Business Finance

Question 1

What are 3 ways of raising money by equity finance?

Answer 1

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)

Question 2

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

Answer 2

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

Question 3

When will the directors have authority to allot shares?

Answer 3

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)

Question 4

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

Answer 4

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

Question 5

What are pre-emption rights re allotment?

Answer 5

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

Question 6

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

Answer 6

By a provision in its articles or by special resolution

Question 7

When do pre-emption rights not apply?

Answer 7

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

Question 8

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

Answer 8

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

Question 9

Can allotted shares be issued partly paid?

Answer 9

Not under model articles

MA21: all shares in a company must be fully paid

Question 10

Allotment of shares: Filing requirements

Answer 10

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

Question 11

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

Answer 11

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)

Question 12

Transfer of shares: filing requirements

Answer 12

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

Question 13

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

Answer 13

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

Question 14

What is the maintenance of share capital principle?

Answer 14

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

Question 15

What kind of resolutions are required to authorise share buyback?

Answer 15

Ordinary resolution authorising buyback

+ Special resolution if buyback out of capital

Question 16

Share Buyback out of profits: filing requirements

Answer 16

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

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

Question 17

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

Answer 17

Private companies with no distributable profits left only

Question 18

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

Answer 18

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)

Question 19

Share buyback out of capital: filing requirements

Answer 19

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)

Question 20

Buyback out of capital: when does payment take place?

Answer 20

Between 5 to 7 weeks after special resolution

Question 21

What is the difference between equity finance & debt finance?

Answer 21

Equity finance = raising money through shares

Debt finance = raising money through borrowing

Question 22

What are the 2 main types of debt finance?

Answer 22

Loans

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

Question 23

What are the 3 main types of loans?

Answer 23

I. Overdraft facility

II. Term Loan

III. Revolving credit facility

Question 24

Debt finance or equity finance: relative risk of investment

Answer 24

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

Question 25

Equity finance or debt finance: restrictions on sale

Answer 25

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**

Question 26

Equity finance v debt finance: tax treatment of income payment

Answer 26

Payment of **dividend** is _not_ deductible expense for company v. Paying debenture **interest** _is_ deductible (normal trading expense)

Question 27

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

Answer 27

Yes - under Model Articles / Companies Act, implied power to grant security for any type of borrowing *(Directors will have authority under MA3, unless amended)*

Question 28

What are the three main types of security?

Answer 28

I. Mortgage II. Fixed Charge III. Floating Charge

Question 29

Why is a mortgage the highest form of security?

Answer 29

(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)

Question 30

What is a fixed charge?

Answer 30

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**

Question 31

What is a floating charge?

Answer 31

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)

Question 32

When will a floating charge crystallise?

Answer 32

a. Chargor goes into **receivership or liquidation** b. Chargor **ceases to trade** c. Any other event specified in charge doc

Question 33

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

Answer 33

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

Question 34

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

Answer 34

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

Question 35

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

Answer 35

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

Question 36

What are the filing requirements for registering a charge?

Answer 36

**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

Question 37

When does a charge become valid?

Answer 37

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

Question 38

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

Answer 38

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_)

Question 39

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

Answer 39

Charge is **void against third party**

Question 40

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

Answer 40

1. Profit & loss account 2. Balance sheet

Question 41

What is the profit & loss account?

Answer 41

Shows how _profitable_ business is Income *minus* Expenses = Profit

Question 42

What is the balance sheet?

Answer 42

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)

Question 43

What is the difference between fixed & current assets?

Answer 43

Assets = what business **owns** / has right to own **Fixed** assets = premises, machinery etc **Current** assets = short-term (eg. stock, debts, cash, prepayments, WIP)

Question 44

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

Answer 44

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

Question 45

How are partnership accounts different from other business accounts?

Answer 45

Have an **appropriation account** showing how **net profit divided** between the partners There will be a **separate capital** account & **current** account for each partner

Question 46

What kind of resolution is needed to authorise a dividend?

Answer 46

**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

Question 47

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

Answer 47

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

Question 48

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

Answer 48

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)

Question 49

What is the difference between revenue reserves & capital reserves?

Answer 49

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

Question 50

Who must a company file their annual accounts with?

Answer 50

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