Business Law

Question 1

Formation of a general partnership

Answer 1

= relation which subsists between persons carrying on a business in common with a view of profit

No formalities required

Party receives a share of profits => prima facie evidence of partnership . Agreement to share losses poss proof of intention to form a partnership but NOT prima facie evidence.

Question 2

Authority to bind the firm in a general partnership

Answer 2

Partnership Act provides that every partner is an agent of the firm and other partners

Agent can bind principal only if the agent acts with authority

Actual authority (in partnership agreement or through partner vote), actual implied authority (has been allowed to regularly so an act without express actual authority), or apparent authority (act of partner carrying on in usual way of business of the kind carried on by the firm)

Question 3

Liability for debts and wrongdoing in a general partnership

Answer 3

Partners have unlimited personal liability (no veil of incorporation)

Liability is joint => creditor can choose to pursue one or all of the partners for their debt or tort

Question 4

Liability for incoming partners in general partnership

Answer 4

Incoming= Not liable for anything before they became a partner.

No new partner may be added without the consent of all existing partners

Partners to not have the power to expel another partner unless that power has been expressly agreed to by the partners (eg in the partnership agreement)

Question 5

Liability for outgoing partners in general partnership

Answer 5

Debts before retirement = Remains liable for all debts/obligations incurred before the partner leaves. Retiring partner and continuing firm can agree that the partner will not be liable to the firm for these obligations (through ‘hold harmless agreement)

Debts incurred after retirement = Retiring partner needs to give notice of their retirement: Actual notice given to existing creditors , and notice by way of an advert in London Gazette required for all new customers

Question 6

Holding out in a general partnership

Answer 6

Person holds themselves out as partner may be liable even if not actually a partner

Also applies if a person knowingly allows another to hold the person out as a partner

Can apply to retiring partners if they have not given proper notice or failed to ensure name is removed from things eg stationary

Question 7

Partnership property

Answer 7

Intention of parties is determining factor.

Unless contrary intention – property brought with money belonging to the firm is partnership property, as in property titled in the firm name

Similarly – property owned by one partner at the start of the partnership will only be treated as partnership property if it is expressly/impliedly agreed between the partners

Question 8

Financial entitlements in general partnership

Answer 8

Division of capital and profits, and division of losses = shared equally (even if unequal initial contributions). Unless contrary intention in partnership agreement

Partner not entitled to interest on their capital contribution, and Not entitled to renumeration for acting in the partnership business (unless contrary intention in partnership agreement)

Partnership must indemnify partners for any payments made or liabilities incurred whilst acting in the course of the business of the partnership

Question 9

Partnership management (general partnership)/voting rights

Answer 9

Partnership act – every partner has an equal right to take part in the management of the firm business (one partner, one vote). Partners free to agree otherwise.

Typically made by simple majority vote (unless part agreement provides otherwise)

BUT following require unanimous vote: Admission of new partner, Change in the nature of the partnership business, Alteration to the partnership agreement

Question 10

Duties of partners in a general partnership

Answer 10

Fiduciary rel, duty to disclose info, duty to account for secret profits (ie any profit obtained without the consent of the other partners from any transaction concerning the partnership)

Question 11

Termination of general partnership

Answer 11

Without court involvement: by expiration in agreement/purpose comes to end, by notice at will, by bankruptcy/death/charge, by illegality

Can be dissolved by court order: court considers partner does not have mental capacity. Partner can also apply if: Partner becomes permanently incapable of preforming their part of the partnership contract (permanent incapacity), Partner found guilty of conduct that would prejudicially affect the carrying on of the business,
Wilful or persistent breaches of partnership agreement, When business can be carried on only at a loss, and ‘just and equitable basis’

Question 12

Effect of dissolution in general partnership

Answer 12

Partnership authority to bind firm will continue to wind up company and complete transactions

Distribution of property:

First used to pay off partnership’s debts

Assets insufficient to pay creditors => partners are personally liable for any shortfall

Assets sufficient to pay creditors => remaining assets used first to repay any advances (ie loans) any partner has made to the firm

If assets remain after loans repaid => used to return the partners’ contributions

If assets still remain => divided among the partners in the same proportion as profits

Losses paid first out of profits, next out of capital, and last by partners individually in the proportion in which they were entitled to share profits

Question 13

Formation of LLPs

Answer 13

Registration required with the registrar of companies and LLP cannot trade until it has received a certificate of incorporation.

LLP has separate legal personality.

Required information in incorp documents: Name of the LLP (must end in LLP or Limited Liability Partnership), Details of the LLP’s registered office location and address, Names and addresses of the members of the LLP, Details of people with significant control, if any

Question 14

Membership in LLP

Answer 14

Must have at least 2 members - If carried on business without having a t least 2 members for more than 6 months, the person who carried on the business will be jointly and severally liable with the LLP for the debts of the LLP incurred after the initial 6 months and while the LLP only has one member

Admission of new member requires unanimous consent

Designated members (at least 2)- Role = perform the administrative and filing duties of the LLP

Registrar must be notified of changes within 14 days

Question 15

Agency/authority in LLPs

Answer 15

Every member of an LLP is an agent of the LLP - BUT an LLP is not bound by anything done by a member if the member has no authority to act and the person they are dealing with knows they have no authority/does not know or believe that they are a member of the LLP

Outgoing member => Giving reasonable notice to other members, and Giving registrar at CH notice with 14 days

Question 16

People with significant control (LLPs)

Answer 16

LLP required to keep register of PSCs

PSC = an ind who meets any one of following conditions:

Directly or indirectly holds rights over more than 25% of the surplus assets on a winding up

Directly or indirectly holds more than 25% of the rights to vote on those matters which are to be decided upon by a vote of the members of the LLP

Directly or indirectly holds the right to appoint or remove the majority of those entitled to take part in management

Otherwise has right to exercise or actually exercises sig influence or control over a trust, or the members of a firm that is not a legal person but meets any of the other specified conditions in relation to the LLP

Question 17

Right to profit in LLPs

Answer 17

No provision otherwise => members entitled to share equally in capital and profits of the LLP

Members not entitled to renumeration (ie to be paid)

Question 18

Management of LLPs

Answer 18

Absence of agreement otherwise => every member may take part in management of LLP

Majority of members may decide any ‘ordinary’ matters connected with the business of the LLP

No change may be made in the nature of the business of the LLP without the consent of all members

Question 19

Liability for acts of members in LLP

Answer 19

Generally members of an LLP are not liable for the wrongful acts or omissions of other members committed in the course of the business of the LLP or with the LLP’s authority

Question 20

Obligation to make certain documents publicly available in LLP

Answer 20

Subject to more onerous filing requirements than general partnership (as incorporated)

Required to file with the registrar of companies: LLP’s annual accounts, Annual confirmation statements, Details of the appointment and removal of members, Details of any changes to the details of the members, Details of any changes to the registered name of registered office of the LLP

Question 21

Liability for debts in LLPs

Answer 21

Limited liability => Only liability of a member is their capital contribution (where LLPs and partnerships differ)

Clawback provisions - ie Member of LLP withdrawn property within 2 years before LLP goes into insolvent liquidation, and it is proved that at the time of the withdrawal they knew or had reasonable grounds for believing LLP was unable to pay its debts, or would become unable to pay its debts as a result of the withdrawal, court may order the member to contribute to the assets of the LLP

Question 22

Termination of LLP

Answer 22

VOLUNTARY => majority of members may apply to the registrar of companies for the LLP to be struck off the register and dissolved

Not possible if: LLP has traded or otherwise carried on business in last 3 months, LLP has changed name in last 3 months, LLP is subject of any insolvency proceeding

If applying to dissolve, Members required to notify other members, creditors, any employees, trustee of any pension fund. On receipt of app, the registrar of companies will published notice of the proposed striking off in the London Gazette (Allows interested parties opportunity to object). Registrar of companies will strike off 3 months after the date of the notice.

INSOLVENCY => as with limited company. Fixed charge receiver or an admin receiver may be appointed by certain secured creditor of the LLP

Question 23

Taxation in LLPs

Answer 23

Not a taxable person => does not pay corporation tax (instead members taxed individually for income tax and members also liable for their share of the gains made on disposal of assets of the LLP)

Inheritance tax purposes – members treated the same as partners in general part

Stamp duty exception:

General – no stamp duty land tax owed if property is transferred to LLP within one year of LLP’s incorporation if:

Transferred by person who: Is/was a partner in the partnership comprised of the members of the LLP; or Holds the property as a bare trustee for a partner in such a partnership; and

The proportional ownership of the property in the LLP remains the same as the proportional ownership of the property in the partnership

Question 24

Unlimited companies

Answer 24

(Rare) - Members are personally liable for all the debts of a company (like a general partnership)

Question 25

Companies limited by guarantee

Answer 25

Requires members to pay a fixed, guaranteed amount (usually £1) in the event of the company being wound up

Usually used by not-for-profit orgs

No shareholders but company must have at least one member

Question 26

Companies limited by shares

Answer 26

Members (shareholders) do not have personal liability beyond the amount they agreed to pay for their shares

Shareholder has fully paid or their shares and company becomes insolvent => shareholder has no personal liability to pay any more

Either private limited companies or public limited companies (Additional filing requirements for public => will be private unless it fulfils those registration requirements)

Question 27

Public Limited Companies (PLCs)

Answer 27

Permitted to issue their shares to the public, and if the PLC is listed, to trade their shares on a stock market

Subject to additional registration requirements eg: Need to have minimum nominal share capital of £50k, and Trading certificate

Must end in Public Limited Company or PLC (or Welsh equiv)

Must be registered as a PLC

Minimum of 2 directors

Company secretary required and must be suitably qualified

Accounts must be filed within 6 months of the accounting reference date and must be audited

Question 28

Private Limited Companies (Ltd)

Answer 28

Not permitted to issues its shares to the public, allowed to be sold only by private arrangement

No min/max amount re trading or stat requirement for minimum shareholding

Minimum of 1 director

Company secretary not required

Accounts must be filed within 9 months of the accounting reference date

Certain companies are exempt from audit

Question 29

Formation of companies - promoters

Answer 29

= people that arrange for investors/registration before it is registered at companies house (as it does not exist until then) ie someone who takes necessary steps to form a company

Memorandum of association

= a statement authenticated/signed by persons wishing to become members of the company

Indicates that the subscribers (signers) wish to form the company and agree to become members of the company

Must be delivered to the registrar of companies along with the application for registration

Owe fiduciary duties

Duty of good faith owed to the company

Question 30

Liability of promoters on pre-incorporation contracts

Answer 30

Promoter personally liable on pre-incorporation contracts

Liability does not disappear once the company is formed – promoter remains personally liable unless different arrangements are made

Promoter can protect themselves by:

Prepare contract in draft and do not execute it until the company has been incorporates

Enter into a novation agreement after the company is incorporates (ie substituting company for promoter in contract)

After the company is incorporated, enter into a contract with it assigning the benefit of the contract to the company in exchange for the company’s agreement to indemnify the promoter for any liability to other contracting party if the promoter is held personally liable on the contract

Set up the company faster by using a shelf company

Question 31

Shelf companies

Answer 31

Ie companies that are pre-incorporated but have never traded that the promoter can purchase and take over by changing basic details like the members

shelf company will be in standard form, so may not be suitable if company with bespoke articles of ass is required

Question 32

Company registration

Answer 32

Promoters must file memorandum of association with registrar of companies at Companies House along with an application for registration

App for registration must incl: Proposed name of company, Location of registered office, Details of company’s business activity and SIC (standard industrial classification) code, Whether the company will be limited by shares or guarantee, Whether private or public company, Details of subscribers, Statement of capital and initial shareholdings, Statement of the proposed officers, Details of persons with significant control, Statement of compliance with the terms of the CA 2006, Payment of the relevant fee

Question 33

Requirements for company name

Answer 33

Must comply with certain rules: Must not be the same as, or essentially the same as, the name of another incorporated company, Must end in Limited or Ltd or Public Limited Company or Plc (or Welsh equiv), Cannot be a name that is deemed offensive, Approval is required for a name that suggests any connection to government or local authority, approval required for a name that contains any sensitive words eg auditor, law commission, medical centre

limited by guarantee => exempt from having to use the word limited

Change: By a special resolution of its members or as provided in the articles, Company must forward a copy of the resolution to the registrar of companies, give the registrar notice of the change, and pay a fee

Question 34

Certificate of incorporation

Answer 34

Registrar will issue once all above submitted and in order

Will incl company’s unique registration number

Becomes a legal entity from the date on the certificate and so can commence trading

Question 35

Company’s constitution

Answer 35

= company’s articles of association plus any resolutions or agreements adopted by the members to amend its articles

Every company is required to have articles which prescribe the internal workings of the company (but they are NOT required to file it a CH in order to register the company)

Sec of State has model sets of articles which apply automatically if a company has not drafted and submitted amended or bespoke articles to CH

Public doc and bind all members

Question 36

Legal effect of articles of ass v shareholder agreements

Answer 36

ARTICLES OF ASS:

Articles forma contract between the company and each of the shareholders, and the shareholders with each other

Right of shareholders to enforce provisions of the articles relates to their membership rights only

Shareholder unable to enforce the articles acting in any other capacity eg if they also act as a director of the company

Excluded from Contract (rights of third parties) act 1999

SHAREHOLDER AGREEMENTS:

Shareholders may enter into additional contract to regulate their affairs

Private contractual agreement which binds only those members who sign it

Question 37

Alteration of the articles of ass

Answer 37

By special resolution only

Alteration in the best interests of the company

Generally for shareholders to decide whether alteration in the best interests of the company

BUT if alteration made that no reasonable person would consider to be for the benefit of the company, a shareholder who did not vote in favour could challenge by making an app to the court

Court agrees => alteration will be set aside

Court will consider whether alteration was bona fide made in the best interests of the company as a whole

Alteration adversely affects minority interests

Not sufficient grounds for objection if the alteration is made in good faith in the interests of the company

BUT alteration cannot be in interests of company as a whole if it discriminates against some other members rather than others, so courts will consider whether the benefit derived from the alteration is one that any individual hypothetical members could enjoy

Question 38

Lifting of veil of incorporation

Answer 38

Where:

Fraudulent and wrongful trading

PLCs require trading certificate => if trading without, directors can be held personally liable for any losses arising as a result

Group accounts

Companies are members of a group => may be necessary to prepare group consolidated accounts which recognise the common link between them

But even where group accounts required, subsidiary companies are not liable for the debts of the other subsidiaries or parent company, nor is the parent company liable for debts of the subsidiaries

Question 39

Appointment of directors (company)

Answer 39

Private company must have at least 1 and public must have at least 2 (and at least 1 of those must be a natural person)

Procedure for appointing new directors

Typically found in the company’s articles

Model articles for company limited by shares = director can be appointed by ordinary resolution of the shareholders or a decision by the directors

Notice of change

Company must notify the registrar of companies within 14 days of any new director appts and any change to the details of existing directors

Question 40

Types of directors (companies)

Answer 40

De jure directors = been formally and properly appointed and registers at CH

De facto directors = not been formally appointed/registered at CH but who carries out all the duties of a director

Shadow directors = regularly influences the acts of a company’s directors (CA06 => treated the same way as de jure/de facto)

Exec = responsible for day-to-day running of the company and are employees

Non-exec = usually consultants and take more of a supervisory role

Alternate director = attends/votes at board meetings when director is unable to attend

Nominee director =appointed to board to represent interests of a particular stakeholder eg a shareholder

De jure directors and have all rights/duties expected of other directors

Question 41

Powers of directors (company)

Answer 41

Derived from the articles

Model articles = give directors power to exercise all the powers of the company except where the article specifically provide otherwise

Shareholders still retain element of control over directors

Model articles state the shareholders may be special resolution direct the directors to take or refrain specified action

Must act as a board - Ie must exercise powers collectively. Can delegate powers

Question 42

Directors as decision makers

Answer 42

Shareholders are owners of the company => certain decisions that require shareholder involvement (usually those that alter constitution of the company or whether directors have a financial interest)

Company decision = resolution

=> some decisions by directors require shareholder approval

And some decisions are reserved to the shareholders by legislation (CA06) or in the articles of association

Question 43

Directors as agents of the company

Answer 43

Actual authority = expressly granted in the articles or by resolution

General rule – articles usually require the board to act collectively, but articles/a board resolution may delegate authority

Apparent authority = authority a third party reasonably believes the director has based on communication from the company

Director usually has no power to bind a company except when directors act as a board, apparent authority does not arise often (but could arise through past dealings)

Execution of contracts and documents

Companies may execute documents by affixing their seal or by the signature of two directors, a director and a secretary, or a single director if signed in the presence of a witness who attests the signature

Question 44

Directors duties

Answer 44

(in summary)

Breach of duty could result in need to compensate company for any loss caused/account for any profit or benefit gained, but Shareholders could ratify conduct by passing an ordinary resolution (if director also a member, their vote would be disregarded)

duties = Basic fiduciary duty, Liability may extend beyond term (Eg may not exploit property, info or opportunities of which the director became aware while a director), Duty to act in accordance with company’s constitution and exercises powers only for purposes for which they are conferred, Duty to promote the success of the company, for benefit of members as a whole (incl concept of ‘enlightened shareholder value’), Duty to exercise reasonable care, skill and diligence, Duty to exercise independent judgment, Duty to avoid conflicts of interest, Duty not to accept benefits from third parties, Duty to declare interest in proposed or existing transactions or arrangements

Question 45

Calling a board meeting (company)

Answer 45

Calling a meeting:

Any director may call by giving reasonable notice of the meeting to other directors or by authorising company secretary to give notice. Reasonable notice depends on facts

Contents of notice

Does not need to be in writing

Must indicate proposed time and date, location, and how they will communicate

Notice must be given to each director unless they have waived their entitlement to notice of that meeting

Electronic meetings possible – just a requirement that each director be able to communicate

Written resolution - Can be passed without holding a meeting, but usually only approved if all approve rather than a majority

Question 46

Vote required for decisions at board meetings

Answer 46

Made by majority vote

Model articles allow for chairman to have casting vote in the event of deadlock

Directors are prohibited from voting on resolutions in which they have an interest

Question 47

Quorum

Answer 47

Ie number of directors who must participate to make meeting valid

Usually no less than 2 (model articles)

Personal interest => may be prevented from counting in the quorum

Question 48

Removal of directors

Answer 48

Power given to shareholders under CA06. Carried out by majority vote (ordinary resolution).

Not possible to remove a director by written resolution

Statutory power usually may not be overridden by eg the articles or director’s services contract

BUT may be limited by Bushell v Faith clause which gives weighted voting rights to a director who is also a shareholder in the event of a resolution to remove a director

May trigger contract rights

Ie to compensate for loss of office and damages for termination of the service contract

28 days’ notice required

Before a general shareholders meeting

Company must give notice to the director

Director has right to make a written representation and to speak at the meeting

Question 49

Disqualification of directors

Answer 49

Can be in rel to general misconduct in connection with companies, unfit to be a director

Question 50

Company secretary

Answer 50

legal requirement for public company to have a qualified company secretary (private companies have no such requirement)

Usually appointed and removed by the directors

Qualification

Directors have duty to take reasonable steps to ensure secretary has requisite knowledge and experience to discharge the functions of secretary and has one or more of the required qualifications:

Held office of public company for at least 3 of 5 years immediately preceding appointment

Is a member of a specified list of accountancy/secretarial bodies

Is a barrister/advocate/sol admitted in the UK

Is a person who, by virtue of holding or having held any other position or being a member of any other body, appears to the directors to be capable of discharging the functions of secretary of the company

Powers and duties

None prescribed by legislation, but usually responsible for:

Maintaining the books and records

Taking minutes at shareholder and board meetings

Making sure the company is in compliance with statutory obligations

Powers usually expressly delegated by the board of directors but can also be implied or apparent

=> company can be bound by acts of secretary even if they were not authorised by the board, if the contracts were of an administrative nature ie of the type that a third party could reasonably assume would be within the powers of the secretary

Question 51

Company auditor

Answer 51

Under CA06 all companies must prepare accounts

CA06 requires large companies to hire a specialist accountant (i.e. auditor)

Small companies (ie those with an annual turnover of less than approx £10m and no more than 50 employees) do not require auditing

Accounts require auditing => auditor will be appointed by the directors

Question 52

Types of dividend

Answer 52

Right to a dividend depends on particular class of shares held

Preference shares:

Paid a dividend ahead of ordinary shareholders, and shares can carry a right to a cumulative fixed percentage (ie fixed income) dividend

No profits available for the purpose => dividend would roll over to the next financial year

Usually no voting rights

On winding up – return of surplus capital ahead of ordinary shareholders

Ordinary shares:

Paid after preference shareholders have been paid

Not cumulative

Full voting rights

On winding up – return of surplus capital after preference shareholders

Question 53

Receipt of dividends

Answer 53

Company must not make distributions to shareholders except out of profits available for that purpose

Procedure=

Directors who decide whether a dividend should be recommended for approval by the shareholders

Recommended => up to shareholders to approve it and declare the dividend by passing an ordinary resolution

Open for shareholders to decline to declare or declare a small amount, but they cannot declare a dividend in excess of that recommended by the directors

Question 54

Shareholder resolutions

Answer 54

Passed at company meetings

Type of share held by shareholders will determine the voting rights available to them

Ordinary shareholders = full voting rights

Preference shareholders = limited to decisions that affect their class rights (ie those that affect preference shareholders only)

Question 55

Derivative shareholder claims

Answer 55

Ie shareholder believes director has/is about to breach a duty owed to the company (and it appears the board will not assert the company’s rights to prevent or remedy the action) => shareholder may apply to court to bring a derivative claim

Only available to shareholders

Claim may be brough against director or another person/both

Shadow directors treated as directors

Can assert a claim that arose before they became a shareholder

Court must dismiss the claim if the application/evidence submitted does not show a prima facie claim

If it does => court must dismiss if:

It is satisfied a person acting to promote the best interests of the company would not seek to continue the claim; or

The action was authorised by the company or authorisation would be likely

Any damages awarded belong to the company

Question 56

Protection of minority shareholders

Answer 56

Majority shareholders typically bring a claim on behalf of the company on whether to ratify the director’s decision by passing an ordinary resolution

Minority shareholders typically cannot bring that action BUT

Unfair prejudice

Shareholder has right not to be unfairly prejudiced

=> if so, they can petition court for a remedy

Most common remedy is an order that the minority shareholder’s shares are purchased

Winding up a company

Any shareholder can apply to have the company wound up if the company is solvent and the shareholder can show it is just and equitable to do so

BUT remedy of last resort as if successful the company will cease to exist, and the shareholder is likely to receive back less money than if they had sold their shares

=> usually better to negotiate with directors/other shareholders to sell their shares

Question 57

Right to inspect

Answer 57

Shareholders have right to inspect the service contracts of the directors, which the company must keep at the registered office for at least a year after the director leaves

Also have right to inspect register of members which also must typically be kept at the registered office

Process

Register of members must incl their names and addresses, the date on which each was registered, the date at which any person ceased being a members and details of their shareholders. If the company has more than 50 members, it also is required to have an index of the members

The shareholder must request inspection and include their name and address the purpose of the inspection, and the name and address of anyone with whom the information will be shared

The company must comply with the request within 5 working days to apply to court claiming the purpose is improper