BUSINESS LAW 1

Question 1

2 types of business medium and examples?

Answer 1

• unincorporated business (sole traders, partnerships)
• incorporated business (limited companies (private and public) and limited liability partnerships)

Question 2

what is a sole trader?

Answer 2

a self-employed person who is the sole owner of their unincorporated business

Question 3

sole trader- advantages and disadvantages

Answer 3

ADVANTAGES
- no specific formalities or legal process required to set up the business
- additional costs of setting up a business are avoided (but do still need to register with HMRC and register for VAT)
- no onerous ongoing formality, decision making, filing and disclosure requirements

DISADVANTAGES
- unlimited liability (the business owner is personally and directly responsible for any debts and liabilities incurred)
- No legal separation between the business and the sole trader’s personal assets/affairs

SUMMARY
MORE PRIVATE, LESS EXPENSIVE, BUT UNLIMITED LIABILITY

Question 4

what is a partnership?

Answer 4

An unincorporated business that exists when two or more people ‘carry on’ a business in common with a view of profit
- different from limited liability partnerships

Question 5

advantages and disadvantages of a partnership

Answer 5

ADVANTAGES
- no specific formalities or legal process required to set up the business
- additional costs of setting up a business are avoided (but do still need to register with HMRC and register for VAT)
- no onerous ongoing formality, decision making, filing and disclosure requirements

DISADVANTAGES
- unlimited liability (the business owner is personally and directly responsible for any debts and liabilities incurred)
- No legal separation between the business and the partner’s personal assets/affairs
- if there is no partnership agreement, the Partnership Act will apply which can have some undesirable consequences

BIT OF BOTH
- under the PA there is no separation of ownership and control so the acts of one partner binds the partnership
- can be a good thing as it makes running the company simpler but can be a bad thing if they act on their own

Question 6

what is a company?

Answer 6

an incorporated business with separate legal personality, where its members can have limited liability

Question 7

what does separate legal personality mean?

Answer 7

• the company is a person separate from its members/shareholders and directors
• it can own property, enter into contracts, and be party to legal proceedings (sue and be sued)
• can also have perpetual succession

Question 8

shareholders vs directors

Answer 8

shareholders
- own the shares in the company
- sometimes referred to as members
- liability is limited to any amount unpaid on their shares

directors
- general management powers to control what the company does day-to-day
- they run the company

Question 9

advantages and disadvantages of incorporation

Answer 9

ADVANTAGES
- separate personality
- limited liability
- can grant floating charges as well as fixed charges
- company can be seen as more prestigious - they are recognised internationally

DISADVANTAGES
- some expenses to set up
- onerous ongoing formality, decision making, filing and disclosure requirements - adds to admin burden and expenses over time
- all info held at Companies House so may not be attractive to those who want commercial secrecy

Question 10

public vs private companies

Answer 10

PUBLIC
- certificate of incorporation stating it is a public limited company
- may be limited by shares
- general public can be invited to subscribe for shares
- minimum capital requirements of £50k and shares must be at least 1/4 paid up
- subject to more stringent rules

PRIVATE
- company that is not a public company
- may be limited by shares or by guarantee
- shares cannot be offered to the general public

Question 11

what are limited liability partnerships (LLPs)

Answer 11

• type of incorporated business and is formed by sending form LLIN01 to companies house
• cross between company and partnership
• combines features of partnerships and limited companies
• LLP has separate personality and members have limited liability
• KEY DISADVANTAGE- not as well recognised internationally as limited companies

Question 12

how do you know a partnership has been formed?

Answer 12

• it is a question of fact
• no specific formalities are required
• have to meet the criteria of two or more people ‘carrying on’ a business in common with a view of profit

Question 13

why should you have a partnership agreement? and what are some of the key default provisions in the PA?

Answer 13

• partnership agreement varies some of the key default provisions of the PA
• Entitlement to Capital and Income profits- BOTH SHARED EQUALLY UNDER PA
• Duration (retirement, death, bankruptcy) - PARTNERSHIP DISSOLVED EVERY TIME
• Management- ALL PARTNERS ENTITLED TO TAKE PART IN MANAGING COMPANY
• Expulsion- NO MAJORITY CAN EXPEL A PARTNER- NEED ALL TO AGREE

Question 14

When is the partnership/firm liable for debts to third parties?

Answer 14

• depends on whether a partner had actual or apparent authority to contract on behalf of the partnership

Actual authority- partner is actually authorised to contract on behalf of beneficiaries

apparent authority-
4 questions
- is the transaction related to the partnership?
- would the partner usually be expected to have authority to make the transaction?
- does the third party know that the partner doesnt have actual authority?
- does the third party know that the partner isn’t actually a part of the firm/have suspicions that that is the case?

if the partner enters with actual authority the partnership is bound

if the partner enters with apparent authority, the partnership is bound but the partner is personally liable

If neither then the partnership is not bound and just the partner is liable

partners are liable 50/50 for all debts

Question 15

liability of individual partners for past debts- retirement/joining

Answer 15

RETIREMENT
- not automatically no longer liable for debt
- 3 ways to release themselves from liability- deed of release from willing creditors, novation agreement from willing creditors (needs a deed to be binding) , or indemnity from continuing partners

JOINING
- not liable for past debts of a partnership

Question 16

liability of future debts of a partnership after retirement

Answer 16

• may be liable if they don’t comply with sections 36 and 14 of the PA

S36-
- retiring partner must give notice to third parties that they are leaving
- 2 types of notice- actual and constructive
actual notice- inform them directly
constructive notice- put a note in the Gazette

S14
- must avoid being held out as a partner
- this means – doing something or allowing something to be done that suggests one is a partner which is relied upon by someone who gives credit to the firm as a result

Question 17

What are the 2 ways to provide a business client with a company

Answer 17

• incorporating a new company (a ‘tailor-made’ company
• acquiring a company that has already been incorporated but which has not traded (a shelf company)

Question 18

What must be sent to Companies House for a new company to be registered?

Answer 18

• application to register a company (form IN01)
• memorandum of association
• articles of association (in some circs)
• the requisite fee

Question 19

Form IN01 information- company name

Answer 19

Name of a company must end with
- Ltd or limited- for priv limited companies
- plc or public limited company- for pub limited companies

Name cannot be chosen which
- is the same as an existing registered company
- is offensive or constitutes a criminal offence
- includes words suggesting a connection with the govt or a local authority

Question 20

Form IN01- what is included?

Answer 20

• company name
• company type
• principle business activity
• registered office address
• articles of association

Question 21

Articles of association vs model articles

Answer 21

• articles of association are the internal rulebook dealing with directors, shareholders, meetings and key administrative requirements
• model articles are provided for by CA and these are standard articles of association
• it is not compulsory to use these and you can either use the MAs in their entirety, MAs with amendments or a bespoke set of articles
• MAs automatically apply unless you exclude them

Question 22

Proposed officers (form IN01 part 2)

Answer 22

• company secretary (not necessary but if there is one their name and address for service must be given)
• directors
  — name, month and year of birth, nationality and business occupation of all directors must be set out
  — address for service and usual address must be given unless valid reason
  — private company must have at least one director- corporate directors are permitted but need at least one natural person
• director can also be secretary

Question 23

Form IN01 (part 3-statement of capital and initial shareholdings) and (part 5- people with significant control)

Answer 23

Statement of capital and initial shareholdings shows-
- initial share capital (no of shares of each type and their nominal value)
- rights attaching to different types/classes of share (eg voting rights)
- initial shareholdings- names and addresses of shareholders and details

details of People with sig control need to be set out-
- need to meet one of the following conditions
— more than 25% of the shares
— more than 25% of the voting rights
— have the right to appoint or remove the majority of the board

MUST BE OVER 25% NOT JUST 25%

Question 24

Certificate of incorporation

Answer 24

• once Companies House has examined the documents and found them to be in order- they issue a Cert of incorporation- essentially the companies birth certificate- a company can change its name but its number remains constant
• company cannot enter into contracts until COI has been issued
• they then need to take some practical steps and have a first board meeting
• one of the things they need to do is to fix an accounting reference date, otherwise it’ll be the last day of the month of incorporation

Question 25

Board meetings and general meetings definitions

Answer 25

Board meetings- meetings of the directors who pass board resolutions (BRs) to make decisions

General meetings- meetings of the members/shareholders, who pass ordinary resolutions and special resolutions to make decisions

Question 26

Key provisions of board meetings

Answer 26

Calling and notice
- any director may call a BM at any time
- reasonable notice must be given to all directors (doesn’t necessarily have to be in writing)
Quorum ( min number of people that need to be present)
- 2
Voting
- show of hands or oral assent
- chairperson has the casting vote in a tie
Resolutions and majority
- simple majority required

Question 27

Ordinary resolution vs special resolution
And
AGM vs GM

Answer 27

Ordinary
- requires simple majority (more than 50% of shareholders attending and voting at a GM)
Special
- requires 75% or more of shareholders attending and voting at a GM

AGM
- annual general meeting
- not required if formed after Oct 2006

GM
- any meeting of the members other than an AGM

Question 28

Key provisions of GMS

Answer 28

Calling and notice
– Written or electronic notice may be given
– 14 clear days notice required(in effect 16 days as you do not include date of service and date of meeting)
– Add an extra two days notice if serving by email or post (in effect 14 clear days equals 18 days)

Quorum
– 2 (unless a one member company)

Voting
– Show of Hands unless poll vote demanded
– Poll may be demanded by the chairperson, at least two voting members, any members holding at least 10% of the voting shares

Question 29

Small companies and accounts

Answer 29

A small company are those that satisfied two or more of the following:
– Turnover of not more than £10.2 million
– Balance sheet of no more than £5.1 million
– Not more than 50 employees

A small company is exempt from the requirement for accounts to be audited

Question 30

Shadow director vs de facto director

Answer 30

Shadow
- a person who, although not properly appointed as a director, exercises a major influence on the directors
- the directors are accustomed to act in accordance with their instructions

De facto
- either a director who has not been properly appointed under the CA, but performs the role of director
- or a person who continues in the role of director after their term of office has expired

Question 31

Appointment of directors
And
Non-executive director vs executive director - definition and appointment

Answer 31

Requirement for directors
– A private company must have at least one direct director and a public company must have at least two directors

Non-executive director
– A person who holds the office of director . They have frights duties restrictions and obligations under the CA, but they do not work for the company in a paid position.
– Appointment as a non-executive director is dealt with under MA 17 and maybe be done by either an ordinary resolution of the shareholders or board resolution of the directors

Executive director
– A person who as well as holding the office of director also works for the company in a paid position
– They will be entitled to a salary
Appointment as an executive director is dealt with under MA 19 and may be done by board resolution

So in practice you would be appointed under MA 17 to the office of director and this may be done by board resolution or ordinary resolution and then your appointment to the paid position will be by way of board resolution under MA19

Question 32

What must the company do following appointment of an executor

Answer 32

Update the register of directors on the register of directors residential addresses and file form AP01 ( individual directors) or AP02 (corporate directors) as appropriate with companies house within 14 days

Question 33

Directors duties

Answer 33

Directors of producer duties to their company I duty not to make a secret profit out of their position and act in the best interest of the company. In comparison shareholders may act in their own interests.

– To act within the companies constitution and to exercise their powers for proper purpose
– To promote the success of the company
– To exercise independent judgement
– To exercise reasonable care skill and diligence
– To avoid conflict of interest
– Not to accept benefits from third parties
– To declare interest in a proposed transaction with the company

Question 34

Remedies and ratification for a directors breach of duty

Answer 34

– Remedies can include an account for profits (payment to the company) damages or an injunction
– Shareholders may ratify (authorise) a breach of duty by ordinary resolution. The votes of any interested director who is also a shareholder and those persons they are connected with or not count

Question 35

Personal liability of directors

Answer 35

A director will be personally liable to 3rd parties dealing with the company where the director has given a personal guarantee or is guilty of wrongful trading , fraudulent trading or misfeasance

Wrongful trading
– A director of an insolvent company may be liable to contribute to the assets of a company by the company continue to trade, and they knew, or ought to have concluded that, there was no reasonable prospect of the company avoiding insolvency proceedings

Fraudulent trading
– A director of an insolvent company may be liable to contribute to the assets of a company by the company carried on business with the intent to defraud creditors of any fraudulent purposes

Misfeasance
– Misfeasance is essentially a breach of directors duties discovered on winding up. Personal liability may be imposed in these circumstances.

Question 36

Restrictions on directors: substantial property transactions

Answer 36

An SPT involves the acquisition/disposal of a non-cash asset where
– The parties involved on the company and a director or a person connected to a director
And
– The asset is substantial. Its value is not £5000 or less and is either more than £100,000 or more than 10% of the companies net asset value

Therefore
– If the value of the transaction is £5000 or less it will never be substantial
– If the value of the transaction is over £100,000 it will always be substantial
– If the value of the transaction is more than £5000 but equal to or less than £100,000 it will only be substantial if the value exceeds 10% of the companies net asset value

Person connected to a director
– Family: include spouse, civil partner, romantic partner in an enduring relationship, children, stepchildren, parents and children of romantic partners (but not brothers, sisters, grandparents, grandchildren, uncles, aunts, nephews and nieces)
– Body corporate: director and persons connected with the director who own at least 20% of the company’s voting shares

Question 37

Restrictions on directors: loans to directors

Answer 37

Subject to limited exceptions loans made to a director of more than £10,000 in total require the approval of the members by OR
The transaction will be voidable if not approved unless ratified by OR of the shareholders within a reasonable time
A memorandum of the proposed terms must be available for inspection for 15 days prior to the meeting and at the meeting

Question 38

Removal of directors

Answer 38

Once appointed a director holds office until death, voluntary retirement, removal or disqualification

Voluntary retirement
A director may resign by serving notification of resignation on the company

Removal under section 168 of the CA
-The right of the shareholders to remove directors by ordinary resolution as an important inherent right
– Special notice of the OR is required to be given to the company of the proposed resolution (this means at least 28 days notice of the proposed resolution must be given to the company otherwise the resolution will be ineffective)
– The director concern has the right to be informed and to make representations to argue against their removal
– The company must then serve notice of the general meeting
– It is important to check the companies articles for any bushell v faith clause
– This is a clause giving shareholder – directors weighted voting rights (e.g. two votes for everyone they would normally have) on a resolution to remove them as a director

Question 39

Minority versus majority shareholders
And the summary of shareholders rights based on percentages

Answer 39

– A minority shower holder individually holds 50% or less of the companies voting shares
– A majority shareholder individually holds more than 50% of the companies voting shares
One of the most significant powers majority shareholders have is the right to remove director under section 168 of the CA

– 100% percentage shareholding gives the owner control of the company
– 75% percentage shareholding gives the owner the ability to pass a special resolution
– 50% percentage shareholding gives the owner the ability to block an ordinary resolution
– More than 50% percentage shareholding gives the owner the ability to pass an ordinary resolution
– More than 25% percentage shareholding gives the owner the ability to block a special resolution
– Majority of number holding at least 90% of the voting shares gives the owners the ability to consent to short notice of a general meeting
– Any two voting members or any members holding at least 10% of the voting shares are able to demand a poll vote
– More than 10% percentage shareholding gives the owner the ability to refuse consent to short notice of a GM
– 5% or more with voting rights means they may circulate Britain resolutions or circulate written statement as to proposed resolutions
-5% percentage share owning means the owner may requisition a gentle meeting

Question 40

Equity finance versus debt finance

Answer 40

Equity finance
– Equity finance is the issue (creation) of new shares in exchange for consideration received by a company it generates money/assets for a company
Debt finance
– Debt finance involves borrowing money in order to finance a business the debt may be secured or unsecured

Question 41

Share issue definition

Answer 41

– A company must have a minimum of one shareholder on incorporation
– Following incorporation the directors of a company are responsible for share issue
– it is The process whereby new shares are allotted (created) in exchange for consideration received by the company and the member is entered onto the register of members in respect of those shares
– It can change the control of a company as the number of shares increases

Question 42

Directors authority in relation to share issue

Answer 42

In private companies with unamended model articles of association 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

– Otherwise the proposed issue of shares by the directors will require the advance authority of the members by ordinary resolution
– Any authority to issue (whether it in the articles or by way of OR) must state:
– The maximum number of shares the directors are allowed to issue
– The date when the authority will expire (generally not more than five years from the date the authority is given)
– if an OR is passed this must be filed at company‘s house within 15 days. It is one of the rare occasions were an OR needs to be filed.

Summary of the approach to take for ascertain authority to issue shares

Does the company have one unamended MAS? And two will it have one class of share (before and after issue)?
– If the answer is yes, members authority is not required and can be done by board resolution
– If the answer is no, members authority will be required and move onto next question

Was the company formed pre-the first of October 2009?
– If yes, check memorandum of association and will need OR to change
If no, check articles of association and will need SR to change

Question 43

Do pre-emption rates apply in relation to share issue?

Answer 43

The statutory pre-emption rights dictate that generally on an issue of new shares they must first be offered to the existing members on the same or more favourable terms in proportion to their existing shareholding. They have a right of first refusal for a period of at least 14 days.

The rationale behind pre-emption rights is that they protect members where the effective issuing shares would be to weaken their control of the company. This is because when new shares are issued there is potential for an individuals percentage shareholding to decrease.

Question 44

Important things to ascertain in regards to share issue

Answer 44

The two key questions with regard to this:
– Do the directors have authority to issue the shares?
– Do pre-emption rights apply?

The most important things to ascertain are how many types of shares the company has (authority) and whether the shares are issued wholly for cash (pre-emption)
If shares are issued, wholly or partly for non-cash assets the transaction could also be a substantial property transaction and an additional OR would be required

Question 45

Payment for shares and administration/filing

Answer 45

Shares may be issued fully paid or partly paid although for private companies with MA’s, MA 21 states they must be fully paid
– Shares are quite commonly issued at a premium i.e. a price exceeding their base value. Any premium paid must be shown in the share premium account on the balance sheet .shares may not be issued at a discount.

Question 46

Share transfer versus share transmission

Answer 46

Share transfer
– Share transfer involves dealing with existing shares e.g. on sale or gift. No new money or assets are generated for the company as it is essentially a transaction between the transferor and transferee whereby ownership changes.

Share transmission
– Share transmission is the transfer of shares by operation of law e.g. to personal representatives on death, or a trustee in bankruptcy. When shares are transmitted, the personal representative or trustee in bankruptcy may receive the dividends but they do not become shareholders.
– They may apply to be registered as a member or selling their capacity as PR/TIB

Question 47

Share transfer process

Answer 47

– Transferor completes and signs of stock transfer form and sends it with the share certificate to the transferee
– transferee pay stamp duty on the STF calculated at 0.5% of the consideration paid rounded up to the nearest £5
– transferee send the stamped STF and the shares certificates to the company
– Directors pass board resolution to approve/reject the transfer directors have absolute discretion under MA 26 – check for special articles
– Transfer must be registered and the new share certificate sent to the new member within two months of the application
– The company will update details of shareholders annually on the confirmation statement

Question 48

Dividends

Answer 48

A dividend as a payment the company makes to its members which provides them with a return on their financial investment in the company
– A dividend may only be made out of profits available for the purpose. This means that the company miscalculated accumulated realised profits to date i.e. its actual net profits to date and deduct it accumulated realised losses to date

The companies articles were further regulate when and how dividends to be paid the procedure is this

– Check profits are available
– MAS 30 to 35 – check special article
– Directors decide whether dividend ought to be declared and make a recommendation to the members in general meeting
– Members vote by ordinary resolution to pay themselves the amount as recommended by the directors or less – note that they cannot vote to pay themselves more than the recommended sum

Question 49

Definition of buyback of shares and maintenance

Answer 49

Buyback of shares is permitted in limited circumstances due to the principle of capital maintenance

Buyback of shares
Where a company buys back its own shares and the shares are cancelled

Capital Maintenance
– A fundamental principle which states the capital provided by shareholders must be maintained and must not be returned to them as creditors rely on it

Buyback of shares as heavily regulated as it could leave the company in a financially precarious position
Shares may be brought back out of profits or in some circumstances and you should know the rules and processes involved

Question 50

Buy back from profits versus buyback from capital

Answer 50

Buyback from profits
– A buyback of shares is only permitted where distributable profits are available

Buy back from capital
– a buyback of shares that is only permitted to the extent the distributable profits are unavailable in other words. Accompany cannot buy back out of capital if profits are available they must use these first.

Question 51

Debt finance – the power to borrow/give security and types of security

Answer 51

The power to borrow/give security
– For a partnership this will involve checking any partnership agreement
– Accompany will have the power to borrow and Grant security unless it articles say otherwise
The process is summarised below:

– Does the company have unamended MAS?
– If yes the directors may approve by board resolution
– If no you ask if the company was formed before the 1st of October 2009
– If yes check memorandum and you can amend by SR
– If no check articles and you can amend by SR

– The types of security for a loan are a mortgage or charge and these can be fixed or floating

– A fixed charge is charged taken over a particular asset or assets. The consent of the lender is required in order to deal with the assets
– A floating charge of a charge taken over a particular class of assets and from time to time (tangible e.g. stock and/or intangible e.g. intellectual property) the company can deal with the assets without the consent of the lender until crystallisation as until then it ‘floats over’ rather than ‘fixes on’ the assets
– Crystallisation is when a floating charge fixes on the assets in the particular class at that time it usually occurs when a company becomes insolvent or any other event occur which the charge specifies will cause crystallisation e.g. nonpayment, ceasing to trade or other default