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SQE1 Volume 1 > Business Law and Practice > Flashcards

Business Law and Practice Flashcards

1
Q

What is the effect of the veil of incorporation?

A

Treats the business as a separate legal entity so the company itself is responsible for an debts to creditors

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2
Q

What would happen if the veil of incorporation was lifted?

A

The shareholders would be personally liable for the debts of the company.

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3
Q

What is a partnership?

A

The relation which subsists between persons carrying on a business in common with a view for profit.

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4
Q

How many people are required to form a partnership?

A

Two or more.

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5
Q

What is the requirement for carrying on a business in common?

A

Business is considered buying and selling goods or providing services for a fee. The people must be carrying this out together with the same right to make decisions about the business and its profits

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6
Q

What is the requirement of intention to make profit for the formation of a partnership?

A

The parties must have an aim to make a profit from the business

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7
Q

Is a partnership agreement a requirement for the formation of the partnership?

A

No, however most partnership practices have one

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8
Q

What needs to be filed at Companies House for the formation of a partnership?

A

Nothing

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9
Q

What would a court look at as to whether a partnership has been formed, with the exception of the 3 main points?

A

If a party receives a share of the profits of a business that is evidence that a partnership exists

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10
Q

When does the presumption of a partnership existing where a person receives a share of the profits not apply?

A

If the funds were repayment of a debt, salary, payment to surviving spouse of a partner

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11
Q

Are partners required to contribute money towards the business in order for a partnership to be formed?

A

No although many do

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12
Q

What is the legal limit on the number of partners allowed in a partnership?

A

None - there can be unlimited partners.

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13
Q

What personal liability do partners have to a partnership business?

A

Unlimited for debts of the partnership

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14
Q

Does a partnership form a separate legal entity?

A

No

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15
Q

What does the Partnership Act rules provide regarding authority of partners?

A

Every partner in a partnership are acting as an agent of the firm and the other partners.

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16
Q

What is the premise under agency law, regarding how an agent can bind a principal?

A

An agent can only bind the principal if the agent acts with authority

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17
Q

What 2 types of authority does the Partnership Act provide?

A
  1. Actual Authority

2. Apparent Authority

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18
Q

What is actual authority as provided by the Partnership Act?

A

A firm will be bound by any act that is done in a way showing intention to bind the firm or by any person actually authorised by the firm to undertake the act

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19
Q

What is apparent authority as provided by the Partnership Act?

A

The act of a partner carrying on in the usual way business of the kind carried on by the firm will bind the firm and the other partners.

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20
Q

When will apparent authority not be presumed under the Partnership Act?

A

Where the partner had no authority to act
The person whom the partner was dealing with either: knew the partner had no authority to act, or believe the person they were dealing with was a partner

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21
Q

What is the test as to whether a partner was acting with apparent authority under the Partnership Act?

A

Would a reasonable third party think a business of this kind usually would do this act and what authority would a reasonable third party expect a partner in such a firm to have?

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22
Q

What is the recourse of action if the third party does not have authority to enter into a contract and has?

A

The partner will be personally liable to the third party as the partner is proportion to enter into a contract with the third party with the authority to do so.

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23
Q

What would be the recourse of action if a partnership is unable to pay its debts?

A

The partners will be personal liable to repay any debts over and above that of partnership property.

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24
Q

How will the liability in a partnership be split?

A

Joint - the creditor can choose to pursue one or all the partners for their debt

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25
Q

When would an incoming partner be liable for debt?

A

They will not be liable for any debt incurred prior to them becoming a partner.

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26
Q

What is required to appoint a new partner?

A

Consent of all the existing partners

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27
Q

Can partners dismiss another partner?

A

No, unless it is expressly agreed e.g. in the partnership agreement.

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28
Q

What debts will a retiring partner be liable for?

A

Any debts or obligations before they leave unless agreed otherwise and any further debts unless notice is given.

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29
Q

How can a retiring partner stop liability being incurred for future debts?

A

Retiring partner must give notice of their retirement. They must give this to all existing creditors and place a notice in the London Gazette for new customers

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30
Q

If a person holds themselves out to be a partner of a firm, even though they are not, will the partnership be bound?

A

The person may be held as though they were a partner to any third party who has given credit to the partnership

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31
Q

Upon dissolution of a partnership, who will property belonging to a partner be distributed to?

A

Remain property of the partner

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32
Q

Upon dissolution of a partnership, what happens to property given by a partner to the partnership?

A

Becomes partnership property and constitutes a capital contribution to the firm by the partner

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33
Q

How does the Partnership Act define partnership property?

A

Property originally brought into the partnership or acquired for the partnership purposes in the course of the partnership business. Whether the property bought with partnership money is partnership property depends on the intention of the parties.

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34
Q

Can a partner dispose of partnership property?

A

No, the property belongs to the partnership and not to the individual partners

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35
Q

How is capital and profits shared between partners in a partnership?

A

Equally unless there is a provision in the partnership agreement against this

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36
Q

If partners contribute unequally from the outset of a partnership, how is capital and profits shared?

A

Equally, unless the partnership agreement states otherwise

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37
Q

Do partners have a right to distribution of the firm’s profits?

A

No not before dissolution, except as agreed by the partners.

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38
Q

Can a partner assign their right to share profits in a partnership?

A

Yes, however the assignee cannot interfere with the running or management of the firm or liable for the firm’s obligations.

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39
Q

What is required for a partner to assign their share of the profits and they wish to acquire rights?

A

Would need to be approved by all parties

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40
Q

How must partners contribute towards the losses of the partnership?

A

Equally unless the partnership agreement states otherwise

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41
Q

What is the requirement regarding the partnership books?

A

Must keep them at its place of business and each partner has the right to inspect and copy them as the partner sees fit.

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42
Q

Is a partner entitled to interest on their capital contribution?

A

No.

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43
Q

Is a partner entitled to interest on any loan made to the partnership?

A

Yes, at the rate of 5% per annum

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44
Q

Is a partner entitled to remuneration for working at the partnership?

A

No, unless the partnership agreement confirms otherwise

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45
Q

What does the Partnership Act confirm regarding management of the business?

A

Every partnership has an equal right to take part in the management of the firm. There might be provisions in a partnership agreement as to what partner will carry out what role.

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46
Q

How many votes does each partner have?

A

One - One partner = One vote

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47
Q

How are decisions usually made in a partnership?

A

By a majority vote of the partners.

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48
Q

When would a unanimous vote be required of all partners in a partnership?

A

Admission of a new partner
Change in the nature of the partnership business
Alteration to the partnership agreement

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49
Q

What are the 4 duties of the partners?

A
  1. Fiduciary Duty
  2. Duty to Disclose
  3. Duty to Account for Secret Profits
  4. Account for Profits of a Competing Business
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50
Q

What is the fiduciary duty owed in a partnership?

A

A partner is required to act in good faith and to exercise their powers for the benefit of the partnership as a whole. The relationship is one of trust and confidence.

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51
Q

What is the duty to disclose owed in a partnership?

A

Partners are under a liability to disclose information on all things affecting the partnership to any partner of their legal representatives

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52
Q

What is the duty to account for secret profits owed in a partnership?

A

Every partner must account to the partnership for any profit or benefit obtained without the consent of the other partners from any transaction affecting the partnership.

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53
Q

What is the duty to account for profits of a competing business in a partnership?

A

If a partner, without the consent of the other partners, carries on any business in competition with that of the partnership they must account to the partnership for all profits they made in that business.

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54
Q

What are the 9 ways a partnership can be brought to an end?

A
  1. Dissolution by Expiration
  2. Dissolution by Notice in Partnership in Will
  3. Dissolution by Bankruptcy, Death or Charge
  4. Dissolution due to Illegality
  5. Permanent Incapacity
  6. Prejudicial Conduct
  7. Wilful or Persistent Breaches of Partnership Agreement
  8. When Business Can be Carried on Only at a Loss
  9. Just and Equitable Basis
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55
Q

What is the process of dissolution of a partnership by expiration?

A

If the partnership agreement provides the partnership is for a certain term, it will be dissolved upon expiry of the term.

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56
Q

If a partnership is dissolved early, what happens to the partners premiums paid?

A

The court might order repayment of the premium

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57
Q

What is the process of dissolution of a partnership by notice in partnership by will?

A

Any partner can give notice to the other partners for their intention to dissolve the partnership.

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58
Q

If a partner gives notice of dissolution of a partnership, when will the dissolution take place?

A

On the date set out on the notice or if there is no date, the date of the communication on the notice.

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59
Q

What is the process of dissolution of a partnership by bankruptcy, death or charge?

A

A partnership is dissolved by the death or bankruptcy of any partner.

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60
Q

What is the effect if a partner charges their share of partnership property for a personal debt?

A

Dissolution of the partnership at the partners option

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61
Q

What is the process of dissolution of a partnership due to illegality?

A

A partnership will be dissolved if an event occurs which makes it unlawful for the business to be carried on or for the partners to carry on the partnership.

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62
Q

What is the process of dissolution of a partnership due to permanent incapacity?

A

If a partner becomes permanently incapable of performing their party of the partnership contract, the other partner(s) may apply to the court for dissolution

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63
Q

What is the process of dissolution of a partnership by prejudicial conduct?

A

If a partner has been guilty of conduct that would prejudicially affect the carryon on of the business a partner may apply to the court for dissolution.

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64
Q

What is the process of dissolution of a partnership by wilful or persistent breaches of partnership agreement?

A

If a partner wilfully or persistently breaches the partnership agreement, the other partner may apply to the court for dissolution

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65
Q

What is the process of dissolution of a partnership when a business can be carried out only at a loss?

A

If the partnership can only be continued at a loss, it should be dissolved

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66
Q

What is the process of dissolution of a partnership for a just and equitable basis?

A

If circumstances have arisen which means it is just and equitable for the partnership to be dissolved, a court may dissolve the partnership.

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67
Q

What is the effect of dissolution on the partners authority?

A

Each partner still can bind the firm and will continue to wind up the partnership and to complete transactions begun but unfinished at the time of dissolution

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68
Q

What will partnership assets first be used for upon dissolution?

A

To pay off partnership debts

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69
Q

If the partnership assets are insufficient to pay off partnership debts, what happens?

A

The partners will be personally liable for any shortfall

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70
Q

If the partnership assets are sufficient to pay off partnership debts, what will happen?

A

Any advances made by the partners will be repaid and then used to return the partner contributions. The remaining will then be divided amount the partners in the same proportion as profits

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71
Q

How will a partnership be taxed?

A

Each year, each partner must include their personal income from the partnership and whether or not the profit was distributed to the partner. The income will be taxed at the appropriate rate for that partner

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72
Q

What is an LLP?

A

Essentially a hybrid between a limited company and a general partnership.

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73
Q

Under what provisions is an LLP formed?

A

Limited Liability Partnerships Act 2000

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74
Q

What is required before an LLP can start trading?

A

Registration with the Registrar of Companies

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75
Q

What must be issued before an LLP can begin trading?

A

Certificate of Incorporation

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76
Q

What will Companies House issue alongside the certificate of incorporation?

A

A unique company registration number

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77
Q

What documents are required to be submitted to Companies House to register an LLP?

A

Name of the LLP
Details of the LLP
Names and address of the members of the LLP
Details of people with significant control

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78
Q

Is an LLP able to change its name?

A

Yes by delivering a notice of the change to the Registrar of Companies

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79
Q

Does an LLP have its own legal personality?

A

Yes.

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80
Q

What is the effect if a business has its own legal personality?

A

They own any property outright, contracts are entered into in the name of the LLP and the LLP can be sued and sue in its own name

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81
Q

Does an LLP cease to exist if a member dies or is made bankrupt?

A

No as they are their own legal entity

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82
Q

Does an LLP have a term for its existence?

A

No exists in perpetuity

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83
Q

How many members must an LLP have?

A

At least 2 members

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84
Q

How long can a member carry on a business in an LLP with less than 2 members?

A

6 months

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85
Q

What happens if an LLP has less than 2 members for more than a 6 month period?

A

The one member will be jointly and severally liable with the LLP for the debts incurred after the initial 6 months

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86
Q

What is required for admission of a new member to an LLP?

A

Unanimous consent from all existing members

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87
Q

What are the main duties of a designated member of an LLP?

A
  • Appoint and remove auditors
  • Submit annual confirmation statements
  • Sign and file accounts
  • Comply with statutory filing requirements
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88
Q

What happens if an LLP does not designate any members?

A

The law will treat all the members as designated members

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89
Q

What is required when an LLP has a change to its members?

A

Must notify Companies House within 14 days of the change.

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90
Q

What are the repercussions if Companies House are not informed of changes to members?

A

This is a criminal offence

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91
Q

Are the members of an LLP agents?

A

Yes

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92
Q

What is the effect of the members of an LLP being agents?

A

They owe a duty of care to the LLP, may bind the LLP in contract and make the LLP liable in tort if they act with actual or apparent authority.

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93
Q

When would an LLP not be bound by an act by a member?

A

When the member does not have the authority to act and the third party knows they do not have such authority

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94
Q

How does a member cease being a member of an LLP?

A

The member must give reasonable notice to the other members and Companies House within 14 days. Still regarded as a member unless they have sent notice to Companies House.

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95
Q

Who is a person with significant control?

A

Directly or indirectly holds more than 25% of the surplus assets on winding up
Directly or indirectly holds more than 25% of the rights to vote on matters
Directly or indirectly holds the right to appoint or remove the majority of those entitled to take part in management

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96
Q

What is the members right to profit in an LLP?

A

Members are entitled to share equally the capital and profits of the LLP.

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97
Q

Are members entitled to remuneration for acting or managing the business?

A

No

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98
Q

What are the requirements with regards to books and reports in an LLP?

A

Members are entitled to have access to and inspect books and records of the LLP at any time they see fit.

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99
Q

What is required if there is to be a change in the nature of the business of an LLP?

A

Consent of all the members

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100
Q

What is a members duty to account in an LLP?

A

If a member carries on any business in competition with the LLP without consent of the LLP, they must account for all profits made by that business.

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101
Q

Are members of an LLP liable for wrongful acts or omissions of other members?

A

No

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102
Q

Is the LLP liable for wrongful acts or omissions by individual members?

A

Yes the LLP is liable to the same extent as the member

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103
Q

What is an LLP required to file with Companies House?

A

Annual accounts
Annual confirmation statement
Details of the appointment and removal of any members
Details to changes to the details of the members
Details of any changes to the registered name or registered office of the LLP

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104
Q

What is the liability for debts owed by an LLP?

A

Members are not liable for debts owed to the LLP’s creditors, only liability is their capital contribution

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105
Q

If a member of an LLP has paid all their capital contribution what further payments will be required?

A

Nothing further,

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106
Q

Members of an LLP are subject to the rules in the Insolvency Act 1986. What does this mean?

A

Make it possible for individuals who acted wrongfully or fraudulently to be held personally liable for the debts of the company in the event of insolvency

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107
Q

What is the effect of a clawback provision?

A

If a member of an LLP has withdrawn any property within the period of 2 years before the LLP goes into insolvent liquidations, and it is proved they knew of the insolvency when the withdrawal was made, the court may order the member to contribute to the assets of the LLP

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108
Q

What are the ways an LLP can be terminated?

A
  1. Voluntary striking off and dissolution

2. Insolvency

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109
Q

What is the process of termination by voluntary striking off and dissolution for an LLP?

A

A majority of members can apply to Companies House to be dissolved or struck off.

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110
Q

When can an LLP not be struck off?

A

The LLP has traded in the last 3 months
LLP has changed its name in the last 3 months
LLP is subject to insolvency proceedings

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111
Q

What must the members of an LLP making an application for dissolution do?

A

Notify the other members, creditors, any employees and the trustee of any pension fund of the application to strike off

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112
Q

On receipt of the application to strike off for an LLP, what will Companies House do?

A

Publish a notice of the proposed striking off in the London Gazette

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113
Q

Why does Companies House place a notice of dissolution of an LLP in the London Gazette?

A

So interested parties can object

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114
Q

How long after the notice of dissolution of an LLP being issued will the company dissolve?

A

3 months

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115
Q

What is the process of termination of an LLP by insolvency?

A

An LLP can be liquidated, put into administration or be the subject of a voluntary arrangement

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116
Q

What are the tax implications for an LLP?

A

LLP is not a taxable person and therefore does not pay corporation tax and the members of an LLP are taxed individually for income tax instead

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117
Q

What is the stamp duty exception for an LLP?

A

No SDLT Is owed if a property is transferred to the LLP within 1 year of incorporation if:

  • transferred by a person who was a partner in the partnership or who holds the property as bare trustee for a partner
  • proportional ownership of the property in the LLP remains the same as the proportional ownership go the property in the partnership
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118
Q

What are the 2 types of companies?

A

Limited Company

Unlimited Company

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119
Q

What are the 2 types of limited companies?

A

Limited by Shares

Limited by Guarantees

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120
Q

What are the 2 types of companies limited by shares?

A

Public Company

Private Company

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121
Q

What are the main features of an unlimited company?

A

Members are personally liable for all the debts of the company and they are not required to publish their accounts at Companies House.

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122
Q

What is a company limited by guarantee?

A

Requires members to pay a fixed, guaranteed amount in the event of the company being wound up

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123
Q

When are companies limited by guarantee usually used?

A

For non-profit organisations

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124
Q

How many members must a company limited by guarantee have?

A

At least 1

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125
Q

What is a company limited by shares?

A

Members do not have any personal liability for obligations of the company beyond the amount they paid for their shares

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126
Q

If a shareholder in a company limited by shares has paid for their shares and the company becomes insolvent, what liability does the shareholder have?

A

Nothing further.

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127
Q

How can a private limited company sell shares?

A

By private agreement only, cannot issue shares to the public

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128
Q

How can a public limited company sell their shares?

A

Can issue shares to the public and if the PLC is listed to trade their shares on the stock market

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129
Q

What are the registration requirements for a public limited company to publicly trade?

A

Need to have a minimum nominal share capital of £50,000 and a trading certificate

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130
Q

What is a company promotor?

A

Someone who goes about arranging for investors and registration to bring the company into existence

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131
Q

What is the memorandum of association?

A

A statement authenticated by persons wishing to become members of a public limited company. Must be delivered to the Registrar of Companies along with the application for registration

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132
Q

What duty do promoter’s owe to a public limited company?

A

A fiduciary duty.

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133
Q

What are pre-incorporation contracts for a public liability company?

A

Promoters make the required contractual arrangements to ensure the company can run when it is registered.

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134
Q

Who will be liable in pre-incorporation contracts for a public liability contract?

A

A promoter

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135
Q

How can a promotor protect themselves against the liability of entering into pre-incorporation contracts?

A

Prepare contracts in draft and only execute when the property is registered
Enter into a novation agreement after the company is incorporated
Enter into a contract with the company when incorporated assigning the benefit of the agreements to it
Set up the company faster by incorporating a shelf company and then entering into the contract

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136
Q

What is a novation agreement?

A

A contract between the parties - the promoter, the company and outside contract party - under which the parties agree to substitute the company for the promoter

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137
Q

What is a shelf company?

A

Companies that are pre-incorporated but have never traded where the promoter can purchase and change the basic details such as members.

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138
Q

For a public limited company, what is submitted to Companies House for incorporation?

A

The promoters of the company must file the memorandum of association with Companies House along with the application for registration.

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139
Q

What must be included in the application for registration of a public limited company?

A

Proposed name of the company
Location of registered office
Details of company’s business activity and Standard Industrial Classification Code
Whether the Company will be limited by shares or guarantee
Details of subscribers
Statement of capital and initial shareholdings
Statement of the proposed offices, including residential address and company secretary
Details of persons with significant control
Statement of compliance with the terms of the Companies Act 2006
Payment of relevant fee

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140
Q

What are the rules for the name for a public limited company?

A

Must not be the same as an already incorporated company
Must end in Limited, LTD or Public Limited or PLC
Cannot be offensive
Approval required for name suggesting connection to Government or local authority
Approval is required for a name that contains sensitive words, such as auditor, chartered , law commission or medical centre

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141
Q

How can a company change their name after registration?

A

By special resolution of the members or as provided in the articles.

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142
Q

If the company is limited in shares, what must the Application for registration also include?

A

Statement of the total number of shares of the company to be taken by the subscribers of the Memorandum of Association
Aggregate nominal value of those shares
If shares are to be divided into classes with varying rights
The amount that will be paid up by shareholders and the amount left unpaid for the shares

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143
Q

What is a certificate of incorporation?

A

Issued once the registration have all been checked and are correct. Also known as the birth certificate of the company.

144
Q

What is the date the company is official incorporated?

A

The date on the certificate of incorporation

145
Q

What is a companies constitution?

A

The articles of association plus any resolutions or agreements adopted by the members to amend the articles of association

146
Q

What do the articles of association contain?

A 
Directors' meetings and decision making
Appointment and removal of directors
Share capital 
Rights attached to shares, including voting and dividends 
Shareholder meetings
147
Q

What is the effect of the restricted objects contained in the articles of association of the company?

A

The directors have a duty to adhere to the restriction.

148
Q

If directors do not adhere to restricted objects in the articles of association, what is the consequence?

A

They breach their duty and may be subject to an injunction preventing the restriction action or an equitable action by the company for any damage caused

149
Q

If the articles do not restrict objects in the articles of association, what effect does this have on the company?

A

The company is free to carry on commercial activity of any kind

150
Q

What restrictions to the model articles contain?

A

None

151
Q

What is the legal effect of the articles of association?

A

Form a contract between the company and each of the shareholders. Allows the shareholder to enforce their membership rights and cannot enforce any article in any other capacity

152
Q

What is a shareholders agreement?

A

Shareholders can enter into a contract to regulate their affairs. Binds only the members who sign it.

153
Q

How can a company alter their articles of association?

A

By special resolution

154
Q

What do approval do ordinary shareholder resolutions require?

A

Majority vote

155
Q

What approval do special shareholder resolutions require?

A

Approval by 75% of the members

156
Q

What is the effect of an entrenched provision of the article?

A

A more onerous process for alteration that those required for a special resolution

157
Q

Where can the provision for entrenchment be included for a public limited company?

A

Can be made in the company’s articles on formation or by a special resolution of the members

158
Q

Will a provision in a company’s articles of association purporting to prevent amendment of the same be effective?

A

No. The articles may be revised if a special resolution by the members is passed.

159
Q

If a minority shareholder does not agree with an alteration to the articles, what action can they take?

A

They can challenge this by making an application to the court that no reasonable person would consider it to be for the benefit of the company.

160
Q

What is a companies ‘legal personality’?

A

Has own legal entity from its members and those that run it meaning they enter into contracts, borrow money, be taxed and sue in their own name

161
Q

What are the 3 situations where the veil of incorporation can be lifted?

A

Fraudulent and wrongful trading
Trading without a trading certificate
Group accounts

162
Q

When would the veil of incorporation be lifted regarding fraudulent and wrongful trading?

A

If the director causes the company to trade while knowing the company is insolvent, the director may be charged with the criminal offence of wrongful trading or the criminal offence of fraudulent trading and incur personal fines and other penalties

163
Q

When would the veil of incorporation be lifted in the case of trading without a trading certificate?

A

If a PLC trades without a trading certificate the directors can be held personally liable for any losses arising as a result

164
Q

Who are directors?

A

Officers of a company and are responsible for the day-to-day management of the company

165
Q

How many directors should a private company have?

A

At least 1

166
Q

How many directors should a public company have?

A

At least 2

167
Q

Where is the procedure for appointing new directors found for a company?

A

The company’s articles

168
Q

When must the company notify Companies House of a new director?

A

Within 14 days

169
Q

What are the 6 types of directors?

A 
De Jure Director
De Factor Director
Shadow Director
Executive and Non-Executive Director 
Alternative Director
Nominee Director
170
Q

What is a De Jure Director?

A

A director who has been formally appointed and registered as such a Companies House.

171
Q

What is a De Factor Director?

A

Someone who has not been formally appointed and registered with Companies House but carries out all the duties of and behaves as a director

172
Q

What is a shadow director?

A

A person who regularly influences the acts of the company’s director. An individual who still wants to exert some control over a company, but in a way that evades any potential responsibility of a director

173
Q

Would an advisor fall into the category of a shadow director?

A

No

174
Q

What is an executive director?

A

Responsible for the day-to-day running of the business

175
Q

What is a non-executive director?

A

Usually consultants and take more of a supervisory role overseeing the activity of the executive directors

176
Q

What is an alternative director?

A

Someone appointed by a director to attend and vote at board meetings when the director is unable to attend

177
Q

What is a nominee director?

A

Appointed to the board to represent the interests of a particular stakeholder

178
Q

What is the role of a director in a company?

A

Run the firm on behalf of the shareholders.

179
Q

Can the role of the directors be limited?

A

Yes within the articles of association

180
Q

Do the shareholders have an element of control over the directors?

A

Yes, the model articles state the shareholders by special resolution direct the directors to take, or refrain from taking specified action.

181
Q

When would a shareholder be required to make a decision regarding the company?

A

Where there is alteration to the constitution of the company or where directors have a financial interest in the transation

182
Q

What is apparent authority within a company?

A

Authority a third party reasonably believes the director has based on communication from the company.

183
Q

What is actual authority?

A

Can be expressly granted to a director in the articles of a resolution. Usually authority is delegated over specific matters to a certain director

184
Q

Does a director have the power to bind the company?

A

Not usually except when the directors act as a board

185
Q

What are the 8 directors duties in a company?

A

Basic fiduciary duty
Duty to act within powers
Duty to promote success of the company
Duty to exercise reasonable care, skill and diligence
Duty to exercise independent judgement
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

186
Q

What is the basic fiduciary duty of a director of a company?

A

The director has a common law duty to act in good faith and in the best interests of the company as a whole

187
Q

How can a director protect themselves against liability from third parties?

A

The company can indemnify the directors based on their positions within the company except with respect to criminal or regulatory fines

188
Q

If a director retires, do they still owe a fiduciary duty to the firm?

A

Yes

189
Q

What is the duty to act within the powers of a company?

A

A director must act in accordance with the company’s constitution and exercise powers only for the purpose for which they are conferred

190
Q

What is the duty to promote the success of the company by a director?

A

The director must act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole

191
Q

What are directors required to consider when deciding what is in the best interests of the company?

A
  • Likely consequence of the decision in the long term
  • Interests of the company’s employees
  • Need to foster the company’s business relationships with the other stakeholders
  • The impact of the company’s operations on the community and the environment
  • The desirability of the company maintaining a reputation for high standards of business conduct
  • The need to act fairly as between members of the company
192
Q

What does the Companies Act require the directors to consider when the company is on the bring of insolvency?

A

The interests of the creditors of the company and the duty to shareholders is displaced

193
Q

What is the duty to exercise reasonable care, skill and diligence?

A

That would be exercised by a reasonably diligent person with:

  • General knowledge, skill and experience that may be reasonably be expected of a person carrying out the functions carried out by the director in relation to the company
  • The general knowledge, skill and experience the director in question actually has
194
Q

What is the duty to exercise independent judgement of a director?

A

A director must act independently without subordinating their powers to the will of others. This is not breached by a director acting in accordance with an agreement which has been entered into by the company

195
Q

What is the duty to avoid conflict of interest owed by a director?

A

The director must avoid a station in which they have a direct or indirect interest that conflicts with the interests of the company.

196
Q

What happens when a director makes a secret profit from the company?

A

The director uses their position in the company to obtain other benefits (free holidays, better negotiating powers etc)

197
Q

What is the directors duty not to accept benefits from third parties?

A

A director is not allowed to accept a benefit from a third party for the reason they are a director.

198
Q

What is the directors duty to declare interest in proposed or existing transactions or arrangements?

A

If a director, directly or indirectly, has an interest in a proposed transaction or arrangement with the company, or becomes interested in an existing transactions they must give notice of the interest before entering into or continuing with the transaction.

199
Q

What is the form of notice required when a director notifies the board of an interest in a proposed or existing transaction?

A

No particular form of disclosure is required however it is permitted by written notice, general notice or oral notice at a meeting of the directors

200
Q

Can a director with the external interest vote on the decision of conflict?

A

No§

201
Q

When will a director not be required to declare an interest in a proposed or existing transaction?

A

If it could not be reasonable to expect a conflict to arise, the other directors are already aware of it or it concerns terms of the director’s service contract that have been or are to be considered by the board of directors

202
Q

Can a company make a loan to a director?

A

Yes, if the transaction has been approved by the members of the company

203
Q

How are the conduct of meetings regulated?

A

They are not

204
Q

What is the first step of a board meeting?

A

Calling the meeting.

205
Q

Who can call a board meeting?

A

Any director

206
Q

What is the process of calling a board meeting?

A

Any director gives reasonable notice of the meeting to the other directors or by authorising the company secretary to give notice.

207
Q

What must the contents of a notice to call a board meeting contain?

A

Must indicate the proposed date, time and location.

208
Q

Who must the notice of a board meeting be given?

A

Every director unless they have waived their entitlement to notice of that meeting

209
Q

Does a notice to call a board meeting need to be in writing?

A

No.

210
Q

Can a board meeting take place electronically?

A

A meeting can be held electronically, by phone, video conference, or any other electronic means,

211
Q

How are decisions at a board meeting made?

A

A majority vote.

212
Q

If there is a deadlock in a board meeting of the directors, what is the remedy?

A

The chairman is to have the casting vote

213
Q

When can a director not vote in a board meeting?

A

On resolutions in which they have an interest.

214
Q

What is a quorum?

A

Number of directors who must participate to make the meeting valid.

215
Q

What is the quorum for a valid board meeting?

A

Usually 2

216
Q

When would a director not be counted towards to quorum?

A

When they have a personal interest in a matter

217
Q

How can written resolutions be passed?

A

Without holding a meeting however all directors must approve it rather than just a majority

218
Q

Where is the power to remove a director granted to the shareholders?

A

Companies Act 2006

219
Q

How can a director be removed by the shareholders?

A

A majority vote of the shareholders

220
Q

What notice must be given by a shareholder to propose a resolution to remove a director?

A

Formal notice at least 28 days before a general shareholder’s meeting

221
Q

What is retirement of a director from rotation?

A

Any directors who have been appointed by directors since the last annual meeting must return from office and may offer themselves for reappointment.

222
Q

What is the benefit of retirement by rotation?

A

Allows the shareholders to have a say in the composition of the board

223
Q

Under what Act can a director be disqualified?

A

Company Directors Qualification Act 1986

224
Q

What can a director under the Company Directors Disqualification Act 1986 be disqualified for?

A

General misconduct in connection with companies or because of unfitness

225
Q

Is there a requirement for a legal secretary?

A

Yes under Companies Act 2006 for a public company but not a private company

226
Q

What qualification does a company secretary require?

A

Requisite knowledge and experience to discharge the functions of secretary. One or more of the qualifications:

  • Held the office of secretary for a public company for at least 3-5 years immediately preceding this appointment of secretary
  • A member of a specified list of accountancy/secretarial bodies
  • Is a barrister, advocate or solicitor called or admitted in any part of the UK
227
Q

What are the powers of directors?

A

No prescribed duties by legislation but they are responsible for maintaining the books and records of the company, taking minutes at shareholder and board meetings and making sure the company is in compliance with statutory obligations

228
Q

What companies must prepare accounts?

A

All companies

229
Q

What companies require an auditor?

A

Large companies

230
Q

Who will appoint the auditor?

A

The directors

231
Q

Who are shareholders?

A

Members of the company.

232
Q

How do you become a shareholder?

A

By being the first subscribers of the company is formed or through having shares transferred from an existing shareholder

233
Q

What is the main role of a shareholder?

A

Provide financial backing for the company

234
Q

When would a person be classed as a person with significant control?

A

Hold more than 25% shares in the company
Hold more than 25% of the voting rights
Hold the right to appoint or remove a majority of the board of directors of the company

235
Q

What is the main right of a shareholder of the company?

A

Right to receive a dividend and the right to vote on decisions taken by the company

236
Q

What is a dividend?

A

A return on the shareholders investment

237
Q

What are the restrictions on distributing dividends to shareholders?

A

Payments cannot be made except out of profits available for the purpose and payment must not render the company insolvent

238
Q

When are the dividend rights of the ordinary shareholders paid?

A

Paid after preference shareholders have been paid. Not cumulative

239
Q

When are the dividend rights of preference shareholders paid?

A

Fixed % dividend paid in priority to ordinary shareholders. Maybe cumulative if they so provide

240
Q

What voting rights do ordinary shareholders have?

A

Full

241
Q

What voting rights to preference shareholders have?

A

None

242
Q

What is the position of the ordinary shareholders on winding up?

A

Return of surplus capital after preference shareholders

243
Q

What is the position of preference shareholders on winding up?

A

Return of surplus capital ahead of ordinary shareholders

244
Q

Who will decide whether any dividends are paid?

A

Directors

245
Q

How will directors decide whether a dividend can be paid?

A

Whether there are profits available for the purpose they will then recommend and the shareholders must approve it.

246
Q

What alterations to the recommendation by the directors to the dividend payment can the shareholders make?

A

They can accept them or reduce the amount however they cannot increase the amount payable

247
Q

When can a shareholder bring about a derivative claim?

A

If the shareholder believes a director has or is about to breach a duty owed to the company

248
Q

Who may bring a derivative action?

A

Only a shareholder or person to whom shares were transferred by operation of law

249
Q

Who can a derivative claim be brought against?

A

A director or another person or both

250
Q

Are you able to bring a derivative claim against a shadow director?

A

Yes

251
Q

What might a court do if the evidence submitted for a detrivative claim does not show a prima facie case?

A

The court must dismiss the case

252
Q

When can a minority shareholder bring a claim for action against a director?

A

Unfair prejudice

Winding up the Company

253
Q

If a shareholder feels the company affairs are being conducted in a manner which is unfairly prejudicial to that shareholder, what is the available remedy?

A

They can petition the court to remedy

254
Q

Who can apply to have the company wound up if the company is solvent?

A

Any shareholder

255
Q

What must a shareholder show if they apply for a company to be wound up if they are solvent?

A

It is just and equitable to do so

256
Q

What rights do shareholders have in respect of the service contracts of the directors?

A

Right to inspect

257
Q

Where and how long must the service contracts of directors be held?

A

At the registered office for at least a year after the director leaves

258
Q

How often is a public limited company required to hold shareholder meetings?

A

At least annually for a public company

No obligation to do so for a private company

259
Q

Who will call a shareholder meeting?

A

Usually the directors however shareholders who hold at least 5% of the paid up capital can require the directors to call a meeting

260
Q

Upon receipt of the request for a shareholders meeting, how quickly must the meeting be called?

A

Within 21 days

261
Q

Upon receipt of the request for a shareholders meeting, how quickly must the meeting be held?

A

Within 28 days

262
Q

What happens if the shareholders meeting is not called by the directors as requested?

A

The shareholders can call the meeting themselves and be reimbursed reasonable expenses for doing so

263
Q

Does a resigning auditor require a meeting to be called?

A

Only if the resigning auditor wishes to give reasons for retirement

264
Q

Who must notice of a shareholders meeting be given?

A

To all shareholders

265
Q

What notice must be given for a shareholders meeting?

A

At least 14 days

266
Q

If a shareholder meeting is called by post, how will the issue of notice be altered?

A

An additional 48 hours is required

267
Q

What happens if the notice provided is insufficient?

A

If a shareholder is unhappy with action taken in the meeting, they can seek to have the action declared invalid

268
Q

Can a shareholder meeting be held at shorter notice?

A

Yes if the majority of shareholders agree
90% traded companies
95% non-traded companies

269
Q

What are the 2 types of resolutions?

A

Ordinary

Special

270
Q

What is required for an ordinary resolution to be passed?

A

Approval of a majority of the members of the meeting

271
Q

What is required for a special resolution to be passed?

A

Approval of 75% or more of the members at the meeting

272
Q

What is required when a special resolution is passed?

A

Must be registered at Companies House within 15 days

273
Q

How is voting usually undertaken at a shareholders meeting?

A

A majority vote with a show of hands

274
Q

If shareholders do not agree to a majority vote, how else can voting be undertaken?

A

Five shareholders or shareholders with 10% of paid up capital or voting rights can request vote via poll instead

275
Q

How does voting by poll change differ from majority vote?

A

Voting from one vote per shareholder to one vote per share

276
Q

What are written resolutions?

A

Available to private companies only and are a way of passing resolution without having a shareholders meeting

277
Q

Can a written resolution be used for ordinary or special resolutions?

A

Yes

278
Q

Can a written resolution be used to dismiss a director or auditor?

A

No

279
Q

What matters require shareholder approval by ordinary resolution?

A

Appointment of auditors or directors
Removal of auditors or directors
Adoption of annual accounts and the reports of the directors and auditors
Declaration of dividends
Approval of the directors’s decision to allot shares
Approval of substantial property transaction involving directors with a personal interest
Ratification of a director’s breach of duty
Entering into service contract with a director for more than 2 years
Giving a director a payment for loss of office
Approval of a voluntary winding up of company

280
Q

Is shareholder approval require for a director buying or selling property for under £5,000?

A

No

281
Q

Is shareholder approval required for a property transaction worth over £100,000?

A

Yes

282
Q

What matters require the approval of shareholders by special resolution?

A

Most decisions to buy back company shares
Changes to the company’s articles of association
Changes to the company’s name

283
Q

What action must be taken if a resolution is adopted by the board?

A

Changes must be filed at Companies House within 14 days of approval of the change

284
Q

What are the 2 ways a company can raise finance?

A

Equity or debt

285
Q

What is the process of raising finance through equity for a company?

A

A company sells ownership shares in the company to third parties in investing in the company.

286
Q

What restrictions are on the cost of the new shares?

A

Cannot be less than the original shares were sold for.

287
Q

What is the money received for shares classed as?

A

Companies share capital

288
Q

How is a company’s share capital different from the companies other funds?

A

Cannot be returned to the shareholders and is always available to pay the company’s creditors

289
Q

Do the directors have the power to allow additional shares?

A

Companies incorporated after 2009 - yes

Prior to then, the director will seek permission from the existing shareholder through ordinary resolution

290
Q

Who will determine the price and number of shares to allot?

A

The directors

291
Q

What must happen to the excess amount paid for shares?

A

Recorded separately in a share premium account

292
Q

What are the pre-emption rights regarding issuing new shares in a company?

A

When issuing additional shares, the shares must first be offered to the existing shareholders so that they have the opportunity to maintain their proportional share of ownership and voting strength in the company

293
Q

How must notice must the existing shareholders be given of issuing new shares?

A

At least 14 days

294
Q

When do the pre-emption rights regarding issuing new shares, not apply?

A

Preference shares and when shares are to be issued for anything other than cash.

295
Q

Who has the power to decide to borrow money on behalf of the company?

A

Directors unless there are restrictions in the articles

296
Q

What are the 3 types of debt a company can incur?

A

Mortgages
Fixed Charges
Floating Charges

297
Q

What is a mortgage of a company?

A

A loan taken over high value assets and legal ownership of the asset is transferred to the lender and if the company defaults the lender will exercise the right to immediate possession

298
Q

What is a fixed charge for a company?

A

Taken over assets which the company will own for a substantial rampant of time. If the company breaches or defaults, the lender can sell he asset and recover the outstanding sum owed. The property cannot be disposed of without consent from the lender

299
Q

What is a floating charge?

A

A charge taken over a group of assets that change regularly. When there is a default, the charge crystallises and attaches to the individual items that comprise the asset

300
Q

When must a charge be registered at Companies House?

A

At least 21 days after creation

301
Q

What is the effect of failure to register a company charge?

A

Render the charge void against a liquidator

302
Q

Who usually registers the charge?

A

The lender

303
Q

What is debt security?

A

A document which evidence a loan made to a company which may be traded.

304
Q

What are the tax implication of the company?

A

Companies pay corporation tax on their profits. Shareholders who invest in a company by way of shares will be taxed in income tac on any dividends they receive from the company

305
Q

What registers does the Companies Act 2006 require private companies to keep?

A

Register of members
Register of directors
Register of secretaries
Register of charges against a company’s assets
Register of people with significant control

306
Q

How long must minutes from general shareholder meetings be kept?

A

At least 10 years and must be made available for all shareholder to inspect

307
Q

How long must copies of a directors service contract be held?

A

1 year

308
Q

What is an annual confirmation statement?

A

Confirms that the information held by companies house is correct and up to date

309
Q

How often must an annual confirmation statement be filed?

A

Annually

310
Q

What are the effects of failure to file the annual confirmation statement?

A

Criminal offence

311
Q

How will the date for the filing of annual confirmation statement be calculated?

A

12 months after the date of incorporation

312
Q

How long after the relevant account period is a private company required to send their account to Companies House?

A

9 months

313
Q

How long after the relevant account period is a public company required to send their account to Companies House?

A

6 months

314
Q

What must the annual accounts for a company contain?

A

Company’s registration number, nature, part of the UK the company is registered, balance sheet as of the last day of the financial year, statement of profit and losses.

315
Q

What is the directors role regarding the accounts?

A

Must approve the accounts, verifying their belief that they are satisfied that the accounts give a true and fair view of the assets, liablities, financial position and profit or loss of the company.

316
Q

Who will review the accounts of small companies?

A

An independent contractor

317
Q

What is the effect of failing to file financial penalties on time?

A

Incur financial penalties, possible criminal sanctions and could result is disqualification of directors

318
Q

What is a directors report?

A

Medium and large companies must file an annual director’s report. Report names the directors, states the amount that the directors recommend should be paid by way of dividend

319
Q

What is a strategic report?

A

Medium and large companies must file this report. Report is to inform members of the company and help them assess how the directors have performed their duty to promote the success of the company.

320
Q

When must Companies House be updated?

A

When there are changes to a company’s board of directors, capital structure or articles.

321
Q

What is insolvency?

A

When a person or business is unable to pay their debts

322
Q

What are the 3 things a sole proprietor or partner can do if they are unable to pay debts?

A
  1. Negotiating with creditors
  2. Individual Voluntary Arrangement
  3. Bankruptcy
323
Q

What is the process of negotiating with creditors?

A

The individual can approach the creditor and ask for the debt to be reduced or extra time to repay the debt.

324
Q

Is an agreement when negotiating with creditors binding?

A

Not usually as there is no consideration given by the debtor to support the creditor’s promise

325
Q

What is an IVA?

A

Negotiated agreement between the debtor and all their creditors. Creditors agree to to accept less than is owed

326
Q

What is the first step to an IVA?

A

Debtor must take professional advice from an insolvency practitioner

327
Q

What is the role of an insolvency practitioner?

A

Draw up proposals and supervise the implementation of an IVA

328
Q

What is the second stage of an IVA?

A

Insolvency practitioner will have the debtor prepare a statement of affairs and will apply to the bankruptcy court for an interim order

329
Q

What is the effect of an interim order in an IVA?

A

No bankruptcy provision petition may be presented or proceeding with unless permission is granted by the court. No further proceedings can be issued against the debtor whilst the order is in force.

330
Q

What is the third step of an IVA?

A

Insolvency practitioner prepares a report advising whether there are realistic proposals to offer to the creditors and whether it is worth calling a meeting of the creditors

331
Q

If a meeting of the creditors is called for an IVA, what percentage of the creditors must agree to the proposals for them to be successful?

A

75% of the debtors unsecured debts

332
Q

Who will the proposals of an IVA become binding on?

A

All unsecured creditors that had notice of the meeting, even if they did not attend or vote

333
Q

Are preferential and secured creditors bound by the proposals of an IVA?

A

No unless they agree to the proposals

334
Q

What is the fourth stage of an IVA?

A

Insolvency practitioner implements the proposals

335
Q

What is the consequence if a debtor fails to comply with the IVA or provided false or misleading information?

A

Creditor can petition for the debtor’s bankruptcy

336
Q

What is the process of bankruptcy?

A

A judicial process in which the assets of the bankrupt debtor are passed to a third party (trustee in bankruptcy) who liquidates assets and uses to the money to pay off as many debts as possible in a strict order.

337
Q

When will a debtor who is declared bankrupt be discharged from their debts?

A

When they are repaid or after 1 year

338
Q

What are the 3 ways an application for bankruptcy can be made?

A
  1. Apply online
  2. One or more unsecured creditors owed at least £5,000 can petition the court
  3. Supervisor of IVA if debtor breached terms of IVA
339
Q

Who is an official receiver?

A

A civil servant appointed to act as trustee in bankruptcy unless the creditors seek to appoint their own nominee

340
Q

What must a creditor applying to declare a debtor bankrupt show?

A

The debt is payable immediately and the debtor cannot pay

The debt is payable in the future and the debtor has not reasonable prospect of paying

341
Q

What is the effect on the bankrupts estate?

A

Vest automatically in the trustee in bankruptcy and therefore no need to transfer the property

342
Q

What assets is the bankrupt entitled to keep?

A

Anything required for day-to-day living and rain any salary they make subject to the trustee applying for income payments

343
Q

How long can a payments order last?

A

3 years

344
Q

What is the order of priority for distribution to creditors?

A
  1. Costs of bankruptcy
  2. Preferential debts
  3. Ordinary unsecured creditors
  4. Postponed creditors
345
Q

What are preferential debts?

A

Holiday pay and wages due to employees for the last 4 months

346
Q

If there is not enough funds to cover all the debt, what is the action taken?

A

Each category will receive the same percentage as their original debt

347
Q

When will the bankruptcy usually end?

A

If the debtor complies with the terms if the restriction, 1 year

348
Q

What is a culpable bankrupt?

A

A debtor who is bankrupt due to their own dishonesty, negligence or recklessness

349
Q

When will a culpable bankrupt order end?

A

Up to 15 years

350
Q

What is the effect of a partnership at will being made bankrupt?

A

Partnership will be dissolved on bankruptcy of partner

351
Q

What is the effect of a partnership not a will becoming bankrupt?

A

The partnership will continue and usually remaining partners will purchase the insolvent partner’s interest from the trustee in bankruptcy

352
Q

What is the effect of a limited liability partnership being made bankrupt?

A

Cannot be member or take part of membership of LLP without the agreement of the court.

353
Q

What is the effect if all partners of a firm are bankrupt?

A

The partnership is wound up in the same process for bankruptcy and the insolvency practitioner will deal with incomplete contracts and cease the business

354
Q

What is the effect of an LLP being insolvent?

A

Administered by official receiver as a limited company

355
Q

What are the insolvency options available for companies?

A

Receivership
Administration
Liquidation

356
Q

What is fixed asset receivership?

A

The creditor will enforce the terms of the loan e.g. repossess the item subject to the charge

357
Q

What is the process of administration?

A

An administrator is appointed to run, reorganise the company

SQE1 Volume 1 (16 decks)

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