Business - Financing

Question 1

What is the purpose of the allotment of shares?

Answer 1

To issue new shares to investors or existing shareholders

Question 2

What must companies incorporated before 1 October 2009 do regarding allotment restrictions?

Answer 2

Check if they have updated their articles since that date

Question 3

What is the authority for directors of a private company with one class of shares to allot shares?

Answer 3

Directors can allot shares without shareholder permission under s 550 CA 2006

Question 4

What is the requirement for public companies or private companies with more than one class of shares before allotting shares?

Answer 4

An ordinary resolution of the shareholders is needed

Question 5

What are pre-emption rights?

Answer 5

Rights of first refusal over shares being allotted

Question 6

Under s 561 CA 2006, what must a company do before allotting equity securities?

Answer 6

Offer them to existing shareholders on the same or more favorable terms

Question 7

What is the minimum acceptance period for a pre-emption rights offer?

Answer 7

14 days

Question 8

What are exceptions to pre-emption rights?

Answer 8

• Bonus shares
• Non-cash consideration
• Employee share schemes

Question 9

What must be done for shares to be fully paid according to MA 21?

Answer 9

All shares must be fully paid when buyers receive them

Question 10

How is a stock transfer completed?

Answer 10

The transferor must complete and sign a stock transfer form and give it to the transferee along with the share certificate

Question 11

What happens to shares if a shareholder dies?

Answer 11

Shares automatically pass to their personal representatives

Question 12

What principle prohibits the reduction of a company’s share capital?

Answer 12

Share capital cannot be reduced because it is the fund creditors rely on for payment

Question 13

What are the exceptions to the rule that a company cannot purchase its own shares?

Answer 13

• Buyback following correct procedure
• Court order under s 994 CA 2006
• Return of capital in winding up

Question 14

What is the difference between market purchase and off-market purchase of shares?

Answer 14

Market purchase occurs on the stock market, off-market does not

Question 15

What must be done before a company can buy back its own shares?

Answer 15

Shareholders must pass an ordinary resolution authorizing the buyback contract

Question 16

What is required for private companies to buy back shares out of capital?

Answer 16

They must exhaust distributable profits before using capital

Question 17

What is the definition of a dividend?

Answer 17

A payment to shareholders from the company’s profits

Question 18

Under s 830 CA 2006, when can a company pay a dividend?

Answer 18

If it has profits available for the purpose

Question 19

What is an overdraft facility?

Answer 19

A contract allowing a business to overdraw on its current account

Question 20

What is the main disadvantage of an overdraft?

Answer 20

Repayment may be demanded at any time by the bank

Question 21

What are the characteristics of term loans?

Answer 21

• Fixed amount of money
• Specified repayment period
• Interest paid at regular intervals

Question 22

What is a revolving credit facility?

Answer 22

A facility allowing a business to borrow and repay money repeatedly within a set limit

Question 23

What is a debenture?

Answer 23

A written loan agreement that is registered at Companies House

Question 24

What is the difference between secured and unsecured debt?

Answer 24

Secured debt has priority over assets; unsecured debt is paid pro rata if funds are insufficient

Question 25

What is a fixed charge?

Answer 25

A charge taken over specific assets that gives the lender control of the asset

Question 26

What is a floating charge?

Answer 26

A charge over a pool of assets that can change over time

Question 27

When must charges be registered ?

Answer 27

All charges must be registered within 21 days of creation?

Question 28

What is a fixed charge?

Answer 28

A fixed charge may be taken over property such as machinery and shares owned by the company. The charger must create a separate fixed charge over each asset.

Question 29

Does a fixed charge prevent a company from operating its business?

Answer 29

No, a fixed charge does not prevent the company from operating its business within the asset that has a fixed charge on.

Question 30

What rights does a fixed charge give to the lender?

Answer 30

A fixed charge does not give the lender the right to immediate possession or transfer legal ownership.

Question 31

What is a floating charge?

Answer 31

A floating charge secures a group of assets, such as stock, which is constantly changing and is suitable for assets that the company needs to sell as part of doing business.

Question 32

Why are floating charges necessary for a company?

Answer 32

Floating charges are necessary because some assets cannot be fixed as the company needs to sell them regularly to operate its business.

Question 33

Can more than one floating charge be created over the same group of assets?

Answer 33

Yes, it is possible to create more than one floating charge over the same group of assets.

Question 34

What is subordination in the context of creditors?

Answer 34

Subordination is an agreement between creditors to alter the order of priority of their charges, often executed through a deed of priority.

Question 35

What might prompt a bank to allow a fixed charge holder to have priority?

Answer 35

A bank might allow this to advance new funds to the borrower to continue trading.

Question 36

What is a negative pledge?

Answer 36

A negative pledge clause prohibits the company from creating later charges with priority to the floating charge without the floating charge holder’s permission.

Question 37

What happens if a subsequent lender takes a charge over the same asset with knowledge of a negative pledge?

Answer 37

The subsequent lender’s fixed charge will be subordinate to the bank’s floating charge.

Question 38

Does breach of a negative pledge covenant render the security void?

Answer 38

No, breach of a negative pledge covenant does not render the resultant security void.

Question 39

How is net current assets calculated?

Answer 39

Net current assets = Current liabilities LESS Current assets.

Question 40

Define net assets.

Answer 40

Net assets = Current and long-term liabilities LESS Fixed and current assets.

Question 41

What is trading profit?

Answer 41

Trading profit is calculated by subtracting deductible expenditure from sales.

Question 42

What does a balance sheet calculation show?

Answer 42

Assets – Liabilities = Net worth of the business.

Question 43

What does 'employment of capital' refer to?

Answer 43

Employment of capital refers to where the money is now.

Question 44

What does 'capital employed' stand for on the balance sheet?

Answer 44

Capital employed also stands for trading profit on the balance sheet.