Business Law Flashcards
Executing documents
- The company must enter into contracts according to CA06 to be valid.
- To sign a simple contract:
- One director signs; OR
- Use the Company Seal.
*To sign a deed:
- Two directors sign; OR
- Director and company secretary sign; OR
- Director and witness sign.
- If a Company Seal is used for any document, a director or company secretary must also sign in the presence of a witness.7
*** If a director signs before the company has been incorporated, the indivudal will be personally liable for that. UNLESS:
- Include a provision in the contract stating that the individual’s responsiblity ends and transfers to the company as soon as it is incorporated; OR
- The directors of the company once it is incorporated must enter an entirely new contract with the other party to replace the pre-incorporation one.
Incorporating a company
1) Setting a company up
Step 1: Fill an application for registration (IN01)
Step 2: Choose your AoA
Step 3: Memorandum of Assocation
Step 4: File all the above documents with Companies House + fee (12£)
* Post incorporation steps: The company will holdits first BM to make the following decisions (if necessary);
- Elect a chair of the board
- Report on the incorporation of the company
- Choose a company bank account
- Choose an accounting reference date (if you want to change, file AA01 to CH)
- Select an auditor (unless the company is exempt because it is soo small)
- Approve company records
- VAT registration
- Enter into insurance arrangements
- Choose the company seal
* A separate shareholders’ meeting can also be held to approve the directors’ employment contracts by ordinary resolution.
2) Procedure for an off-the-shelf company
Step 1: Board meeting
Step 2: General meeting
Step 3: Board meeting 2
* Post-meeting matters and CH filings
- change of name = NM01 (filed with SR, 15 days)
- change of registrated office = AD01 (14 days)
- change of accounting reference date = AA01 (14 days)
- Resignation (TM01) and appointment (AP01) of new directors and/or company secretary (AP03) within 14 days
Company Directors Disqualification Act 1986
- The court has discretionary power to disqualify a directon (2-15 year). During this time, the director is not allowed to be a director of a company or involved in the management or formation of a company. Grounds or disqualificarion are:
- Conviction of an indictable offence.
- Persistent breaches of company legislation.
- Fraud on a winding up.
- On summary conviction for a filing or notice default.
- Being an unfit director of insolvent companies.
- Disqualification after investigation.
- Fraudulent or wrongful trading.
- Breach of competition law.
Termination of Directorship
1) Resignation
2) Removal by members under s168 CA06: Three ways member can remove a director:
i. A member must send s312 special notice to the board requesting a GM (at least 28 clear days before the proposed GM). The board must then only consider the request:
a) Call a GM. The board must give standard notice of GM (14 clear days)
b) No GM is called.
* If the board decides not to call a GM, to avoid that a shareholder with a 5% stake can give a s303 notice with the s312. If a s303 notice is given a GM must eventually be called and the board has two choices:
ii. Co-opera: Directors must call a GM within 21 days of receipt of the s303 notice. The GM must be held within 28 days of the directors calling the GM.
iii. Not co-operate: Directors don’t call the GM after 21 days of receiving the s303 notice. If they don’t, the member that send the notice or any member with 50% or greater stake can all a GM with 14 clear notice.
!!! Director protections against a vote of remove:
- s169 CA06: the director concerned must be sent a copy of the special notice immediately after being received by the company from the shareholders. The director has a right to make written representation to the company and speak at the general meeting
- BUSHELL V FAITH: AoA may contain. Gives a director if they are also shareholder, weighted voting rights when voting on an ordinary resolution to remove the director. This means they have more votes per share.
- Employment contract rights: the removal of the director amy have breached their service contract.
Directors’ Duties
s171: Duty to act within powers
s172: Duty to promote the success of the company for the benefit of the members as a whole
s173: Duty to exercise independent judgment
s174: Duty to exercise reasonable care, skill and diligance
s175: duty to avoid conflicts of interest
s176: duty to not accept benefits from third parties
s177: Duty to declare interest in proposed transaction or arrangement with the company
- Consequences of breach of duty:
- For breach of s174, the director must pay damages.
- All other breaches the director must account for any profits, return any property, pay damages, the contract may be rescinded and injunction may be ordered.
- To avoid liability: The s175 conflict of interest can be ratified by a board resoulution, all other breaches can be ratified by an ordinary resolution (written or at the GM)
Person in Significant Control
Can be:
- Owns more than 25% of the any class shares
- Owns more than 25% of the ordinary shares (voting rights)
- right to appoing/remove a majority of the directors
- right to excercise significant influence/control
Shareholders’ main statuory rights under CA06
- Right to vote at general meetings (10% -> poll vote)
- Right to receive notice of general meetings
- Right to receive dividend
- Right to remove director/auditor (OR)
- Right to call a GM (5%)
- Unfair prejudice claim
- Application to wind up to company
- Information rights
- Minorty shareholder rights: who hold less than 50%
- Statuory rigths: Right to circulate a WR (5%+) , right to circulate a written statement (5%+ or more than 100 shareholders holding at least an average of £100 of paid-up share capital.), bring an injunction against the directors, the information rights
- Other rights: others + Derivative claim: A claim by any shareholder in the company’s name for wrongs committed against the company. The shareholder must apply for court permission to bring claim. The court will only grant permission if is satisfied that the claim promotes the success of the company; the shareholder is acting in good faith and the director’s breach of duty has not been rafied/authorised by the company’s board of shareholders.
Types of shares
1) Ordinary shares: these give shareholders ownership in the company. They give shareholders the right to vote, and receive dividends from company profits.
2) Preference shares: Holders cannot vote. But they do get a guaranteed right to a fixed amount of a dividend when declared out of profit. The fixed amount will be paid first before any ordinary shareholders get theri dividend amounts.
- a. Cumulative or non-cumulative: if cumulative, the shareholder gets paid any missed dividend (from both year before and other previous years if applicable) plus the current year’s dividend (provided that there are sufficient profits.)
- b. Participating: as well as the guaranteed fixed dividend , they get the dividend ordinary shareholders get.
Poll vote
- each shareholder has one vote for every share they hold. it must be taken if demanded by:
- chairperson
- the directors (via board resolution)
- any two shareholders
- 10%+
The Company’s Constitution
- Certificate of incorportation
- Statement of capital and any subsequent statement each time the company issues shares
- AoA
- Shareholder resolutions
- Agreements involving shareholders that affect the constitution
*** The Memorandum of Association is not part of the company’s constitution.
Equity Finance
- Nominal Value: The nominal value is the minumum subscription or purchase price for that share.
Market Value: The actualy price a share sells at and is made up of the nominal value plus a premium.
Share Capital: The amount of money the company has raised by issuing shares. This will be both the nominal value and the premium of those shares.
1) Alotting New Share:
+ Step 1: check the AoA = there can be a limit (if yes, SR to alter)
+ Step 2: check the directors have authority to allot
- Private company with one class of share: only BR to allot
- Public or private companies with more than one class of shares: if there is no authority in the AoA -> BR+OR (it must state the number of shares and the expiry date which must be no than 5 years. Filed at CH)
+ Step 3: Pre-emption rights: offer-> 14 days to accept -> can be disapplied by SR.
+ Step 4: Allot the share: via BR.
+ Step 5: Admin
2) Transfer of shares
+ Step 1: Check the AoA
+ Step 2: Board resolution
+ Step 3: Admin
Maintenance of capital
- Distrubutable profits: These are profits made in the current financial year + any undistributed profits from previous financial years.
+ Two ways of a company can pay distrubutable profits to shareholders:
1) Dividends: there must be profits available to distribute. Then: - pay interim dividends during the financial year via BR
- declare a final dividend amount end of the financial year via OR
2) Buyback of shares: Check the AoA for is there any restrictions. Then vote to send the contract to the shareholders. Get shareholder approvel via OR. The board votes to enter into contract to buyback the shares. The CA06 LIMITS: - The AoA must not prohibit or restrict (if yes ->SR)
- If the company must has not any distributable profits available (chech accounts, no more than 3 months old)
- Directors must prepare written statement of solvency (SoS)
- An auditor’s report -> SoS is true
- The directors will hold a board meeting -> affirm the contract, the SoS, the auditor’s report. (SoS and auditor’s report must be signed min. 1 week before. Also, they must available for 15 days before)
- Approve payment out of capital -> SR, Approve the contract -> OR
- Withing 1 week following the SR, notice must be published in the London Gazette. On the same day file the documents to CH.
- The SoS and the auditor’s report must be available for 5 weeks after the SR passed.
- The directors can hold BM2 -> confirm the entry into the contract and pay for the shares (between 5 and 7 weeks after the SR passed.)
-The company send a statement of capital and a notice of cancellation to CH within 28 days. Copy of the contract is available for inspection for 10 years.
!!! Buyback of a small amount: AoA must authorised. Only private company. –> OR is enough. If purchase does not exceed: - £15,000; or
- 5% of the company’s share capital at the beginning of the financial year.
!!! Reduction of capital procedure for private companies: AoA must not prohibit.
Debt Finance
1) Loans: Three different types:
i. Overdraft: A contract between bank and the company which allows the company to overdraw on its current account. “temporary loan” “uncommitted facility” “no need for notice” “pays fee for the overdraft facility” “unsecured” “small business”
ii. Term loan: Fixed sum is borrowed for a fixed periof and repayable on a certain date. “acquisitions (assets like land etc.)” “term sheet” “facility/loan agreement” “security documentation (debenture)”
iii. Revolving credit facility: Bank agrees to make a maximum amount available (committed amount) to the company for a specified period “normally secured” “facility agreement” “larger business”
2) Debt Securities:
i. Mortgage: “Strongest” “transfer of legal title (except land)” “right to immediate possession”
ii. Charge: “No transfer of legal ownership”
- Fixed charge: “lender has control over” “can’t sell without lender’s consent” “lender has right to first claim”
- Floating charge: “assets that constantly changes (like stocks)” “crystallises (the company defaults, insolvent, receivership” “book debts” “no sufficient control” “low priority on insolvency”
!!! Priority of fixed and floating charges:
- A charge must be registreted properly within 21 days of creationg at CH to be valid.
- Fixed > Floating
- “date of creation (not registration)”
iii. Guarantee: “not strictly security”
iv. Plegde: “implied power to sell the asset”
v. Lien: “operation of law” “bike repairmen” “no automatic powet to sell”
!!! Failure to register the charge witin 21 days at CH results the loan being immediately repayable and the security being void against an administrator, liquidator and creditor. The holder of the void charge is an unsecured creditor. Registreted charge deemed “actual notice” to any other lender. To register you must file at CH:
- The debenture (document containing the security) or mortgage deed,
- File MR01
- Fee
If a charge is taken over land -> also Land Registry.
Types of liquidation
1) Compulsary liquidation:
+ Initiated by creditiors -> winding petition (must be proved) -> the London Gazette -> if the petition is granted -> the Offical Receiver appointed by the court -> dissolved by the Registrar of Companies once the liquidator has fulfilled their dut. A final return is filed with the court and the Registrar. The company is dissolved after 3 months.
2) Creditor’s Voluntary Liquidation (CVL):
+ Initiated by the directors -> majority (board resolution) to company is insolvent -> members pass SR to liquidate the company -> SR is advertised in the London Gazette -> directors produce a statement in a prescribed form on the company’s affairs and send it to the creditors within 7 days after SR passed. After 3 months of the liquidater fullfiled his duties’ company is dissolved.
3) Members’ Voluntary Liquidation (MVL):
+ Only solvent company can do this. “shareholders want to retire”
+ The directors must make “statuory declaration of solvency” -> “SR” to liquidation + “OR” to appoint a liquidator -> London Gazette + Registrar is notified. -> “3 months”
Alternatives of liquidation
1) Administration: “court route” “out of court (qualifying floating charge holder” “moratorium” “after 1 year automatically ends”
2) Company Voluntary Arrangement (CVA):
+ cheaper than administration
+ writing agreement binding all parties (including unsecured creditors) “statuory contract”
+ no moratorium automatically, directors can apply for an initial period of 20 business days to insolvency practioner.
+ 75%+ in value of UNSECURED and 50%+ non connected creditors must approve
3) Receivership
+ only for secured creditors
+ no need to be insolvent but the company breached the loan agreement
+ “fixed asset receiver”
4) Corporate Insolvency and Governance Act 2020:
+ Free standing moratorium: lasts for 40 days (can be extended) “insolvency monitor”
+ Restructuring plan: apply court -> bind creditors if one class of creditors votes for it and dissenting creditors would be no worse off on insolvency
