Business Law and Practice Flashcards

Question

When a partner lacked actual or apparent authority

Answer 1

Partner who contracted with third party is liable; partnership is not laible

Answer 2

Firm liable for partner's tort committed in ordinary course of partnership business or with authority from fellow partners

Answer 3

The following rules can't be modified by partnership agreement Incoming partner: liable for debts only if incurred after they became a partner unless they agree Outgoing partner: - Remains liable for existing debts even if partnership agrees they won't try to collect any more money from the partner - Can escape liability only if creditor agrees to free partner of debts (novation agreement) - Can escape liability if partner can get 'hold harmless agreement' from partnership but may still be pursued by creditor. The agreement means partner can claim money back from partners that they have to paid to creditors once they have left

Answer 4

Partner liable for debts incurred after they leave unless they give correct notice Old/current creditors: anyone who dealt with partnership whilst outgoing partner was a partner must receive actual notice i.e. partner must send a letter or email telling them they are no longer a partner of the firm New creditors: need to be notified by an advertisement in London Gazette, if not outgoing partner will be liable for future debts

Answer 5

Partner liable for debts incurred after they leave unless they give correct notice Old/current creditors: anyone who dealt with partnership whilst outgoing partner was a partner must receive actual notice i.e. partner must send a letter or email telling them they are no longer a partner of the firm New creditors: need to be notified by an advertisement in London Gazette, if not outgoing partner will be liable for future debts

Answer 6

Non-partner may be liable for partnership debts if they hold themselves out as a partner or knowingly allow another to do so

Answer 7

In absence of agreement, property bought with partnership money deemed partnership property Partnership property not available to creditor of individual partner to satisfy that individual partner's debts

Answer 8

Simply using the asset in the business doesn't make it partnership property Depends on - Partie's intention is key e.g. assert listed in partnership book as partnership asset, who paid for maintenance of asset, how was the asset used etc. - Property brought in by partner at beginning of partnership treated as partnership property only if there is an agreement

Answer 9

Unless otherwise agreed, partners share profits and losses equally If partners agree on how to share profits but not losses, losses will be shared in same proportion as profits Creditors can pressure any of the partners for the full amount of the debt and the partner who pays more than their agreed share would then pursue their fellow partners for what is owed

Answer 10

Unless otherwise agreed, partner has no right to distributions prior to dissolution e.g. if partner A wants to take profits out of the partnership they can't until all partners agree or the partnership is dissolved

Answer 11

Partner's right to share of profits is assignable Assignee does not become a partner or gain management rights Outsider can become partner only by unanimous agreement (unless partnership agreement provides otherwise)

Answer 12

Every parter has equal right to manage Most decisions require simple majority vote Unanimous vote required for: - Admitting new partner - Changing nature of partnership business - Amending partnership agreement - Expulsion of partner (unless partnership agreement provides otherwise) Can all be changed through the partnership agreement

Answer 13

Other than when a partnership comes into existence and liability owed to third parties all other rules on partnerships are open to change

Answer 14

1. Must render true accounts and provide full information to fellow partners in regards to anything that might affect the partnership 2. Must account for profits made by using partnership's property or name 3. Must refrain from competing with partnership Can all be changed through the partnership agreement

Answer 15

Does not have to be in writing, can be oral or evidence by past history

Answer 16

Partnership for specific term or undertaking: dissolves on expiration of term or completion of undertaking Partnership at will: - Dissolved by any partner giving notice to others (notice only has to be oral if partnership agreement is not in writing) - Any partner's death or bankruptcy - automatic dissolution - Court has power to dissolve partnership e.g. partner becomes incapable of carrying out duties Can all be changed through the partnership agreement

Answer 17

- Business continues and partners can still bind partnership in contract - Partners must wind up business and pay off debts i.e. not take on new business and complete transactions which were begun before dissolution - Distribution of leftover money in following order: 1. Repay partner's loans 2. Repay partner's capital 3. Distribute in accordance with agreement (or equally if no agreement)

Answer 18

Each partner taxed on their share of partnership profits, even if profits not distributed Each partner pays tax on profits at their particular tax rate

Answer 19

At least two persons who wish to associate to carry on a business for profit Seperate legal entity Does not dissolve because of change in membership LLP is liable for own debts (members can't be persued for any debts) Requires incorporation - incorporation documents: - Name of LLP - Country and address of registered office - Name and address of each member (at least two) - Identies of designated members - Details of people with significant control (more than 25% of assets or voting rights or another right to control) - Partnership agreement is NOT required

Answer 20

Members can agree how to run business internally but if they don't agree on any provisions the Limited Liability Partnership Act provides for default rules

Answer 21

- At least two - If less than two members for more than six months the person who carried on business is liable for LLP debts after six month period - At least two members must be designated members - Free to leave - Adding members requires unanimous consent

Answer 22

Each member is agent of LLP and can bind LLP using actual or apparent authority LLP is bound not the members

Answer 23

- Share of profits (equal by default) - Not entitled to be paid for working for partnership - Entitled to be indemnifed by LLP if they pay expenses on behalf of LLP - Entitled to inspect books and records - Right to manage LLP Majority of members can decide any ordinary matters connected with the business (unless partnership agreement says otherwise)

Answer 24

- Refrain from competing with LLP - Refrain from profiting off LLP's name or property - Account to LLP

Answer 25

- No liability for LLP's debts or wrongful acts or omissions of fellow members - Only liable for amount of capital contribution - Still subject to rules for wrongful and fraudulent trading

Answer 26

- Continues despite death of member - To cease to exist LLP must be removed from register at Companies House - LLP will be struck off register at Companies House following insolvency - Members of solvent LLP can apply to strike LLP from register at Companies House if LLP no longer needed or if dormant and no longer trading (majority vote required and notice given to all members, creditors, employees, trustee) - dissolved three months after Registrar publishes notice

Answer 27

Unlimited company Limited company 1. By guarantee: when wound up members must pay a fixed amount (usually £1) 2. By shares: - Separate legal entity - Shares bought by members - Liability limited to shares bought - Two types: 1. Public company (plc): shares can be sold to public 2. Private company (ltd): default position All companies must be incorporated at Companies House to come into existence

Answer 28

- Pre-incorporated - Can be purchased - Begin business immediately

Answer 29

Memorandum of association: document authenticated/signed by persons wishing to become members Application for registration (standard form) - Name of proposed company - Location of registered office - Business details - Initial shareholding - Share capital statement (plc must have minimum of £50,000 vs ltd doesn't have minimum) - Directors (ltd needs one vs plc needs at least two) - Officers (company secretary is required for plc) - Persons with significant control ( more than 25% of voting control)

Answer 30

- Memorandum of association - Application for registration - Statement of compliance

Answer 31

Private limited company - Must have limited or Ltd in name Public company - Must have public company or PLC in name Can't have the name of a company already in existence Some names need approval Company name, address, directors, members and business can change BUT company number cannot

Answer 32

Regulates internal affairs of company Creates contract between company and members in their capacity as members Model articles: standard articles based on Companies Act 2006 - most can be varied but not all Special articles: variations from model articles must be filed with Companies House Once incorporated a companies articles can be amended through a shareholders special resolution

Answer 33

Used to alter articles Requires approval of at least 75% of members

Answer 34

Require greater approval Provided in the articles

Answer 35

Private agreement Not filed at Companies House Can include members who are not sharehodlers Includes provisions that cannot be included in articles Common provision

Answer 36

In small companies it's common shareholders are also directors But even when shareholders and directors are the same person the roles are separate

Answer 37

Public company must have at least two directors Private company only requires one director First directors specified in registration document After incorporation directors appointed according to rules in articles: majority decision required and requires directors consent Companies House must be notified of changes to members or their details within 14 days

Answer 38

De jure director: - Formally appointed De facto directors: - Not appointed but carries out duties of director Shadow directors: - Influences and controls directors - Not appointed as a director Executive directors: - Employed by company Non-executive directors (NED): - Do not work for company - Operate as consultants - Attend board meetings and are paid a fee for doing so

Answer 39

Directors make decisions known as resolutions Board resolutions: decisions taken by board of directors Directors are agents of company - Actual authority - Apparent authority: directors cannot give themselves implied authority it must be made by the company itself

Answer 40

Directors duties are owed to company Shareholders can ratify (approve) a director's breach of duty BUT directors who are also member can't vote to ratify own breach 1. Duty to act within powers 2. Duty to promote success of company 3. Duty to exercise independent judgement 4. Duty to exercise reasonable care, skill and diligence 5. Duty to avoid conflicts of interest

Answer 41

- Act within proper purpose - Act within powers conferred by company memorandum and articles

Answer 42

- Act in good faith to promote company for benefit of its members as a whole - Not just maximising profit today - Consider (but can ignore once considered): 1. Long term consequences 2. Interests of employees 3. Relationship with suppliers and customers 4. Impact on community/environment 5. Company's reputation 6. Fairness between members - Duty CHANGES if company is insolvent 1. Director must act for benefit of creditors NO breach if director would have made. different decision if they were a sole director

Answer 43

Test is subjective - what that director honestly considers would promote success of company

Answer 44

- Must ake decisions independently rather than contract out decision i.e. with shareholder - Can follow professional advice i.e. solicitor, accountant

Answer 45

If director has no specialist skills (minimum standard) - Objective test - Reasonable director If director has specialist skills - Objective test - Reasonable director with same skill, knowledge or experience

Answer 46

- Avoid situations of direct or indirect interest - Can't take benefit of a business opportunity unless board authorise (even if business didn't want to or couldn't take advantage of opportunity) - No beach if company is party to transaction

Answer 47

- No secret profit Exception: if accepting benefit is not likely to give rise to a conflict of interest

Answer 48

- Must state nature and extent of interest before transaction is entered into (only needs to be done once and not each time) Exception: - If other directors are aware or ought to be aware of conflict

Answer 49

- Applies if the transaction is already in existence before the director becomes interested i.e. began a relationship with supplier who was already contracted with the company

Answer 50

1. Account of profits 2. Return of company property 3. Payment of equitable compensation 4. Recission of a contract 5. Injunctions - to prevent breach 6. Common law damages for breach of reasonable, skill and care 7. Removal of director through majority vote 8. Disqualificaiton of director (usually following investigation from company's insolvency)

Answer 51

Secretary is officer of the company A public company MUST hire a secretary Secretary must be professionally qualified (ie. solicitor, accountant) OR have significant experience as a company secretary Secretary must maintain company's internal records and file necessary documents at Companies House

Answer 52

Ways to obtain shares: 1. Allotment/ issues of shares 2. Transfer of shares

Answer 53

When name added to register of members (internal register kept at registered officer) Company issues certificate of shares to shareholder

Answer 54

If shareholder holds more than 25% of shares or voting rights or has control of appointment of board of directors

Answer 55

1. Right to dividend 2. Right to vote 3. Right to bring a derivative action 4. Right not to be unfairly prejudiced 5. Right to inspect documents

Answer 56

- Selling shares at a profit (plc) - Dividends

Answer 57

- Only paid if sufficient available profits - Paying dividend must not render company insolvent - Must retain enough to pay corporation tax bill before paying dividend Procedure for dividends - Directors recommend dividend in resolution - Shareholder must vote to approve resolution and can decrease but not increase amount recommended

Answer 58

Equal rights for voting, dividends and on dissolution Preferred shares: created with rights superior to ordinary shares 1. Dividend preference: paid first before ordinary shares - Cumulative: rolls over to next year if not paid - Non-cumulative: that year's right disappears at end of year if not paid

Answer 59

Shareholders pass resolutions at general meetings and NOT board meetings Shareholders' power is determined by voting rights - more shares = more voting power Majority shareholders = more than 50% of voting rights

Answer 60

Permission process: 1. Court reviews application to determine if: prima facie case for breach of duty 2. Hearing to determine: - If shareholder acting in good faith - If reasonable director would continue claim - Likelihood the wrong would be ratified

Answer 61

Examples - Non-payment of dividends - Exclusion from management of quasi partnership company - Directors exercising pwoers fr improper purpose - Directors rewarding themselves excessive remuneration Differs from derivate action as shareholder is seeking a remedy to benefit himself rather than the company If successful the most common remedy is an order that the minority shareholders shares are bought by the other shareholders or by the company

Answer 62

Includes insepcting details of directors service contract

Answer 63

General meetings Plc must have an annual general meeting Directors call general meetings Shareholders owning at least 5% of the company's paid in voting capital have the right to require the directors to call a meeting If directors refuse to call meeting requested by members then members who requested the meeting can themselves call the general meeting To call a general meeting the directors must pass a resolution at a board meeting

Answer 64

Notice must be given to: - Shareholder (personal representative if deceased or trustee in bankruptcy if insolvent) - Directors - Company's auditor Notice cannot be oral but can be via email or on a website Notice must contain: - Compnay name - Date, time and place of meeting - General nature of business to be considered - Text of any special resolutions - Proxy statement Members do not have to show up in person, they can send someone else to vote in their place (proxy)

Answer 65

Must be called at least 14 clear days before meeting (not including day notice is send out and date of meeting but can include weekends and bank holidays) Hand delivering: start counting day after delivered notice (meeting held on day 15) Post and email: add two more days for deemed service (meeting held on day 17) Short notice: - Members can agree to hold a meeting on short notice - Two conditions 1. Majority of shareholder must agree (more than 50% ) 2. Majority must hold at least 90% of shares Members can agree to hold meeting immediately so long as no resolution to be passed which requires information to be available at the registered officer for 15 days prior to meeting

Answer 66

General meeting is not valid unless a quorum is present Company of two or more members: quorum = two (unless company's articles provide otherwise) No personal interest disqualification from general meetings BUT EXCEPTION a member cannot vote to ratify their own breach of director's duty Members do not have to vote in the best interests of the company

Answer 67

Ordinary resolution: - Passed if over 50% of members present at the meeting vote in favour Special resolution: - Passed if over 75% of members present at the meeting vote in favour Default position is that a members resolution is an ordinary resolution UNLESS Companies Act or the articles state it must be a special resolution Companies Act - Special resolution to - Change company name - Amend company's articles - Reduce share capital - Remove pre-emptions rights - Wind up company

Answer 68

Methods of voting at general meeting: 1. Show of hands (default) - 1 hand = 1 vote 2. Poll vote: each share counts as one vote Who can demand a poll? - 5 or more shareholders OR - Shareholders who hold at least 10% of voting rights OR - Shareholders who's shares represent at least 10% of the paid up capital 3. Written resolution: alternative to passing general resolution at meeting - Alternative to general meeting - Shareholder with 5% of voting shares can require board to circulate written resolution - Must contain instructions for voting in favour - Time limit for return typically 28 days (time starts once notice is circualted) - The same voting percentages apply for ordinary and special resolutions - Approval based on all shares entitled to vote

Answer 69

Equity finance: selling shares Debt finance: borrowing money e.g. loan

Answer 70

Subscribers: original members who sign memorandum of association when company is formed

Answer 71

Shares will have a fixed legal value (nominal or par value) Share capital: can never be returned to shareholders except on liquidation. It is a fund available to pay bills for the company

Answer 72

Directors can sell shares as long as: - The company only has one class of shares and it allotes the same class of shares (i.e. only ordinary shares or only shares with a dividend preference) - There is nothing in the articles removing the power for directors to allot shares (model articles do not remove this power) If directors do not have power to allot shares they need to get approval from shareholders through an ordinary resolution

Answer 73

Issuing shares at more than their nominal value = issuing shares at a premium The premium received for shares above the nominal value will allocated to a premium account

Answer 74

Statutory preemption right: if a company issues new shares for cash they must first be offered to existing shareholders in the same proportion that they currently own the shares Companies Act provides existing shareholder 14 days to decide whether to purchase new shares

Answer 75

1. Only applies to shares being bought for cash and not in exchange for property 2. Articles can modify or disapply preemption rights 3. Shareholders can disapply preemption rights by a special resolution

Answer 76

Company borrow money i.e. loan Creditor has no ownership rights but instead has a contract with the company including how much is borrowed, when it will be repaid and how much interest

Answer 77

Taken over assets that have a long life in the company e.g. machinery, freehold land Company can't dispose of asset without lender's consent or without repaying loan If terms of loan are breached company can repossess asset and sell it to recover amount owed If company becomes insolvent, the liquidator must repay loan from proceeds of sale before any other creditor is paid using the proceeds of that sale

Answer 78

Taken over assets that change regularly e.g. raw materials or goods the company sells Company is free to sell items If the company defaults on loan charge crystallises and attaches to whatever inventory exists at time of default

Answer 79

1. Fixed charges 2. Floating charges Both rank in order of creation so long as they were registered at Companies house within 21 days

Answer 80

A company must keep at registered office and allow inspection of a register of: 1. Directors 2. Members 3. Secretaries 4. People with significant control 5. Charges against company's assets

Answer 81

Minutes of board meetings or shareholders minutes are not public A member of the public can't ask to see a copy of a director's service contract

Answer 82

Names (previous names) Statement of capital Nominal value of shares How many shares are issued Directors Registered office

Answer 83

Creditor accepts less money or gives debtor more time to pay debt Formal procedure Creditor bound by agreement Debtor must seek professional advice from insolvency practitioner who becomes nominee IVA must be administered by an insolvency practitioner Debtor must have enough money to pay insolvency practitioners' fees Process: 1. Debtor prepares statement of affairs 2. Insolvency practitioner uses statement to apply. tocourt for interim order Order prevents any creditors taking action against debtor At least 75% in value of unsecured creditors must agree to proposals and/or 50% of independent creditors vote in favour If necessary amount vote in favour IVA will bind all ordinary unsecured creditors who were notified at a creditor's meeting even if didn't vote in favour Secured creditors and preferential creditors are not bound by IVA Nominee will supervise implementation of IVA Any debts owed to unsecured creditors beyond what is payable under plan will be discharged

Answer 84

Taken a charge to protect the debt

Answer 85

Employee who is owed wages or holiday pay from last four months

Answer 86

Judicial process in which assets of bankrupt are passed to a third party (trustee in bankruptcy) who is tasked with selling non-cash assets and paying off as many debts as possible in strict statutory order

Answer 87

1. By debtor 2. By unsecured creditor(s) owed at least £5,000 (individually or together) 3. By supervisor of an IVA (if debtor has breached terms of IVA)

Answer 88

Official receiver appointed Official receiver will serve as trustee in bankruptcy UNLESS debtor's credits choose their own trustee Most of the bankrupt's assets will vest automatically in the bankrupts estate

Answer 89

1. Tools need for job 2. Furniture (unless expensive will be sold and replaced for something cheaper) 3. Clothing (unless expensive will be sold and replaced for something cheaper) 4. Income (subject to trustee applying for an income payments order if salary exceeds amount needed for reasonable needs of bankrupt and family)

Answer 90

- Apply for credit over certain amount - Act as company director - Be a partner - Trade under another name unless disclosing bankruptcy

Answer 91

Caused bankruptcy by own dishonesty, negligence or recklessness Bankruptcy lasts for longer (2-15 years) Can be subject to restrictions even after bankruptcy discharged

Answer 92

If partnership at will then parternship is dissolved by any partners bankruptcy Trustee receives partnerships shares after creditors are all paid

Answer 93

Bankrupt cant member of LLP

Answer 94

- Protect creditors - Balance creditors competing interests - Try to save company - If appropriate control or punish directors (only if they caused the insolvency or sought to hide assets)

Answer 95

Not a true insolvency procedure but often leads to insolvency A person who has taken security over specific assets will reserve the right to appoint a receiver to sell those assets if debtor (company) defaults on loan Proceeds of sale are used to pay off loan Appointment of receiver will usually lead to insolvency as the assets are usually important to the business, and without which the business cannot usually operate, fixed asset receivership usually leads to bankruptcy.

Answer 96

Allows for reorganisation of a company or realisation of its assets - usually for insolvency companies but it is possible for a solvent company to enter administration Advantage: - Moratorium applies (prevents creditors taking action against company to enforce their claims so provides the administrator with time to reorganise company or make a sale of assets or entire company) Administrator must be a licenced insolvency practitioner and acts in interests of all creditors (compared with receiver who only acts for creditor with secured debt) Aim to rescue company or if not possible to achieve better result for creditors as a whole than if company went into liquidation or if not possible to realise some or all of company's property to distribute it to one or more secured or preferential creditors Administrator will investigate company and come up with proposals on how to proceed Administrator has power to: - Take control of the company's property and sell it - Bring or defend legal proceedings - Carry out companies business - Remove or replace directors - Etc...

Answer 97

Court order Filing documents at court by company, its directors or. a holder of a qualifying floating charge (includes power for floating charge holder to appoint administrator or administrative receiver)

Answer 98

Managers pre-arrange sale of company to buyer Admministrator sells to buyer upon appointment Limited participation by unsecured creditors who often go unapdi

Answer 99

Compromise between company and creditors Must be implemented under supervision insolvency practitioner (nominee and then supervisor) If CVA is approved by necessary majority of creditors it binds all creditors Does NOT bind secured or preferential creditors unless they agree Directors can propose CVA unless in liquidation or administration then either liquidator or administrator can propose No automatic moratorium for CVAs but a small company (varies with inflation) can apply to court for one Supervisor can petition for winding up or administration of company

Answer 100

Final - comapny is dissolved Following procedure company is wound up and struck off register at Companies House Liquidator is appointed and will sell assets and then distribute money to creditors in the order set out in statute Liquidator can look back on previous transactions to see if any can. be challenged to increase amount of money available to creditors

Answer 101

Members voluntary liquidation - Used by solvent company who wish to cease trading or to wind down a dormant company or member who wishes to leave Process: - Statutory declaration of solvency sworn by directors - Within 5 weeks of statutory declaration members must pass special resolution that company be wound up - Appoint insolvency practitioner - Liquidator takes over powers of directors - Liquidators appointment is advertised in London Gazette and filed at Companies House - Liquidators sells assets and distribute proceeds - If creditors are fully paid must distribute surplus to members - Company dissolved three months after final accounts sent to Comapnies House Directors voluntary liquidation - Creditors voluntary liquidation - Creditors aren't being paid and company enters after directors realise business is no longer viable and unable to pay creditors on winding up Process: - Members special resolution to wind up company - Appoint liquidator - Rest of process same as members voluntary liquidation - Pay creditors in statory order as no all will be repaid Compulsory - Started by creditor presenting a winding up petition to Court as company has not paid debts to creditors - Winding up hearing listed - Petitioner must serve copies of petition and notice of hearing on company and advertise petition - Court either order winding up order or dismiss or adjourns - Order made if statutory ground is met e.g. unable to pay debts

Answer 102

1. Expenses of winding up (liquidators fees etc.) 2. Preferential creditors (employees, amounts owed to HMRC) 3. Floating charges 3. Unsecured creditors 4. Members If class of creditor must be fully paid before moving on to next class If not enough money to pay all creditors in class then money is shared according to amount owed

Answer 103

If more than £10,000 is left for floating charge creditors then 50%. of first £10,000 and 20% above £20,000 up to £600,000 is set aside for unsecured creditors

Answer 104

Paying one creditor over another before liquidation i.e. in cash or by providing security on an asset meaning an unsecured creditor would go from being paid last to first - voidable if taken place 6 months before liquidation - extended to two years if the person is connected to bankrupt or company (partner, close relative, director, shadow director etc) - must be proved it was desired to prefer that creditor - desire is presumed if connected person

Answer 105

Example - insolvency: selling an asset for less than it's worth in the two years prior to insolvency and at the time was insolvent or became insolvent as a result of the transaction. Presumed if transaction was with connected person Example - bankrupt: selling an asset for less than it's worth in the five years prior to insolvency and at the time was insolvent or became insolvent as a result of the transaction. Presumed if transaction was with connected person If made within 2 years it is not necessary to show insolvency Voidable by liquidator or administrator Defence: if transaction was entered into in good faith for purpose of carrying on business and there were reasonable grounds for believing that a transaction would benefit the company

Answer 106

Putting outsets out of reach from creditors i.e. selling asset at an undervalue with the intention of getting asset back at the end of the insolvency period Dishonestly is required to make out the fraud - difficult to prove intention Action can be brought against party who carried on business with intent to defraud creditors Defence: if director genuinely thought things would get better even if that belief was unrealistic

Answer 107

Director knew or ought to have known that the company would become insolvent and failed to minimise effect on creditors Once directors knows they can't avoid going into liquidation their duty shifts from doing what's best for the company to whats best for creditors Claim brought by adminstrator or liquidator in a compulsory or creditors voluntary liquidation against directors Director can be personally liable to make such contribution to company's assets as the court think is proper Reasonably diligent person test: the higher of what a reasonable director would do or what a director who possessed this director's particular skills or experience would have done

Answer 108

If created within 12 months of insolvency for no fresh consideration and proved company was insolvent at time floating charge was given or became so as a result then floating charge is automatically void if floating charge is given to connected person period is extended to 2 years and there is no requirement to show insolvency at time of charge