Business Law Flashcards
What are the characteristics of a partnership?
‘relationship between persons carrying on a business in common with a view to making a profit’.
- No formality required;
- Not a legal entity separate from the partners;
- Two or more persons;
What are the list of rules for determining the existence of a partnership?
Section 2 PA 1890
1. evidence of profit sharing will be prima facie evidence of a partnership but not necessarily conclusive evidence.
2. If all individuals take part in decision-making, this also makes it more likely that a partnership will be held to exist.
3. A loan of money by one party to another does not create a partnership. Case law has also held that if the person is not being ‘held out’ as a partner this makes the existence of a partnership less likely.
What are the three key provisions that govern the fiduciary relationship between partners?
- Honest and full disclosure (s 28 PA 1890);
- Unauthorised personal profit (s 29(1) PA 1890));
- Conflict of duty and interest (s 30 PA 1890).
What is the extent of personal liability under a partnership?
Nature of partners’ liability.
- Contractual liability (s 9);
- Tortious liability (ss 10, 12);
- New partners = will not be automatically liable for any debts incurred before they joined.
- Former partners = liable unless the partner gives
i) actual notice (s 36(1))
ii) constructive notice (publication in London Gazette (36(2)). - ‘Holding out’ = a non-partner may be personally liable on a partnership debt if they have held themselves out as a partner (s 14)
i) a representation to a third party to the effect that a person is a partner;
ii) the third party’s action in response;
iii) the third party’s state of mind.
What is the power of a partner to bind the firm against the other partners’ wishes?
Section 5 = a partner’s unauthorised act will bind the firm if:
1. The act is for carrying on business of the kind carried on by the firm;
2. the act is for carrying on such a business in the usual way.
What is the power of a non-partner to bind the firm against the other partners’ wishes?
- the apparent (ostensible) authority to act;
- holding out the individuals as a partner.
How is a partnership taxed?
Each partner is liable to tax as an individual on their share of the income or gains of the partnership. (tax transparency).
Capital gains tax = each partner is treated as owning a fractional share of the asset. On disposal, each partner is treated as making a disposal of their share.
How can a partnership vary the mutual rights and obligation?
by unanimous consent (s 19) through express or inferred from course of dealing.
What is the purpose of a ‘commencement and duration’ clause in a partnership agreement?
Useful for the agreement to set out a date on which the partners agree that the particular rights and obligations contained in the agreement will commence.
If the agreement has a fixed term but the partners continue in business after the expiration of that term without entering into a new agreement, they are presumed to be partners on the same terms as before (s 27 PA 1890).
How can a partnership agreement be used to allocate or dispose of partnership property?
ss 20, 21 = All property brought into the partnership whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, is partnership property.
all property bought with money belonging to the firm/partnership is deemed to have been bought on account of the firm/partnership, unless the contrary intention is shown.
What is the standard position of entitlement to income and capital etc. and salary in a partnership?
All partners are entitled to share equally in the capital and profits of the business, and to contribute equally towards the losses of the business.
s 24(1) = all partners are entitled to share equally in income profits. Not entitlement to a set salary without a partnership agreement (s 24(6)).
What is the standard position on decision-making and work input in a partnership?
Every partner is not required to participate in the management of the partnership business (s 24).
All partnership decisions must be decided by a majority, other than the following which require unanimity:
1. Changes to the nature of the partnership business (s 24(8));
2. Introducing a new partner (s 24(7));
3. Varying the rights and duties of partners (s 19).
What is the effect of s 24(7) PA 1890?
Unanimous consent of all partners is required for a new partner to join a partnership.
What is the rules about expulsion for partnerships?
s 25 PA 1890:
- A partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this.
What is the effect of a partner leaving a partnership?
If there is no partnership agreement or if the agreement is silent on retirement or termination, the effect of a partner leaving is that the partnership is dissolved (‘technical dissolution’, s 26 PA 1890).
What is the standard position of non-compete clauses?
s 30 PA 1890:
- if a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, they must account to the firm for all profits made by them in that business.
What are the main ways a partnership can be dissolved (terminated)?
- automatic dissolution
- expiry of fixed term (s 32(a))
- Completion of specific venture (s 32(b))
- death or bankruptcy (s 33). - dissolution of partnership by notice (ss 26 and 32(c));
- dissolution of partnership if the partnership business becomes unlawful (s 34)
- dissolution by the court as a last resort (s 35).
What is the procedure upon dissolution of a partnership?
Where a partnership is wound up, once all debts and liabilities have been paid, any money/assets left will be distributed so that each partner is paid back their original capital first. Then the remainder of the asset surplus is shared equally.
If there is a profit share ratio - the asset surplus ratio is shared on the same basis.
How is a LLP formed?
- Two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP (s 2(1)(a)) LLPA);
- Registration at Companies House (Form LL IN01) with relevant fee;
- name of the LLP
- its registered office’s address;
- which member, if not all of them are to be designated members (s 2(2) LLPA) - Certificate of incorporation
What is the ‘continuing registration regime’?
It is the obligation of the LLP to continue to file information with Companies House:
1. change of name;
2. change of registered office;
3. changes in membership;
4. creation of a charge;
5. annual confirmation statement; and
6. accounts.
Also, maintain in-house records:
1. register of its members; and
2. its PSC (people of significant control).
What are the members requirements?
An LLP must have at least two formally appointed members at all time:
- There is no limit on the maximum number of members an LLP can have.
At least two members of the LLP must be ‘designed members’. Their obligations include, amongst other things, signing the accounts on behalf of the members, making filings at Companies House and acting on behalf of the LLP if it is wound up.
Section 4(3) LLPA states that a member will cease to be a member of the LLP upon:
What are the members requirements?
An LLP must have at least two formally appointed members at all time:
- There is no limit on the maximum number of members an LLP can have.
At least two members of the LLP must be ‘designed members’. Their obligations include, amongst other things, signing the accounts on behalf of the members, making filings at Companies House and acting on behalf of the LLP if it is wound up.
Section 4(3) LLPA states that a member will cease to be a member of the LLP upon:
1. Their death;
2. Agreement with the other members of the LLP;
3. Giving notice to the other members of the LLP; or
4. Dissolution (if the member is a body corporate).
What is the main feature of a LLP Agreement?
The LLP Agreement is a private document which sets out the formal procedures and arrangements which the members have agreed to be the basis of the operation of their business.
There is no requirement for an LLP Agreement.
What are the eleven default provisions in the absence of an agreement to the contrary?
- Members share equally in capital and profits (Reg 7(1));
- An LLP must indemnify its members for payment made and personal liabilities incurred by them in the ordinary and proper conduct of the business of the LLP (Reg 7(2));
- Every member may take part in management (Reg 7(3));
- No member is entitled to remuneration for managing the LLP (Reg 7(4));
- No person can become a member or assign their membership without the consent of all existing members (Reg 7(5));
- Ordinary decision-making may be done by the majority of the members. Any proposed change to the nature of the business requires the consent of all the members (Reg 7(6));
- Books and records of the LLP must be available for inspection by the members at the registered office (Reg 7(7));
- Each member must give true accounts and full information of all things affecting the LLP to any member or his legal representative (Reg 7(8));
- If a member (without consent) carries on any business of the same nature as, and competing with, the LLP then they must account for and pay over to the LLP all profits made by them in the business (Reg 7(9));
- Every member has a duty to account for benefits derived from transactions with the LLP and its business or property (Reg 7(1));
- There is no implied power of expulsion of a member by the majority unless the members have expressly provided for such a power in a Members’ Agreement (Reg 8).
How is an LLP taxed?
Each partner will be traxed as an individual (tax transparency)
Assets held by the LLP will be treated as being held by the members as partners for capital gains tax purposes.
The LLPa gives relief from stamp duty where a partnership is incorporated as an LLP and assets of the partnership business are transferred to the LLP, subject to strict tax avoidance conditions. In some circumstances, stamp duty and/or SDLT is payable on the transfer of an interest in an LLP at the relevant rate.
As regards VAT, the LLP itself may register for VAT, not the members.
What are the three ways a company can form its Articles?
- Model Articles (MA);
- Amended model articles; and
- Tailor-made Articles.
How can a company amend its Articles?
Special resolution (s 21(1) CA 2006).
Unless entrenched. Can only be amended by the agreement of all the members, or by a court order (22(3) CA 2006).
What is needed to incorporate a new company from scratch?
s 9
1. a copy of the company’s memorandum;
2. articles
3. the fee;
4. an application for registration (Form IN01).
i) the company’s proposed name and registered office;
ii) whether the company is to be private or public;
iii) Whether the company is to be limited by shares (or guarantee);
iv) statement of capital and initial shareholdings;
v) statement of the company’s proposed officers and PSCs;
vi) statement of compliance.
What document does the Registrar of Companies issue to a successful applicant to Companies House?
Certificate of incorporation containing:
- the name of the company;
- company’s registered number;
- the date of incorporation.
The company becomes a legal entity (s 16(3)) from the date on which the certificate of incorporation is issued by Companies House. The date of incorporation is set out in the certificate of incorporation (s 15 CA 2006).
What is the procedure to convert a shelf company?
- Name (changed by special resolution - Form NM01)
- Registered office (Ordinary resolution - Form AD01)
- Articles (Special resolution)
- Members (board or sale of the subscriber to another)
- Directors (appoint (Form AP01), terminate (Form TM01)).
- Company Secretary (appoint (Form AP03), terminate (TM02)).
What are some post-incorporation steps?
Chairperson
- The Board needs to decide whether to elect a chair and whether the Chairperson should have a casting vote in the event of a tied board resolution. MA 13 provides for this but they may wish to change this by special resolution.
Accounting reference date
- s 391(4) provides that the default accounting reference
date will be the last day of the month in which the company was incorporated. Often companies will change this to align with their financial year. Form AA01 is required.
Auditor
- all companies must prepare annual accounts (s 394) and will usually
therefore need to appoint an auditor.
Tax registrations
- the company will need to register for corporation tax, VAT and PAYE and National Insurance (if it has employees).
Shareholder agreement
- this is a private contract between the shareholders. It is
not required and not all companies have a shareholder agreement, but it may be useful. We will consider shareholder agreements in more detail later in this module.
What is the function of section 51?
(1) A contract that purports to be made by or on behalf of a company at a time when the company has not been incorporated has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.’
What are the three ways to vote at a General Meeting?
- Show of hands:
- Each shareholder who is present at the meeting will be entitled to one vote, regardless of the number of shares held by that shareholder. - poll vote:
- every shareholder has one vote in respect of each share held by them. - written resolution (only for private companies)
- written ordinary resolution - passed by a simple majority of the total voting rights of eligible members (s 282(2) CA 2006).
- Written special resolution
> must state it is a special resolution; and
> passed by a majority of members representing not less than 75% of the total voting rights of eligible members.
(note that there are two decisions that may not be passed as written resolutions: (i) removal of a director under s 168; and (ii) removal of an auditor under s 510).
Who is entitled to call a Board Meeting and what is the formality for a BM?
WHO CALLS = Director may call a BM or require the company secretary to do so at any time.
NOTICE = In Brown v La Trinidad, the court held that reasonable notice of the BM was necessary, and that this would be whatever notice is usual for the directors to give.
QUORUM = MA 11(2) requires a minimum of two directors to be present for the meeting to be quorate (unless the articles provide otherwise).
VOTING = Board resolution are passed by majority vote on a show of hands (MA 7(1)). Each director has one vote. The chair may have a casting vote to prevent deadlock (MA13 provides for this but it is possible for the company to amend this).
Who is entitled to call a General Meeting and what is the formality for a GM?
WHO CALLS A GM = The Board will usually convene (i.e. call) a GM.
NOTICE = 14 clear days’ notice is required.
- the day of the meeting and the day the notice is given are both excluded.
- the board must inform the shareholders of when (and where) it is taking place, by giving notice to the shareholders.
- the directors must approve the form of the notice of the GM and then they must authorise its circulation to the shareholders.
QUORUM = the quorum for a GM is generally two shareholders, although it is one shareholder for single-member companies.
What is the ‘GM sandwich’?
BM1 = first required in order to call the GM;
GM = the GM will take place and the shareholders will vote on the resolutions set out in the notice.
BM2 = a further BM will be held and the direction will be informed as to how the shareholders voted at the GM and whether the resolution were passed. The directors will then authorise the company secretary, or a director, to deal with the post-meeting matters.
Post-Meeting Matters (PMMs) = The PMMs will then be carried out by the company secretary (if the company has one) or a director (if not). This means that copes of the relevant documents will be filed at Companies House, and the company’s internal records (minute books and registers) will be brought up-to-date.
How can a Board shorten the notice for a GM?
Section 307(5) = GM may be called on short notice if:
1. a majority in number of the members who;
2. together hold shares with a nominal value of not less than 90% of the total nominal value of the shares which give the right to attend and vote at the GM.
What is the written resolution procedure?
Written resolution
- A written resolution is passed when the required majority of those eligible members signify their agreement to it. The lapse date is 28 days beginning with the circulation date;
- resolutions to remove a director or auditor from office may not be passed by way of written resolution;
- auditors are entitled to copies of written resolutions;
- written resolutions must be recorded in the minute books in the same way as the minutes of a GM.
What are the two options to proceed with a written resolutions?
- If the shareholders are present. The approval of the WR takes place immediately following the adjournment of the BM and the shareholders vote on the resolutions set out in the WR by signing to signify their approval or not signing or abstaining; or
- If the shareholders are not present. The WR is passed once it receives the requisite level of support or it will deem to lapse after 28 days.
What are some Post-Meeting Matters?
PMM break down into three categories:
1. Internal
- Minutes of all meetings need to be kept for 10 years;
- Updating of statutory books e.g. register of members, directors, PSC register.
- Filing at Companies House
- All special resolution must be filed. Generally ordinary resolutions do not need to be filed;
- Amended Articles must be filed, along with any forms that the Companies House requires. - Record keeping
- You will come across various documents that need to be kept at the registered office, e.g. directors service contracts.
What are the ways that a director can be appointed?
- By an ordinary resolution of the shareholders (MA 17(1)(a));
- By a decision of the directors (MA 17(1)(b)).
What are the disclosure requirements of directors and secretary appointments?
- Every company must maintain a register of its directors (s 162(1) CA 2006) and secretary (s 275(1) CA 2006) and should keep these registers at its registered office;
- Each company must also notify the Registrar of Companies of changes relating to its directors or secretary using forms published by Companies House.
Section 412 CA 2006:
1. the directors’ salaries, bonus payments and pension entitlements; and
2. compensation paid to directors and past directors for loss of office.
How can a director be terminated by shareholders?
s 168(1) CA 2006, a company (i.e. the shareholders) may by ordinary resolution remove a director before the expiration of their period of office.
Under s 168(2) = special notice (28 days) is required of a removal resolution.
What are other ways directors can cease to be a director?
Resignation by notice
- a director may simply take the decision to resign from the board by tendering a letter of resignation.
Automatic termination (MA18)
- director becomes disqualified from being a director;
- director becomes the subject of an individual voluntary arrangement;
- director becomes bankrupt; or
- a registered practitioner who is treating the direction states in writing.
Disqualification - Company Directors Disqualification Act 1986 (‘CDDA’)
- The period of disqualification is for a maximum of 15 years. If a director has been disqualified under the CDDA, it is a criminal offence to participate directly or indirectly in corporate management without leave of the court.
Retirement by rotation
- The model articles for public companies require retirement and reappointment of directors by the members every three years.
Companies House filing requirements
- When a director leaves office, the company must both update the company’s register of directors and also give notice to Companies House by filing form TM01.
What are the general duties of directors under ss 170-177?
s 171 = Duty to act within powers;
s 172 = Duty to promote the success of the company for the benefit of the members as a whole;
s 173 = Duty to exercise independent judgment;
s 174 = Duty to exercise reasonable care, skill and diligence;
s 175 = Duty to avoid conflicts of interest;
s 176 = Duty not to accept benefits from third parties; and
s 177 = Duty to declare any interest in a proposed transaction.
What and when must a notice under s 177 be made?
When it must be done:
1. equally to ‘indirect interests’. The director does not have to be a party to the transaction for s 177 CA 2006.
2. A director must declare their interest in a proposed transaction before the transaction is entered (s 177(4) CA 2006.
3. The declaration can be at a Board Meeting or in writing in advance of the Board Meeting. It is also possible for directors to give a one-off general notice of their interest.
4. If a director discloses an interest to the other directors by way of written notice rather than in a meeting of the directors, the n the notice must be sent to all directors either electronically (if agreed) or in paper form.
5. under s 185, a director can give general notice to the effect that they are always to be considered interested in any transaction or arrangement with a specified party. This will be if a director has an interest in a specified body corporate or firm or is connected to a specified person.
When it must not be done:
- directors is not aware of the interest or transaction or arrangement in question.
- the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or the other directors know about or ought to have known about the conflict of interest; or
- if the conflict arises because it concerns their service contract and their service contract has been or will be considered by the board, or a committee of the board, of directors.
