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SQE1: Business Law & Practice > Business Finance > Flashcards

Business Finance Flashcards

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1
Q

What are 3 ways of raising money by equity finance?

A
  1. Allotment of shares
  2. Transfer of shares
  3. Buyback of shares

(Equity Finance = prospective shareholders pay money/give property to company in return for shares)

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2
Q

What are the 3 questions to ask for allotment of shares?

A
  1. Do the directors have authority to allot shares?
  2. Are there any pre-emption rights?
  3. Are there any constitutional restrictions on allotment?
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3
Q

When will the directors have authority to allot shares?

A

Directors of private companies with one class of share have authority to allot

Otherwise, authorisation can be given by:
a. Ordinary resolution
b. Articles

(If in articles, must state max number of shares that may be allotted & date on which authority will expire, no more than 5 years after incorporation)

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4
Q

Pre-emption rights apply to a company proposing to allot ‘equity securities’. What are equity securities?

A
  1. Ordinary shares
  2. Right to subscribe for, or to convert securities into, ordinary shares
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5
Q

What are pre-emption rights re allotment?

A

Company proposing to allot equity securities (eg. ordinary shares) must first offer them to existing shareholders in proportion to their existing shareholding

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6
Q

How can a private company disapply pre-emption rights re allotment?

A

By a provision in its articles or by special resolution

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7
Q

When do pre-emption rights not apply?

A
  1. Allotment of bonus shares
  2. Consideration for allotment is wholly/partly non-cash
  3. Shares are held under/allotted/transferred pursuant to an employee share scheme
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8
Q

When will a company need to pass resolutions to alter its constitution re allotment?

A

Special resolution to change articles needed if:

  • Restriction in articles on allotment of shares
  • New shares being allotted have different rights to existing shares

If company incorporated pre 1 Oct 2009 & haven’t updated articles, must pass ordinary resolution to remove authorised share capital clause

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9
Q

Can allotted shares be issued partly paid?

A

Not under model articles

MA21: all shares in a company must be fully paid

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10
Q

Allotment of shares: Filing requirements

A

Filed at Companies House:
1. Any special resolutions adopting articles or disapplying pre-emption rights + any ordinary resolutions authorising allotment or removing ASC clause within 15 days
2. SH01 (return of allotment + statement of capital) within 1 month

Internal Registers
Update register of members (& PSC if nec) + issue new share certificate within 2 months

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11
Q

What restrictions on transfer of shares are there in the articles?

A

Cannot restrict shareholder selling or particular purchaser buying

BUT MA26: board has discretion to refuse to register transfer (only become shareholder when entered on register)

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12
Q

Transfer of shares: filing requirements

A
  1. Update register of members & issue new share certif within 2 months
  2. Notify Registrar of Companies of change of ownership when file annual confirmation statement
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13
Q

When a shareholder dies or becomes bankrupt, are their shares transferred?

A

No: their shares vest automatically in PR / TiB, who don’t become shareholders (but are entitled to any dividends)

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14
Q

What is the maintenance of share capital principle?

A

Paid up share capital cannot be returned to shareholders (dividends can only be paid out of profit)

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15
Q

What kind of resolutions are required to authorise share buyback?

A

Ordinary resolution authorising buyback

+ Special resolution if buyback out of capital

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16
Q

Share Buyback out of profits: filing requirements

A

Before GM/WR: ensure contract available for inspection at least 15 days before & at GM / circulated with WR

After completion:
1. File return of purchase of shares & notice of cancellation of shares within 28 days

  1. Keep contract at registered office for 10 years
  2. Cancel shares, update register of members (& PSC reg if required)
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17
Q

What kind of company can buy back shares out of capital?

A

Private companies with no distributable profits left only

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18
Q

Share buyback: when must a statement of solvency be prepared?

A

For a buyback out of capital

States company will remain solvent during year following buyback (if don’t, seller of shares & directors may be required to contribute to the financial losses of the company)

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19
Q

Share buyback out of capital: filing requirements

A

i. Within 1 week of special resolution: place notices in London Gazette + national newspaper/notice to each creditor; file statement of solvency & auditors report at CH

ii. Within 15 days: file the special resolution at CH

iii. For 5 weeks after: SS & AR kept at company’s registered office (whilst creditors & dissenting members have right to object)

iv. Within 28 days: file return of purchase of own shares + notice of cancellation of shares

v. Keep contract at registered office for 10 years

vi. Cancel shares, update register of members (& PSC reg if required)

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20
Q

Buyback out of capital: when does payment take place?

A

Between 5 to 7 weeks after special resolution

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21
Q

What is the difference between equity finance & debt finance?

A

Equity finance = raising money through shares

Debt finance = raising money through borrowing

22
Q

What are the 2 main types of debt finance?

A

Loans

Debt Securities essentially IOUs issued to investor in return for cash payment, repaid at agreed future date

23
Q

What are the 3 main types of loans?

A

I. Overdraft facility

II. Term Loan

III. Revolving credit facility

24
Q

Debt finance or equity finance: relative risk of investment

A

Buying shares riskier than lending to company (lender more likely to be repaid than shareholder if company insolvent)

25
Q

Equity finance or debt finance: restrictions on sale

A

Private companies’ articles usually restrict shareholders’ freedom to sell (eg. MA26: refuse to register new shareholder)

v.

If wish to realise capital earlier than repayment date, lender can sell its debenture to a third party

26
Q

Equity finance v debt finance: tax treatment of income payment

A

Payment of dividend is not deductible expense for company

v.

Paying debenture interest is deductible (normal trading expense)

27
Q

Does a company have authority to grant security over its assets?

A

Yes - under Model Articles / Companies Act, implied power to grant security for any type of borrowing

(Directors will have authority under MA3, unless amended)

28
Q

What are the three main types of security?

A

I. Mortgage
II. Fixed Charge
III. Floating Charge

29
Q

Why is a mortgage the highest form of security?

A

(Over an asset other than land): transfers legal ownership to mortgagee → lender has right to immediate possession (although held in reserve ie. if borrowed money not repaid)

30
Q

What is a fixed charge?

A

Can be taken over property such as machinery, shares in other companies

Gives lender control (but not legal ownership) of asset (eg. chargor can’t dispose without chargee’s consent)

Fixed charge holder has right of first claim

31
Q

What is a floating charge?

A

A charge over the whole or a class of assets which are constantly changing (eg. stock)

Company retains freedom to deal with the assets in the ordinary course of business until charge crystallises (ie. turns into a fixed charge over a particular asset)

32
Q

When will a floating charge crystallise?

A

a. Chargor goes into receivership or liquidation

b. Chargor ceases to trade

c. Any other event specified in charge doc

33
Q

What is the priority of charges between a fixed charge / mortgage & a floating charge over the same asset?

A

Provided registered properly, the fixed charge or mortgage takes priority over floating charge (even if floating charge created first)

34
Q

What is the order of priority for more than one registered fixed charge / mortgage / floating charge over the same asset?

A

Priority in order of date of creation (not registration!)

35
Q

What is a negative pledge clause in a floating charge document?

A

Prohibits company creating later charges with priority to floating charge without floating charge holder’s permission

→ If subsequent lender takes charge over same asset & has actual knowledge of negative pledge, their fixed charge will be subordinate to the floating charge

36
Q

What are the filing requirements for registering a charge?

A

Within 21 days must file statement of particulars (MR01) & certified copy of instrument creating charge at CH

Should also be kept available for inspection at company’s registered office

37
Q

When does a charge become valid?

A

When it is registered ie. if required documents correctly delivered on time, charge will be fully valid against any creditor, administrator, liquidator

38
Q

What are the consequences of late or inaccurate delivery of MR01 & charging documents?

A

Charge is void against third party
(ie. company still obliged to repay debt but lender cannot enforce security)

Nb. Court has limited power to extend 21 days if failure accidental/would not prejudice other creditors or shareholders (if application successful, charge has priority only from date of actual registration)

39
Q

What is the consequence of a failure to register a charge?

A

Charge is void against third party

40
Q

What are the two sections in a business’s final accounts?

A
  1. Profit & loss account
  2. Balance sheet
41
Q

What is the profit & loss account?

A

Shows how profitable business is

Income minus Expenses = Profit

42
Q

What is the balance sheet?

A

Shows the net worth of the business

Assets minus Liabilities = Net Worth

Split into:
1. Employment capital (assets minus liabilities owed to third parties)
2. Capital employed (balance on capital account plus net profit minus drawings)
(These 2 numbers should be the same)

43
Q

What is the difference between fixed & current assets?

A

Assets = what business owns / has right to own

Fixed assets = premises, machinery etc

Current assets = short-term (eg. stock, debts, cash, prepayments, WIP)

44
Q

What is the difference between current liabilities & long-term liabilities?

A

Liabilities = what business owes

Current: repayable in 12 months or less from date of balance sheet

Long-term: repayable in more than 12 months from date of balance sheet

45
Q

How are partnership accounts different from other business accounts?

A

Have an appropriation account showing how net profit divided between the partners

There will be a separate capital account & current account for each partner

46
Q

What kind of resolution is needed to authorise a dividend?

A

Ordinary resolution

Can only pay dividend if has profits available for the purpose

MA30: the directors decide whether to recommend dividend & how much → shareholders then approve w/ ordinary res

47
Q

What is recorded in the share capital account in company accounts?

A

The payment of money in return for shares

(Also shown in the ‘capital & reserves’ / ‘financed by’ / ‘equity’ section of the balance sheet)

If shareholder pays premium, this is shown separately in the share premium account

48
Q

What are the three ways a company can use it’s net profits?

A

a. To pay tax

b. Pay to shareholders as dividends (only from profit

c. Retained within company (‘profit & loss reserve’ ie. profits after tax & payment of any dividends)

49
Q

What is the difference between revenue reserves & capital reserves?

A

Reserves = what company ‘owes’ to shareholders ie. what would be paid to them if company were wound up

Revenue reserves can be distributed to shareholders

Capital reserves cannot be distributed to shareholders

50
Q

Who must a company file their annual accounts with?

A

Registrar of Companies

+ send copy to shareholders, debenture holders & anyone else entitled to receive notice of general meetings

SQE1: Business Law & Practice (9 decks)

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