business finance

Question 1

true or false? The directors of a private company with unamended model articles of association will always be able to authorise the issues of shares without recourse to the members

Answer 1

fasle - the board may issue shares without recourse to the members only where the company will have one type of share, both before and after the issue. authority will be required by ordinary resoluton or a provision in the articles if this is not the case

Question 2

explain what is meant by pre emption rights

Answer 2

right for existing shareholders to have a right of first refusal for existing shareholders

Question 3

true or false - a fixed charge will usually have priority over a floating. charge and only companies and llps may grant floating charges

Answer 3

ttrue a fixed charge will usually have priority over a floating charge unless a prior floating charge contains a negative pledge

Question 4

rue or false - a charge against a companys assets must always be registered at companies house

Answer 4

false - but will loose priority very serious consequences

Question 5

explain the nature of the profit loss account and balance sheet.

Question 6

directors authority

Answer 6

in private companies with unamedned model articles and only one class of shares, before and after the issue, the directors are free to issue further shares of the same class by board resolution under ma3 - this can be done without prior reference to the members.

otherwise the proposed issue of shares by the directors will require the advance auhtority of the members by ordinary resoltuion or by provision of the companies articles

pre 2009 - ordinary resolution to change
post 2009 - check articles of association and special resolution to change.

Question 7

pre -emption rights

if it is proposed to issue shares wholly for cash the statutory pre emption rights may apply

Answer 7

idea is to protect members where the effect of issuing shares would be to weaken their control of the company.

dictate generally that on an issue of new shares, they must first be offered to the existing members of the same or more favourable terms , in proportion to their existing shareholdings.

i.e they have the right of first refusla for a period OF AT LEAST 14 DAYS.

Question 8

statutory rights may be varied or removed

Answer 8

• varied or removed by contrary provision in the articles either on incorporation or subsequently by special resolution - the mas do not vary the statutory rights.
• disapplied by special resolution of the members.
• formally waived in relation to a specific issue if all the members intend to decline the offer.

Question 9

when considering share issues

Answer 9

the most important thing to ascertain are how many types of share the company has and whether the shares are issued wholly for cash - pre emption rights would apply.

if shares are issues wholly or partly for non cash assets, the transaction could also be a SPT and an additional OR would be required.

Question 10

payment for shares and administration / filing

Answer 10

shares may be issued fully paid or partly paid although for private companies with model articles - must be fully paid.

• shares are often issued at a premium - must be shown in the share premium account on the balance sheet.

shares may not be issued at a discount i.e below their base value.

Question 11

filing

Answer 11

a return of allotments must be sent to companies house within one month of the share issue.

copies of any or (pre 2009) or sp (post 2009) must be sent to companies house within 15 days.

any relevant PSC forms must also be filed.

the registrar of members must be updated if kept and share certificates issued within 2 months.

Question 12

share transfer

Answer 12

share transfer and transmission are fundamentally different

share transfer: involves dealing with existing shares - no new money or assets are generated for the compay the number of shares remains the same but their is a potential for an individuals control of the company to change.

Question 13

transmission

Answer 13

is the transfer of shares by operation of the law on death or a trustee in bankruptcy. when shares are transmitted the pr / tin may receive the dividends but they do not become shareholders. they apply to be registered as a member or sell in their capacity as personal representative or TIB.

Question 14

CAN DIRECTORS REFUSE TO REGISTER THE PROPOSED TRANSFER?

Answer 14

will depend on the terms of the articles.

• ma26 the directors have an absolute discretion to refuse to register the transfer of shares
• the transferee will become a member when entered on the register of members and until them the transferor holds them on trust for the transferee so if the directors exercise the discretion not to register the transferee may never be the egal owner. however the transferor must vote according to the wishes of the transferee and must hold any dividends on trust for them.

some companies may decide to adopt other types ofr restrictions on the right to transfer shares in their artiles e.g. requiring member who wishes to sell to offer to existing members - or allowing the members freedom only to transfer to family or other company members.

Question 15

dividends

Answer 15

a payment the company makes to its members which provides them with a return on their financial investment

Question 16

dividends continued

Answer 16

may only me made out of profits available for the purpose.

1. check profits are available
2. MAS 30-35, check special articles
3. directors decide whether a dividend ought to be declared and make a recommendation to the members in general meeting.
4. members vote by ordinary resolution to pay themselves the amount as recommended by the directors or less - they cannot vote to pay themselves more than the reccomended sum.

Question 17

dividends 3

Answer 17

if the company does not declare a dividend when it is properly payable this may be grounds for unfairly prejudicial conduct

however a company will often wish to ensure it has sufficient reserves available to deal with future liability.

Question 18

buyback of shares

(WHEN A COMPANY BUYS BACK ITS OWN SHARES, AND THE SHARES ARE CANCELLED.)

Answer 18

permitted in limited circumstances due to the principle of capital maintenance.

capital maintenance: fundamental principle that states that capital provided by shareholders must be maintained and must not be returned to them as creditors rely on it.

buyback of shares is heavily regulated as it could leave the company is a financially precarious position reducing available profits and or capital. there are different rules for the buyback of shares on the srock market.

Question 19

buyback from profits

Answer 19

only permitted where distributable profits are available

1. check shares are fully paid
2. check articles dont prohibit buyback
3. directors should consider their duties
4. ceck profits are available by producing accounts - distributable profits must be available or payment made from a fresh issue
5. Or required to approve contract - holders of shares being bought cannot vote and their votes do not count.
6. copy byback contract must be sent with written resolution or made available for inspection at least 15 days before the gm and at the gm. payment must be made at the time of the buyback
7. file forms SH03 and SH06 within 28 days - cancel shares, update register of members, file relevant PSC forms and update PSC register. make contract/ summary available for inspection for 10 years at the registered office once completed.

Question 20

buypack from capital

Answer 20

only permitted to the extent that distributable profits are unavailabe - in other words a company cannot buyback out of capital if profits are available (they must use these first).

1. check shares are fully paid
2. check articles do not prohibit buyback
3. directors should consider their duties
4. check whether profits are avaulable by producig accounts prepared no more than 3 months before the statement of solvency.
5. no earlier than one week before the meeting, directors must made an sos that the company will remain solvent for a year after the transaction 0 they may face personal luability and criminal sanctions if they do this negligently
6. or required to approve contract
7. SP required to approve buyback from capital holders of shares cannot vote and their votes do not count.
8. copy buyback contract or a summary of it must be sent with written resolution or made available for inspection for at least 15 days before the general meeting and at the gm.
9. COPY SOS and auditors report must be made available for inspection before and at the meeting, otherwise the resolution will be ineffecive
10. notice must be published in the london gasette as well as a national newspaper or actual notice to each creditor within 7 days of the speciak resolution.
    - payment must be made in 2 weeks following five weeks of the sr.
    file form sh-3 and sh06 within 28 days at companies house, file special resolution within 14 days.

Question 21

debt finance

Answer 21

does the power have power to borrow / give security?

• partnership - check the partnership agreement.
• a company - will have the power to borrow and grant security unless articles say otherwise.

Question 22

security - a charge document will usually provide a lender with security for a loan. this means that in the event of default the charge holder will have priority over unsecured creditors.

Answer 22

a lender will usually require security for a loan, a mortgage or charge.

they will normally carry out due dilligence in any secured lending.

Question 23

mortgage

Answer 23

highest form of security. it involves the transfer of the legal title to the ortgagee with reconveyance back to the mortgagir when the debt is satisfied. as such it gives the lender an immediate right to possession - usually created by fixed charge.

Question 24

charge

Answer 24

provides lender with an interest in the property but inlike a traditional mortgage - does not transfer legal title.

Question 25

fixed charge

Answer 25

charge taken over a particular asset or assets - the consent of the lender is required to deal with the assets

Question 26

floating charge

Answer 26

charge taken over a particular class of assets ownded from time to time e.g. stock and or IP and can only be granted by a company or LLP. the company or LLP can deal with the assets without the consent of the lender until crystallisation as until then it floats over tarther than fixes on the assets

Question 27

crystallisation

Answer 27

where a floating charge fixes on the assets in the particular class at the time, i.e becomes a fixed charge.

occurs when the company becomes insolvent or any other event occurs which the charge specifies will cause crystallisation e.g. non payment, ceasing to trade or other default.

Question 28

floating charge advantages

Answer 28

• flexibility to deal with assets that are contsantly changing.
  advnatge for lender - have security when it matters.
• the lender takes the risk that assets may not be released and the sevurity will usually be postponed to fixed charge holders and preferential creditors, or may even be set aside.

Question 29

debenture

Answer 29

a document which includes secuirty in the form of a floating charge or sometimes both fixed and floating charges.

because they contain a floating charge - they can only be granted by companies or LLPS.

Question 30

priority of security

Answer 30

general rules as to priority of security - subject to registration.

1. as between validly created charges of the same type, the fist in time (date of creation) will have priortiy
2. as between validly created fixed charge or mortgage and a floating charge, the fixed charge or mortagge will take priority even if granted later unless

the document creating the fixed charge contains a negative pledge clause and
the later fixed chargee has notice of this prohibition at the time when it takes it charge.

Question 31

negative pledge clause

Answer 31

a clause which prohibts the later creation of a fixed charge without permission

Question 32

registration of charges

Answer 32

generally all charges created by a company may be registered at companies house.

1. submit the folowing to companies house within 21days of creating the charge
   - form MR01
   - a certified copy fo the charge document
   - the relevant fee

the company will recieve a certificate of registration and must also update its register of charges.

failure to register:
- void against a liquidator

Question 33

business accounts

summaries of financial information

preparation of accounts

Answer 33

• double entry system whereby every business transaction has two aspects a debit and a credit.

they begin with a trial balance

Question 34

profit and loss accounts

Answer 34

show whether the business has made a profit or a loss in the relevant period. the basic formula is income - expenses = net profit.

Question 35

income

Answer 35

usually recurring and includes sales, profit costs, interest recieved and rent recieved.

Question 36

expenses

Answer 36

usually incurred and exhausted over a short period of time. they are necessary to keep the business running. they include stock, purchased, wages utiilities, rent and interest paid, insurance, repairs, petrol and hire charges.

Question 37

balance sheet

Answer 37

1. first part shows the value of a nusiness at a particular point in time. assets - liabilities