Business Law Flashcards
Three friends set up a company to operate a wool processing business. One of the three previously worked at a different wool processing business that failed. Because the wool industry is small and tightly knit, the friends decide that it would be best if the friend from the failed business did not personally serve on the company’s board of directors. Instead, the two not associated with the failed business would serve as directors along with a third person nominated by the shareholder who worked at the failed business. The nominated director would be required to act as the shareholder from the failed business.
What is the name given to the shareholder from the failed business in this scenario?
A shadow director
According to the Companies Act 2006, a shadow director is the name given to a person with whose directions or instructions the directors of a company are accustomed to act
A company has been advised by an Insolvency Practitioner to enter a Company Voluntary arrangement (‘CVA’). The company owes the following amounts as unsecured debts:
£50,000 to creditor 1
£22,000 to creditor 2
£4,000 to creditor 3
£2,000 to creditor 4
Which creditors must vote in favour of the proposals for the CVA to be approved?
Creditors 1 and 2
Approval of a CVA requires the agreement of the company’s unsecured creditors holding at least 75% in value of unsecured debt. If such approval is obtained, the Practitioner’s proposals become binding on every ordinary unsecured creditor.
A small company manufactures and sells scented candles. The company has recently experienced a severe decrease in business. The sole director and shareholder of the company realises that soon the company will be unable to pay its debts. The director sells the company’s inventory of wax to their spouse for £100; it is valued at £2,000 in the accounts. The director also gives their son security over the company’s wax melting and mixing machine for a debt already owed to the son. Ten weeks later, the company goes into liquidation.
Describe the legal position regarding the transfer to the spouse and the security granted to the director’s son?
Only the transfer to the director’s spouse is a transaction at an undervalue. It may be voided by the court.
The transfer to the spouse is a transaction at an undervalue and may be voided. A transaction at an undervalue arises when a transfer of property as a gift or for significantly less than market value is made within two years of a company’s insolvency.
A company was incorporated several years ago with the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association. The company is currently valued at £5 million and wishes to borrow £1 million to acquire new premises. The loan will be secured by fixed charge over the premises.
Describe the shareholders’ resolutions which must be passed before the company can enter the loan?
No shareholders’ resolutions are necessary.
Unless there are restrictions in the articles (unamended Model Articles do not include any), the board has the power to borrow money. Therefore, a board resolution is all that will be needed to enter the loan and grant the charge. No shareholder approval is needed.
Three friends wish to start a business as partners. They are trying to decide between setting up as a general partnership under the Partnership Act 1890 and setting up as a limited liability partnership (‘LLP’) under the Limited Liability Partnerships Act 2000.
What is the position on both entities tax position?
Both entities are subject to the same rules as regards taxation
An LLP is very similar to a limited company in many respects. However, as far as taxation is concerned, LLPs are more akin to partnerships, as their members are taxed for income tax (like the partners in a general partnership) rather than the LLP being liable for corporation tax like a company
A company was incorporated seven years ago. It has adopted the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association. It has an issued share capital of 400 ordinary £1 shares held in equal amounts by eight shareholders. This year, the company has £60,000 lawfully available to distribute as a dividend. The directors of the company adopt a resolution approving payment of a £100 per share dividend.
Describe the legal position regarding the shareholders’ rights with respect to the dividend?
The shareholders may reduce the amount of the dividend, through an ordinary resolution adopted for that purpose. The directors have the power to declare dividends out of lawfully available funds, but before the dividend may be paid, the shareholders must approve it (or approve a lesser amount) through passing an ordinary resolution.
An entrepreneur has a brilliant idea for a business. She wants to get started straight away with all the contracts required to start the business. She also wants to start preparing the necessary documentation to incorporate the company with limited liability status. She is concerned, however, about the impact of executing contracts prior to the company coming into existence.
Describe the circumstances the promoter would be relieved of personal liability on contracts entered into whilst engaged in forming the company
When the third party, the company, and the promoter enter into an agreement to substitute the company for the promoter.
A promoter will be personally liable on a pre-incorporation contract, but there are a number of ways the promoter can protect themselves in these circumstances, one of which is when the third party, the company, and the promoter enter into an agreement to substitute the company for the promoter, that is, enter into a novation agreement.
A group of five friends set up a partnership a number of years ago. One partner wishes to leave the partnership, with the agreement of the other two. The partners notify existing creditors of the partner’s retirement and publish notice of the partner’s retirement in the London Gazette.
Would the retiring partner continue to be liable for debts incurred by the partnership?
The retiring partner will be liable for pre-retirement debts, but will not be liable for any post-retirement debts.
A partner will always be liable for partnership debts incurred whilst they were a partner, but they can avoid liability for debts incurred post-retirement if they give notice of their retirement. The partner should give actual notice to people who have dealt with the partnership whilst they were a partner and should put a notice in the London Gazette to alert people who have never dealt with the partnership whilst they were a partner. Because the retiring partner has followed the necessary notice procedures, they will not be liable for post-retirement debts.
Two friends set up a partnership 15 years ago to provide a home delivery ready meals service. Each partner invested £5,000 capital which was used to buy a delivery van, catering equipment, and raw materials. One partner agreed to allow the business to use an industrial unit they owned, free of charge, to prepare the meals. The business was such a success that 10 years ago the partners took on another partner. It was agreed that the new partner would contribute a shop unit he owned, in lieu of a capital contribution, so that the business could sell its ready meals from the shop.
Which of the assets are partnership property?
The shop and the delivery van only.
Property will be considered partnership property if it was brought into the partnership with the intention that it would be partnership property. Property purchased with partnership funds will usually be considered partnership property, and the van was bought with partnership money. Whilst the shop unit was not purchased with partnership funds, the parties made it clear that it was to be the incoming partner’s contribution to the partnership. Capital contributions become partnership property because that is the purpose of a capital contribution. The industrial unit, on the other hand, is not partnership property because it belonged to one of the partners and he merely said he would allow the partnership to use the unit (as opposed to saying he would contribute the unit). It follows that the other choices are incorrect.
A woman inherited a majority of the shares of a small, private limited company. The board of directors were happy to register her as owner of the shares, and she has attended and voted at several general meetings of shareholders. However, recently, upon reviewing the company’s articles of association, the woman noticed that a quorum is required for shareholder meetings. Concerned that the resolutions passed at meetings she has attended may not be valid, she is keen to find out what ‘quorum’ means.
Under the Companies Act 2006, what does it mean for there to be a quorum at a shareholders’ meeting?
That two or more shareholders entitled to vote were present at the meeting before a vote on the resolution took place.
A quorum must attend a shareholders’ meeting before a vote may validly be taken. Pursuant to the Companies Act 2006, but subject to any contrary provision in the company’s articles, two members present at a meeting will constitute a quorum.
The Companies Act 2006 contains statutory requirements regarding a quorum. These provisions can be overridden by a provision in the articles, but if the articles are silent on quorums, the statutory rules will apply.
A company was incorporated 10 years ago. It has adopted the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association. It has an issued share capital of 100 ordinary £1 shares. One shareholder wants to sell his shares to another shareholder at full market price. The shareholder executes a stock transfer form and hands over his share certificate to the buyer. The buyer pays stamp duty and sends the stock transfer form and share certificate to the company.
Describe the procedure for registering the transfer of shares?
It is open to the board to refuse to register the transfer, as the model articles grant the board absolute discretion to refuse to register the transfer.
The Model Articles give the board absolute discretion to refuse to register a transfer of shares. The board would be limited only by their duty to act in the best interest of the company.
No fee can be charged for registering a transfer of shares under the Model Articles.
There is no special rule for transfers to existing shareholders.
The only limitation on the board’s discretion is their duty to act in the best interest of the company. So, a personal reason for not registering the transfer (such as they don’t want to give the transferee shareholder more voting power because they think he votes recklessly) could be valid.
A company has just appointed a new executive director by ordinary resolution of the members.
What must be filed at Companies House in respect of the director’s appointment?
The Appointment of Director form within 14 days.
A director’s service contract is not filed at Companies House, although a copy must be kept at the registered office.
An ordinary resolution to appoint a director is not filed at Companies House.
A partner in a nail salon business orders nail varnishes from a new supplier at a trade fair. The partner tells the supplier that they do not usually order stock but as the discount offered is so good, they are confident the other partners will be happy with the contract. When the nail polish is delivered, the other partners are horrified at the poor quality and colours of the varnish and refuse to accept the delivery.
Will the nail polish supplier be successful in enforcing the contract against the nail salon?
No, because the nail polish supplier knew that the partner had no authority to order stock.
Every partner is an agent of the partnership and has apparent authority to bind the partnership on contracts as apparently carrying out business of the kind usually carried on by the partnership unless the creditor knows the party has no authority. Here, the partner told the supplier they did not usually order stock and so the supplier is on notice that this partner has no authority.
A company runs three pizza restaurants and has four directors. A board meeting has been called to consider the acquisition of a fourth restaurant. The company has adopted the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association.
In what situation will the proposed acquisition be defeated?
All four directors attend the meeting. The chairman and one director vote against the acquisition and the two other directors vote in favour.
The proposed acquisition will be defeated if all four directors attend and the chairman and one director vote against the acquisition. A board resolution is passed by simple majority vote, provided a quorum is present at the meeting. Under the Model Articles, a quorum is two directors. When there is a tie vote, the chairman has the casting vote—that is, the vote goes the way the chairman voted. If all four directors attended the meeting and two directors voted in favour of the acquisition and two voted against, there would be a tie. But in this scenario, the chairman voted against the acquisition, so it would be defeated.
A company is planning to change its registered office from its trading address to the office of its accountant. It needs to change its website and notepaper to reflect the change.
When will the change of registered office be effective?
When the Change of Registered Office Address form is registered by the Registrar of Companies.
The change takes effect on registration of the notice by the Registrar, although there is a 14-day period after registration when a document will be validly served if sent to the previous registered office
