Business Law Flashcards
1
Q
What are the characteristics of a partnership?
A
‘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;
2
Q
What are the list of rules for determining the existence of a partnership?
A
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.
3
Q
What are the three key provisions that govern the fiduciary relationship between partners?
A
- 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).
4
Q
What is the extent of personal liability under a partnership?
A
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.
5
Q
What is the power of a partner to bind the firm against the other partners’ wishes?
A
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.
6
Q
What is the power of a non-partner to bind the firm against the other partners’ wishes?
A
- the apparent (ostensible) authority to act;
- holding out the individuals as a partner.
7
Q
How is a partnership taxed?
A
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.
8
Q
How can a partnership vary the mutual rights and obligation?
A
by unanimous consent (s 19) through express or inferred from course of dealing.
9
Q
What is the purpose of a ‘commencement and duration’ clause in a partnership agreement?
A
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).
10
Q
How can a partnership agreement be used to allocate or dispose of partnership property?
A
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.
11
Q
What is the standard position of entitlement to income and capital etc. and salary in a partnership?
A
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)).
12
Q
What is the standard position on decision-making and work input in a partnership?
A
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).
13
Q
What is the effect of s 24(7) PA 1890?
A
Unanimous consent of all partners is required for a new partner to join a partnership.
14
Q
What is the rules about expulsion for partnerships?
A
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.
15
Q
What is the effect of a partner leaving a partnership?
A
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).
16
Q
What is the standard position of non-compete clauses?
A
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.
17
Q
What are the main ways a partnership can be dissolved (terminated)?
A
- 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).
18
Q
What is the procedure upon dissolution of a partnership?
A
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.
19
Q
How is a LLP formed?
A
- 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
20
Q
What is the ‘continuing registration regime’?
A
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).
21
Q
What are the members requirements?
A
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:
22
Q
What are the members requirements?
A
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).
23
Q
What is the main feature of a LLP Agreement?
A
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.
24
Q
What are the eleven default provisions in the absence of an agreement to the contrary?
A
- 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).
25
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.
26
What are the three ways a company can form its Articles?
1. Model Articles (MA);
2. Amended model articles; and
3. Tailor-made Articles.
27
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).
28
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.
29
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).
30
What is the procedure to convert a shelf company?
1. Name (changed by special resolution - Form NM01)
2. Registered office (Ordinary resolution - Form AD01)
3. Articles (Special resolution)
4. Members (board or sale of the subscriber to another)
5. Directors (appoint (Form AP01), terminate (Form TM01)).
6. Company Secretary (appoint (Form AP03), terminate (TM02)).
31
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.
32
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.'
33
What are the three ways to vote at a General Meeting?
1. 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.
2. poll vote:
- every shareholder has one vote in respect of each share held by them.
3. 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).
34
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).
35
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.
36
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.
37
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.
38
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.
39
What are the two options to proceed with a written resolutions?
1. 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
2. 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.
40
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.
2. 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.
3. Record keeping
- You will come across various documents that need to be kept at the registered office, e.g. directors service contracts.
41
What are the ways that a director can be appointed?
1. By an ordinary resolution of the shareholders (MA 17(1)(a));
2. By a decision of the directors (MA 17(1)(b)).
42
What are the disclosure requirements of directors and secretary appointments?
1. 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;
2. 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.
43
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.
44
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.
45
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.
46
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.
47
What is the function of MA14?
MA14 specifies that a director who is interested in a transaction or arrangement with the company cannot vote on or count in the quorum for board resolutions in respect of that transaction or arrangement.
1. the company disapplies MA14(1) by ordinary resolution;
2. the director's interest cannot reasonably be regarded as likely to give rise to a conflict of interest; or
3. the director's conflict arises from a permitted cause.
48
What are the consequences of a breach of directors' duties?
section 174
- damages.
Section 171-173 and 175-177
- injunction;
- setting aside of the transaction;
- restitution and account of profits;
- restoration of company property; and/or
- damages.
49
What can the shareholders do to support a director's proposed action?
1. s 180(4) - support action in advance.
'subject to any rule of law enabling the company to give authority, specifically or generally, for anything done (or omitted) by the directors... that would otherwise be a breach of duty'.
2. s 239(2) - ratification for breach of duty.
- ordinary resolution, subject to anything in the company's articles.
i) negligence;
ii) default;
iii) breach of duty; and
iv) breach of trust.
50
What is a 'long-term service contract'?
director's service contract for a guaranteed period in excess of two years.
1. a period during which the contract is to continue other than at the instance of the company (i.e. a contractual term of more than two years or where the director is in control of how long the contract continues); and
2. during this time, the company either cannot terminate the contract or can only terminate in specific circumstances; or
3. the period of notice to be given by the company.
51
What is the consequence of non-compliance with s 189 CA 2006?
If a company agrees to a provision i a service contract in contravention of s 188 CA 2006, the consequences are as follows:
1. the provision will be voided to the extent of the contravention under s 189 CA 2006; and
2. the contract will be deemed to contain a term entitling the company to terminate it at any time by the giving of reasonable notice.
52
What is the exception to long-term contract contained in s 188(6)(b) CA 2006?
Under s 188(6)(b) CA 2006 approval is not required by the members of any company which is a wholly-owned subsidiary of another company.
53
What is the required procedure for s 188 CA 2006?
1. disclosure of interest - 177 CA 2006:
- 177(6)(c) a director is not required to disclose their interest in the service contract.
- directors will typically make the declaration of interest under s 177(1) so that it is documented in the board minutes.
2. Members' inspection rights of all directions' service contracts - s 228
- A company must keep a copy of all directors' service contracts at the company's registered office or a place specified in regulations made under s 1136 CA 2006 for a period of at least one year from the date of termination or expiry of the contract for members to inspect.
- This obligation applies regardless of the length of any service contract and whether or not it is terminable within 12 months.
- under s 229 CA 2006 members have the right to inspect without charge or to request a copy on payment of a fee.
3. Where the ordinary resolution is to be passed at a General Meeting - s 188(5)(b).
- a memorandum setting out the proposed contract must be made available for inspection by members of the company both:
i) at the company's registered office for not less than 15 days ending with the date of the meeting; and
ii) at the meeting itself.
- A minimum of 15 days' notice of the GM held to approve the contract will therefore have to be given to shareholders.
4. Where the written resolution procedure is being followed - s 188(5)(a)
- the memorandum setting out the proposed contract must be sent or submitted to every member at or before the time at which the proposed resolution is sent or submitted to the member.
54
What is the definition of a 'Substantial Non-Cash Asset'?
1. Substantial:
- An asset worth £5000 or less is not a substantial asset;
- An asset worth more than £100,000 is a substantial asset;
- An asset worth more than £5,000, but not more than £100,000 is a substantial asset only if it is worth more than 10% of the company's net asset value.
2. 'Non-Cash Asset':
- Any property other than cash.
55
What is the definition of 'persons connected with a director'?
1. Members of the director's family:
- Spouse or civil partner;
- Parents;
- Children
- Step-children.
2. Companies in which the director (and others connected with them) hold 20% or more of the shares.
3. A business partner of the director or those connected with them;
4. Trustees of a trust, the beneficiaries of which include the director or those connected with them.
56
What are the exceptions to approval of substantial transactions?
s 190(4)(b)
- apporval is not required by the members of any company which is a wholly-owned subsidiary of another company.
s 192 - list of exceptions
- if a director who is also a shareholder sells their shares back to the company.
57
What are the remedies for a substantial property transaction?
Where a SPT is entered into without shareholder approval, under s 195(2) CA 2006 the transaction is voidable at the instance of the company unless:
1. restitution is no longer possible;
2. the company has been indemnified for the loss or damage suffered by it; or
3. rights acquired in good faith by a third party would be affected by the avoidance.
58
What are the remedies for a substantial property transaction?
Where a SPT is entered into without shareholder approval, under s 195(2) CA 2006 the transaction is voidable at the instance of the company unless:
1. restitution is no longer possible;
2. the company has been indemnified for the loss or damage suffered by it; or
3. rights acquired in good faith by a third party would be affected by the avoidance.
s 196
- arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period.
59
What is the defences to SPT?
If the SPT is between a company and a person connected with a director, and the director concerned shows that they took all reasonable steps to ensure the company's compliance with s 190 CA 2006, the directors will not be liable under 195(6) CA 2006.
There is also a defence under s 195(7) CA 2006 for any connected person (if relevant) and any director who authorised the transaction who can show they had no knowledge of the circumstances constituting the contravention.
Under s 177(1) CA 2006 a director would need to disclose the nature and extent of their interest to the board.
Under the exception in s 177(6)(b) CA 2006, it is arguable that an interested director need not formally to declare an interest if the other directors are already aware of it.
MA14(1), any interested directors will not be permitted to vote on the board resolution to approve the contract and authorise a signatory.
60
What are the regulated loans to directors?
1. Loans
2. Quasi-loans
3. Credit Transactions
4. Guarantees or the provision of security for any of the above
61
Which companies are regulated of loans, guarantees or security for directors?
All companies (s 197)
- 'No company may make loans to its directors or to directors of its holding company or give guarantees or enter into security in connection with loans to such directors, without the transaction first being approved by the shareholders by ordinary resolution.'
Public companies and private companies associated with public companies (s 198-202): Quasi loans, credit transactions and connected persons.
1. Loans to person connected to a director of the company or a director of its holding company;
2. Quasi-loans (s 198) to, or credit transactions with their directors and directors a holding company or persons connected with such directors; and
3. Guarantees or security in respect of any such loans, quasi-loans or credit transactions with their directors and directors of a holding company or persons connected with such directors.
62
What are the exceptions to Loans and related transactions shareholder approval?
s 204 - Expenditure on company business (up to a maximum of £50,000);
s 205 - Loans for defending proceedings brought against a director;
s 206 - Loans for defending regulatory actions or investigations;
s 207 - Minor and business transactions - loans or quasi-loans of up to £10,000 and credit up to £15,000 do not require shareholder approval;
s 208 - intra group transactions; and
s 209 - Money lending companies (where the loan is made in the ordinary course of the business of the company).
63
What are the remedies for failing to seek shareholder approval for Loans and related transactions?
The arrangement is voidable at the instance of the company unless:
1. restitution is no longer possible;
2. the company has been indemnified for the loss or damage suffered by it; or
3. rights acquired in good faith by a third party would be affected by the avoidance.
The directors involved are liable to account to the company for any profits made and to indemnify the company for any loss incurred.
64
What is the procedure for shareholder approval for Loans and related transactions?
Where the ordinary resolution is to be passed at a General Meeting, a memorandum setting out the proposed transaction must be made available for inspection by members of the company both:
1. At the company's registered office for not less than 15 days ending with the date of the meeting; and
2. at the meeting itself.
Where the written resolution procedure is being followed:
- a memorandum setting out the proposed transaction must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to the member.
65
What is the minimum amount of directors in a private and public company?
LTD = one director
PLC = at least two directors.
66
What is the minimum amount of company secretary required in a private and public company?
LTD = no minimum requirement
PLC = must have a company secretary.
67
What are examples of membership rights that hvae been enforced under s 33 CA 2006?
1. Right to a dividend once it has been lawfully declared;
2. Right to share in surplus capital on a winding up;
3. Right to vote at meetings; and
4. Right to receive notice of GMs and AGMs.
68
What is the function of a Shareholders' Agreement?
1. Right of action/enforceability enables one member to enforce the provisions of the Shareholders' Agreement directly against another.
2. If a term of a Shareholders' Agreement is breached general contract law principles applies.
3. Reserved matters in shareholders' agreement - may be used to agree between shareholders on matters requiring the consent of all shareholders or certain shareholders or protect minority shareholders.
4. Amendments to shareholders' agreement can give effect to a changes to a company's articles of association by passing a special resolution requiring 75% approval.
69
How can a director be removed before the expiration of their period of office?
s 168(1) CA 2006.
- ordinary resolution.
- special notice (28 days) is required.
- (NOT POSSIBLE FOR A COMPANY TO REMOVE A DIRECTOR USING A WRITTEN RESOLUTION).
70
What are the two options for the Board to respond to a Special notice?
Option 1: Board places the removal resolution on the agenda of a GM
- Board will need to give shareholders at least 14 clear days' notice.
- notice of the removal resolution may be given either by advertisement in a newspaper or any other mode allowed by the company's Articles at least 14 clear days before the GM.
1. Unhappy shareholders give special notice (28 days);
2. If Board agrees to put removal resolution on the agenda of GM gives notice to all SH (14 days notice before SH);
3. GM to allow SH to vote on removal resolution.
Option 2: Board does not place the removal resolution on the agenda of a GM.
- Board may decide not to place the removal resolution on the agenda of a general meeting. Directors are not bound to place the removal resolution on the agenda for consideration at a forthcoming general meeting.
71
What are the two options for the Board to respond to a Special notice?
Option 1: Board places the removal resolution on the agenda of a GM
- Board will need to give shareholders at least 14 clear days' notice.
- notice of the removal resolution may be given either by advertisement in a newspaper or any other mode allowed by the company's Articles at least 14 clear days before the GM.
1. Unhappy shareholders give special notice (28 days);
2. If Board agrees to put removal resolution on the agenda of GM gives notice to all SH (14 days notice before SH);
3. GM to allow SH to vote on removal resolution.
Option 2: Board does not place the removal resolution on the agenda of a GM.
- Board may decide not to place the removal resolution on the agenda of a general meeting. Directors are not bound to place the removal resolution on the agenda for consideration at a forthcoming general meeting.
72
What is an s 303 request in the context of termination of directors?
The unhappy shareholders may have the ability to require the directors to call a GM and, if the directors refuse to do this, the unhappy shareholders may be able to call the GM themselves if:
- shareholder(s) holds not less than 5% of the paid up voting share capital of the company.
- serves a request to the board.
Consequently, the directors are obliged to:
1. within 21 days form the date on which they become subject to he s 303 request to call the GM;
2. to be held on a date not more than 28 days after the date of the notice convening the GM.
73
What happens if the directors fails to call a GM under s 304(1)?
All of the shareholders who submitted the s 303 request or any of them representing more than one half of the voting rights of those who submitted that s 303 request, can call a GM themselves pursuant to s 305 CA 2006.
GM must be called on no fewer than 14 clear days' notice and held within 3 months of the date that the directors received the s 303 request.
The shareholders forced to call the GM themselves can recover their reasonable expenses for doing so from the company.
74
What can the director do to protest his removal?
1. The director has the right to make representations in writing provided those representations are of a reasonable length (s 169(3) CA 2006).
- If the representation is not circulated, it should be read out at the GM (s 169(4) CA 2006).
2. In any event, the director concerned has a right to be heard whether or not they are a shareholder (s 169(2) CA 2006).
3. Bushell v Faith clause. weighted voting rights at a GM at which an s 168 CA 2006 resolution is proposed.
4. Shareholders' Agreement.
- may provide that the unanimous consent of all shareholders is required in order for a resolution to remove a director to be passed.
- does not remove the statutory right of the majority shareholders to remove a director under s 168 CA 2006.
75
What is the director's entitlement to compensation for loss of office?
Any payment must be approved by the company's shareholders by way of ordinary resolution, UNLESS:
- the payment, together with any other relevant payments, does not exceed £200; or
- payment is made in good faith:
1. discharge of an existing legal obligation;
2. way of damage in respect of such an obligation;
3. in settlement or compromise of a claim in connection with termination of a peron's office or employment; or
4. by way of pension in respect of past services.
However, no approval is required from the shareholders of a wholly-owned subsidiary.
(NOTE disclosure requirement: A memorandum setting out particulars of the payment must be made available to shareholders for 15 days before the ordinary resolution is passed, ending with the date of the general meeting.)
76
When and what are the grounds for bringing a derivative claim?
s 260(3) - when
- '... may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.'
s 260(1) CA 2006 - grounds
1. in respect of a cause of action vested in the company; and
2. seeking relief on behalf of the company.
77
What is the two-stage procedure to receive the court's approval?
1. member must obtain the permission of the court to continue a derivative claim.
2. Particular criteria: particular regard to any evidence it has before it has to the views of the members who have no 'personal interest, direct or indirect, in the matter'.
78
What is the requirement for unfair prejudice (s 994 CA 2006)?
1. that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least that shareholder); or
2. That an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudical.
79
What are examples of unfair prejudice (s 994 CA 2006)?
1. negligent or inept management of a company;
2. Disagreements as to company policy;
3. Bad faith;
4. Breaches of the articles of association;
5. claimant's conduct;
6. Excessive remuneration; and
7. Legitimate expectation.
80
What are the remedies for unfair prejudice?
1. the court has the power to grant such order as it thinks fit to provide relief.
2. sets out a list of particular types of order that may be made. These include orders regulating the future conduct of the company's affairs and requiring the company to do or refrain from doing certain acts.
81
What is, and when is just and equitable winding up used?
Just and equitable winding up is the right to bring a petition to the court for the company to be wound up (liquidated) on the grounds that it is just and equitable to do so.
82
What are the characteristics of ordinary shares?
s 560(1) CA 2006
-'shares other than shares that as respects dividend and capital carry a right to participate only up to a specified amount in a distribution'.
83
What are the two types of dividend that can be declared?
1. Final dividends
- final dividends are declared by the directors and approved by an ordinary resolution of the shareholders following the financial year end.
2. Interim dividends
- The articles of a company normally give the directors the power to decide to pay interim dividends if the company has sufficient distributable profits (MA30).
84
What are the six broad categories of shares?
1. Ordinary shares;
2. Preference shares;
3. Participating preference shares;
4. Deferred shares;
5. Redeemable shares; and
6. Convertible shares.
85
What is the position of private companies offering shares to the public?
Under s 755 CA 2006, a private company limited by shares is prohibited from offering its shares to the public. Must offer to targeted investors only and not to the public indiscriminately.
Every time the company offers shares - required to publish a prospectus to would-be investors.
- must contain all the information necessary to enable investors to make an informed assessment of the financial status of the company and the rights attaching to the shares (s 87A(2) FSMA).
86
What are the two common forms of restriction on the transfer of shares?
1. Directors' power to refuse to register.
- Article 26(5) MA states: "The directors may refuse to register the transfer of a share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal;
-UNLESS they suspect that the proposed transfer may be fraudulent.
- Must give reasons for the refusal (s 771)
2. Pre-emption clauses (rights of first refusal)
- Pre-emption rights on transfer will often require that a shareholder wishing to sell shares must offer them to the other existing shareholders before being able to offer them to an outsider.
87
What formalities are involved in transferring shares?
1. Instrument of transfer:
- Stock transfer form, which has to be signed by the transferor and submitted, with the share certificate, to the new shareholder.
2. Legal and equitable ownership:
- Beneficial title to the shares passes on the execution of the stock transfer form.
- Legal title passes on the registration of the member as the owner of those shares in the register of members by the company (s 112 CA 2006).
- Share certificate in the new owner's name should be sent within two months of registration.
3. Stamp duty payable at 0.5% of the consideration rounded up to the nearest £5.
- No stamp duty is payable where the consideration is £1000 or less.
- minimum fee of £5 is payable if consideration is more than £1000.
88
What is the five-step process to issue new shares?
1. Any cap on the number of shares that may be issued?
2. Do the company's directors need authority to allot?
3. Must pre-emption rights be disapplied on allotment?
4. Must new class rights be created for the shares?
5. Directors must pass a broad resolution to allot the shares.
89
What is, and how can pre-emption rights be disapplied?
"s 561 CA 2006:
(1) A company must not allot equity securities to a person on any terms unless
(a) it has made an offer to each person who holds ordinary shares in the company to allot to him on the same or more favourable terms a proportion of those securities that is as nearly as practicable equal to the proportion in nominal value held by him of the ordinary share capital of the company..."
There are three ways to disapply pre-emption rights:
1. General disapplication of pre-emption rights;
- A company may disapply pre-emption rights where the directors are generally authorised for the purposes of s 551 CA 2006 by passing special resolution or by including the disapplication in its articles.
2. Private companies with one class of share;
- s 569 - disapplication of pre-emption rights for private companies with only one class of share by special resolution.
4. Other ways to disapply pre-emption rights;
- Specific disapplication of pre-emption rights (special resolution)
- Exclusion of pre-emption rights
- Private companies with one class of share - disapplication in the Articles.
90
When can a director allot shares without a general meeting?
1. has no limit in its constitution on the number of shares which can be issued by the company; and
2. does not require directors' authorisation because the company is private company with only one class of shares and there is no restriction in the company's Articles - s 550 or has already given the directors authority to allot shares; and
3. is issuing the shares to existing shareholders in proportion to their existing shareholdings and follows the procedure in s 562 CA 2006 or has already disapplied s 561 CA 2006 or is a private company and has taken advantage of s 567 CA 2006; and
4. has the relevant class rights in its Articles.
91
What are the administrative requirements on allotment?
1. Copies of resolutions to be sent to Companies Hosue within 15 days;
2. Company forms to be sent to companies house;
3. Updating company registers (within two months)
4. Issue share certificates (sent to shareholders within two months).
92
Which companies are prohibited from giving financial assistance?
1. the identity of the company
- If public:
i) the target company itself; and
ii) any subsidiary of the target company, whether private or public.
- if private:
i) applies to any public company subsidiary of the target company.
2. Gives financial assistance:
- gift;
- guarantee, security or indemnity, release or waiver;
- loan or similar arrangement;
- Any other financial assistance where the company's net assets of the company are reduced to a material extent.
93
What are the exceptions to 'financial assistance'?
1. 'purpose' exceptions:
- giving of financial assistance will not be unlawful if the principal purpose in giving it is not for the purpose of the acquisition or if that purpose (the acquisition) is only an incidental part of some larger purpose.
2. unconditional exceptions
- dividend payment etc.
3. conditional exceptions
- money lending in the ordinary course of business; and
- Assistance in respect of employee share schemes.
94
what are the consequences of carrying out prohibited financial assistance?
1. the company = fined
2. officers of the company = fine and/or imprisonment.
3. Loan contract and the wider transaction may be void.
95
What are the steps to buyback shares?
1. distributable profits;
2. Proceeds of a fresh issue of shares made for the purpose of financing the buyback; or
3. Capital (only private companies)
- Companies must first use any money available either in the form of profits or the proceeds of a fresh issue of shares to fund the purchase using capital.
Procedure:
1. a contract to purchase own shares is required (s 694(1)); and
2. the terms of the contract need to be approved by ordinary resolution (s 694(2)).
3. contract must be available for inspection at the company's registered office for a period of 15 days before the GM and also at the GM.
(contract must be sent together with the copy of any written resolution (s 696(2))).
96
What steps must be taken to make a buyback out of capital?
1. check company articles for restrictions;
2. accounts were prepared no more than three months before the directors' statement;
3. check if there are any profits before using capital;
4. directors' statement of solvency must be prepared with an auditors' report (one week before the GM and solvent for 12 months after the buyback);
5. A special resolution to approve payment out of capital must be passed within a week after the directors sign the written statement of solvency (s 716).
(7. notification requirement (seven days of the passing of the special resolution)
i) publish a notice in the Gazette;
ii) publish a notice in an appropriate national newspaper or give notice in writing to each creditor; and
iii) Filing copies of the directors' statement and auditors' report at Companies House.
8. Purchase must take place no earlier than five weeks, and no later than seven weeks, after the date of the special resolution (s 723 CA 2006).
97
What is the minimum amount an investor in a public company must pay if the nominal value is £1 and the price/share is £5?
On allotment of shares in a public company, a shareholder must pay at least 25% of the nominal value (25p) and the whole of any premium.
98
How should a writ for an outstanding amount be served on a partnership?
Bring the action against the partnership in the firm's name, serving the writ on any partner or on any person having control or management of the business at the principal place of business.
99
What can old partners do to compel a new partner to comply with the terms of a partnership agreement?
A new partner can execute a deed of adherence.
100
When can an individual apply for a debt relief order?
If the individual does not own their own home, and have debts of up to £30,000.
101
What effect does a DRO have on the creditors of a debtor?
During the period of the DRO, most creditors may not take action to enforce debts, except for rent arrears, payment to bailiffs and normal household expenses.
102
When does the requirement to register for VAT arise?
If at any month end, taxable supplies made during the past year exceed £85,000.
103
How is the flat rate VAT rate calculated against?
The optional HMRC flat rate is applied against the tax-inclusive turnover.
104
What is the time limit to file annual information and what are the penalties?
14 days from the end of each 12 month review period.
It is a criminal offence where both the company and the officers are liable to a fine.
- persistent failure to comply with filing obligations can be grounds for a disqualification order against a director.
105
When is a person required to be registered for VAT?
1. at the end of any month if the value of their taxable supplies in the period of one year of less has exceeded the VAT registration threshold (the person must notify HMRC with 30 days of the end of that month and will be registered from the beginning of the second month after the taxable supplies went over the threshold); or
2. at any time if there are reasonable grounds for believing that the value of their taxable supplies in a period of 30 days then beginning will exceed the VAT registration threshold (the person must notify HMRC within the 30 days and will be registered from the beginning of the 30 days).
(current registration threshold is £85,000 and the current deregistration threshold is £83,000)
106
When must a VAt return be submitted?
Taxable businesses must submit a VAT Return online to HMRC every three months.
The due date is within one month and seven calendar days after the end of the VAT period.
Business that pay more than £2.3 million a year to HMRC in VAT must make monthly payments on account and then pay the balance when submitting the quarterly VAT return.
107
How can trading losses be set off against other taxable profits?
1. Current year profits;
2. Previous year profits;
3. Future trading profits;
4. Group relief;
108
How can capital losses be set off?
Capital can generally only be set off against capital gains.
Capital losses can be set off against capital gains in the current year, but they cannot generally be carried back to a previous year.
The company may use carried forward capital losses against capital gains of up to the available Deduction Allowance in the relevant accounting period, provided that the Deductions Allowance ahs not already been used for the purposes of setting off carried forward trading losses against trading profits in that same period.
109
What is the conditions to be considered a close company?
if it is under the control of:
1. five or fewer participatory; or
2. any number of participatory who are also directors.
UNLESS IF:
- shares are quoted on a recognised stock exchange; or
- controlled by one or more non.close companies, and it could only be a close company by treating a non-close company as one of the five or fewer participatory having control.
110
What is the taxation effect to close companies?
1. 'Loans': all advances of credit are caught, except for:
- a loan in the form of credit.
- loans in the ordinary course of a company's business;
- a loan to a borrower does not exceed £15,000 and does not have a 'material interest' in the close company.
2. Distributions
3. Inheritance Tax Implications
4. Transactions in Securities rules
111
When, and how must a charge be registered?
s 859A(2) CA 2006, the Registrar of Companies shall register any security created by a company at Companies House provided that the company or any person interested in the charge delivers to Companies House within 21 days beginning with the day after the day on which the charge is created:
Form MR01 detailing:
- company creating the charge;
- date of creation of the charge;
- persons entitled to the charge; and
- a short description of any land, ships, aircraft or intellectual property registered in the UK which is subject to a fixed charge;
Certified copy of the charge; and
relevant fee.
112
Who must register a charge?
company or any person interested in that charge can register the charge.
If the charge is not registered or within the 21-day period.
- the charge is void;
- debt becomes immediately payable.
113
What is the function of a pre-insolvency moratorium and what is the procedure?
A company can obtain pre-insolvency moratorium by filing documents at court including:
1. a statement that the company is, or is likely to become, unable to pay its debts as they fall due;
2. A statement from a licensed insolvency practitioner (usually an accountant), known as a Monitor.
Function:
- Pre-insolvency moratorium lasts 20 business days but can be extended by the directors for a further 20 business days.
- Further extensions are possible with the consent of a requisite majority of creditors and/or court order.
- The maximum period is one year subject to a court order to extend further.
114
What is the procedure to set up a CVA?
1. company is not in liquidation or administration.
2. The directors submit proposals and statement of the company's affairs to a nominee.
3. The nominee considers the proposals and, within 28 days must report to court on whether to call a meeting of company and creditors.
4. Nominee gives 14 days' notice of meeting to creditors. (meeting of member within 5 days of the creditors' decision)
5. Vote: must be approved by
- 75% in value of creditors and a majority in value of unconnected creditors;
- simple majority of members.
115
What is a restructuring plan?
It is a restructuring arrangement that divides Creditors and members into classes and each class votes on the restructuring plan. If each class approves by at least 75%, the restructuring plan binds all creditors including secured creditors.
(requires permission from the court)
116
What is the procedure to appoint a administrator?
Company/Directors:
1. File notice of intention and serve the qualifying charge holder;
2. wait business days;
3. Appoint and file Notice of Appointment
4. Administrator appointed.
QFCH
1. Appoint and file notice of appointment; and
2. Administrator appointed.
