payment of the judgment debt, file a petition at the court to liquidate the company. Again if the company cannot pay the judgment debt, no further evidence is needed.
- Apply to court to put the company into administration.
What can the directors do if they face insolvency?
- Approach the creditors to see if the company can delay debt repayments or come to a compromise arrangement/informal agreement
- Put the company into liquidation themselves
- Enter into a formal agreement with the creditors, called a Company Voluntary Arrangement (CVA)
- Appoint an administrator. The administrator either turns the company around, sells it, or liquidates it. The company can apply to court for an administrator or use the out of court route.
Directors must try and improve the situation (and take professional advice ASAP) to avoid personal liability but also have duties to the creditors when insolvency is triggered.
Explain the outline of the liquidation process
- Liquidator Appointed - they take over the running of the company. The director’s powers cease and they are no longer directors of the company.
- Liquidator collects in company’s assets
- Liquidator distributes assets to the creditors according to the order of priority
- The company is dissolved
Name the main powers and duties of a liquidator
In addition to all the powers a director has, they can:
- Collect in assets and distribute them according to the statutory order
- Sell assets
- Appoint agents
- Use the company’s bank account
- Litigate on the company’s behalf
- Do all things necessary to carry out a winding up / liquidation
- Claw back assets - investigate past transactions of the company and the conduct of directors
What is compulsory liquidation?
A petitioner (who has filed a wind-up petition at court) must be able to prove the company is unable to pay its debts according to the insolvency test, which means one of the following applies:
- A creditor owed more than £750 has served a statutory demand on the company and they have not responded in 3 weeks (or not paid it in whole or part);
- A judgment has been filed against the business that is unpaid;
- The company is unable to pay its debts as they fall due (known as the cash flow test)
- The value of the company’s assets is less than the amount of its liabilities (known as the balance sheet test)
The process begins with presentation at court of a winding-up petition byb the creditor(s). The petition is advertised in the London Gazette.
What is a creditors’ voluntary liquidation?
Initiated by the directors and then taken forward by the creditors. Although voluntary, it is usually because of creditor pressure. Therefore, because it is director-led, it is more favourable than the hostile process under compulsory liquidation.
- The directors will agree by majority (i.e., board resolution) that the company is insolvent and will be liquidated.
- Members pass a SR to liquidate the company. The directors’ powers cease. The resolution is advertised in the London Gazette.
- The directors of the company must, before the end of the period of 7 days beginning with the day after the day in which the SR was passed, produce a statement in a prescribed form on the company’s affairs and send it to the creditors. They must also ask the creditors to nominate a liquidator. The appointment of the liquidator by the creditor is advertised in the London Gazette and the Registrar is notified.
- The liquidator carries out their duties of distributing assets to creditors. A return is sent to creditors which is filed with the Registrar. The company is then dissolved after 3 months.
What is a members’ voluntary liquidation?
Only a solvent company can do this.
A solvent may want to wind itself up because the director shareholders want to retire.
- The directors must make a statutory declaration of solvency.
- Members pass a SR to start liquidation and OR to appoint a liquidator. Directors’ powers cease. The appointment of the liquidator by the creditor is advertised in the London Gazette and the Registrar is notified.
- The liquidator distributes assets to creditors. A final return is sent to members and filed with the registrar. The company is then dissolved after 3 months.
What is administration?
A type of insolvency procedure.
During administration, an administrator, an independent insolvency practitioner, runs, reorganises, and possibly sells the company or distributes assets.
- The directors no longer run the company and their powers cease (but note, they are still technically directors)
- The administrator owes their duties to all creditors as a whole - both secured and unsecured creditors
- The main advantage is that an administrator enjoys the benefit of a moratium, which is a freeze on creditor actions
- It is also more flexible than liquidation, which simply winds up the company. The administrator could try and rescue the company first
What are the duties of an administrator?
The administrator has a set of “cascading duties” meaning they move down the list if each one is not available or not in the interest of creditors:
- To rescue the company as a going concern; OR
- Achieve a better result for creditors as a whole than if the company was just wound up (this means the administrator will try and turn around the company or make a profit to allow the creditors to get more of their debts repaid than if it were just broken up and sold); OR
- Sell company property to make a distribution to secured or preferential creditors (note: an administrator cannot make distributions to unsecured creditors without court approval).
What is the administration process?
Administration can be commenced by:
- A court route, which involves an application to court and a hearing, after which the court decides if an administrator should be appointed. The application can be made if an administrator should be appointed. The application can be made by the company (directors) or creditors; OR
- An out-of-court route, whereby an administrator is appointed by:
- The company/directors; or
- The holder of a qualifying floating charge (QFC) over the company’s assets with such a power under the charging document
Once the administration has started, the moratorium comes into effect. A moratium prevents creditors from making claims against the company.
The administrator will then put forward their proposals which a majority in vale of creditors present and voting must approve.
The proposals will set out which of the three cascading objectives the administrator intends to pursue and why. Once the proposals are approved, the administrator runs the company, and the directors cease to have power.
What is a qualifying floating charge?
A floating charge that is over all, or substantially all, of the company’s property
How does an administration process come to an end?
The administration ends automatically after a year unless extended (by creditor consent, for another year or less).
If the whole object of the administration has been achieved, the administration can be terminated. This means on the whole the company can continue to trade after its debts have been restructured or repaid.
The administrator can dissolve the company if there is no property to distribute to creditors or choose to put the company into liquidation.
The administrator or creditor(s) can apply to court to terminate the administration.
What is a Company Voluntary Arrangement?
A CVA is a written agreement binding on all parties (the company and unsecured creditors) and is known as a statutory contract.
The creditors are likely to agree that they will:
- Delay repayment of their debt; or
- Accept part payment of their debt; or
- A combination of the two.
What is the process for a CVA?
- Directors make a written proposal to creditors. May appoint an insolvency practitioner to help oversee the process.
- The proposal is voted on by unsecured creditors. It needs 75% or more in value of creditors and 50% of more of “non-connected” creditors.
- All creditors (except secured and preferential, unless they agree) are bound by the CVA even if they did not vote.
- The directors continue to run the company, supervised by the practitioner. The practitioner will report to members and creditors on the CVA at the end of the process.
What is fixed asset receivership?
A receiver appointed by a fixed charge holder under the terms of the charging document.
Creditors who take security may have a right to appoint a receiver if the borrower is not complying with the terms of the loan. The company does not need to be insolvent, but it must have breached the loan agreement (e.g., not paying its interest instalments on time).
The receiver will sell the fixed charge assets and only owe duties to the fixed charge creditor (unlike an administrator).
What is the statutory order of priority on a distribution of a company’s assets?
- Liquidator sells fixed charge assets
- Liquidator’s costs in selling fixed charge assets
- Fixed charge creditors: entitled to full proceeds of sale of asset. If there is a short-fall, fixed charge creditor becomes unsecured creditor.
- Liquidator sells all other assets and assets secured by floating charge
- Liquidator’s other costs and costs of using professional advisers (e.g., lawyers)
- Preferential Debts: Wages of employees (for last 4 months of work up to max £800 each) and HMRC for PAYE and VAT only (unless HMRC is an unsecured creditor)
- Ring-Fenced Fund: Liquidator must set aside a certain amount for unsecured creditors before making payments to floating charge holders
- Floating Charge Holders
- Unsecured Creditors (+ ring-fenced fund set aside above)
- Shareholders
What is a “preference” transaction>
Where a creditor has been put in a better position by the company than they would have been had the company been insolvent (e.g., been paid earlier).
- The company must have had a “desire to prefer” the creditor. This means that the company must “positively wish” to improve the creditor’s position - must give a preference to a creditor with no obvious benefit to itself. It is a subjective test (look at what the directors were thinking when making the preference).
- Desire is presumed if the creditor is a connected person (e.g., a spouse of a director).
- If the creditor is a connected person, the liquidator/administrator can go back two years before the insolvency, if not, they can go back 6 months.
- The company must have been insolvent at the time of the preference or become so as a result.
- Transaction is voidable if there has been a preference.
What is a transaction at undervalue?
When a company gives to another (e.g., a director) an asset either for free or below market value.
On what grounds can a liquidator or administrator set aside a floating charge?
When a creditor got a floating charge in connection with an existing loan for no fresh consideration.
What is wrongful trading?
When directors continue to trade when the company is about to go into liquidation/administration.
What is fraudulent trading?
When a director intentionally defrauded creditors by continuing to conduct business before liquidation to avoid any money being paid to them.
What does it mean when an individual is personally insolvent?
An individual is personally insolvent if they cannot pay their debt of £5,000 or more due immediately or in the future.
- An unsecured creditor with a debt of at least £5,000 must file a petition at court proving either:
- They have a debt (£5k) that is due immediately or in the future and they have served a statutory demand on the debtor in respect of this debt and after 3 weeks either it has not been paid or the debtor has not proven to the creditor they can pay;
OR
- The creditor has a judgment debt (£5k) against the debtor which is unpaid in whole or in part.
Note - An individual can also apply for bankruptcy themselves online.
What is the bankruptcy process?
- A creditor with £5k debt who has served a SD and is not paid within 3 weeks or has a judgment debt applies to court for a bankruptcy order.
- The court will determine whether to make a bankruptcy order.
- Official Receiver as trustee in bankruptcy will take control of the debtor’s property and will preserve the value of the debtor’s goods. The creditor may appoint their own person (a trustee in bankruptcy).
- The bankrupt’s estate vests in the trustee from the moment the bankruptcy order is made.
- The bankrupt will be subject to restrictions.
- A trustee in bankruptcy will then collect and sell the debtor’s assets to pay off the creditors. They can also investigate past conduct and disclaim onerous transactions.
- Once the trustee fulfills their role, they can apply for release or, after one year, the bankrupt is automatically discharged. Automatic discharge may be suspended if the bankrupt is uncooperative.
- The bankrupt may be subject to a bankruptcy restriction order or bankruptcy restriction undertaking even after bankruptcy has come to an end.
What property can the bankrupt keep and what happens to the bankrupt’s home?
The bankrupt can keep assets that are necessary for day to day living, e.g., stuff needed for work and household items. But if they are expensive, the trustee can sell them and replace them with a cheaper alternative.
The bankrupt’s home will vest in the trustee. The trustee will sell it but if others are living in it / have an interest (e.g., the bankrupt’s family) the trustee must get a court order. After a year, if the application to court for sale is made, the court is more likely to grant it. If the trustee has not sold it or charged it, after three years it returns to the bankrupt.
Bankrupts can receive their salary but may have to enter into an income payments agreement or a court-imposed income payments order if their salary is high. The IPA and IPO last for three years so will survive the bankruptcy (which lasts a year).
How can a bankruptcy trustee claw back or preserve the bankrupt’s assets?
The trustee has various powers to preserve a bankrupt’s assets and can take a number of actions.
- Disclaiming onerous property, e.g., an unprofitable lease
- Transaction at Undervalue - The trustee can investigate anything 5 years before the petition. The trustee does not have to prove the bankrupt was insolvent when entering into the transaction or became so as a result unless it was more than two years prior. If a transaction was with an associate, the presumption is the bankrupt was insolvent even if more than 2 years before the petition.
- Preferences - Bankrupt, while insolvent, intentionally gave a good deal to a creditor (e.g., a friend).
- Transaction defrauding Creditors
- Extortionate Credit Transactions - Trustee can set aside extortionate credit terms received within 3 years before the petition.
What is the order of priority for the distribution of unsecured assets of the bankrupt?
- Costs of Bankruptcy (trustee’s fees)
- Preferential Debts - Accrued holiday pay and wages of employees of the bankrupt 4 momths prior to the petition (up to a max of £800) and HMRC for PAYE and VAT
- Unsecured Creditors
- Spouse of Bankrupt
Secured creditors take possession of their assets, sell them, and give any surplus to the trustee. They become unsecured creditors if there is a shortfall.
What is an individual voluntary arrangement?
A binding agreement between the bankrupt and unsecured creditors setting out how much each creditor will get to settle their debts.
Either:
- A debtor hires an insolvency practitioner who acts as their nominee. The practitioner draws up the IVA proposals and oversees their implementation; or
- The trustee in bankruptcy during the bankruptcy process applies for an IVA.
An IVA is only available if the debtor has the means to make a reasonable offer of payment to his creditors.
What is the process for an IVA?
- Debtor applies to court for an interim order which acts as a moratorium for 2 weeks: no creditor can take any action against the bankrupt. A nominee is appointed.
- Proposals made (by the nominee, if applicable) for unsecured creditors to vote on
- 75% in value must agree (of which 50% not associates agree). Preferential and secured creditors are not bound unless they agree to be (all unsecured creditors are bound).
- Nominee (if applicable) supervises the IVA until it is carried out and then the debtor is released from it.
When does a partnership arise?
A partnership automatically arises when two or more people agree to run a business together for profit.
S.1 PA 1980
How is a partnership governed?
Partnership Agreement
If not, PA 1980 applies
What does the PA 1980 say about the share of profits and losses of the partnership?
PA 1980 - Partners must share profits and losses equally, and any gain or fall in the value of any capital asset is also borne equally.
Subject to the Agreement.
What does the PA 1980 say about how partners make decisions?
All decisions are to be made by majority vote (one vote per partner) - except that the introduction of a new partner, an amendment to the agreement, or a change in the partnership’s business requires unanimity.
How can a partnership be dissolved under the PA 1890?
- “Partnership At Will” - A partner can give notice to the others partners at any time to dissolve the partnership (if there is no defined term in the agreement)
- It is a fixed term partnership, and its term expires.
- When a partner retires.
- Death or bankruptcy of one of the partners.
- A partner has their share of the partnership charged for a separate debt.
- If the continuing operation of the partnership is unlawful, it will automatically cease to exist (this rule cannot be disapplied by the agreement).
- Application by a partner to court to dissolve.
All of the above (apart from the illegality point) are subject to agreement to add certainty as to when/if the partnership is to come to an end.
When will the partnership be liable for a partner’s actions?
A partner has the power to bind the firm (S.5 PA 1980).
A partner is an agent of the firm.
A partner will NOT bind the firm where they act without authority, the transaction is outside usual business and the counterparty knew the partner was acting without authority or did not know or believe that they were a partner.
What if a partnership is liable for a partner’s actions, acting with authority?
All partners have joint and several liability under the partnership, so can be personally sued if they enter into a contract.
What if a partnership is liable for a partner’s actions, acting without authority?
As the partnership is liable, the counterparty can sue the partnership or the individual partners.
But the partner who has breached the agreement and acted without authority will need to idemnify the other partners for their losses, and if he is sued, will not be able to claim an indemnity from the other partners.
Why does a partner who is retiring care about debts incurred before and after they have left?
A retiring partner is joint and severally liable for debts incurred before and after they retire. They therefore need to take steps to avoid such liability after they retire.
For debts incurred before the partner retires:
- Novation agreement between the retiring partner, the creditor, and the new partner replaces the retiring partner with the new one who will take on the debt; and
- Indemnity between the retiring partner and the other parties means that if the partner is sued, they can recoup money from the other partners. Contained in the PA 1980 but advisable to include one in the PA too.
For debts incurred after they leave the partnership:
- Send a S.36 PA 1890 notice directly to everyone who has dealt with the firm in some way stating that the partner is leaving
- Put a notice in the London Gazette
- Get an indemnity from the other partners.
What is the risk of “holding out” for a retiring partner?
Even if a partner does take the steps necessary to release himself from liability after retiring, if he continues to “hold himself out” as a partner after retiring, he could still be liable for a contract entered into by the partnership.
E.g., telling people you are still a partner, having your name still on the letterhead (knowingly or without explicitly telling the other partners to remove it), not acting when the partnership/other partners say you are still partner
S.14 PA 1890
Who can a creditor sue if they want to recover their money from a partnership?
- The partners or any partners at the time the debt was incurred
- The partner whom the creditor entered into the contract with under privity of contract
- A retired partner who has been “holding out” or failed to give required notice
- The partnership in the firm’s name
What is Actual Authority (S.6 PA 1890)?
📌 Definition: Actual authority refers to the authority given to a partner by the firm to act on its behalf, making the firm bound by contracts or deeds entered into by the partner.
📜 Types:
Express Actual Authority – Clearly given permission by partners to enter specific transactions.
Implied Actual Authority – Assumed authority based on regular course of dealing or the nature of the business.
⚖️ Key Point: If a partner is acting within their actual authority, the firm is bound by their actions.
What is Apparent Authority (S.5 PA 1890)?
📌 Definition: Even if a partner lacks actual authority, the firm may still be liable if their actions appeared authorised to an outsider.
🔍 Conditions for Liability:
The transaction is relevant to the firm’s business.
A partner would usually have authority for such transactions.
The third party was unaware of any limitation on the partner’s authority.
The third party reasonably believed the person was a partner.
⚖️ Key Point: The firm is responsible for the impression of authority it gives to outsiders.
