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FLK1 > Business Law and Practice > Flashcards

Business Law and Practice Flashcards

1
Q

What are the three requirements for the formation of a general partnership under the Partnership Act 1890?

A

A: 1. Two or more persons.
2. Carrying on a business in common.
3. Intention to make a profit.

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2
Q

What is “actual authority” in the context of partnerships?

A

It is authority expressly or impliedly given to a partner to act on behalf of the partnership, binding the firm to those acts.

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3
Q

How does “apparent or ostensible authority” work in a partnership?

A

A: A partner’s act in the usual course of the business binds the firm unless the third party knew the partner lacked authority or did not recognize them as a partner.

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4
Q

Are incoming partners liable for the debts and obligations of the partnership incurred before they joined?

A

No, incoming partners are not liable for any debts or obligations incurred before they became partners, unless a contractual agreement states otherwise.

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5
Q

Are outgoing partners liable for debts incurred by the partnership after they retire?

A

No, outgoing partners are generally not liable for debts incurred after their retirement, provided they give proper notice of their retirement to creditors and the public.

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6
Q

What is the liability of outgoing partners for debts incurred while they were still partners?

A

Outgoing partners remain liable for all debts and obligations incurred while they were partners unless a novation agreement releases them from liability

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7
Q

How can an outgoing partner notify current and new customers of their retirement?

A

Current customers can be informed by giving notice and new customers can be made aware by publishing a notice in the London Gazette

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8
Q

What is the statutory definition of partnership property under the Partnership Act 1890?

A

Partnership property is property originally brought into the partnership or acquired for partnership purposes and in the course of the partnership business.

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9
Q

How is property purchased with partnership funds treated?

A

Unless otherwise agreed, property bought with partnership funds is considered partnership property.

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10
Q

What happens if an individual partner brings in their property to the partnership?

A

The property will remain the partner’s even after dissolution, if the property is given to the partnership then it becomes partnership property which will constitute a capital contribution

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11
Q

Can property used in the partnership business automatically be considered partnership property?

A

No, the mere use of property in the business does not make it partnership property. The intention of the partners determines its status.

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12
Q

What is the primary fiduciary duty of partners in a general partnership?

A

Partners have a fiduciary duty to act in good faith and in the best interest of the partnership, placing the partnership’s interests above their own.

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13
Q

What is the duty of disclosure in a partnership?

A

Partners must disclose all relevant information concerning the partnership to other partners, including any matters affecting the business.

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14
Q

Are partners allowed to make secret profits from partnership activities?

A

No, partners must account for any secret profits or benefits obtained from partnership activities or the use of partnership property without the consent of the other partners.

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15
Q

What is the duty to account for competing business profits?

A

If a partner engages in a competing business without the consent of the other partners, they must account to the partnership for any profits made from that business.

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16
Q

What is the duty to avoid conflicts of interest?

A

Partners must avoid situations where their personal interests conflict with their duties to the partnership, ensuring impartiality in decision-making

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17
Q

What ways can a general partnership be dissolved?

A

By certain term (Expiration)
By notice
By Bankruptcy, death, or charge
By illegality
By Court order (permanent incapacity, carry on at a loss, persistent breached of partnership duties

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18
Q

what must an LLP file at companies house to be incorporated?

A

Name of LLP
Details of LLP’s registered office and address
Names and addresses of LLP members
Details of anyone with significant control (generally, someone who holds more than 25% of the assets or voting rights

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19
Q

minimum amount of members for LLP?

A

2

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20
Q

When can a LLP start trading?

A

once certificate of incorporation has been issued

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21
Q

How can a new member be added to a LLP?

A

Only by unanimous decision

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22
Q

Requirements of an outgoing member of an LLP?

A

Must give reasonable notice to the other members and notified companies house within 14 days

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23
Q

What are LLPs responsible for filing with companies House?

A

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

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24
Q

How are debts managed in an LLP?

A

Members are not liable for any debts owed to the LLP’s creditors, their own liability is their capital contribution upon winding up

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25
Q

Can members of an LLP be personably liable?

A

Yes, if the individual acted wrongfully or fraudulently in the event of insolvency

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26
Q

Taxation of LLP?

A

An LLP does not pay corporation tax and each member is treated as they would be in general partnership i.e. taxed individually for income tax and their share of any gains in the LLP

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27
Q

What is the difference between a company limited by shares and a company limited by guarantee?

A

Limited by Shares: Liability of members is limited to the unpaid amount on their shares.
Limited by Guarantee: Members agree to pay a fixed amount (usually £1) if the company is wound up, commonly used for charities and non-profits

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28
Q

What are the key characteristics of a private limited company (Ltd)?

A

Cannot issue shares to the public.
Shares are sold privately.
No minimum share capital requirement.
A single director and no requirement for a company secretary

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29
Q

What are the requirements for a public limited company (PLC)?

A

Must have a minimum nominal share capital of £50,000.
Can issue shares to the public and trade them on a stock market.
Requires a trading certificate before commencing business.
Must have at least two directors and a company secretary.

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30
Q

What is a pre-incorporation contract, and who is liable for it?

A

A pre-incorporation contract is made by promoters on behalf of a company before it is registered. The promoter is personally liable unless a novation agreement transfers liability to the company after incorporation.

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31
Q

What is a shelf company, and why might a promoter use one?

A

A shelf company is a pre-incorporated company that has never traded. Promoters use it to save time when setting up a business quickly.

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32
Q

hat documents must be filed with the Registrar of Companies to register a company?

A

Memorandum of Association
Application for Registration (including company name, registered office, business activity, statement of capital, and initial shareholdings)
Statement of Proposed Officers
Statement of Compliance with the Companies Act 2006
Payment of the registration fee.

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33
Q

What is the purpose of the Memorandum of Association?

A

It is a document signed by the initial subscribers (members) indicating their intention to form a company and agree to become its members.

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34
Q

What information is included in the Statement of Capital and Initial Shareholdings?

A

Total number of shares.
Aggregate nominal value of shares.
Classes of shares and their rights (if any).
Amount paid and unpaid on each share.

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35
Q

What constitutes a company’s constitution under the Companies Act 2006?

A

Articles of Association
Any resolutions or agreements adopted by members to amend the articles.

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36
Q

What are the key contents typically covered in a company’s Articles of Association?

A

Directors’ meetings and decision-making.
Appointment and removal of directors.
Share capital and transfer of shares.
Rights attached to shares (voting, dividends).
Shareholder meeting procedures.

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37
Q

What is the legal effect of the Articles of Association?

A

The articles form a contract between:

The company and its members.
The members with each other.
However, the articles can only be enforced in relation to membership rights (e.g., voting or dividend rights).

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38
Q

What is the concept of separate legal personality in company law?

A

A company is a separate legal entity from its members and directors, meaning it:

Owns property in its own name.
Enters contracts in its own name.
Can sue and be sued.
Is taxed separately from its members.
Has perpetual succession

39
Q

In what circumstances can the veil of incorporation be lifted?

A

Fraudulent trading (intentional deception).
Wrongful trading (continuing to trade while insolvent).
Avoiding an existing legal obligation.
Using the company as a sham or facade.

40
Q

What is the minimum number of directors required for private and public companies under the Companies Act 2006?

A

Private company: At least one director.
Public company: At least two directors, with at least one being a natural person

41
Q

What are the different types of directors?

A

De jure directors – Formally appointed and registered with the Registrar of Companies.
De facto directors – Not formally appointed but act as directors.
Shadow directors – Influence the board’s decisions but are not officially recognized as directors.
Executive directors – Involved in the day-to-day management.
Non-executive directors – Oversee and advise, without daily management involvement.
Nominee directors – Represent specific stakeholders but must act in the company’s best interests.

42
Q

What are some key statutory duties of directors under the Companies Act 2006?

A

Duty to act within powers.
Duty to promote the success of the company.
Duty to exercise independent judgment.
Duty to exercise reasonable care, skill, and diligence.
Duty to avoid conflicts of interest.
Duty not to accept benefits from third parties.
Duty to declare interests in proposed transactions.

43
Q

What is the duty to promote the success of the company?

A

Directors must act in good faith to promote the success of the company for the benefit of its members as a whole, considering:
Long-term consequences.
Interests of employees.
Relationships with stakeholders.
Impact on the community and environment.
Maintaining high standards of business conduct.

44
Q

How can directors be removed from office?

A

Directors can be removed by a simple majority vote of the shareholders through an ordinary resolution. However, this may trigger compensation for breach of the service contract.

45
Q

What does the duty to exercise independent judgment entail?

A

Directors must not subordinate their judgment to the will of others, but they can act according to:

Agreements entered into by the company.
The company’s constitution.
Independent expert advice, as long as the final decision remains theirs.

46
Q

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

A

Objective test: The care, skill, and diligence expected of a reasonably diligent person with general knowledge and experience.
Subjective test: The care, skill, and experience the specific director actually possesses, meaning more is expected from directors with specialized knowledge.

47
Q

What is the duty to avoid conflicts of interest?

A

Directors must avoid situations where they have a direct or indirect interest that conflicts with the interests of the company, particularly in exploiting:

Company property.
Information.
Business opportunities.
Exceptions:
If the situation is authorized by the board.
If it cannot reasonably be regarded as likely to cause a conflict.

48
Q

How are board meetings called?

A

Any director can call a board meeting by giving reasonable notice to the other directors. Does not required to be in writing but must indicate date, time, location, and how communication will be done if all members can be in the same place.

49
Q

What is the vote threshold and quorum for a board meeting?

A

Majority vote and at least two.

50
Q

Is a company secretary required for private and public companies?

A

Private companies: No legal requirement.
Public companies: Must have a qualified company secretary.

51
Q

What are the qualifications required for a public company secretary?

A

Held office as a company secretary for at least 3 out of the last 5 years.
Membership in a recognized professional body.
A qualified barrister, advocate, or solicitor.
Other relevant experience as deemed appropriate by the directors.

52
Q

How can directors be removed from office?

A

Directors can be removed by a simple majority vote of the shareholders through an ordinary resolution. However, this may trigger compensation for breach of the service contract.

53
Q

What are the key duties of a company secretary?

A

Maintaining statutory records and books.
Filing annual returns and other documents with Companies House.
Taking minutes at board and shareholder meetings.
Ensuring the company complies with legal obligations.

54
Q

Which companies are required to appoint auditors?

A

Large companies are required to have their accounts audited by a qualified auditor.
Small companies (turnover < £10 million and fewer than 50 employees) are exempt from auditing.

55
Q

When can a dividend be issued to shareholders?

A

This will depend on the type of share they hold however, generally, dividends are made from profits available for purpose.

56
Q

Difference in shares?

A

Preference shares - Profits are paid to these shareholders before ordinary shareholders, limited in voting rights to those of their class
Ordinary shares - profits paid to after preference shareholders, have full voting rights on resolutions

57
Q

Shareholder’s rights

A

Right to inspect service contracts of the directors, companies must keep these a year after a director has left.
Right to inspect register of members

58
Q

What is the primary difference in shareholder meeting requirements between public and private companies?

A

Public companies are required by statute to hold an annual general shareholders’ meeting. Private companies have no such statutory obligation, but they can hold general shareholders’ meetings as needed.

59
Q

Under what conditions can shareholders require directors to call a meeting?

A

Shareholders holding at least 5% of the paid-up voting capital can require the directors to call a meeting. Directors must then call the meeting within 21 days, and it must occur within 28 days. If directors fail to act, shareholders with at least 50% voting rights can call the meeting themselves.

60
Q

Define “ordinary resolution” and “special resolution” and their respective approval requirements.

A

Ordinary Resolution: Requires a simple majority (more than 50%) of votes at the meeting.
Special Resolution: Requires 75% or more affirmative votes. Typically used for significant matters like altering the articles of association or winding up the company.

61
Q

Explain the process and purpose of a written resolution?

A

A written resolution allows private companies to pass resolutions (ordinary or special) without a meeting. It must be circulated to all eligible members, state the method for agreement, and typically lapse after 28 days unless stated otherwise.

62
Q

What are examples of matters requiring approval by special resolution?

A

Examples include changing the company’s articles of association, altering the company’s name, or most decisions to buy back company shares.

63
Q

What rights do shareholders have at different shareholding thresholds?

A

5%: Request meetings, circulate resolutions/statements.
10%: Demand a poll vote.
25%+: Block special resolutions.
50%+: Block or pass ordinary resolutions.
75%: Pass special resolutions.

64
Q

Method of voting at meetings?

A

Vote by hands one vote per shareholder present or their proxy at the meeting. However, if 5 shareholders or more or shareholders holding more than 10% of shares or capital assets to demand a poll instead, changing everyone’s vote from one per person to one per share.

65
Q

Examples of shareholder’s approval by ordinary resolution?

A

Appointment of auditors
Appointment, re-appointment, and removal of directors
Declaration of dividends
Adoption of annual accounts and reports of directors
Ratification of director’s breach of duty
Entering service contract with director for more than 2 years
Making a loan to a director

66
Q

What are the two main types of finance a company can raise?

A

Equity Finance: Raising capital through selling shares, which grants ownership stakes.
Debt Finance: Borrowing funds that must be repaid, often with interest.

67
Q

What is the difference between nominal value and market value of shares?

A

Nominal Value (Par Value): The minimum amount a shareholder must pay for a share, as stated in the company’s articles.
Market Value: The current value of shares based on the company’s performance and market conditions. Shares can be sold at a premium above nominal value.

68
Q

Explain the concept of “Preemption Rights.”

A

A: Existing shareholders have the right to purchase new shares first, in proportion to their current ownership, to maintain their voting power. These rights can be altered or disapplied by special resolution or articles

69
Q

What is the difference between secured and unsecured loans in debt finance?

A

Secured Loans: Backed by collateral (e.g., property or machinery), giving the lender a claim to specific assets if the borrower defaults.
Unsecured Loans: Not backed by collateral, often with higher interest rates due to increased risk for the lender.

70
Q

What are fixed and floating charges in secured debt?

A

Fixed Charge: Tied to specific assets (e.g., equipment) that the company cannot sell without lender consent.
Floating Charge: Covers fluctuating assets (e.g., inventory). It becomes fixed upon a “crystallization event,” like default.

71
Q

What happens if a charge is not registered at Companies House within 21 days?

A

A: The charge becomes void against the liquidator, administrator, or creditors, leaving the lender with no claim on the secured assets.

72
Q

What are the key registers private companies must maintain under the Companies Act 2006?

A

Register of Members
Register of Directors
Register of Secretaries
Register of Charges
Register of People with Significant Control (PSC)

73
Q

What is required in the annual confirmation statement filed with Companies House?

A

A: It verifies that company details are up to date. Companies must submit the statement annually within 14 days of their review period ending, even if no changes occurred

74
Q

What financial information must be included in a company’s accounts?

A

Registration details (e.g., number, type of company).
Balance sheet and profit/loss statement showing a “true and fair view” of the company’s finances.
Approval from directors to confirm accuracy.

75
Q

What happens if a company fails to file its accounts on time?

A

A: The company faces financial penalties, potential criminal sanctions, and possible disqualification of directors.

76
Q

What reports are mandatory for medium and large companies but not for small companies?

A

Directors’ Report: Names directors and proposed dividends.
Strategic Report: Assesses business performance and success.

Medium and large companies are regarding has having 50 or more employers or annual turnover in excess of £10 mil or more

77
Q

What details must be disclosed on a company’s letterhead?

A

Registered name.
UK registration region.
Registered number.
Registered office address.
If director names are included, all directors’ names must be listed.

78
Q

What key changes require filing with Companies House within specific timeframes?

A

Appointment/removal of directors: 14 days.
Issuance of shares: 1 month.
Special resolutions (e.g., changing articles): 15 days.
Allotment of new shares: 15 days

79
Q

Explain the process for transferring shares in a private company.

A

The seller provides the share certificate and stock transfer form.
Transferee pays stamp duty (if applicable).
The board reviews and may refuse registration under company articles.
If approved, a new share certificate is issued, and the register of members is updated

80
Q

When must accounts be filed with companies house?

A

Private - no later than 9 months from accounting period
Public - no late than 6 months from accounting period

81
Q

what is included on letterhead for sole trader?

A

Business name
Real name (if different to business name)
Business address

82
Q

What are the options available to a sole proprietor or partner facing insolvency?

A

Options include negotiating with creditors, entering an Individual Voluntary Arrangement (IVA), or applying for bankruptcy.

83
Q

What is an Individual Voluntary Arrangement (IVA)?

A

A formal, negotiated agreement between a debtor and their creditors to pay a portion of the debt, typically under supervision by an insolvency practitioner. It requires approval by creditors holding at least 75% of the debt’s value.

84
Q

What happens during bankruptcy for sole proprietors or partners?

A

The debtor’s assets are handed over to a trustee in bankruptcy, who liquidates them to repay creditors. After one year, the debtor is typically discharged from most debts unless found culpable for dishonesty or negligence.

85
Q

What are the main corporate insolvency procedures?

A

They include receivership, restructuring plans, moratoriums, administration, company voluntary arrangements, and liquidation (voluntary or compulsory).

86
Q

Are all creditors bound by the IVA agreement?

A

Ordinary unsecured creditors are bound by the IVA if they receive notice of the meeting and the proposal is approved. Preferential and secured creditors are not bound unless they agree to the proposal.

87
Q

What protections does an IVA offer the debtor?

A

A: While an interim order is in place, creditors cannot present a bankruptcy petition or take other enforcement actions, giving the debtor time to negotiate and implement the IVA.

88
Q

What is a Members’ Voluntary Liquidation (MVL)

A

MVL is a process initiated by a company’s members to voluntarily wind up the company when it is solvent, typically because the business is no longer needed or the owners wish to retire.

89
Q

What is a Creditors’ Voluntary Liquidation (CVL)?

A

A: CVL is a process initiated by the directors and members of an insolvent company to wind it up. The process is controlled by the creditors after the initial resolution

90
Q

What is meant by ‘clawback of assets’ in insolvency?

A

A: Clawback refers to the legal process where a liquidator, administrator, or trustee in bankruptcy reverses transactions made by a debtor before insolvency that are deemed unfair, fraudulent, or prejudicial to creditors.

91
Q

What is a preference in the context of clawback of assets?

A

A preference occurs when a debtor takes actions that give one creditor better repayment terms than others, placing that creditor in a more favourable position during insolvency proceedings.

92
Q

What are the time limits for challenging a preference?

A

If they occur within six months before insolvency for unconnected persons, or two years for connected persons (e.g., directors, family members).

93
Q

What constitutes a ‘transaction at an undervalue’?

A

A transaction at an undervalue involves a debtor selling assets for significantly less than their market value or gifting assets without adequate consideration, within two years (companies) or five years (individuals) before insolvency.

FLK1 (9 decks)

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