Business Law and Practice Flashcards
Unincorporated
- Requires few formalities
- No legal requirements
- Sole traders
- General partnerships
Incorporated
- Requires formal registration
- Private limited companies
- Limited liability partnerships
Sole trader
- Makes all decisions
- Owns all assets
Advantages
- Lack of formality
- Low administrative costs
Disadvantages
- Scale of business
- Unlimited liability
General partnership
- More than one party
- Parties contract to run business together
- Governed by Partnership Act 1890
- Not an entity in it’s own right
- Each partner has unlimited liability
- Can only grant a fixed charge to raise finance
Limited partnerships
- Governed by Limited Partnerships Act 1907
- Two types of partners and there must be one of each
1. General: - Manages business
- Unlimited liability
2. Limited - Invests capital
- Limited partner
- No role in managing/operating business
- Must be registered with companies house
- Can only grant a fixed charge
Limited liability partnership (LLP)
- Hybrid of limited company and general partnership
- Organisational flexibility
- Limited liability (up to amount invested)
- Must be registered with companies house
Both limited partnerships and LLPs must be registered with the Registrar of Companies at Companies House before beginning trading
Company
- Separate legal entity
- Limited liability for owners
Company limited by shares
- Shareholders generally liable only to say for shares
- Must register with companies house
- Two types: private and public
- Can raise finance by granting a floating charge over assets
- More administration
- Documents must be filed at Companies House and updated regularly
- Accounts must be filed (less private)
Companies not registered with companies house can keep details of financial affairs private
Fixed charged
A charge taken over a particular asset e.g. piece of land or machinery
Floating charge
A charge taken over a collection of assets e.g. stock
Easier method of raising finance compared with fixed charge
Company is liable for it’s only tax i.e. corporation tax compared to unincorporated companies where the sole traders or partners are taxed on personal income
Partnerships: Formation
- Persons: at least two humans or legal entities
- Carrying on a business in common i.e. buying or selling goods or providing services
- With a view to profit
This definition must be satisfied for a partnership to exist
An agreement to share profits is prima facie evidence of a partnership
Liability of partners
Each partner is personally liable for all of the debts of the partnership
Sharing profits - presumption of partnership
Does not apply to wages
Does not apply when agreement was only to repay a debt e.g. will share profits until debt is repaid
Sharing of losses
Agreement to share losses: some evidence of partnership but no presumption
Absence of agreement to share losses does not prevent formation of partnership
Merely owning property together and sharing gross returns does not create a partnership
Partnerships: Authority
Every partner is agent of partnership for purpose of partnerships’ business
Act of every partner carrying on in the usual way business of the kind carried on by partnership binds partners
Partnerships: authority
Partners are agents of partnership
Under agency law an agent is someone who can enter into legal relationships on behalf of another
Not every act of a partner can bind a partnership
Partnerships: authority
A partner can bind a partnership only if the partner acts with authority
Two types of authority:
1. Actual:
2. Apparent (ostensible):
Actual authority
Authority partner believes they have based on their communications and dealing with the firm,
Express actual authority: granted in partnership agreement or by a vote of the partners at a partnership meeting
Implied actual authority: course of dealing or related to express authority
Apparent (ostensible) authority
Partner’s act that seems related to business of the kind carried on by firm binds firm but some exceptions
Two objective tests:
1. Is partner’s act related to firm’s business
2. Is transaction one a partner in this type of firm would have authority to do?
Apparent (ostensible) authority: when a firm is not bound
- Partner had no actual authority to act AND;
- Third party knew partner lacked authority OR
- Third party did not know partner was a partner i.e. thought the partner was acting for themselves
Subjective test
Creditors rely on apparent authority
Apparent (ostensible) authority: when a firm is not bound
- Partner had no actual authority to act AND;
- Third party knew partner lacked authority OR
- Third party did not know partner was a partner i.e. thought the partner was acting for themselves
Subjective test
When a partner lacked actual or apparent authority
Partner who contracted with third party is liable; partnership is not laible
If a partner had apparent authority only the partnership is bound but can pursue partner for contractual remedies
Tort laibility
Firm liable for partner’s tort committed in ordinary course of partnership business or with authority from fellow partners
Partnerships: incoming and outgoing partners
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
Outgoing partner’s liability for future debts
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
Outgoing partner’s liability for future debts
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
Holding out
Non-partner may be liable for partnership debts if they hold themselves out as a partner or knowingly allow another to do so
Partnership Act provides a fallback position that applies if the partners have not considered an issue and not entered a partnership agreement addressing the issue
Partnerships: property
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
Property bought in by partner
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
Partnerships: financial rights - profits and losses
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
Partnerships: financial rights - distributions
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
Each partner owes tax on their share of the profit of the partnership whether or not the profit has been distributed
Partnerships: Financial rights - assignment of profit
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)
Partnerships: management
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
Parntership agreements
Other than when a partnership comes into existence and liability owed to third parties all other rules on partnerships are open to change
Partnerships: duties to other partners
- Must render true accounts and provide full information to fellow partners in regards to anything that might affect the partnership
- Must account for profits made by using partnership’s property or name
- Must refrain from competing with partnership
Can all be changed through the partnership agreement
Partnership agreement
Does not have to be in writing, can be oral or evidence by past history
Partnerships: termination of partnership
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
Effect of dissolution
- 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)
Partnership taxation
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
Limited liability partnerships
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
Information filed at companies house is publically accessible subject to paying a fee
LLP: partnership agreement
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
LLP: members
- 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
Designated members must file a notice with Companies House of a member joining or leaving the LLP within 14 days of the change
LLP: member as agent
Each member is agent of LLP and can bind LLP using actual or apparent authority
LLP is bound not the members
LLP: rights of members
- 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)
LLP: members duties
- Refrain from competing with LLP
- Refrain from profiting off LLP’s name or property
- Account to LLP
LLP: liability of members
- 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
LLP: termination
- 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
Companies: Nature of Companies
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
Companies: formation- shelf company
- Pre-incorporated
- Can be purchased
- Begin business immediately
Promoters: people who form company
Companies: formation
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)
Companies formation: documents
- Memorandum of association
- Application for registration
- Statement of compliance
Company name requirements
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
Articles of association (aka company constitution)
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
Companies: formation - shareholders special resolution
Used to alter articles
Requires approval of at least 75% of members
Companies: formation - entrenched provisions
Require greater approval
Provided in the articles
Shareholder’s agreement
Private agreement
Not filed at Companies House
Can include members who are not sharehodlers
Includes provisions that cannot be included in articles
Common provision
Companies: directors
In small companies it’s common shareholders are also directors
But even when shareholders and directors are the same person the roles are separate
Companies: appointmet of directors
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
Companies: types of directors
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
Companies: powers of directors
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
Companies: director’s duties
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
- Duty to act within powers
- Duty to promote success of company
- Duty to exercise independent judgement
- Duty to exercise reasonable care, skill and diligence
- Duty to avoid conflicts of interest
Companies: director’s duties - duty to act within powers
- Act within proper purpose
- Act within powers conferred by company memorandum and articles
Companies: director’s duties - duty to promote success of company
- 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
Companies: director’s duties - good faith
Test is subjective - what that director honestly considers would promote success of company
Companies: directors duties - duty to exercise independent judgement
- Must ake decisions independently rather than contract out decision i.e. with shareholder
- Can follow professional advice i.e. solicitor, accountant
Companies: director’s duties - duty to exercise reasonable care, skill and diligence
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
A director is allowed to delegate their powers to another BUT must do so under adequate supervision
Companies: director’s duties - duty to avoid conflicts of interest
- 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
Companies: director’s duties - duty to not accept benefits from third parties
- No secret profit
Exception: if accepting benefit is not likely to give rise to a conflict of interest
Comapnies - director’s duties - duty to declare an interest in proposed or existing transaction with company
- 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
Companies - director’s duties: duty to declare interest in existing transaction or arrangement
- 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
Companies: director’s duties - remedies for breach of duties (deriviate claim)
- Account of profits
- Return of company property
- Payment of equitable compensation
- Recission of a contract
- Injunctions - to prevent breach
- Common law damages for breach of reasonable, skill and care
- Removal of director through majority vote
- Disqualificaiton of director (usually following investigation from company’s insolvency)
Companies: company secretary
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
Companies: members
Ways to obtain shares:
1. Allotment/ issues of shares
2. Transfer of shares
Companies: becoming a member
When name added to register of members (internal register kept at registered officer)
Company issues certificate of shares to shareholder
Companies: persons with significant control
If shareholder holds more than 25% of shares or voting rights or has control of appointment of board of directors
Companies: members rights
- Right to dividend
- Right to vote
- Right to bring a derivative action
- Right not to be unfairly prejudiced
- Right to inspect documents
Shareholders can make profit by:
- Selling shares at a profit (plc)
- Dividends
Companies: dividends
- 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
All shares do not have to be equal and a company can create classes of shares with different rights e.g. different dividend rights, different voting rights, different rights on dissolution
Companies: ordinary shares vs preferred shares
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
Shareholders decisions = resolutions
Companies: member rights - right to vote
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
Companies: member rights - right to bring a derivative action
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
Companies: member rights - right not to be unfairly predjudiced
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
Shareholder can make application to court to have company wound up if solvent and shareholder can show it is just and equitable. to do so e.g. in deadlock
Companies: member rights - right to inspect documents
Includes insepcting details of directors service contract
Companies: member voting
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
28 clear days notice to the company is needed to sack a director
Companies: general meetings
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)
Companies: general meetings - timings
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
Companies: member voting - quorum requirements
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
Companies: member voting - ordinary resolution or special resolution
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
A special resolution that has been approved must be filed at Companies House within 15 days
Companies: members voting - poll vote
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
- 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
At general meetings only shareholders who are present or who have sent proxies are counted
Members who are deceased or bankrupt cannot vote unless their personal representative or trustee in bankruptcy applied to be put onto the register of members
Companies: raising finance
Equity finance: selling shares
Debt finance: borrowing money e.g. loan
Companies: subscription agreement
Subscribers: original members who sign memorandum of association when company is formed
Application for registration for a company to be formed must include a statement of share capital and initial shareholdings (how many and how much to each subscriber)
Companies: shares
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
Companies: shares
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
Companies: issuing shares at a premium
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
Shares are usually bought for cash but can be bought for property
Companies: shares - preemption rights
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
Companies: shares - limitations on preemption right
- Only applies to shares being bought for cash and not in exchange for property
- Articles can modify or disapply preemption rights
- Shareholders can disapply preemption rights by a special resolution
Before issuing new shares must consider whether the company has a limitation on the number of shares that can be issued
Any company formed before the Companies Act 2006 have a limit on the number of shares that can be allotted. Ordinary resolution must be passed to increase limit BUT for Companies formed after 2006 the restriction is only if in the companies articles (model articles does not include this restriction)
During a transfer of shares from shareholder to third party the company does not get an additional finance, the shareholder transferring their shares is paid by the third party
Directors have to register a transfer of shares and they can refuse to do so if the articles allow them
Model articles allows directors absolute discretion to refuse to do so
Companies: debt finance
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
Directors make decision to borrow money NOT shareholders (unless special articles says otherwise)
Benefit of providing security = low interest (security makes it more likely that lender will be repaid)
Companies: debt finance - fixed charge
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
Companies: debt finance - floating cahgre
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
Any charge created by a company must be registered at Companies House within 21 days of creation if not then it is void against other creditors or the liquidator or administrator if the company becomes insolvent BUT it is still valid against company itself so they can’t refuse to pay loan if not registered
Companies: debt finance - priority
- Fixed charges
- Floating charges
Both rank in order of creation so long as they were registered at Companies house within 21 days
Companies: recordkeeping, filing and disclosure
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
Companies: recordkeeping, filing and disclosure
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
Companies: recordkeeping, filing and disclosure
Names (previous names)
Statement of capital
Nominal value of shares
How many shares are issued
Directors
Registered office
Companies must file annually: accounts, profit and loss sheet and balance sheet
Bankruptcy of individuals: Individual voluntary arrangement (IVA)
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
An insolvency practitioner who agrees to propose an IVA to creditors is called a nominee. If the creditors approve the IVA, then the insolvency practitioner oversees implementation of the plan and is now called a supervisor
Secured creditor
Taken a charge to protect the debt
Preferential creditor
Employee who is owed wages or holiday pay from last four months
Bankruptcy
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
How to obtain an order for bankruptcy?
- By debtor
- By unsecured creditor(s) owed at least £5,000 (individually or together)
- By supervisor of an IVA (if debtor has breached terms of IVA)
Bankruptcy
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
What is Bankrupt is allowed to keep?
- Tools need for job
- Furniture (unless expensive will be sold and replaced for something cheaper)
- Clothing (unless expensive will be sold and replaced for something cheaper)
- Income (subject to trustee applying for an income payments order if salary exceeds amount needed for reasonable needs of bankrupt and family)
After 1 year interests of creditors take precedence over any other interests in home and trustee will be able to get an order for sale
Most bankruptcy orders are discharged after one year and then the bankrupt can start again free from any debts which haven’t been paid
What can’t a bankrupt do?
- Apply for credit over certain amount
- Act as company director
- Be a partner
- Trade under another name unless disclosing bankruptcy
Culpable bankrupt
Caused bankruptcy by own dishonesty, negligence or recklessness
Bankruptcy lasts for longer (2-15 years)
Can be subject to restrictions even after bankruptcy discharged
Partnership at will = partnership for ucnertain duration
Bankruptcy of member of partnership
If partnership at will then parternship is dissolved by any partners bankruptcy
Trustee receives partnerships shares after creditors are all paid
Bankruptcy of member of LLP
Bankrupt cant member of LLP
If all members of partnership are bankrupt official receiver can apply for order that partnerships is wound up and use any money available to pay creditors
If a company is insolvent or on the brink of becoming insolvent, the directors must consider or act for the benefit of the creditors, displacing their duty to shareholders
Aim of corporate insolvency law
- 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)
IVA’s are not binding for lack of consideration
Fixed asset receivership
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.
Insolvency: Administration
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…
An administrator (not a receiver) acts for the benefit of the company as a whole (or for its creditors), whereas a receiver acts for an individual creditor by taking and selling a particular asset for a particular creditor
How does a company go into adminsitration?
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)
Pre-pack administration
Managers pre-arrange sale of company to buyer
Admministrator sells to buyer upon appointment
Limited participation by unsecured creditors who often go unapdi
Company voluntary arrangement (CVA)
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
Liquidation (winding up)
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
Types of liquidation
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
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
Liquidation: statutory order
- Expenses of winding up (liquidators fees etc.)
- Preferential creditors (employees, amounts owed to HMRC)
- Floating charges
- Unsecured creditors
- 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
Ring fencing
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
Insolvency: clawback - preference
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
Insolvency: clawback - transactions at an undervalue
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
Insolvency: clawback - defrauding creditors
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
Insolvency: wrongful trading (company or LLP)
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
Insolvency: clawback - floating charges
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
