Business Law and Practice - ALL Flashcards
1
Q
Which 2 business structures are unincorporated and which 3 are incorporated?
A
Unincorporated* Sole Trader* General PartnershipIncorporated* Limited Partnership* Limited Liability Partnership* Limited Company
2
Q
What is required for formation of each of the 5 business structures?
A
- Sole Trader: No formalities, owner simply operates the business* General Partnership: No formalities, can be formed by verbal/written agreement or by conduct* Limited Partnership: File relevant documents at Companies House and receive a Certificate of Registration* Limited Liability Partnership: File relevant documents at Companies House and receive a Certificate of Registration* Limited Company: File relevant documents at Companies House and receive a Certificate of Registration
3
Q
What is the liability of owners of each of the 5 business structures?
A
- Sole Trader: Unlimited personal liability for the obligations of the business* General Partnership: Unlimited personal liability for the obligations of the partnership, jointly and severally* Limited Partnership: General Partner has unlimited personal liability, Limited Partners have liability limited to their capital contribution* Limited Liability Partnership: Partners generally not personally liable beyond their investment* Limited Company: Shareholders generally not personally liable beyond their investment
4
Q
How are each of the 5 business structures managed?
A
- Sole Trader: Managed and run directly by the sole trader* General Partnership: Managed and run by the partners but a managing partner may be appointed* Limited Partnership: General Partner manages the partnership and Limited Partners do not manage, otherwise their liability will become unlimited* Limited Liability Partnership: Managed and run by the partners but a managing partner may be appointed* Limited Company: Managed by a board of directors
5
Q
How can each of the 5 business structures be transfered?
A
- Sole Trader: Sole trader can sell the business at will* General Partnership: Partners cannot transfer ownership without unanimous consent* Limited Partnership: Partners cannot transfer ownership without unanimous consent* Limited Liability Partnership: Partners cannot transfer ownership without unanimous consent* Limited Company: Shareholders generally may transfer ownership
6
Q
How is tax paid for each of the 5 business structures?
A
- Sole Trader: Sole trader pays income tax* General Partnership: Partner pays income tax* Limited Partnership: Partner pays income tax* Limited Liability Partnership: Partner pays income tax* Limited Company: Company pays corporation tax
7
Q
What are the administration requirements of each of the 5 business structures?
A
- Sole Trader: No legal requirement to keep records or publish accounts * General Partnership: No legal requirement to keep records or publish accounts * Limited Partnership: Must file records, but not always accounts at Companies House* Limited Liability Partnership: Must file records and accounts at Companies House* Limited Company: Must file records and accounts at Companies House
8
Q
How do each of the 5 business structures raise finance?
A
- Sole Trader: Cannot create floating charge* General Partnership: Cannot create floating charge* Limited Partnership: Cannot create floating charge* Limited Liability Partnership: Can create floating charge* Limited Company: Can create floating charge
9
Q
What is the disadvantage to forming a company or LLP?
A
Tighter regulation and filing requirements:* register with Companies House* comply with various filing requirements (including accounts and annual confirmation statement). These additional requirements mean additional expense, asthe company/LLP may need to hire a company secretary and accountant, and a loss of privacy as accounts are public.
10
Q
What is the major advantage of forming a company or LLP?
A
Limited liability.Shareholders in a company and Partners in an LLP are will not required to make any additional contribution to the company’s debts in the event of insolvency provided their contributions are paid up (subject to certain exceptions involving wrongdoing)
11
Q
What is the ‘veil of incorporation’?
A
Incorporation makes a company a separate legal entity and the company itself becomes responsible for any debts to creditors.
12
Q
What does ‘joint and several’ liability of a partnership mean?
A
A creditor can pursue all or any of the partners for the outstanding debt.
13
Q
What are the advantages and disadvantages of the sole trader business structure?
A
Advantages: * Lack of formality* Low adminsitration costs (e.g. may have to register for VAT)* Can start trading immediately * Takes all profitsDisadvantages* Responsible for all debts* Scale is limited (can hire employees but personally liable)* Can only grant fixed charges, not floating charges to raise finance
14
Q
Is an LLP subject to corporation tax?
A
No, partners pay income tax on their share.
15
Q
What is a floating charge?
A
A charge over present and future assets that are to be retained in the business (e.g. inventory).
16
Q
Can the same person own and run a company?
A
There is a separation between ownership (shareholders) andmanagement (directors), but it is possible for the same individual to hold both positions, particularly in small family-run businesses.
17
Q
What law applies to Partnerships?
A
Partnership Act 1890It contains provisions that deal with management e.g. partners’ power to bind the firm and partners’ liability.Note, partners are largely free to dictate how the business should be run in a separate partnership agreement.
18
Q
What law applies to Companies?
A
Companies Act 2006
19
Q
What is a partnership and how is it formed?
A
A business medium available only for two or more persons. There are three requirements for a partnership to exist: * two or more persons must* carry on a business in common* with the intention to make a profit.Note, there are no formalities required for formation beyond establishing the three requirements.
20
Q
What is the purpose of the Partnership Act 1890?
A
It governs the contract partners and the relationship between them.It largely operates as a fallback for anything not in the partnership contract.The only provisions of the Act that cannot be altered are:* when a partnership is considered to exist* The relationship between the partners and any 3rd party contracting with them
21
Q
What does the term “person” mean under the Partnership Act 1890?
A
Not limited to natural persons but also includes other business entities e.g. a company. Example: a human can form a partnership with a company
22
Q
Is a separate entity created when a partnership is created?
A
No, a partnership is like a marriage i.e. there is nothing more than the contractual relationship between the parties.
23
Q
What does “business in common” mean under the Partnership Act 1890?
A
Two separate ideas: * ‘business’ (buying or selling goods or providing services for a fee e.g. operating clothing shop/law firm)* ‘in common’ (the idea that the people conducting the business are operating it together, i.e. they each have a right to make decisions about the business, share in its gains etc.)
24
Q
Can a partnership exist if the goal is not to make a profit?
A
The parties’ aims in coming together must include the goal of making a profit. If profit is not a goal, there is no partnership (note, intention is the important thing, the fact the business never actually makes a profit does not prevent it from being a partnership) Parties do not need to intend to form a partnership (i.e. use the word ‘partnership), only an intention to carry on together a business for profit.
25
If two people join together to build a boat to sail together, have they created a partnership?
**No**, they are not buying or selling goods or services, there is **no business**.If they **sell the boat to cover costs**, there is still **no partnership** as there is no intention to create a profit. If they **decide to sell it at a profit**, they **have a partnership** even if they did not intend to create one.
26
What is a limited partnership?
Basic limited partnerships are governed by the **Limited Partnerships Act 1907**.It involves **2 types of partner** (at least one of each):* **General partner** (responsibility for running the business and unlimited liability)* **Limited partner** (invests capital but has no active role in running the business, liability limited to capital invested)A limited partnership **must be registered** at Companies House before it can start trading. Generally only used for certain types of venture capital funds where investors are protected as limited partners and the general partner invests their money in companies/property
27
Are any formalities required in the formation of a partnership?
**No**, as soon as the three elements are satisfied, a partnership exists, and it can start trading immediately.**No requirement of a written partnership agreement** (in practice, many have them) and **nothing need be filed** with Companies House.
28
When it is unclear whether a partnership exists or not, what do the court look at?
The **circumstances**If a party receives a share of the **profits** of a business, that generally is treated as **prima face evidence** that a partnership exists.This presumption does not apply if the receipt is: * repayment of **debt*** **remuneration** (payment) of an employee or an agent (e.g. shop owner paying employee commission of 10% of the profits); * an **annuity** to a survivor of a partner on account of a partner's share of the profits or to a person who has sold the goodwill of the business. An agreement to share **losses** might be some proof of an intention to form a partnership, it is **not prima facie evidence** (but a lack of such an agreement does not prevent the formation of a partnership)
29
When might it be particularly important to determine whether a partnership exists or not?
When **creditors** are looking to be paid. People may try to argue that they are not in a partnership to avoid personal liability for debts.Note, sometimes people think they are in a partnership but in fact are not due to a required element being missing.
30
Which 2 common circumstances do not create a partnership under the Partnership Act 1890?
* The mere fact that two or more people **jointly own property**, even if they **agree to share profits** from the property (e.g. A and B buy a flat together and sell it 2 years later at a profit. There is no business). * **Sharing of gross returns**
31
Does a contribution have to be made for a partner to form a partnership?
**No**. Note, in practice, partners often do make a contribution of money or property which become assets of the business.
32
What is the maximum number of partners that can be in a partnership?
There is **no legal limit**
33
Does a partnership have separate legal personality from the partners?
**No**. Partners in a partnership have **unlimited personal liability** for the debts of the partnership.
34
Who are the minimum 3 players in a question involving a partner's authority to bind the firm?
* **2 partners** in the partnership* **Third party** interacting with them to do businessWhen considering a partnership question, always first consider whether the question is asking about the **internal relationship** of the partners **or** the **relationship between the partnership and a third party**.
35
When will the act of a partner bind the partnership?
When the partner has: * **actual authority** (express or implied)* **ostensible/apparent authority**Every partner in a partner is an **agent** of the partnership and the other partners. An agent can bind a principle (i.e. the partnership) when it acts with authority.| Rules in the Partnership Act 1890 are based on the principles of Agency
36
Will every act of a partner bind a partnership?
**No**, only acts where the partner acted with authority are binding
37
What is **actual authority** of a partner?
A firm will be bound by any act:* Done in a way showing an **intention to bind** the firm,* By any person **actually authorised** by the firm to undertake the act.**Express** * **Partnership agreements** will often give certain partners specific powers and responsibilities (**grant of actual authority**) e.g. purchasing power up to a limit.* Partners could **vote** to give a particular partner actual authority to do a specific kind of act. **Implied*** Courts also recognise implied actual authority if the partners have **allowed a partner without express actual authority to regularly do an act**.
38
When do issues of actual authority typically arise?
When a partner does something the others don't approve of and they are trying to **recover money** from that partner or claiming a **breach of the partnership agreement**.
39
What is **apparent or ostensible** authority?
The **act of a partner** carrying on **in the usual way business of the kind carried on by the firm** will bind the firm and the other partners **unless**:* The partner had **no authority** to act, **and** * The **person** with whom the partner was dealing either: 1. **knew** the partner had no authority to act, or 2. **did not know or believe** the person they were dealing with was a partner.Test for business of firm is **objective**: * would a **reasonable** third party think a business of this kind would **usually do this act**, and * **what authority** would a reasonable third party expect a partner in such a firm to have?Test for exceptions to the rule are **subjective**.
40
Why do creditors often rely on ostensible/apparent authority of a partner?
They have **no access** to the partnership agreement or minutes of a partnership meeting
41
If a partner tells a third party that they do not have authority to buy something but that it is such a good deal and the others wouldn't mind, is the partnership bound?
**No** only the partner buying the good would be bound.
42
If a seller thinks a partner is a sole trader when selling a good to them, is the partnership bound?
**No** only the partner buying the good would be bound.
43
What 5 acts can third parties expect a partner with ostensible authority to be able to do?
In the ordinary course of the partnership's business: * Make **admissions or representations** concerning affairs of the partnership * **Buy and sell** firm goods* **Receive debt** payments due to the firm* **Hire** employees* **Borrow** money and grant certain types of security (trading partnerships only)If a contract is **outside the scope** of partnership business, the **partnership generally will not be bound** unless the partner has actual authority.
44
Is notice given to a partner by a third party considered valid notice to the partnership?
**Yes**, if a third party gives notice (e.g. a notice by a tenant to continue a lease) to a partner who **habitually acts in the partnership business** the notice will be considered to be notice to the partnership (except in cases in which the third party and partner have joined to commit a **fraud** on the firm).
45
Who is bound by a contract formed by a partner that did not have authority?
**Only that partner** will be personally liable to the third party (technically, not on the contract but instead for **breach of a warranty of authority**, on the basis of the principles of agency). By purporting to enter into the contract on behalf of the partnership, the partner warrants (i.e. promises), that they have the authority to do so.
46
If a partner enters into a contract with ostensible/apparent authority and a partnership is bound, do the other partners have any remedies?
If the partner had no actual authority, the others can pursue that partner for **breach of contract** (i.e. the partnership agreement) and usually the remedy is **damages** for the loss suffered as a result of the breach.Note, if a profit is made as a result of the breach, partners will very rarely take action
47
Is a partnership liable for torts committed by a partner?
* Where any partner acting in the **ordinary course of the business** (**or with the authority** of the other partners) of the partnership commits a tort, the **partnership is liable** to the same extent as the partner, and the partners' liability is **joint and several.*** Note, if the partnership **business was totally unrelated to the tort**, the other partners would **not be liable**. Example: if a partner makes a misrepresentation to or otherwise defrauds a third party while conducting partnership business, all partners would be liable.
48
What is the liability of incoming partners to a partnership?
* **Not liable** to creditors of the partnership for anything done **before they become a partner**. (unless they come to a contractual agreement otherwise.)* **Consent of all existing partners** is required to add a new partner.* Partners have **no power to expel another partner** unless that power has been expressly agreed to by the partners (e.g. in partnership agreement).
49
What is the liability of outgoing partners to a partnership?
Debts incurred **before retirement** * Partner **remains liable** for any debts or obligations incurred before they leave. * The retiring partner and the partnership can **agree that the partner will not be liable** to the partnership for these obligations (e.g. by executing a **release** or '**hold harmless agreement**' indemnifing the retiring partner for liabilities) * This has **no effect on the retiring partner’s direct liability** to third parties unless the third party alsoagrees (a '**novation**').Debts incurred **after retirement*** Third party creditors are entitled to treat all apparent partners of the old firm as **still being partners of the firm until notice** of the change has been received. * **Actual notice** should be given to **existing creditors** (e.g. by email/letter) and notice by way of an **advertisement in the London Gazette** is required for **new customers**.* If a partner retires and they were **not known to a person** dealing with the partnership to have been a partner, that retiring partner will **not be liable** for partnership debts contracted with that person after the date of their retirement.
50
If a partnership is insolvent and a creditor (for a debt entered into before a partner retired) pursues the retired parther who had a hold harmless agreement with the partnership, does the retired partner have to pay the creditor?
**Yes**, the hold harmless agreement is between the **retired partner and the partnership only**. It entitles them to make a claim for any money paid to a creditor against the existing partners. If the partnership is insolvent, the agreement will be useless as the partners will not be in a position to reimburse the retired partner.
51
What 3 things should be considered in a question involving liability of incoming/outgoing partners for debts?
* The **date** the debt was incurred * **Who** was in partnership at that time* Whether the creditor **new or exisiting**
52
What are the consequences of holding someone out as being a partner?
If a person holds themselves out as a partner (even though they are not) they **may be held liable** as if they were a partner to any third party who has given credit to the partnership on the strength of the holding out. Note, they will not be entitled to any of the benefits of partnership e.g. share of profit by holding out.Same applies if a person **knowingly allows another** to hold the person out as a partner. The term '**given credit**' is broader than just money being lent to a partnership.'Holding out' **can apply to retiring partners** if they have not given proper notice to existing and new customers, and if they have failed to ensure that their name is removed from any notices websites, or stationery
53
If a partner went to a bank and asked for a loan, telling the bank their rich uncle was also a partner in the partnership, would the uncle be liable for the debt?
* If the uncle was **absent** and **didn't know** this was happening, **no**.* If the uncle was **absent** and **knew** this was happening, **yes*** If the uncle was **present** at the meeting and **said nothing**, **yes**, because he knew what they were doing * If the uncle was **asking** the bank for the loan, **yes**
54
What is partnership property?
* Property **originally brought into** the partnership (e.g. capital contribution) or **acquired** for partnership purposes and in the course of the partnership business.* Unless a **contrary intention** appears, property **bought with money belonging to the firm** is partnership property, and property titled in the firm name is partnership property. * Partnership property may **only be used for partnership purposes** and is **unavailable for a separate debt** of an individual partner. * Note, property belonging to a partner individually used by the partnership remains that partner's property after dissolution
55
How is it determined whether property is partnership property or property of the individual partner?
**Intention of the parties*** The mere fact that the **property is used** in the business is **not enough** evidence that it has become partnership property.* Property owned by one partner at the start of the partnership will be treated as partnership property only if it is **expressly (e.g. partnership agreement) or impliedly agreed between the partners**.* If unclear, **courts look at**:1. Whether the asset is **listed on the partnership books** as a partnership asset2. Who paid for **maintenance** 3. How the asset was used (e.g. **partnership/personal purposes**)
56
Can partnership property be used for personal use?
It must be held and applied by the partners **exclusively for the purposes of the partnership** and **in accordance with the partnership agreement**.Example: a vehicle owned by the partnership can only be used for personal use with the permission of the other partners.
57
Can creditors of an individual partner (i.e. not of the partnership) use partnership property to satisfy a debt of that partner?
**No**However, such creditors may ask a court to make an **order charging the partner's interest** in the partnership which would entitle them to **receive distributions** that are due the partner (note, they do not become partner and can't manage the partnership)
58
Can a partner dispose of partnership property at will?
**No**, the property belongs to the partnership and **not to the individual** partners.
59
What are the 7 rules relating to the financial entitlements of a partner in a partnership?
1. **Equal share of capital and profits** (unless partnership agreement specifies otherwise)2. **No right to distribution before dissolution** (unless partnership agreement specifies otherwise)3. Right to share is **assignable** 4. **Equal share of losses** (unless partnership agreement specifies otherwise)5. Right to **inspect partnership books**6. Right to **interest on loans** to partnership (but not capital contribution)7. **Not entitled to remuneration** (unless partnership agreement specifies otherwise)8. Right to **indemnity from partnership** for payments/liabilities incurred in course of business or for preservation of partnership business/property
60
If partners in a partnership contribute unequal shares at the outset, is their share of the profits pro-rated?
**No**, profits will be **split equally** unless it is specified in the partnership agreement that they should be pro-rated (note, it would be rare for the partnership agreement not to specify the split)
61
If a partnership of 3 partners makes a profit of £30,000 in year one, how much is each partner entitled to?
**None**, unless **all partners agree** to distribute the profit or the partnership is **dissolved**. If they agree, each partner will get £10,000 unless the partnership agreement specifies otherwise. Note, the partners will **still owe tax** on the profit even if it is not distributed.
62
Can a partner assign their right to a share in the profits of a partnership?
**Yes** but the assignment **does not**: * entitle the assignee to **participate in, or interfere with, management** of the firm. * make the assignee **liable** for the firm's obligations. This sometimes happens if a partner owes a personal debt to a third party.An assignee can only become a partner and gain these rights is with the unanimous consent of the partners (unless the partnershipagreement provides otherwise).
63
How are losses (capital or otherwise) shared by partners in a partnership?
**Equally**, unless the partnership agreement states otherwise. However, **if profits are sharedunequally** by virtue of a provision in the partnership agreement, **on dissolution, any remaining losses** will be paid by the partners **in the same proportion**.
64
What 2 rules apply to partnership books?
* The partnership is required to **keep its books at its place of business** (or principal place of business if there is more than one), and * each partner has a **right to inspect and copy** them as the partner sees fit.
65
Is a partner entitled to charge interest on a loan it makes to the partnership?
**Yes**, at a rate of 5% per annum.Note, they cannot charge interest on their capital contribution.
66
Is a partner entitled to remuneration for acting in the partnership business?
**No**However, the partnership agreement may provide that certain **partners who manage the business** get paid a **salary**, as opposed to sleeping partners who are merely investors and take no active part in the day-to-day running of the business.
67
Does the partnership have to indemnify partners for anything?
**Yes**:* any payments made or liabilities incurred whilst acting **in the course of the business** of the partnership, or * anything done for the **preservation of the business or property** of thepartnership.Note, other indemnities may exist but they would need to be set out in the partnership agreement.
68
Who has the right to manage a partnership?
Regardless of contribution, every partner has an **equal right** (not an obligation) to take part in management of the partnership and the basic rule is **one partner, one vote** and a **simply majority** carries the decision subject to some exceptions (unless the partnership agreement provides otherwise).
69
Which 3 decisions of a partnership require a unanimous vote?
1. Admission of a **new partner**2. Change in the **nature** of the partnership business3. Alteration of the **partnership agreement**Other management decisions are made by a **simple majority vote** unless the partnership agreement provides otherwise.
70
Can a majority of partners vote to expel another partner?
* **No**, unless there is an express agreement to do so has been **agreed by all partners** (e.g. in the partnership agreement)* Note, it would be difficult to get a partner to vote to expel themselves so the partnership agreement should cover **situations when a partner's behaviour justifies expulsion**.
71
What are the 3 duties of partners in a partnership?
1. **Fiduciary** duty2. Duty to **disclose information**3. Duty to **account** for secret profits
72
What is required from partners under their fiduciary duty?
They must **act in good faith** and exercise their powers for the **benefit of the partnership as a whole**. Specifically, the relationship of trust and confidence requires them to:* Render **true accounts** and provide **full information** to their fellow partners with regard to anything that might impact the partnership* **Account for any profits** they make using partnership property or in the name of the partnership* **Refrain from competing** with the partnership.
73
What is required of partners under the duty to disclose information?
Disclose information on **all things affecting the partnership** to any partner or their legal representatives.It is a broad duty: **see it, say it, sort it.**
74
What is required of partners under the duty to account for secret profits?
**Account for secret profits*** Account to the partnership for any **profit or benefit** * obtained **without the consent** of the other partners* from **any transaction concerning the partnership**, or from any use by the partner of the **partnership property or the partnership name**. This would include any business that came to the partner **as a result of their involvement** with the partnership (even if it does not interfere with their duties under the partnership)**Account for profits of a competing business*** If a partner, * **without the consent** of the other partners, * carries on any **business in competition** with that of the partnership, * they must **account to the partnership for all profits** they made in that business.
75
If a partner used the partnership delivery van to make money delivering packages for another business, what would the partner have to do?
Account for the profits made unless the other partners consent
76
A, B, and C are partners in an auto repair garage. B's friend asks B to repair his motorbike. B tells the friend to bring the motorbike to the shop after hours and he will fix it personally. B fixes the motorbike and the friend pays B £500. Can B keep the £500?
**No**, B must account to the partnership for the £500 unless the partners consent otherwise.
77
A and B run a successful cake baking partnership. A customer asks B to run cake baking classes as a representative of the business. Can B keep the money paid for the classes?
**No**, B must account to the partnership for any profits even if it doesn't interfere with her duties under the partnership agreement
78
In which 10 ways can a partnership be terminated?
**Without court involvement*** By expiration* By notice in partnership at will * Bankruptcy, death or charge* By illegality**By court order*** Lack of mental capacity (Mental Capacity Act 2005)* Permanent incapacity* Prejudicial conduct* Wilfil or Persistent breaches of partnership agreement * When business can be carried on only at a loss* Just and equitable basis
79
Can a partnership exist perpetually?
**No**Technically, if there is a **change in the partners**, this effectively **brings the partnership to an end**. Note, the business will often actually continue, but it technically is a new partnership as the membership has changed.
80
What are the 2 basic types of general partnerships under the Partnership Act 1890?
1. Partnerships for a **specific term or undertaking**2. Partnerships **at will**
81
How does a partnership dissolve by expiration?
Subject to the partnership agreement:* If the partnership agreement is for a certain term, it is dissolved upon the **expiry of the term**. * If it was set up for a specific enterprise, it will be dissolved by the **completion or termination of that enterprise**. * Example: A partnership to sell drinks at a festival will end when the festival is over* Note: If a partner has paid a **premium** to another partner upon entering a partnership for a fixed term, and the partnership is **dissolved early** (except by death), a court may order **repayment of the premium** or such part the court thinks is just.
82
How does a partnership dissolve by notice?
Subject to the partnership agreement:* If a partnership was **not set up for a fixed term**, any partner can give **notice** to the other partners of their **intention to dissolve** the partnership. * Dissolution will take place on* the **date set out in the notice** or, if there is no such date, from the **date of the communication** of the notice.* If the partnership agreement is **not in writing**, the notice can be **oral*** Note, in order to protect other partners against threats of dissolution, the partnership agreement should set out a **mechanism for partners to retire instead** so the business can continue without them
83
How does a partnership dissolve by bankruptcy, death or charge?
Subject to the partnership agreement* **Death or bankruptcy** of any partner will dissolve the partnership. * If a partner **charges their share of partnership property** for a **personal debt**, the partnership may be dissolved by the other partners, at their **option**.
84
How does a partnership dissolve by illegality?
If an event occurs which makes it **unlawful** for the **partnership business to be carried on** or for the **partners to carry it** on in partnership, the partnership will be dissolved. This **cannot be modified** by the partnership agreement.Example: Failure by a partner in a law firm to renew a practising certificate would mean that the partnership would be illegal.
85
Will a partnership dissolve if a partner does not have mental capacity?
**Yes**, it will be dissolved under the Mental Capacity Act 2005
86
How is a partnership dissolved for permanent incapacity?
The other partner(s) may **apply to a court** for dissolution if a partner becomes permanently incapable of performing their part of the partnership contract.
87
How is a partnership dissolved for prejudicial conduct?
A partner may **apply to a court** for dissolution if a partner has been guilty of **conduct that would prejudicially affect** the carrying on of the business, with regard to the **nature** of the business.Example: partner sets up a business in competition with the partnership/partner obtains a criminal conviction
88
How is a partnership dissolved for wilful or persistent breach of the partnership agreement?
Partners may **apply to a court**for dissolution if: * a partner **wilfully or persistently** breaches the **partnership agreement**, or* **otherwise conducts themselves** in a way that means it is **not reasonably practicable** for the other partners to carry on in partnership with them (e.g. wilful or persistent breaches of trust and confidence)
89
Why is a partnership dissolved if it can be carried on only at a loss?
Because a partnership can only exist if it is carried on with a **view of profit.**
90
How is a partnership dissolved for a just and equitable basis?
**Court may dissolve** a partnership if circumstances have arisen which mean it is **just andequitable** for the partnership to be dissolved e.g. deadlock situations
91
What are the 2 effects of dissolution of a partnership?
1. **Authority, rights and obligations** of each partner will **continue** in order to wind up the partnership and complete unfinished transactions2. **Debts** will be paid and any **remaining partnership property will be distributed**
92
In what order is partnership property distributed upon dissolution?
* **Debts** are paid first from profits, then capital.* If assets and capital are insufficient to pay debts, partners will be **personally liable for shortfall*** If debts are cleared, **loans** made by partners to the partnership will be repaid first* If loans are repaid, **contributions** will be returned to partners* Any remaining assets will then be **divided among partners** according to the partnership agreement or in the same proportion as profits
93
How is a partnership taxed?
Governed by the **Income Tax Act** 2007. Each year, each individual partner must include in their personal income **their share of the profit** made by the partnership, **whether or not the profit was distributed** to the partner (e.g. £120,000 profit, £90,000 distributed, tax owed on share of £120,000). The income will be taxed at the appropriate rate for that partner.
94
What is an LLP?
A **Limited Liability Partnership** is essentially a **hybrid** between a limited company and a general partnership* Members have the benefit of **limited liability** * Members are still able to constitute their business as a partnership with its **associated organisational flexibility** LLPs are governed by the **Limited Liability Partnerships Act 2000** and associated legislation.Often used by large professional partnerships e.g. solicitors and accountants
95
What are the 4 requirements to form an LLP?
* **Two or more** persons * carrying on a **business in common*** with an **intention to make a profit*** **registration** at Companies House for incorporation (with a unique name and company number)Note, an LLP **cannot trade** until it has received a **certificate of incorporation**| Formed under provisions of the Limited Liability Partnerships Act 2000
96
Is a partnership agreement required for an LLP?
**No**, in the absence of acontractual agreement between the members, LLPs are governed by the **provisions of the LLPA**. Note, most LLPs will have a partnership agreement in practice.
97
What is a PSC of an LLP?
A member who: * directly or indirectly has the right to **more than 25% (i.e. 25% is insufficient) of the surplus assets on a winding up** or * directly or indirectly has **more than 25% of the voting rights** or * directly or indirectly holds the **right to appoint or remove the majority of management*** **Otherwise has the right to exercise, or actually exercises, significant influence or control** over a trust, or the members of a firm that is not a legal person but meets any of the other specified conditions in relation to the LLP.LLPs must **keep a register** of PSCs.
98
Which 2 types of documents are required to be submitted to the registrar of Companies House in order to form an LLP?
1. A **statement** that there are at least 2 persons who wish to associate to carry on a business for profit2. **Incorporation** documentsNote a **partnership agreement** is **not required**
99
What 4 pieces of information are required in the incorporation documents?
* **Name** of the LLP (must end in LLP or Limited Liability Partnership)* Details of the LLP's **registered office** location and address* Names and addresses of the **members** of the LLP (an LLP is required to have at least two designated members)* Details of **people with significant control**.Note: An LLP **may change its name at any time** by delivering a notice of the change to the Registrar of Companies. The change is **effective when the Registrar issues a certificate** of the name change
100
What is a registered office address?
The **address to which official notices may be sent**. This is usually the business address of the LLP or the address of the LLP's solicitor (often the case)
101
At what point does an LLP come into existance
When the registrar of Companies House **issues a certificate of incorporation** being satisfied that the documentation for incorporation has been properly submitted.
102
Does an LLP have separate legal personality?
**Yes**. This means that: * members have **limited liability*** it **owns property** in its own right* **contracts** are entered into in the name of the LLP* it can **sue and be sued** in its own name. * it has **perpetual succession** (i.e. exists independently of any changes to the member and, therefore, does not cease to exist if a member dies or is made bankrupt, or the like).
103
How many members are required to form an LLP?
**At least two**, who are named in the incorporation documents. * Note, if an LLP carries on business **without having at least two** members for **more than six months**, the person who carried on the business will be **jointly and severally liable with the LLP** for the debts of the LLP incurred **after the initial six months** and **while the LLP has only one member**.
104
A, B, and C open an accountancy firm as an LLP. After a year, A and B leave, but C continues to operate the firm as an LLP while looking for new partners. Five months after A and B left, the coffee machine broke, and C caused the LLP to purchase a new one on credit. Eight months after A and B left the LLP, C caused the firm to purchase a photocopier on credit for use in the office. Nine months after A and B left the firm, D and E agreed to join the LLP. Immediately after D and E became members, the LLP purchased new laptops for them on credit. Is C personally liable for any of the purchases?
* C is **not** personally liable for the cost of the coffee machine because the LLP it had not been operating with only one member for more than six months. * C is **personally liable** (jointly and severally with the LLP) for the cost of the photocopier because the LLP had been operating with only one member for more than six months when the machine was purchased.* C is **not** personally liable for the cost of the computers, because when they were purchased, the LLP once again had more than one member.
105
Can new members be added to an LLP after incorporation?
**Yes**,new members may be added by **unanimous consent** of all the current members (unless an LLP agreement provides otherwise). The **LLP must notify the Registrar of Companies** of changes in membership or in the identity of the designated members **within 14 days** of the change. Failure to comply with these requirements is an **offence**.
106
What is a designated member of an LLP?
**General role** is to perform the **administrative and filing** duties of the LLP, including to: * **Appoint (and remove)** **auditors*** Submit **annual confirmation** statements* **Sign and file accounts*** Comply with **statutory filing requirements** e.g. filing registration documents and notifying Companies House of changes to the members of the LLP and charges entered into by the LLPNote, If an LLP **does not designate** any members (there must be **at least 2**), the law will treat **all the members** as designated members.
107
Who has authority to bind an LLP?
**Every member** of an LLP isan agent of the LLP. Members:* owe a **duty of care** to the LLP* may bind the LLP in **contract*** can make the LLP liable in **tort** if they act with **actual or apparent authority**. Note, an LLP is **not bound** by anything done by a member if: * the member has **no authority** to act **and*** the person they are dealing with **knows** that the member has **no authority**, or **does not know or believe that they are a member** of the LLP.
108
What is the key difference between general partnerships and LLPs in terms of actual and ostensible/apparent authority?
The **LLP will be bound** by acts of actual or ostensible/apparent authority, not the individual members.
109
How does a member of an LLP cease to be a member?
* Giving **reasonable notice** to the other **members** and * Giving **notice to the Registrar** at Companies House within **14 days**. Note, the former member is regarded (in relation to any person dealing with the LLP) as still being a member **unless that person has been notified** or **notice has been sent to the Registrar** of Companies.
110
ABC LLP has four members who all share profits equally and have an equal say in running the LLP. Which members are PSCs?
**None** would constitute PSCs (because **each has exactly a 25% interest** rather than morethan a 25% interest). Note: if ABC LLP had **three members** with the same rights, **all the members would be PSCs** as they would satisfy either of the first two conditions.
111
How is capital and profit split between members of an LLP?
**Equally** if there is no provision to the contrary in the LLP agreement.
112
Are members of an LLP entitled to remuneration?
**No** but the LLP agreement may provide for a salary to be paid to certain members
113
Does an LLP have to indemnify members for anything?
**Yes** members are entitled to be reimbursed by the LLP in respect of:* **payments made and personal liabilities** incurred by the member **in the conduct of the business** of the LLP* anything done for the **preservation of the business or property** of the LLP
114
Do members of an LLP have a right to access and inspect books and records of the LLP?
**Yes**
115
Who manages an LLP?
* In the absence of an agreement otherwise, **every member** may take part in the management of the LLP* A **majority of members** can decide any **'ordinary' matter**s connected with the business of the LLP* Note, **unanimous consent** is required for any **change in the nature** of the business.
116
Do members of an LLP have a duty to account?
**Yes**:* if a member carries on any **business in competition** with the LLP **without the consent** of the LLP, they must account for all profits made by that business. * for any **personal benefit** they derived **without the consent** of the LLP from any **transaction concerning the LLP**, or from their **use of the property of the LLP, name, or business connection**.
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Who is liable for acts of members of an LLP?
The **LLP** is liable to the **same extent** as the member who committed the act.Generally, the **members of an LLP are not liable** for the wrongful acts or omissions of other members **committed in the course of the business** of the LLP or with the **LLP's authority**.
118
Which documents are LLPs required to file and make public?
Among other things:* Annual **accounts*** Annual **confirmation statement** (i.e. a statement confirming or updating information on file with Companies House)* Details of the **appointment and removal of members*** Details of any **changes to the details of the members** (e.g. changes in a member's name or address) * Details of any **changes to the registered name or registered office** of the LLP
119
Are members liable for the debts of LLPs?
**No** the only liability of a member of an LLP is their **capitalcontribution**. If this is paid up and the **LLP agreement does not provide for any further contribution**, the member would owe nothing on winding up.
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Is there personal liability for a member of an LLP?
**Yes**.* The rules regarding **wrongful and fraudulent trading** in the Insolvency Act 1986 apply to members (i.e. it is possible for individuals who acted wrongfully or fraudulently to be held personally liable for the debts of the LLP in the event of **insolvency**).* **Clawback provisions** also apply i.e. if a member withdraws property (e.g. share of profits, salary, repayment of or payment of interest on a loan to the LP, or any other withdrawal of property) within the period of **two years before the LLP goes into insolvent liquidation**, and it is proved that at the **time of the withdrawal** they **knew or had reasonable ground** for believing that the LP was unable to pay its debts, or would become unable to pay its debts as a result of the withdrawal, the **court may order the member to contribute to the assets of the LLP**.
121
How can an LLP cease to exist?
1. Voluntary striking off and dissolution2. Insolvency
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What can happen to an LLP in the event of insolvency?
LLP can be:* **liquidated** (voluntarily or compulsorily)* put into **administration** * subject of a **voluntary arrangement** (a composition with its creditors)* A fixed charge **receiver** or an administrative receiver (i.e. a receiver or manager of the whole, or substantially the whole, of an LLP's property) may be appointed by certain secured creditors of the LP.* LLP may enter into a **moratorium**.
123
In which circumstances may an LLP be struck off?
Subject to certain limitations:By a **majority of members** applying to the Registrar of Companies and giving notice as required:* If they decide it is **no longer needed** (e.g. if there is only one member left)* If the LLP is **dormant and nontrading****By the Registrar directly** if the Registrar:* has **reason to believe it is not carrying on business**, e.g. because filing requirements have not been complied with or documents sent to the registered office are returned.
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Are there any circumstances in which it is not possible to strike off an LLP?
* The LLP has **traded or otherwise carried on business** in the **last three months*** The LLP has **changed its name** in the **last three months*** The LLP is the subject of any **insolvency** proceeding.
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What are the notice requirements for striking off an LLP?
**Members making the application** are required to notify: * other **members*** **creditors*** any **employees*** **trustee** of any pension fund On receipt of an application to strike off, the **Registrar of Companies** will: * publish notice of the proposed striking off in the **London Gazette**. This is to allow any interested parties the **opportunity to object**. * strike off the LLP **three months after the date of the notice** and the LP will be dissolved.
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Who is required to pay tax for an LLP?
* **Members** of an LLP are taxed individually for **income tax** and on their **share of the gains** made on disposal of assets. * For **inheritance tax purposes**, the members of an LLP are treated the same as partners in a general partnership.* An LLP does **not pay corporation tax**.
127
Is stamp duty land tax owed on property transferred to the LLP?
No stamp duty land tax is owed if property is transferred to the LP **within one year of the LP's incorporation** if:* Transferred by a person: 1. who **is/was a partner** in a partnership comprised of the members of the LLP or 2. who **holds the property as a bare trustee** for a partner in such a partnership; **and** * The **proportional ownership** of the property in the LLP **remains the same as the proportional ownership of the property** in the partnership.
128
What are the rules regarding the name of private and public companies
* **Private**: Must end in Limited or Ltd or the Welsh equivalent* **Public**: Must end in Public Limited Company or Plc or Welsh equivalent
129
What are the rules regarding registration of private and public companies
* **Private**: Any company limited by shares registered at Companies House that is not a Plc* **Public**: Must be registered as a Public Limited Company
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What are the rules regarding the liability of owners of private and public companies
* **Private**: Limited liability* **Public**: Limited liability
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What are the rules regarding directors of private and public companies
* **Private**: Minimum of one* **Public**: Minimum of two
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What are the rules regarding company secretaries of private and public companies
* **Private**: Not required* **Public**: Required and must be suitably qualified
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What are the rules regarding the sale of shares of private and public companies
* **Private**: Sold privately* **Public**: Can be sold to public and on the stock exchange if a listing is obtained
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What are the rules regarding the minimum shareholding of private and public companies
* **Private**: No statutory requirement* **Public**: Minimum nominal value of £50,000
135
What are the rules regarding trading of private and public companies
* **Private**: No minimum or maximum requirement* **Public**: Requires a trading certificate to commence trading
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What are the rules regarding accounts and audit of private and public companies
* **Private**: Accounts must be filed within 9 months of the accounting reference date. Certain small companies are exempt from audit* **Public**: Accounts must be filed within 6 months of the accounting reference date and must be audited.
137
What are the different types of registered company?
* Limited Company1. Limited by Shares (Private Company/Public Company)2. Limited by Guarantee* Unlimited Company
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What are unlimited companies?
* The members are **personally liable** for all the debts of the company* It has a **legal personality separate from its members*** It is **not obliged to publish its accounts** and so enjoys a higher degree of confidentiality than a limited company.* This form of company is **rare**.
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What are the limited companies and what are the 2 most common types?
Liability of owners (called members) in a limited company is **restricted**. **Limited by Guarantee*** Requires its members to pay a **fixed, guaranteed amount** (usually £1) in the event of the company being wound up. * Usually used for **not-for-profit organisations**, such as charities (no need for large capital contributions for business to run)* **No shareholders** but the company must have **at least one member (or guarantor)**.**Limited by Shares*** **Members (also called shareholders) do not have personal liability** for obligations of the company beyond the amount they agreed to pay for their shares. * If **fully paid up**, the shareholder has no personal liability to pay any more upon insolvency. * Classified either as **private limited companies** or **public limited companies**
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Why are companies limited by guarantee not used as trading companies?
Creditors are usually unlikely to provide credit when there may be **little chance of recovering the money** if the company does not pay.
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What is the main difference between a private limited company and a public limited company?
A private limited company is **not permitted to issue its shares to the public**, they are allowed to be sold only by private agreement.
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What is a promotor?
* The person who **takes the necessary steps to form a company** i.e. arranges for investors and registration (note, no statutory definition).* Promotor owes **fiduciary duties** (e.g. duty of good faith, must account for profits, declare personal interests), creates the **Memorandum of Association** and may enter **pre-incorporation contracts**. * Note, professional advisors e.g. solicitors and accountants are not considered promoters simply because they give advice.
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What is a Memorandum of Association?
* A statement **authenticated/signed** by persons wishing to become members of a company. * It indicates that the **subscribers (signers) wish to form** the company and **agree to become members** of the company. * It must be **delivered to the Registrar of Companies** along with the application for registration.
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What are pre-incorporation contracts?
* **Contractual arrangements** entered into by promotors **before a company exists** to enable the company to operate once it is registered and a certificate of incorporation is issued. * Because the company is not yet in existence, it cannot be a party to such contracts. Therefore, both common law and the Companies Act 2006 provide that a **promoter will be personally liable** on pre-incorporation contracts* This **liability does not disappear once the company is formed**-the promoter remains personally liable even after the company is formed unless different arrangements are made to **protect the promotor**
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What 4 things can a promotor do to protect itself?
* Prepare the contract in **draft** and **do not execute it** until the company has been incorporated* Enter a **novation agreement** after the company is incorporated (i.e. a contract between the the **promoter, the company, and the third party** under which the parties agree to **substitute the company for the promoter**, releasing the promoter from personal liability)* After the company is incorporated, enter into a contract with it **assigning the benefit** of the pre-incorporation contract to the company **in exchange for the company's agreement to indemnify** the promoter for any liability to the other contracting party* Use a **shelf company** to enter the contract
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What is a shelf company?
Standard form companies that are **pre-incorporated**, but have **never traded**, often set up by solicitors, that the promoter can simply **purchase and take over** by changing basic details like the members.
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What documents must be filed in order to form a company?
1. **Memorandum** of Association2. **IN01** (i.e. application for registration)Note, the relevant **fee** must accompany the documents
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What are the 10 requirements of an application for registration of a company?
* Proposed **name** * Location of the **registered office** * Details of the company's **business activity** and **SIC** (Standard Industrial Classification) code;* Whether the company will be **limited by shares or guarantee*** Whether the company is **private or public*** Details of **subscribers*** A **statement of capital and initial shareholdings*** A statement of the **proposed officers** (directors who may, but need not be members of the company), including their **residential address**, and the **company secetary** if applicable* Details of p**ersons with significant control** * A **statement of compliance** with the terms of the Companies Act 2006
149
What 5 rules apply to the company name?
* Not be the **same as**, or **essentially the same as**, the name of an already incorporated company* End in **Limited** or **Ltd** or **Public Limited Company** or **Plc** (or the Welsh equivalent if registered in Wales), as applicable (Company limited by guarantee is exempt from this rule)* Cannot be a name that is deemed **offensive*** **Approval** is required if any connection to **Government or local authority** is suggested* **Approval** is required for a name that contains any **sensitive words**, such as Auditor, Chartered, Law Commission, or Medical Centre.
150
Can a company change its name?
**Yes** by **special resolution** of the members or as provided in the articles. The company must forward a copy of the **resolution** (or a **statement that the change was per the articles**) to the **Registrar of Companies**, give the Registrar **notice** of the change, and pay a **fee**.
151
What is the statement of capital and initial shareholdings that is required in the application for registration?
If the company is **limited by shares**, the IN01 must include:* **Total number** of shares to be taken by the **subscribers of the Memorandum of Association*** The **aggregate nominal value** of those shares * If the **shares are to be divided into classes with varying rights**, a description of those classes and rights * The **amount that will be paid up** by shareholders and **any amount left unpaid** for the shares.
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What is the aggregate nominal value of shares?
* The aggregate amount of the **least amount for which each share is to be sold**, which often is stated as £1 per share in private companies.* This has **nothing to do with what the shares are actually sold for**, although it can be more realistic * If the directors approve a sale for **less than the stated value**, they can be **liable for breach of duty**
153
What is a certificate of incorporation?
* A certificate **issued by the Registrar** once they have inspected the registration documents and are satisfied they are in order* It contains the **company's unique registration number**. * It is essentially the **birth certificate** of the company, and it is **from the date stated on this certificate** that the company becomes a legal entity and can **legally commence trading** with the protection of limited liability.
154
When can a company legally commence trading?
From the date on the certificate of incorporation.
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What is a company number used for?
**Identifying** the company. It **should be used on any documentation or contracts** relevant to the company in future as other details e.g. name, directors etc. may change over time.
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What is the constitution of a company?
* Its **articles of association** plus any resolutions or agreements adopted by the members to amend its articles of association. * **All companies must have articles** which regulate the **internal affairs** of the company and create a **contract between the company and the members**.* The Secretary of State has prescribed **model sets of articles** for the various types of companies. The model articles **apply automatically** if a company has not drafted and submitted amended/bespoke articles to Companies House.
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Do articles of association need to be submitted with an application to register a company?
**No**, if they are not submitted, the model articles will apply.
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What are variations to the model articles called?
**Special articles*** They must be **filed at Companies House** and are available to the public. * Special articles **govern** and should always be checked. * Most provisions of the model articles can be changed but they **can't be changed in a way that violates the Companies Act**.
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What are the 7 main provisions covered by Articles of Association?
* **Directors' meetings** and **decision making*** **Appointment and removal** of directors* **Share capital** (including issuing, allotting, and transferring shares)* **Rights attached to shares**, including voting and dividends* **Shareholder meetings** (including, for example, notice and quorum requirements).* Power to **borrow** * Powers and duties of **directors**
160
What are the objects of a company?
The **articles of association** can **restrict the objectives** of the company (e.g. "The object of this Company is to operate restaurants").**Restricted Objects*** Directors have a **duty to adhere** to restrictions in the articles. * If they do not, they **breach their duty** and **may be subject to an injunction or an equitable action** by the company for any damage caused. * However, the company action that was beyond the scope of what was authorised is nevertheless **valid**.**Unrestricted Objects*** If there are no restrictions, the company is **free to carry on commercial activity of any kind**. * The model articles do not include any restriction so most newly formed companies are unrestricted.
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What is the legal effect of Articles of Association?
* The articles form a **contract between the company** and **each of the shareholders**, and the **shareholders with each other**. * Articles **bind all shareholders** whether or not they sign them* The **right of shareholders to enforce** provisions of the articles relates to their **membership rights only** (e.g. to enforce dividend or voting rights against the company). A shareholder is unable to enforce the articles acting in any other capacity, e.g. as a director of the company.Example: A director (who is also a member) has a dispute with the company in its capacity as director. Articles require all disputes to to be arbitrated before court. As the dispute was in the director's capacity as director, they can go straight to court.
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Articles of Association state that an individual (who was also a member) would always be employed as a solicitor for the company. Is this provision enforceable?
**No**. The member in this question would be **attempting to enforce a personal employment right**, rather than his rights as a member of the company.
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What is a Shareholders' Agreement?
Shareholders may wish to enter into a **contract to regulate their affairs** in addition to the articles known as a shareholders' agreement. This is a **private contractual agreement** which **binds only those members who sign** it. Note, despite the name, **other parties** may enter this agreement e.g. directors or the company itself. Example:* They may agree that the company's constitution cannot be changed without unanimous consent (Articles are not permitted to contain this provision, under the Companies Act a special resolution is required and this rule can't be amended)* They may agree none of them will compete with the company* They may agree not to vote to remove one or more parties to the agreement as a director of the company.
164
Can third parties obtain the benefit of Articles of Association?
**No**. Articles of Association arespecifically excluded from the provisions of the Contracts (Rights of Third Parties) Act 1999.This Act enables **third parties** to obtain the **benefit of contracts to which they are not a party** and **enforce the terms** of such a contract, provided they are **specifically identified** in the contract.
165
Can Articles of Association be amended?
* **Yes** by **special resolution** (more than 75% of the members) if not entrenched. **Entrenched** articles may be amended by following the prescribed process in the articles. * Alterations must be in the **best interests of the company** (can be set aside by court if not).* Note, an alteration **cannot require a shareholder to increase their liability** to the company i.e. force a shareholder to subscribe for more shares
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What does entrenchment of articles mean?
Entrenched articles require a **more onerous process** for alteration than those required for a special resolution (e.g. approval by all members). * Provision for entrenchment may be made in the company's articles on **formation** or by a **special resolution** of the members* The company must give **notice to the Registrar** that its articles include such a restriction.* The articles may be revised if a special resolution of the members is passed so entrenched articles **cannot be drafted to attempt to prevent amendment.**
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Can an alteration to the Articles of Association be challenged by shareholders?
* Generally, the **shareholders** make this determination.* If the shareholders make an alteration that **no reasonable person** would consider to be for the benefit of the company, a **shareholder who did not vote in favour** of the alteration can challenge it by making an application to court. * If the court agrees, it **can set the alteration aside**. * In making its determination, the court will need to decide **whether the alteration was bona fide** (i.e. genuinely/legitimately and in good faith) **made in the best interests** of the company as a whole.* An **alternation adversely affecting minority shareholders** is **not sufficient grounds** for objection if it is made in good faith in the interests of the company
168
Can alterations adversely affecting minority interests be made to Articles of Association?
The fact that an amendment **adversely affects minority shareholders** is **not sufficient grounds for objection** if the alteration is **made in good faith in the interests of the company**. Note, an alteration **cannot be in the interests of the company** as a whole **if it discriminates against some members** rather than others, so the courts will consider whether the benefit derived from the alteration is one that any individual hypothetical member could enjoy.
169
A company alters its articles to require the compulsory purchase of the shares of any member carrying out a competing business with the company. Could the court set this alteration aside?
**No**, the alteration is bona fide in the best interests of the company as a whole.
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A company alters its articles to enable a compulsory purchase of the shares of minority shareholders who were refusing to inject further capital into the company. Could the court set this alteration aside?
**Yes**. This alteration was for the **benefit of the majority shareholders** rather than the **company as a whole**, because it would have been possible for the majority shareholders to remove the minority and then refuse to provide the capital.
171
What are the 6 things a company can do because of separate legal personality?
* **Own property** in its own name* **Enter into contracts** in its own name* Can **borrow money** and **grant security** in its own name* **Is taxed separately** from its members* **Can sue (and be sued)** in its own name* Has **perpetual succession.**
172
In which 3 situations might the shareholders and directors of a company be held personally liable for the debts of a company?
1. Forming a company for **fraudulent purposes/to avoid an existing obligation** e.g. a non-solicitation clause2. **Fraudulent and wrongful trading**3. PLC trading **without a Trading Certificate**
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What is fraudulent and wrongful trading?
If a director causes the company to trade while **knowing the company is insolvent**, the director may be charged with the **civil offence of wrongful trading** or the **criminal offence of fraudulent trading** and incur personal **fines and other penalties**
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What happens if a public company trades without a Trading Certificate?
Directors of the PLC can be held **personally liable for any losses** arising as a result.
175
What is the purpose of group consolidated accounts?
To **recognise the common link** between groups of companies. Note, **even where group accounts are required**, the subsidiary companies are **not liable for the debts** of the other subsidiaries or parent company, nor is the parent company liable for the debts of the subsidiaries.
176
What is a director?
* An **officer** of the company (a human agent of the company)* Responsible for the **day-to-day management** of the company* **Identified by function** rather than title
177
Do shareholders have the power to manage a company?
The power of a shareholder (who is not also a director) to manage is limited to more **fundamental decisions**. **Directors** are responsible for the **day-to-day management**Certain decisions are **reserved** for shareholders in the **articles** and under the **Companies Act 2006**
178
In a company, are the powers of management and ownership separate?
**Yes**, company structure is designed to have:* one set of people **putting money in** (shareholders) **and** * another **spending the money** (directors)This is to **encourage investment** (limited liability and don't have to actually run the company)Even in small companies, the **roles are separate** and certain formalities must be followed.
179
What are the requirements under the Companies Act 2006 in relation to appointment of directors?
* **Private company** must have at least **one** director* **Public company** must have at least **two*** **At least one** director of a company must be a **natural person** and **at least 16** years of age. * The first director(s) of a company is/are **those specified on the registration documents** on incorporation.
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How are directors appointed?
* The appointment procedure for subsequent/new directors is **usually in the company's articles.*** The **model articles** provide that a director can be appointed by an **ordinary resolution of the shareholders** or by a **decision of the directors.*** The model articles will be **often be modified** to allow for decision of the directors but only subject to approval of the appointment by the shareholders at their next meeting.* The company must **notify the Registrar of Companies** within **14 days** of any new director appointments/removals andof any changes to the details (e.g. their address) of existing directors
181
When must a company notify the Registrar of Companies of any new director appointments/removals and of any changes to the details of existing directors
Within **14** days
182
What are the 7 types of directors?
* **De jure** directors* **De facto** directors* **Shadow** directors* **Executive** directors* **Non-executive** directors* **Alternate** directors* **Nominee** directors
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What is a de jure director?
A director who has been **formally and properly appointed** and registered as such with the Companies House. A **private company** must have **at least one** de jure director and a **public company** must have **at least two**.Most directors are de jure directors.
184
What is a de facto director?
Someone who has **not been formally appointed and registered** with the Registrar of Companies but who **carries out all the duties** of and **behaves as a director**. Such a person is **held out as a director by the company**, and **claims to be a director**, despite the fact that they have never actually been appointed as such.De facto directors usually want the power of being a director but not the responsibility, obligations and duties.
185
What is a shadow director?
* A person in accordance with whose **directions or instructions** the **directors** of the company are **accustomed to act** (i.e. puppet master). If directors don't **always** follow the advice, the person **won't be a shadow director** * This is typically an individual who still wants to **exert some control** over a company, but in a way that **evades any potential responsibility or liability** connected with the office of a director, because, e.g. they are a disqualified director. * Shadow directors are **treated the same as de facto or de jure** directors under the Companies Act 2006.* **Advisors** acting for the company in a **professional capacity** are **specifically excluded** from the definition of a shadow director by the Companies Act 2006.
186
What is an executive director?
A director that is responsiblefor the **day-to-day running** of the company and is an **employee** of the company.It is a function of **good corporate governance** for a board to consist of a **mixture** of executive and non-executive directors (most small companies only have executive directors).
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What is a non-executive director?
Usually a **consultant** and takes more of a **supervisory role** overseeing the activity of the executive directors. Non-executive directors are **not employees** but are paid a fee for attending board meetings.It is a function of **good corporate governance** for a board to consist of a **mixture** of executive and non-executive directors.
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What is an alternate director?
Someone **appointed by a director** to **attend and vote at board meetings** when the director is unable to attend.
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What is a nominee director?
A director appointed to the board to **represent the interests of a particular stakeholder**, usuallya shareholder. Nominee directors will still be **de jure directors** and have all the rights and duties expected of other directors. A nominee director **must still act in the best interests of the company**, even though they have been appointed to represent the interests of a particular stakeholder.
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Where is the power of directors derived from?
The **Articles of Association**.* The **model articles** give the directors the power to exercise **all of the powers of the company except where the articles specifically provide otherwise**. * Note, **shareholders retain an element of control** over the directors, as the model articles also state that the shareholders may, by **special resolution direct the directors to take, or refrain from taking, specified action**.Directors take all company decisions unless they have been reserved for the shareholders by the articles or the Companies Act 2006.
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Can a director act alone (if there is more than one)?
Under the **model articles**, directors are required by the to **exercise their powers collectively** as a board. However, it is **permitted for the board to delegate** their powers to a person or committee as they think fit.
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What type of decisions require shareholder approval?
Decisions **approving transaction** in which a **director has a financial interest**. This ensures that the **directors are acting in the best interests** of the company. Example: the board needs shareholder approval to offer a director an employment contractfor longer than two years.
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What type of decisions are reserved for shareholders?
Certain decisions are reserved to the shareholders by **legislation** (the Companies Act 2006) or in the **articles of association.**Example: changing the articles requires a special resolution.
194
What is a resolution?
A **company decision*** **Board** resolutions are made by the board of directors* **Shareholder** resolutions are made by the members
195
What types of authority do directors have to bind a company?
Directors are **agents** of the company so they can bind thecompany in contract or for liability in tort if they act with **actual** or **apparent/ostensible** authority. Note: The Companies Act 2006 provides that acts of a person acting as a director are **valid** notwithstanding that it is afterwards discovered that there was a **defect in their appointment**, that they were **disqualified** from holding office, that they had **ceased to hold office**, or that they were **not entitled to vote** on the matter in question.
196
What is actual authority of a director?
* Actual authority can be **expressly granted** in the **director's service contract**, the **articles** or by a **resolution** (i.e. a director has actual authority to do whatever the articles or a resolution say the director can do). * Note, generally the articles usually require the board to act collectively, but the articles or a board resolution may **delegate authority over specific matters to a particular director** or group of directors.Example: board appointing Director A to negotiate a particular contract will give Director A actual authority to negotiate.
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What is apparent/ostensible authority of a director?
* Apparent/ostensible authority is authority a **third party reasonably believes** the director has **based on communication from the company** including merely holding the director out to the third party as a director (the director will have authority to do whatever a director ordinarily would have authority to do **unless the third party has reason to know** the person lacked such authority).* Note, a director usually has no power to bind the company **except when the directors act as a board** so apparent authority **should not arise often**, but apparent authority **could arise through past dealings**.Example: Board honours 3 contracts Director A has made (lacking actual authority) with a third party for purchase of office supplies. The fourth time, the board treis to refuse to honour the contract as A did not have authority but a court would likely find A had apparent authority.
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Can directors give apparent authority to themselves?
**No**, the **representation must come from the company** (and can be made by words or conduct)Example: a director at a trade fair saying she has authority to enter a contract and showing the trader her business card **is not a representation from the company** so therefore does not give her apparent authority. The company would only be liable if it confirmed to the trader that she had authority.
199
In what ways can a company enter a contract?
* Under their **seal** (execution by affixing their seal to the documents)* By a **person with authority** to act on behalf of the company (execution by the signature of **either** 1. **two directors** or 2. a **director and a secretary**, or 3. a **single director if signed in the presence of a witness** who attests the signature)
200
What are the 9 duties of directors?
* Basic **fiduciary duty** * Duty to **act within powers*** Duty to **promote the success** of the company* Duty to exercise **reasonable care, skill and diligence*** Duty to exercise **independent judgment*** Duty to **avoid conflicts** of interest* Duty to **account** for secret profit* Duty **not to accept benefits from third parties*** Duty to **declare interest** in proposed or existing transactions or arrangementsThese are derived from a number of sources, mainly the **common law**, the **articles**, and **statute**. Directors will also have obligations in their **employment contracts****All** directors have duties, formally appointed or not
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What are the consequences of a breach of a director's duty?
* The director could be required to **compensate** the company for any loss caused as a result of their breach* If any profit was made or benefit gained, they could be required to **account to the company** for it. Note, it is possible for the shareholders to **ratify the conduct** of the director by passing an **ordinary resolution** (this is rare). If the director is also a member (or their child/spouse is), their vote would be disregarded.
202
To whom are directors' duties owed?
To the **company** i.e. not the shareholders, creditors or other directors
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When are directors no longer bound by directors's duties?
Directors may **still be subject** to statutory and fiduciary duties owed for the period when they were a director, **even after they have ceased being a director**. Example: a person who was a director **may not exploit property, or information, or opportunities** of which the director **became aware while a director**.
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Can directors be exempt from performing their duties?
**No**, any provision in the **articles** or a **contract** that **purports to exempt a director for liability** that would otherwise attach to the director for **breach of duty, negligence, or breach of trust** in relation to the company is **void**. * Note, a company may purchase **insurance** for the directors to protect them against such liability.* The company may also **indemnify** directors against liability they incur **on claims by third parties** against the directors based on their position with the company **except with respect to criminal or regulatory fines**.
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What is the fiduciary duty of directors?
A **common law** fiduciary duty to **act in good faith** and in the **best interest of the company as a whole**
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What is the duty of directors to act within powers?
A director must act **in accordance** with the **company's constitution** and exercise powers **only for the purposes for which they are conferred**.Examples of breaches:* Issuing new shares to fight a takeover bid (even if in best interests of company) as the power to issues shares is to raise capital* A director's actual authority extents to entering contracts up to value of £1000, and the director enters into a contract for £1,500
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What is the duty of directors to promote the success of the company?
* A director must act **in the way the director considers, in good faith, would be most likely to promote the success** of the company for the **benefit of its members as a whole**. [Note, this is a **subjective** test, not what a reasonable director considers]* In deciding what's best, directors are not limited to considering only what will maximise profit due to the concept of **'enlightened shareholder value'** in the Companies Act 2006 **except** when the company is **insolvent** or on the **brink of insolvency** (in which case the directors must act in the interests of the creditors).* Bad decisions don't breach the duty unless it was **so ridiculous it shows bad faith** as the duty acknowledges risk taking is required.* As the board makes decisions on a majority basis, a **director is not in breach if he disagreed** with the board and would have made a different decision as a sole director.
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What 6 factors should be considered to determine 'enlightened shareholder value'?
Directors are required to have regard to **all** of the following (amongst other matters):* The likely consequences of any decision in the **long term*** The interests of the company's **employees*** The need to foster the company's business **relationships with other stakeholders** (e.g. suppliers and customers)* The impact of the company's operations on the **community and the environment*** The desirability of the company maintaining a **reputation** for high standards of business conduct* The need to **act fairly as between members** of the company.Note, directors are required to **consider each factor** but **after considering**, they **can ignore them** e.g. directors buy a business with an appalling environmental history, there is no breach if they note in the minutes of the meeting that they considered the factors and they believe the decision is in the best interests of the company anyway.
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When a company is insolvent or on the brink of insolvency, which directors' duty changes?
Duty to **promote the success** of the companyDirectors must consider or act in theinterests of the **creditors** of the company, i.e. the duty to shareholders is displaced.
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What is the duty of directors to exercise reasonable care, skill and diligence?
A director must exercise the **care, skill, and diligence** that would be exercised by a **reasonably diligent person** with:* The **general knowledge, skill, and experience** that may **reasonably be expected** of a **person carrying out the functions** carried out by the director in relation to the company (an **objective** test); **and*** The **general knowledge, skill, and experience** the **director in question actually has** (a **subjective** test).Each director is judged by **whichever standard applicable to the director is higher**. A director with no more knowledge, skill, and experience than reasonably expected is judged under the objective test, but a director with more is judged under the subjective standard.The duty relates largely to **incompetence** or **negligence**.
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Directors spent 5 minutes considering spending £20 million. Is there any breach of duty?
**Yes**, breach of the duty to exercise reasonable care, skill and diligence.
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What is the duty of directors to exercise independant judgement?
A director must exercise independent judgment, **without subordinating their powers to the will of others**.This duty is **not breached** by:* a director acting in accordance with an **agreement** which has been entered into by the company, or in a way authorised by the company's **constitution/articles** and is in the best interests of the company. Note, if the director entered into a contract to behave in a certain way at board meetings, their would be a breach.* a director seeking **independent advice from experts**, so long as the **director makes the final decision** and does not delegate their decision making to the expert* a director **deferring to the judgement of a fellow director expert** (even if they turn out to be a fraudster) as long as there is no total surrender of responsibility
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A director asked a family law solicitor for advice on an M&A deal. Is there a breach of the director's duties?
**Yes**, the director has breached the duty to exercise **independant judgment**. There would not be a breach if they approached a corporate M&A lawyer.
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A director is absent, inactive and delegates their power to another. Is there a breach of the director's duties?
**Yes**, the director has breached the duty to exercise **independant judgment**
215
What is the duty of directors to avoid conflicts of interest?
A director must avoid a situation in which they **have, or can have**, a **direct or indirect interest** that **conflicts**, **or possibly may conflict**, with the **interests of the company** (e.g. a situation that would benefit a spouse/close relative/some other business the director has a significant interest in would be indirect). This applies in particular to the exploitation of any **property**, **information**, or **opportunity** (and it is **irrelevant whether the company could take advantage** of the property, information, or opportunity) [Note, transactional arrangements are caught by a different duty].There can be a breach even if there was **no bad faith** by the director, there was **no actual conflict** and there is **no quantifiable loss** to the company. A breach also cannot be avoided by **resigning**.Note that **no duty is breached** if the conflict of interest relates to: * a transaction with the **company** itself and the **board knows** the director has an interest * the situation **cannot reasonably be regarded as likely** to give rise to a conflict of interest, or * the matter has been **authorised by the directors.**
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What is the duty of directors to account for secret profit?
A director **should not make an unauthorised profit** from the company.However a secret profit **can be authorised** by the directors.
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What is the duty of directors to not accept benefits from third parties?
A director is **not allowed to accept** a **benefit from a third party** conferred **by reason of being a director**, or **doing (or not doing) anything as director**. **Exception**: where the **benefit cannot reasonably be regarded as likely to give rise to a conflict** of interest e.g. corporate hospitalityTo avoid a breach, directors should **comply with their company's policy** on the Bribery Act and **disclose any gifts or benefits** they receive.
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A director accepts a bribe from a supplier to order goods from that supplier over other suppliers who may present better values to the company. Is there a breach of the director's duties?
**Yes**, the director has breached its **duty not to accept benefits from third parties**.
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A director attents a football match as an invitee of a prospective supplier and then buys supplies from them. Is there a breach of the director's duties?
**No**, there is no breach of the duty not to accept benefits from third parties because the **benefit cannot reasonably be regarded as likely to give rise to a conflict**
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What is the duty of directors to declare interest in proposed or existing transactions or arrangements?
If a director is **in any way**, directly or indirectly, **interested in a proposed transaction or arrangement** with the company, **or becomes interested in an existing transaction**, they must give the other directors **notice** of the interest before entering into, or continuing with, the transaction or arrangement.Exceptions:A director is **not required to declare** an interest if:* it could **not reasonably be regarded as likely to give rise to a conflict** of interest e.g. if director is not aware of the transaction* the other directors are **already aware** of it* it **concerns terms of the director's service contract** that have been or are to be considered by the board of directors.Note, transactional arrangements are caught under this duty, **not** the duty to avoid conflicts of interest
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What form of notice is required under the duty of directors to declare interest in proposed or existing transactions or arrangements?
* **No particular form** of disclosure is required. The statute permits disclosure by **written** notice, **general** notice, or **oral** notice at a meeting of the directors. Notice only needs to be **given once**.* The notice must include the **nature** and **extent** of the interest (e.g. "I own the company with which we are dealing", or "My brother-in-law owns the company with which we are dealing", or "I own 20% of the voting shares in the company with which we are dealing", as opposed to "I just want to let you know I have a personal interest in this transaction"). * Note that **disclosure to the members is not sufficient**.* Under the **model articles**, a director who is interested in an actual or proposed transaction with the company **usually cannot form the quorum** on that decision.
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A director gave the board a list of companies in which he or a family member is shareholder or director. The company considers entering a transaction with one of the companies 20 years later. Has there been a breach of the director's duties?
**No**, the duty to declare interest in proposed or existing transactions or arrangements has been complied with. **Notice only needs to be given once**
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A caterer has a contract in place with a company to provide corporate lunches. One of the directors marries the caterer 5 years into the contract. Does the director have a duty to declare this interest in the existing transaction?
**Yes**
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Are companies permitted to make a loan/guarantee/give security for a loan to a director by a third party?
**Only if approved by the members** of the company.
225
How is the conduct of board meetings regulated?
The **articles** usually have provisions governing the conduct of board meetings, including:* **calling** a meeting, * **votes** required for decision* **quorum** and * **written resolutions.**It is almost entirely unregulated by the Companies Act 2006.
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What are the rules with regard to calling a board meeting under the model articles?
* **Any director** may call a board meeting by giving **reasonable notice** of the meeting to the other directors (unless they have waived their entitlement to notice of that meeting) or by **authorising the company secretary** (if the company has one) **to give notice**. * What constitutes 'reasonable notice' will **depend on the facts** but could be as little as a few minutes for a non-contentious issue, if all the directors work in the same office.* Meetings may be by **phone**, by **video conference**, or by **other electronic means**. The model articles require only that each director be **able to communicate with the others**.
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What must a notice to call a board meeting contain?
The notice **does not need to be in writing** but must indicate its proposed **date** and **time**, **location**, and, if it is anticipated that the directors participating will not be in the same place, **how it is proposed thatthey should communicate** with each other during the meeting.Notice of a directors' meeting **must be given to each director unless they have waived their entitlement** to notice of that meeting.
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How are decisions made in a board meeting under the model articles?
By a **majority vote** (i.e. **more than half in favour**. If it is 50:50, the decision will not pass).The **chairman of the board has a casting vote** in the event of deadlock Note, under the model articles directors are **prohibited from voting** (and **counting towards the quorum**) on resolutions in which they have an **interest**, subject to certain exceptions.
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What is the quorum required for a board meeting under the model articles?
The quorum (i.e. the **number of directors who must particpate** to make the meeting valid) is **no less than two**. If a **director has a personal interest** in a matter, they **may be prevented from counting** in the quorum.
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A company with the model articles has three directors: A, B, and C. C is the chairman. A. If only C turns up to a validlycalled board meeting, is there a quorum? B. If both A and C turn up, is there a quorum?C. If C votes for the decision and A against, then the vote is tied 1:1. Can the decision pass? D. If B also attends, can C ever use the casting vote?
A. no decisions can be made as the meeting is not quorate.B. The meeting is quorate, so long as they are not voting on a matter in which either is personally interested. If C votes against a decision and Avotes for it, the resolution will fail, as there must be a majority vote in favour. There is no need for C to use the chairman's casting vote.C. Yes, C can now use the casting vote to pass the resolution.D. No as deadlock will not happen with 3 and C will never need to use his casting vote so long as no director has a personal interest.
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Can a board make a decision without calling a meeting?
**Yes**, directors can pass **written resolutions** without holding a meeting. If this process is used, the resolution is considered approved only if all the directorsapprove it (**unanimous approval**) rather than a majority.
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Are directors entitled to compensation and expenses?
* The Companies Act 2006 assumes that directors will have **service contracts** and that their **rights will be provided** for in the contract. * Any director whose service contract is being agreed by the board **may not count towards quorum or the vote** on that issue* The model articles for private companies limited by shares provide that the **board may determine what constitutes fair compensation** for the directors. * The model articles also provide that the company may pay **reasonable expenses** the directors incur in connection with attending **meetings**.
233
In which 3 ways might a director cease to be a director?
1. **Removal** by shareholders2. **Retirement** by Rotation - Public Limited Companies3. **Disqualification**
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How do shareholders remove a director?
* A simple majority vote (an **ordinary resolution**) of the shareholders.* Note, it is **not possible** to remove a director **by written resolution.*** The shareholders' statutory right to remove a director **overrides most provisions** to the contrary in either the **articles** or the **director's service contract**. However, in certain circumstances the shareholders' removal power may be **limited** by a clause known as a **Bushell v Faith clause**-which gives **weighted voting rights to a director who is also a shareholder** in the event of a resolution to remove a director.* Removal of a director **may trigger payments to compensate** for loss of office and damages for termination of the service contract.* A shareholder must give the company a **formal notice** of the intention to propose the resolution **at least 28 days before a general shareholders' meeting**. The company must give notice to the director, and that director has the **right to make a written representation** (which the company must send to shareholders) and **to speak at the meeting** (even if that director is not a shareholder).
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A clause in the articles provided that in the event of a resolution being proposed to remove a director, the shares of that director would carry the right to three votes per share. The company had £300 capital, with 100 shares held by three shareholders who were also directors. When two of the shareholders tried to remove the other as a director, the shareholder in question would have 300 votes and the other two, 200 votes. Is this type of clause permissible?
**Yes**, and therefore the resolution to remove the director could not be passed.This is called a **Bushell v Faith** clause.
236
How does the system of retirement by rotation in PLCs work under the model articles?
* At the **first** annual general shareholders' meeting, **all the directors must retire** from office. * At **every subsequent** annual general shareholders' meeting **any directors who have been appointed by the directors since the last** annual general shareholders' meeting, or **who were not appointed or reappointed at one of the preceding two** annual general shareholders' meetings, must **retire from office** and **may offer themselves for reappointment** by the members. This system gives **new shareholders** that have subscribed for shares since the last annual general shareholders' meeting a **chance to have a say in the composition** of the board.
237
For which 2 reasons can a director be disqualified from office under the Company Directors Disqualification Act 1986?
1. **General misconduct** in connection with companies2. **Unfitness**
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What are the consequences of disqualification under the Company Directors Disqualification Act 1986?
If disqualified under the CDDA, that individual may not: * be a **director** of a company, * act as **receiver** of a company's property, or * in any way take part in the **promotion, formation, or management** of a company.
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What are the 4 elements of the ground of disqualification of a director for general misconduct in connection with companies?
* Conviction of an **indictable offence** in connection with the **promotion, formation, management, liquidation, or striking off** of a company, with the **receivership** of a company's property, or with being an **administrative** receiver of a company* **Persistent breaches** of companies' legislation requiring any **return**, **account**, or **other document** to be filed with the Registrar of Companies* **Fraud**, including fraudulent trading, in connection with the winding up of a company* **Summary conviction** of an offence in contravention of, or failure to comply with, any provision of the **companies' legislation** requiring a **return**, **account**, or **other document** to be sent to the Registrar of Companies.This would usually arise following an investigation into a company's insolvency. It might also arise during running the company e.g. a director running a cartel in breach of competition laws
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What is the ground of disqualification of a director for unfitness?
* A director can be disqualified for unfitness for between **2 and 15 years*** A director will be an unfit director of an **insolvent company**, if the director's conduct as a director of that company (either taken **alone** or taken together with that **director's conduct as a director of any other company or companies**) makes them **unfit to be concerned in the management** of a company.* The **Secretary of State may apply to court** for an order if an investigation shows that it is **expedient in the public interest** that a disqualification order should be made.* A director can be disqualified for **wrongful trading** under the Insolvency Act 1986 or because they are an **undischarged bankrupt.*** In certain circumstances, it is possible for a director to give a **voluntary disqualification undertaking**, which means the director would be disqualified, but that they would **not have to go to court.**
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What is a company secretary?
* **Officer** of the company usually appointed and removed by the directors * **Mandatory for a PLC** but not a private limited company* Must be **suitably qualified** in a PLC* Usually responsible for **maintaining books and records** of the company, taking **minutes** at board and shareholder meetings and **ensuring the company is compliant** with statutory obligations
242
What qualifications are required of company secretaries in a PLC?
Public company **directors** have a duty to take **reasonable steps to ensure the secretary has the requisite knowledge and experience** to discharge the functions of secretary of the company and has **one or more** of the required qualifications:* Held the office of secretary of a public company for at least **three of the five years immediately preceding** this appointment as secretary;* Is a member of a **specified list of accountancy/secretarial bodies*** Is a **barrister, advocate, or solicitor** called or admitted in any part of the **UK** or* Is a person who, by virtue of holding or having held any other position or being a member of any other body, **appears to the directors to be capable of discharging the functions** of secretary of the company.
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What are the powers and duties of a company secretary in a PLC?
There are **no prescribed duties** by legislation.They are usually responsible for:* **maintaining** the **books** and **records** of the company* taking **minutes** at shareholder and board meetings* making sure the company is in **compliance** with its statutory obligations e.g. filing requirements The **powers** are **usually expressly delegated** by the board of directors, but a company secretary's **authority can also be implied or apparent**. The company can be bound by the acts of a company secretary even if they were not authorised by the board, if the contracts the company secretary entered were of an **administrative nature**, i.e. of the type that a third party could reasonably assume would be within the powers of the company secretary e.g. hiring cars
244
What is a company auditor?
* All companies must **prepare accounts** under the Companies Act 2006.* **Large companies** are required to hire a **specialist accountant** known as an auditor. * **Small companies** (i.e. with an annual turnover of less than around £10 million and no more than 50 employees) **do not require auditing**. * If the accounts require auditing, the **auditor will be appointed by the directors**.
245
What is the main role of a shareholder?
To provide **financial backing** for the company.
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How does a person become a shareholder of a company?
Shareholders are members of the company, either through:* being one of the **first subscribers** for shares when the company is formed through the purchase of newly issued shares* purchasing **newly issued shares after formation** of the company or * having **shares transferred by an existing shareholder** (i.e. shareholder is paid, not company).Membership takes place either:* on **registration** or * when the details of the member are entered onto the company's **register of members**
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What is the register of members?
An **internal register** which the directors **must keep up to date** at the **registered office** (unless the company has elected for their records to be kept at Companies House).
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What is a PSC of a company?
A **shareholder** of a company may be classed as a Person with Significant Control if they:* Directly or indirectly hold **more than 25% of the shares** in the company * Directly or indirectly hold **more than 25% of the voting rights** in the company* Directly or indirectly hold the **right to appoint or remove a majority of the board** of directors of the company or * Have the **right to exercise, or actually exercise, significant influence or control** over the company.If there are PSCs, certain information about the relevant shareholders must be entered into the company's **PSC register**.
249
Company X Ltd has 4 shareholders, A, B, C and D, who all hold 25% of the shares each. Who is the PSC(s)?
**None** of them as they have 25%, not **more than 25%** of the shares.If A sold their shares to B, giving B 50%, the PSC register would need to be updated.
250
What are the 5 main rights of shareholders as regards the company?
* Right to receive a **dividend (only if recommended by directors)*** Right to **vote** on decisions taken by the company* Right to **inspect** the service contracts of directors and the register of members* Right to **bring a derivative claim** in certain circumstances* Right not to be **unfairly prejudiced**
251
What is a dividend?
A **return** on a shareholder's investment. The right to a dividend will depend upon:* if there are **profits** available for distribution* the particular **class** of shares held by the shareholder.Payment of a dividend **must not render the company insolvent**.Shareholders often invest in **private** companies in the hope of receiving a dividend - investment in public companies is more often in the hope that the company will grow quickly so they can sell their shares at a profit.
252
What does the term 'profits available for the purpose' of paying dividends mean?
* The term is defined as **accumulated realised profits less accumulated realised losses**.* Note, the company must retain enough to pay **corporation tax bill** before having a surplus for a dividend. * This requirement is part of the rules regarding a **company's capital maintenance**, i.e. capital invested into the company by the shareholders is not returned to them. * This is for the **protection of creditors** and the company's capital structure will be included in the registration documents at Companies House.
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A. A company makes a realised profit in Y1 of £2,000 but has realised losses of £3,000. Is a dividend payable?B. In Y2 the company makes a profit of £3,000 and there are realised losses of £1,000. Is a dividend payable?
A. **No** dividend ispayable in year 1. B. **Yes** a dividend could be payable of £1,000, as the accumulated losses in year 2 would be £2.000.
254
What are class rights in respect of shares in a company?
* Shares are often split into different types (classes) with **varying rights** attached to each in terms of **dividend** and **voting** rights * Example: **preference shares** are paid a dividend **ahead of ordinary shareholders**, and the shares can carry the right to a **cumulative fixed percentage** (i.e. a fixed income) dividend. If there are no profits available for the purpose, the **dividend would roll over** to the next financial year. * Example: 5% preference shares are £100 each. If directors recommend a dividend, the preferential shareholders get £5 per share (5% of £100) before any non-preference shareholders are paid* **Ordinary shares have no cumulative right** i.e. if there are no profits available for the purpose, the ordinary shareholders may receive no dividend. * In the event of the company's **insolvency**, the preference shareholders may also receive a **return of capital** in priority to the ordinary shareholders.
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What is the difference between ordinary shares and preference shares in respect of dividend rights?
* **Ordinary**: Paid after preference shareholders have been paid. Not cumulative* **Preference**: Fixed % dividend paid in priority to ordinary shareholders. May be cumulative if they so provide
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What is the difference between ordinary shares and preference shares in respect of voting rights?
* **Ordinary**: Full voting rights* **Preference**: Usually none
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What is the difference between ordinary shares and preference shares in respect of the position on winding up?
* **Ordinary**: Return of surplus capital after preference shareholders* **Preference**: Return of surplus capital ahead of ordinary shareholders
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A company has 2,000 £1 ordinary shares and 2,000 £1 5% preference shares. A dividend is declared of £100. How is the dividend paid?
The preference shareholders would be entitled to their dividend of £100 (2,000 x 5% of £1), which means there would be no dividend left to pay to the ordinary shareholders once the preference shareholders had been paid.
259
A company has 2,000 €1 ordinary shares and 2,000 €1 5% preference shares. These preference shares are cumulative. In Y1 no dividend is declared. In Y2 a dividend is declared of £200. How is the dividend paid?
The preference shareholders' dividend of £100 rolls over from Y1 to Y2. The preference shareholders would be entitled to their Y1 and Y2 dividends of £100, which means there would be no dividend left to pay to the ordinary shareholders once the preference shareholders had been paid.
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What is the procedure for declaring dividends?
* **Directors decide**, having considered the accounts and whether there are profits available for the purpose, whether a dividend should be **recommended** for approval by the shareholders. * If a dividend is recommended, the **shareholders can decided to approve it** and declare the dividend by passing an **ordinary resolution**. * Shareholders **can decline** to declare the dividend or **declare a smaller amount**, but they are **not permitted to declare a dividend in excess** of that recommended by the directors.
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What is an unlawful dividend?
* A dividend **payable other than out of profits available** for the purpose.* If **at the time** of the distribution a **shareholder knows or has reasonable grounds for believing** that the distribution has been declared unlawfully, the shareholder is **liable to repay it**.* **Directors** may also be **personally liable** if a dividend is declared unlawfully, as they will have recommended in the first place.
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What are shareholder resolutions?
* Resolutions **passed by shareholders** at general company meetings (i.e. not board meetings).* The **type of share** held by the shareholder will determine the **voting** rights available to them. * **Ordinary** shareholders usually have **full voting rights**, whereas **preference** shareholders' voting rights are **usually limited to decisions that affect their class** rights* **Majority** shareholders hold **more than 50%** of the voting rights. Those with less are called **minority** shareholders.* Most decisions require a majority (**ordinary** resolutions), others require 75% (**special** resolutions) and others are **entrenched**.
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What is a derivative claim?
A claim brought **against a director** on behalf of the company by a **shareholder** who believes the **director has or is about to breach a duty** owed to the company and it **appears the board will not assert the company's rights** to prevent or remedy the action* It can only be brought by a **shareholder** or a **person to whom shares were transferred by operation of law** (e.g. through inheritance). Note, the majority of shareholders will typically make the decision to bring the claim.* It can be brought against the **director (including a shadow director) or another person**, or **both**. * It is permissible for a shareholder to assert a **claim that arose before the shareholder became a shareholder**. * Any **damages** awarded **belong to the company**. At common law the **courts could require the company to indemnify the shareholder** who brings a derivative claim.
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How is a derivative claim dealt with by the court?
**First stage**: A court must **dismiss** the claim if the application and evidence submitted along with the application **do not show a prima facie case**. E.g. a prima facie case would likely be found if a company paid too much for material supplied by a partnership a director is involved in.**Second stage (hearing)**: If it does, the court must dismiss if: 1. it is satisfied a person acting to **promote the best interests of the company would not seek to continue** the claim **or** 2. the **action was authorised** by the company or **authorisation would be likely**. The **court must also consider** (among other things): * whether the shareholder is **acting in good faith*** the **importance of the action** in question to the **success of the company** based on what a reasonable director would think* and **whether the shareholder could seek a remedy in their own right** rather than on behalf of the company (e.g. where the director has violated a duty owed personally to the shareholder). **Third stage (full hearing)**: This is the permission stage which is a hearing of the claim itselfThe stages are to ensure that a shareholder isn't bringing a **frivolous or vexatious** claim. At the **second stage**, the court would want to see **support from a majority of shareholders** for the claim.
265
In which 2 situations can a minority shareholder take a claim against the directors of the company?
1. **Unfair prejudice**2. **Winding up** if the company is **solvent** and it is **just and equitable to do so**These derive from **common law**
266
What is the unfair prejudice ground for a minority shareholder to bring a claim against the directors of a company?
If a shareholder feels that the **company's affairs** are being conducted in a manner which is **unfairly prejudicial to that shareholder**, they can petition the court for a remedy. Examples:* **exclusion from the management** of a quasi-partnership company,* directors exercising their powers for an **improper purpose** (e.g. issuing shares to water down a shareholder's rights)* directors awarding themselves **excessive remuneration*** **non-payment of dividends** e.g. if directors are excessively remunerated.Most common **remedy** for a successful claim is an order that the **minority shareholder's shares are purchased at a fair price**. Note, this is **not a derivative claim** as the shareholder is seeking a remedy for themselves.
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What is the winding up of a solvent company when just and equitable to do so ground for a minority shareholder to bring a claim against the directors of a company?
* **Any shareholder** can apply to have the company wound up if the company is **solvent** and the share- holder can show it is **just and equitable** to do so e.g. deadlock situations or where the company can no longer carry on the business for which it is formed * This is a **remedy of last resort** because if successful, the company will cease to exist and the shareholder is **likely to receive back less money** than if they had sold their shares. * Therefore if a minority shareholder has lost confidence in the board of directors, it is **usually a better solution to negotiate** with the directors/other shareholders to sell their shares
268
What is a shareholder entitled to inspect?
* **Service contracts of directors**, which must be kept at the **registered office** for **at least a year after the director leaves**. * **Register of members**, which also must typically be kept at the **registered office**. This must include their **names** and **addresses**, the **date** on which each was **registered**, the date at which any person **ceased being a member** and details of their **shareholdings**. * If the company has **more than 50** members, it also is required to have an **index of the members**.The shareholder must **request** inspection and include their **name** and **address**, the **purpose** of the inspection, and the name and address of **anyone with whom the information will be shared**.The company must comply with the request **within five working days** or **apply to court claiming the purpose is improper** (generally, the purpose must be related to the shareholder's right as a shareholder as opposed to, for example, getting names to create a commercial mailing list for personal gain).
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In which 2 ways are decisions by shareholders made?
* Shareholder/General **meetings** (usually to vote on appointing a director or a matter decided by the board)* Written **resolutions**
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What are the 4 steps involved in a shareholder meeting?
1. Meeting must be **called** (by directors/shareholder/resigning auditor/court)2. **Notice** must be given to the shareholders, directors, PRs of deceased shareholders, trustees in bankruptcy and auditor, if there is one.3. There must be a **quorum**4. Resolutions must be **voted** on
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Is an AGM required for a private company?
**No**, AGMs are only required for PLCs (this is a statutory requirement)
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When can general meetings be held?
Companies (both private and public) may also hold general shareholders' meetings **as and when required.**
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Who can call a general meeting?
* **Directors** (under statute)* **Shareholders** who hold **at least 5% of the paid-up voting capital** can request a meeting (this is unusual and is normally when board won't call the meeting because they know they are going to be sacked). On receipt of such a request, the **directors must call the meeting within 21 days**, and it must **actually be held within 28 days**. If the directors fail to call the meeting, the **shareholders who requested** it (or **any shareholders holding at least 50% of the voting rights** of the company) can call the meeting themselves. If that happens, the shareholder who calls the meeting is entitled to be reimbursed by the company for reasonable expenses.* A **resigning auditor** can require the directors to call a meeting they want to give reasons for the resignation.* The **court** can call a meeting if it is impracticable for the company to call it e.g. in cases of deadlock between shareholders.
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What are the notice requirements for a general meeting?
* Notice must be given to all the **shareholders** and **directors**, the **personal representatives of any deceased shareholders**, and the **trustee in bankruptcy of any bankrupt shareholders** and to the **auditor**, if one has been appointed.* Notice can be given **in writing** or electronically, by **email** or via a **website**. * Notice must be given **at least 14 clear days** (including weekends and bank holidays) before the meeting unless the articles provide for longer notice i.e. the date the notice is given and the date of the meeting are not counted. If the notice is being communicated by a method other than by hand delivery, an additional 48 hours must be included for deemed service. (**Hand delivery: meeting date minus 15. Posted delivery: meeting date minus 17**) AGMs of PLCs require 21 clear day's notice. [Note: **short notice exception**].* If a shareholder wishes to call a meeting to consider a resolution to **remove a director**, the shareholder must give the company notice **at least 28 clear day**s prior to the meeting.
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What is the main difference between notice required for board meetings and shareholder meetings?
Notice for shareholder meetings **cannot be oral**.
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What 7 elements must a notice of a general meeting contain?
* The company **name*** **Time** of meeting* **Date** of meeting* **Place** of the meeting* **General nature of the business** to be carried on at the meeting* A statement of the **right to appoint a proxy** to attend the meeting* The **full text of any special resolution**| Prescribed by legislation
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Notice of a general meeting was posted on 3 February. When is the earliest the meeting can be held?
**20 February** (17 clear days after posting as not hand delivered)
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What notice is required for an AGM of a public company?
**21 clear days'** notice
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What are the consequences of providing insufficient notice of a general meeting?
A member who is unhappy with action taken at a meeting can **seek to have the action declared invalid**.
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In what circumstances can short notice to a general meeting be given?
* If:1. agreed by a **majority** of shareholders agree and 2. that majority holds **90%** (**95% for non-traded public companies**) of the shares. Short notice **cannot be used** in those circumstances where **documents must be left at the registered office for 15 days** prior to the general shareholders' meeting,
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A company with four equal shareholders wants to hold a general meeting at short notice. How many shareholders must agree?
**All the shareholders** need to agree to short notice, as a majority in number would be three shareholders, but three shareholders would only hold 75% of the shares.
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A company with three shareholders wants to hold a general meeting at short notice. One shareholder holds 90% of the shares and the other two shareholders holding 5% of the shares each. How many shareholders need to agree?
The majority shareholder **and** one other shareholder to agree to short notice.
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What is the quorum required at a general meeting under the model articles?
* Under the model articles, the quorum required for a shareholder meeting is **two** (**unless the company is a single member company**) members (or proxies of two members.* A **single shareholder** who attends a general shareholders' meeting and who is **also a proxy** for another shareholder **cannot by himself be quorate**).* Note, there is **usually no personal interest disqualification** for members except a member who is also a director can't vote to ratify their own breach of duty. Beyond this, members are entitled to vote in their own self-interest and don't need to vote in the best interests of the company.
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What are the 2 types of shareholder resolution?
* **Ordinary resolution**: requires the **affirmative** vote of a simple **majority** (**more than 50%** of the members **at the meeting**). Default is resolutions will be ordinary unless articles or Companies Act requires a special resolution* **Special resolution**: requires the **affirmative** vote of **75% or more** of the members **at the meeting**. These are generally for actions of the company that may **detrimentally affect shareholders** e.g. any **alteration to the articles** of association of the company, a **reduction in the company's share capital**, the **winding up** of the company, **removing pre-emption rights**, and to **change the company's name**. Note, this is not, an exhaustive list, and the company's articles may provide for further matters that are required to be voted on by special resolution. All special resolutions must be filed at Companies House within **15 days**.
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What methods of voting are used at general meetings?
* **Normal method**: by a **show of hands**- **one vote per shareholder** who is present or by a proxy whom the shareholder has sent in their place. * **Poll vote**: It is **open to five shareholders or more**, or shareholders with **not less than 10%** of the **voting** rights or 10% of the **paid-up capital** of the company to **demand a poll** instead. A poll changes the voting from one vote per shareholder to **one vote pershare**. This can dramatically affect the outcome of the vote.Note, in voting, the **shares of deceased or bankrupt members** would be disregarded unless the PR or trustee in bankruptcy applied to be entered onto the register of members.
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A company has four shareholders. One shareholder has 50% of the voting rights, one has 25%, one has 20%, and the final shareholder has 5%. How would a special resolution be passed?
On a **show of hands**: three out of the four shareholders would need to vote in favour of the resolution to achieve the required 75% majority. On a **poll**: the 50% shareholder would only require the support of the shareholder with 25%, so the resolution could be passed with thesupport of only two out of the four shareholders.
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X Limited has 10 shareholders, named A, B, C, D, E, F, G, H, I, J. The company has adopted the model articles without change. A general meeting was properly called but only A, B, C and D attend. They have a quorum as they have adopted the model articles. The company has issued 300 shares - A owns 70 shares, B, C, and D own 10 shares. A, B, C and D hold 100 shares of the 300 that have been issued. The chairman of the meeting asked the shareholders to vote on a resolution to ratify a breach of duty by one of the directors. On a show of hands, B, C and D vote in favour. Is the resolution passed?
This would be sufficient to approve the matter even though there were fewer than half of the shareholders at the meeting and less than a third of all shareholders approve the resolution. That is because they have a quorum and more than 50% of the votes at the meeting were voted in favour of passing the resolution. It would only matter that A (holding 70) did not vote and the shareholders who voted only had 30 if A asked for a poll vote. If A asked for a poll vote and cast his 70 shares against ratification and the others vote in favour, the resolution will be defeated because it did not receive more than 50% of the votes that were voted at the meeting.
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Are written resolutions available to PLCs?
**No**, they are only available to private companies.
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What are written resolutions?
* A way of **passing resolutions without having to have a shareholders' meeting** (commonly used in small companies)* **Quicker and more cost effective** than a face-to-face meeting. * Can be used for **either ordinary or special resolutions** (with the required majority being the same); but **cannot be used to dismiss a director or auditor as they must be given a right to defend themselves**. * Note, the percentage for written resolutions is based on **all the shareholders entitled to vote** whilst at a meeting the percentage is based on shareholders who attend in person or by proxy. It is based on **one vote per share** as opposed to one vote per shareholder.* Typically, they are **only used when the directors are confident** the resolution will pass
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What is the procedure used for written resolutions?
* Usually, the board of **directors decide** whether to circulate a written resolution; however, **shareholders who hold at least 5% of the total voting rights** can require the directors to do so* The written resolution must be **circulated to all members eligible to vote*** The written resolution must contain a statement informing the shareholder **how to signify agreement** (usually sign and return - not returning is a vote against) and **when the resolution will lapse**, typically **28 days** **from and including the circulation date** unless the articles say something different* Any **documentation which must be left at the company's registered office for 15 days** prior to a general shareholders' meeting, or available at the general shareholders' meeting, must be **circulated with the resolution.*** **As soon as enough votes in favour are received**, the resolution is passed.
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A written resolution is sent out to all eligible members on 1 February. It contains an ordinary and a special resolution. A, who holds 10% of the shares, signs and returns the resolution on 4 February. B, who holds 15% of the shares, signsand returns the resolution on 6 February. C, who holds 30%of the shares, signs and returns the resolution on 8 February. D, who holds 20% of the shares, signs and returns the resolution on 10 February. E, who holds the remaining shares, signs and returns the resolution on 28 February.Do the resolutions pass?
The ordinary resolution is passed on 8 February and the special resolution is passed on 10 February.
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Y Limited has 3 shareholders: A, B and C. A and B are also directors. A holds 40% and B holds 40%. At a board meeting, A produces a written resolution they prepared and A and B sign it. C has not seen it. Does it pass?
**Yes**, C didn't need to see it as they could not have blocked it anyway.
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What is the procedure for decision making if only directors need to approve the decision?
The board will:* pass the **necessary resolution** and* comply with any **filing requirements**Example: changing the address of the company's registered office
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What is the procedure for decision making if both directors and shareholders need to approve the decision?
Note, this applies **regardless of whether directors and shareholders are the same people**. Board and shareholder meetings cannot be combined. * Approval will start with a **board meeting**. There will be **2 resolutions** to:1. **Approve** the matter2. Call a general shareholders' **meeting/circulate a written resolution** for the members to resolve to approve the matter.* The **shareholders must then vote** whether to pass the resolution, and if they do, the resolution is passed.* Often, there is no requirement for a further board meeting, as no further decisions of the board are necessary, although the directors will still have to **comply with the necessary filing requirements**. * Sometimes another **resolution will be necessary to deal with administration** of the decision e.g. if the resolutions approved entering a contract to purchase a new factory building, after the shareholders approve, the directors would need to call a meeting and adopt a resolution to appoint two directors to execute the contract.Example: a special resolution to change the company's name
295
Which 11 decisions require shareholder approval by ordinary resolution under the model articles?
* **Appointment** of **auditors** (if there are any)* **Appointment** or reappointment of **directors*** **Removal** of a **director or the auditor*** Adoption of the **annual accounts** and the **reports** of the directors and auditors* A declaration of **dividends*** Approval of the directors' decision to **allot shares*** Approval of **substantial property transactions** involving directors with a personal interest* **Ratification** of a director's **breach of duty*** Entering a **service contract** with a director for **more than two years*** Making a **loan to a director*** Giving a director a **payment for loss of office** (essentially, giving a director a gift after leaving office).
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What is a 'Substantial Property Transaction'?
* If a director buys property from or sells property to the company for **less than £5,000**, the transaction is considered de minimis and **does not need shareholder approval**. * If the value of the item purchased or sold is **more than £100,000**, it is **automatically considered an SPT**. * **Between those figures**, whether a sale or purchase of property is substantial depends on the value of the company. The transaction will qualify as an SPT if its **value exceeds 10% of the company's asset value** (that is, net assets)
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What is the voting power of a shareholding under the model articles?
* **Vote*** Receive **notice** and **attend** general meetings * Receive **dividends** if declared* **Restrain** directors' **breach of duty**Any **limitations** will be in the **articles**.
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What additional voting power comes with a shareholding of 5%?
* Circulate **written resolution*** **Request** a general **meeting** * Circulate a **written statement**
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What additional voting power comes with a shareholding of 10%?
Request a **poll** vote
300
What additional voting power comes with a shareholding of 25%+?
**Block** a **special** resolution (note, must be **more than 25%**)
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What additional voting power comes with a shareholding of 50%?
**Block** an **ordinary** resolution
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What additional voting power comes with a shareholding of 50+%?
**Pass** an **ordinary** resolution (note, must be **more than 50%**)
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What additional voting power comes with a shareholding of 75%?
**Pass** as **special** resolution
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Which 3 matters require shareholder approval by special resolution under the model articles?
* Most decisions to **buy back company shares*** Changes to the company's **articles** of association* Changes to the company's **name**.
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When must a resolution (board or shareholder) be filed at Companies House?
If a resolution affects information filed at Companies House, a copy of the changes typically must be filed at Companies House within **14 days of approval** of the change.
306
What are the two forms of finance a company can use to raise capital?
1. **Equity** finance2. **Debt** finance
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What is equity finance?
* A method of raising capital whereby a **company sells ownership shares** in the company to third parties interested in investing in the company. * The **third parties give the company money/property**, and in exchange the company allots shares of ownership to the third parties who **become members** of the company. * In a **company limited by shares**, the members are allotted a certain number of shares and referred to as **shareholders**.
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What is initial share capital of a company?
* Before a company is formed, **subscribers** will sign a memorandum of association (subscription agreement) in which they **agree to purchase a certain number of the company's shares** at a certain price once the company is formed.* The shares will have a **stated minimum value**, the least amount that the shareholders may pay for the shares i.e. (nominal or par value of those shares).* Once the company is formed, the **board of directors will allot the agreed shares** to the subscribers and receive payment for the shares. The **money received on account** of the nominal or par value **becomes a company's share capital**. This is a fund of money that **cannot be returned to the shareholders** and which theoretically is always available to pay the company's creditors.
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Can a company allot additional shares after it has been formed?
**Yes*** For companies incorporated **after 2009**, directors **automatically** have the power to allot additional shares provided the company has **only one class of shares** and there is **no restriction removing this power in the articles** (the model articles have no restriction).* In **other situations**, in order to issue additional shares, the **directors must seek permission** from the existing shareholders through an **ordinary resolution**.There is a **procedure** for issuing shares, they may be **issued at a premium** and **pre-emption rights** must be considered
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How are shares alloted after a company has been incorporated?
* Directors will determine the **price** (shares may be issued at a premium) and **number of shares** to allot and will resolve to allot the shares **after receiving an application** from a person who wants to buy the shares (having regard to any pre-emption rights). * Generally, shares are issued in exchange for **cash**, but the directors may accept **property** for shares as well. * Under the model articles, the **full value** of the shares must be **paid to the company on allotment**. If the shares have a **nominal or par value**, the **money received on account of that value** will be **added to the company's share capital**.
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What does it mean to issue shares at a premium?
* The **nominal** or par value of shares often **does not reflect the shares' true market value** e.g. commonly articles will give shares a nominal value of £1. * If the company has successfully been trading for a while, each share is likely worth more than the nominal value so the if the directors decide to issue new shares, they will want to get as high a price as they can and not just the £1 each. **Any amount received beyond the nominal value is known as a premium**. The excess amount paid over and above the nominal value **must be recorded separately in a share premium account**. This **still constitutes share capital**.
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What are pre-emption rights?
* Unless its articles provide otherwise, when the company decides to **issue additional ordinary shares** (i.e. not preference shares) in exchange **for cash** (i.e. not property), those shares **must first be offered to the existing shareholders** based on their proportional ownership on the terms for which the shares would be offered in the **open market**. The existing shareholders must be given **at least 14 days** to accept. If any shareholder does not accept, the shares allocated to the shareholder may be sold in the market.* This is so that they have the **opportunity to maintain their proportional share of ownership** and voting strength in the company. * A **special resolution** can be used to **disapply** the pre-emption right. A company's **articles** may **alter** the statutory pre-emption right. A private company's articles may disapply the statutory preemption right altogether.
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What must be checked before issuing new shares?
Whether there is a **restriction** in the **articles**. There may be a restriction on the amount of shares that may be issued e.g. in companies incorporated before 2009.
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Do pre-emption rights apply to preference shares?
No
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Do pre-emption rights apply where shares are to be exchanged for equipment?
No, only cash.
316
Do pre-emption rights apply where shares are to be exchanged for land?
No, only cash.
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How is transfer of shares different to issue of shares?
* Transfer involves the **sale or gift of existing shares** by a shareholder to another person. * **No new shares** are created and the **selling shareholder receives the consideration** paid for the shares rather than the company. * The **ability** of an existing shareholder to sell their shares is **governed by the articles** of the company. The model articles for private companies grant the **directors an absolute power to refuse** to allow a transferof shares.
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What are the 7 steps involved in the transfer of shares?
* Existing shareholder gives **share certificate** and **completed stock transfer form** to **transferee*** If necessary, transferee pays **stamp duty*** Transferee sends **share certificate** and **stamped stock transfer form to company*** Board **check articles** and consider if they have the **power to refuse registration*** Board resolve to **register new member/refuse registration*** If resolve to register board also resolve to **issue new share certificate*** **Register of members is updated** (no filing at Companies House is necessary)
319
What is debt finance?
* Occurs when the **company borrows money to raise capital** (decided by **directors** under model articles) usually in the form of **loans** or **debt securities**. * The company enters into a **creditor-debtor relationship**, whereby the company has borrowed funds from an 'outside creditor' and promises to repay the creditor. * The **debt holder has no ownership interest** in the company, there is just a contract in place.
320
Who has the power to decide to borrow money for a company under the model articles?
Directors
321
What must be included in a loan contract?
The contract will set out:* **parties** i.e. lender (bank/director/shareholder etc.) and borrower (company)* **how much** money is or can be borrowed (in the case of an overdraft or revolving credit facility)* **when it must be repaid*** **interest** rates* **other terms** of the loan.A loan is a **contract between the company and a lender** and it is a common form of debt finance.It may be **secured or unsecured**.
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What is the difference between secured and unsecured loans?
* A loan can be **secured by collateral** (i.e. property the debtor agrees the creditor can take to satisfy the loan in the event the debtor defaults in paying back the loan) or **unsecured** (i.e. no collateral provided).* Lenders have **more chance of recovering the sum** borrowed if the company defaults on a **secured loan** so the **rate of interest charged may be lower** on a secured loan.* Common forms of secured loans include: **Mortgages**, **fixed charges** and **floating charges**.* Secured loans i.e. charges must be **registered** at Companies House within **21 days** of creation which is relevant to determining **priority**.
323
What is a mortgage?
* A **loan taken over high value assets** (e.g. land, buildings, or machinery). * **Apart from land**, the **legal ownership of the asset is transferred** to the lender, and if the company defaults, then the lender will exercise the **right to immediate possession** of the asset. With land the right to possess and sell the asset if the lender defaults are governed by statute.
324
What is a fixed charge?
* A fixed charge is taken over **assets** which the company will **own for a substantial period** (e.g. machinery and shares). * If a company **breaches** the loan terms, or goes into **receivership** or **liquidation**, the **charge holder has the right to sell** the asset and recover the outstanding sum owed. Note, in the case of liquidation, the liquidator must sell the asset and repay the loan from the proceeds before any other creditor is paid.* To protect the charge holder, the **company is prohibited from disposing of, leasing, or granting a further charge** on the charged assets **without the lender's consent**.
325
What is a floating charge?
* A charge taken **over a group of assets that change regularly** e.g. inventory. * The items that make up a company's inventory **can change from day-to day**, with new items coming in from suppliers and other items being sold (i.e. no lender consent required to sell items subject to floating charge). * The **charge hovers** over the named asset (e.g. inventory) but **does not attach to any particular item until there is a default**. At that time, the **charge crystallises** and attaches to the individual items that comprise the asset that is subject to a floating lien.
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When must a charge be registered at Companies House?
* **Within 21 days** of creation. * A **certified copy of the charge** and a **fee** must also be sent. * Some charges must be registered on **other specialised registers**, e.g. a fixed charge over land would also be registered at Land Registry. * **Failure** to register the charge at Companies House **renders the charge void against a liquidator or administrator** of the company and against the company's **other creditors**. For this reason the **lender will often register the charge**, rather than relying on the company's directors to do so. Note, even if not registered, the charge is **still valid against the company** itself.
327
How are secured debts prioritised?
* **Fixed charges** over the same asset take priority in date **order of their creation** if validly registered* **Floating charges** over the same assets take priority in date **order of their creation** if validly registered* A **fixed charge will always take priority over a floating charge** over the same asset, even if the floating charge was created before the fixed charge.
328
What is a debt security?
* A document which **evidences a loan made to a company** and which **may be traded**. * The **holder** of the debt security is **entitled to interest and repayment** of the loan as provided in the security.* Conceptually, it is a **tradable 'IOU'** issued by the company in return for cash. The IOUs must be repaid by the company at an **agreed future date**.
329
How are companies taxed?
* Companies pay **corporation tax** on their **profits**. * **Shareholders** who invest in a company by way of shares will be taxed to **income tax on any dividends** they receive from the company.
330
What 7 actions trigger a filing requirement at Companies House.
* Change of **address** of registered office * Change of **accounting reference date*** **Appointment** of director (form within 14 days)* **Removal** of director (form within 14 days)* **Issue** of shares (Return of Allotment of Shares form within 1 month and any necessary shareholder resolutions within 15 days)* Changing the **articles** (Special resolution and new articles within 15 days)* Changing the company's registered **name** (Special resolution, form and fee)
331
What is the purpose of recordkeeping, filing and disclosure requirements of companies?
Allow **creditors/those interested in buying shares** to check the financial condition of the company, who can act for the company etc.
332
What is the obligation that comes with limited liability status?
The obligation is to **maintain transparency** by providing certain company information and financial affairs to the **public**.
333
What records must be kept by a company?
* **Registers** (members, directors, secretaries, charges against the company's assets, and people with significant control)* **Minutes** of all general shareholders meetings (10 years)* **Directors' service contracts** (1 year beyond each directors' service)
334
What 5 registers are private companies required to keep according to the Companies Act 2006?
* Register of **members*** Register of **directors*** Register of **secretaries*** Register of **charges** against the company's assets* Register of **people with significant control**The registers are required to be kept **available for inspection by members (for free)** or the general **public (for a fee)** at the company's **registered office** (or in the case of the register of director or members, at Companies House if the company so elects). They are **often stored electronically** but used to be in leather bound ledgers known as "company books"
335
How long should the minutes from general shareholders' meetings be kept?
**At least 10 years** and made **available for shareholders to inspect** free of charge. Not available to public.
336
How long should directors' service contracts be kept?
**At least one year beyond each director's service** and made **available for members to inspect**. Not available to public.
337
What information must be publically available at Companies House
* Company's **name** and **any previous names*** **Statement of capital** including nominal value of shares and number of shares issued* Details of **past and present officers** * Company's **registered office address*** **PSCs*** Company's **registration number*** An **annual confirmation statement** must be submitted (formerly known as an **annual return**)* Any **charges** against company assets* **Accounts** must be filed annually* **Directors' Report** for medium and large companies annually* **Strategic Report** for medium and large companies annuallyNote, there are a few **exceptions** to the details that need to be made public e.g. home addresses of officersNote, a **fee** may be payable by the public for access to certain information
338
What 3 things must be filed annually at Companies House?
* **Confirmation Statement** * **Accounts** * **Directors' Report** for medium and large companies* **Strategic Report** for medium and large companies
339
What is a confirmation statement?
* Statement **confirms**, annually, that the **information** held by Companies House for the company is **up to date**. (Formerly known as an **annual return**)* A company with share capital must deliver a **statement of capital** with the confirmation statement **if there has been a change since the last confirmation statement** was delivered. * A company must make a '**no change**' confirmation statement **even if there have not been any changes** during the review period. * The review period covered by a company's first confirmation statement begins on the **date of incorporation and ends 12 months later** e.g. 1 January 2021 to 31 December 2021.* It must be delivered **within 14 days of the end of the review period** e.g. 14 January 2022 in the example. Failure to do so is a **criminal offence**
340
Is it a criminal offence to fail to file a confirmation statement?
**Yes**, it is a criminal offence to fail to file the confirmation statement **within 14 days** of the **end of the company's review period**.
341
When do charges against a company's assets need to be filed?
**Within 21 days** of creation.
342
What are rules regarding company accounts under the Companies Act 2006?
* The **preparation** and **filing** of accounts is required with **more relaxed requirements for small private companies**. Accounts are made **public** and have **prescribed requirements**.* **Private companies** must send copies of their accounts to Companies House **no later than nine months after the relevant accounting reference period**. For **public companies**, the filing period is shortened to **six months**. Therefore, accounts are not necessarily representative of the current financial health of the company.* **Directors must approve** the accounts i.e. that the accounts give a true and fair view of the assets, liabilities, financial position, and profit or loss of the company.* Except in small companies accounts must be reviewed by an **independent auditor** * Failure to file accounts on time will incur **financial penalties**, can lead to **possible criminal sanctions**, and could result in **disqualification** of directors.
343
What information must be included in the accounts filed at Companies House?
* The company’s **registration number** * Its **nature** (i.e. public or private and limited by shares or guarantee).* The **part of the UK** in which the company is registered. * A **balance sheet** as of the last day of the financial year (assets and liabilities)* A **statement of profit and losses** must be included. Each must give a '**true and fair view**' of the company for the financial year.
344
What is considered to be a 'medium or large company'
A company with **more than 50 employees** or a **turnover of about £10 million or more**.
345
What is a Directors' Report?
This report **names the directors** and states the amount (if any) that the directors recommend should be paid by way of **dividend**. This needs to be filed by **medium and large** companies.
346
What is a Strategic Report?
* A report to inform members of the company and help them assess **how the directors have performed their duty to promote the success** of the company. * This report provides a **balanced and comprehensive view** of the **development** and **performance** of the company's business. * This needs to be filed by **medium and large** companies.
347
What are the administrative requirements of appointing a director?
* **Internal**: Update **register** of directors and Directors' Residential Addresses* File an Appointment of Director form at Companies House within **14 days**.* Note, a notice of **change in residential information** must be filed within **14 days**.
348
What are the administrative requirements of terminating a director?
* **Internal**: Update **register** of directors and Directors' Residential Addresses* File an Termination of Director form at Companies House within **14 days**.
349
What are the administrative requirements of giving directors the power to allot new shares?
The **ordinary resolution** must be filed with Companies House **within 15 days** of approval
350
What are the administrative requirements of passing a special resolution?
Special resolutions must be filed with Companies House **within 15 days** of approval.If the special resolution is to **reduce share capital**, the resolution must also be accompanied by a **statement of solvency**.
351
What are the administrative requirements of issuing new shares?
* **Internal**: update **register of members** and **new share certificate** within **2 months*** File a **Return of Allotment of Shares form** at Companies House **within 1 month** and any necessary shareholders' **resolutions** within **15 days.**
352
What are the administrative requirements of changing the company's registered address?
* **Internal**: change **company documentation/letterhead/website** etc.* File a **Change of Registered Office Address form** at Companies House.Note, a change of address of the company's registered office **will not be effective until filed** with Companies House.
353
What are the administrative requirements of changing the accounting reference date?
File a **Change of Accounting Reference Date form** at Companies House
354
What are the administrative requirements of a transfer of shares?
**Interal filing**: update the **register of members**, issue **new share certificate** within **2 months**
355
What are the administrative requirements of changing the articles?
**Special resolution** and new **articles** must be filed at Companies House within **15 days**.
356
What are the administrative requirements of changing a company's registered name?
**Special resolution**, a Change Your Company's Name By Resolution **form**, **and** fee must be filed at Companies HouseOnce **new certificate of incorporation** issued by Companies House, all company **documentation**, **website** correspondence etc. must be **changed** to new name
357
What 5 disclosures must be made on the letterhead of a company?
* Registered **name*** **Part of the UK** in which the company is registered* Company's **registered number*** **Address** of the company's **registered office**.* If a company chooses to display the name of **any director on its letterhead**, it must include the **name of every director** on the letterhead.
358
What 3 disclosures must be made on the letterhead of a partnership?
* **Name** of the partnership* **Name of each member** of the partnership* Partnership's **business address**.
359
What 3 disclosures must be made on the letterhead of a sole trader business?
* **Business name*** **Real name** if it is different than the business name* Business **address**.
360
What is insolvency?
A term that indicates **a person orbusiness** is **unable to pay their debts**.
361
What are the 3 options available to sole traders and partners in the event of insolvency?
* **Negotiating** with creditors* **Individual Voluntary Arrangement*** **Bankruptcy**Note, a creditor may present a **creditor's petition for bankruptcy**, forcing the debtor into bankruptcy if certain criteria are met
362
What does negotiating with creditors involve for insolvent sole traders or partnerships?
* The debtor can approach a creditor and **ask** either for the **debt to be reduced** or for **extra time** to repay the debt. * A **creditor might agree** to do this if it means they are likely to receive more money than they would if the debtor becomes bankrupt/can keep the business with the customer and get more orders eventually. * Typically such an agreement is **not binding on the creditor**, as there is **no contract consideration** given by the debtor to support the creditor's promise to abide by the change in terms. * Therefore, at **any point the creditor could demand the full amount** on the original payment terms. * In addition, any agreement with one creditor **would not prevent other creditors starting proceedings**.
363
What is an IVA?
* An **individual voluntary arrangement** is a **negotiated agreement** between the debtor and **all of their creditors**. * The creditors **each agree to accept less** in payment than is owed them. * It **avoids the enforceability problem** of individual negotiation because it is a **formal procedure**. * However, it is **suitable only if the debtor has enough money**, or the **prospect of receiving some money**, to enable the debtor to make a reasonable offer of payment to their creditors.* There are **advantages** for debtors and creditors and a **statutory procedure must be followed**
364
What are the advantages of an IVA for the debtor?
* Enables the debtor to **avoid the restrictions and disqualifications** they will be subject to if they are made bankrupt. * Allows the debtor to **avoid the stigma of bankruptcy**, as well as any **negative publicity** or **stress** that comes with bankruptcy. * If the debtor is a sole trader or partner, they **can continue to trade**.
365
What are the advantages of an IVA for the creditor?
* They **might receive more money** than they would in a bankruptcy (as there are less costs and fees associated with an IVA which eat into the available funds to distribute to the creditors). * It is **usually quicker** than bankruptcy.* Also, because the debtor can continue to trade, while the creditor might lose some money now, they **keep a customer for the future**.
366
What are the 5 steps involved in putting an IVA in place?
* The debtor must take **professional advice** from an **insolvency practitioner** (they are not permitted to proceed alone). If the insolvency practitioner agrees, they become the **debtor's nominee** * The nominee will **draw up proposals** and **supervise** the implementation of the IVA (which the debtor will have to pay for). * The debtor must prepare a **statment of affairs** and the nominee will **apply to the bankruptcy court for an interim order*** The nominee will **prepare a report** and if worth doing so, will call a **meeting of the creditors*** If an agreement is reached with the creditors, the nominee will become a **supervisor** who **oversees** and **implements** the proposalsNote, it is also possible for a **trustee in bankruptcy** to apply for an IVA on behalf of a debtor.
367
What is an insolvency practitioner?
An individual who is **licensed to act on behalf of companies or individuals** facing insolvency.
368
What is a Statement of Affairs in the context of an IVA?
* The insolvency practitioner directs the **debtor** to prepare a statement of affairs which details their **assets and liabilities**. * This is used by the insolvency practitioner to prepare **realistic proposals** for the creditors so the debtor must be **truthful** in the statement.* If the IVA is entered into and the debtor **provided false or misleading information**, the **supervisor** or any **creditor** who is a party to the IVA **may petition for the debtor's bankruptcy**.
369
What is an Interim Order in the context of an IVA?
* The insolvency practitioner applies to the **bankruptcy court** for an interim order. * Whilst in force, **no bankruptcy petition** may be presented or proceeded with **unless permission is granted by the court** to proceed. * Additionally, **no other proceedings or executions can be commenced** against the debtor. This gives the insolvency practitioner a **breathing space** to try to work out what **assets and liabilities** the debtor has, and whether there is **any likelihood of a successful IVA** without individual creditors sending in the bailiffs and whittling away the available assets.
370
What happens at a meeting of creditors in the context of an IVA?
* The insolvency practitioner prepares a **report** advising whether there are any realistic proposals to offer to the creditors and **whether it is worth calling a meeting** of creditors.* If a meeting is called and **at least 75% in value** of the debtor's **unsecured creditors** agree (which must account for **more than 50% of independant creditors**) to the practitioner's proposals, the proposals become **binding on every ordinary unsecured creditor who has notice** of the meeting, **even if they did not attend or vote**.* **Preferential creditors** (i.e. employees owed holiday pay or wages due in the last four months) and **secured creditors** (creditors who have taken collateral to protect their debt) **are not bound, unless they agree** to the proposal.
371
How much debt must be held by creditors in agreement in order for an IVA to be binding?
**At least 75%** in value of the debtor's unsecured creditors (which must account for **more than 50% of independant creditors**).Independant creditors must not have a personal relationship with the debtor e.g. if the debtor's sister is a creditor, they would not get a vote on the IVA.
372
How is an IVA implemented?
* The insolvency practitioner (now called a **supervisor**) **oversees** and **implements** the proposals. * If implemented successfully, any **debts to unsecured creditors** beyond what is payable under the plan will be **discharged**.* If the **debtor fails to comply** with the IVA or **provided false or misleading information**, the **supervisor** or **any creditor** who is a party to the IVA **may petition for the debtor's bankruptcy** e.g. if the debtor tried to put money or assets out of reach of the creditors before the IVA by making transactions at an undervalue or giving preferences as only the trustee in bankruptcy and not the supervisor of an IVA has the power to apply to court to set aside these transactions.
373
What is bankruptcy?
A **judicial process** (instigated by the debtor/their creditors/IVA supervisor) in which: * the **assets** of the bankrupt debtor are **passed to a third party**, the **trustee in bankruptcy**, * who **liquidates** the assets (subject to certain exceptions) and * uses the money from the liquidation to **pay off as many of the debtor's debts as possible** in a **strict order** set out by legislation. During the bankruptcy, the **bankrupt** will be **restricted** from certain behaviour.Once an application for bankruptcy is made, the debtor's **creditors must stop chasing after the debtor**, and the **debtor will be discharged** from most of their debts after **one year**.Note, there is **no longer moral judgement or punishment** but if the bankrupt is seen as **culpable** or **dishonest**, there may be **sanctions**.
374
What are the 3 main advantages and 4 main disadvantages of bankruptcy to the debtor?
**Advantages*** They can **start afresh**, free of debt. * **Creditors stop chasing** them * They are allowed to keep a **reasonable amount from their income** to live on. **Disadvantages*** It will affect the debtor's **credit rating**,* Their **home** might be sold* It will be a **matter of public record** which could result in shame or stigma * It will prevent the bankrupt holding **certain jobs** e.g. being an MP, a bankruptcy order immediately suspends a solicitor's practising certificate.
375
What is the advantages of bankruptcy to the creditor?
Debts are paid off in the **statutory order**, so it prevents one creditor benefiting at the expense of another.
376
What is the procedure for applying for bankruptcy?
An application for a bankruptcy order can be made in 3 ways:* The **debtor** can apply **online** to declare themself bankrupt. The application is heard by an adjudicator appointed by the Secretary of State. The application will be **granted** if the adjudicator finds the **debtor is unable to pay their debts*** **One or more unsecured creditors** who is/are **owed at least £5,000 combined** can present a petition for an order of bankruptcy to the **bankruptcy court** if they can prove the debtor is insolvent.* The **supervisor of an IVA** can petition for the debtor's bankruptcy if the **debtor has breached the terms** of the IVA, **hidden assets**, or given a **preference** to a creditor.If the bankruptcy order is made, then an **official receiver** is appointed. The official receiver is a **civil servant** who will act as the **trustee in bankruptcy** unless the creditors seek to appoint their own nominee.
377
How much do creditors need to be owed in order to petition for an order of bankruptcy in relation to a debtor?
**One or more unsecured creditors** who is/are **owed at least £5,000 combined** can present a petition for an order of bankruptcy to the bankruptcy court
378
How does the adjudicator determine whether to grant a bankruptcy application?
The application will be **granted** if the adjudicator finds the **debtor is unable to pay their debts**
379
In which circumstances can a supervisor of an IVA petition for the debtor's bankruptcy?
If the debtor has:* **breached** the IVA* **hidden assets*** given a **preference** to a creditor
380
How can a creditor/creditors show a debtor is insolvent in the application for bankruptcy against them?
The creditor must prove that the **debtor is insolvent** by showing either that the **debt is payable immediately** and the **debtor does not have funds to pay**, or the **debt is payable in the future** and the debtor has **no reasonable prospect of being able to pay**. The creditor may use the following methods to make the necessary showing: * If the debtor owes a **liquidated debt for £5,000 or more**, the creditor may make a **statutory demand for payment**; if the debt is **not paid within three weeks**, or the debtor does **not apply to set aside** the statutory demand within three weeks, the debtor will be deemed insolvent. * If the debtor owes a **future liability of more than £5,000**, the creditor may serve a **statutory demand for proof of ability to pay**; if the debtor does **not show a reasonable prospect** of being able to pay the debt when it falls due or **apply to court to set aside** the statutory demand, the debtor will be deemed insolvent. * If the debtor owes a **judgment debt of more than £5,000**, the creditor can **seek to execute** on the judgment; if the **attempt fails**, the debtor will be deemed insolvent.
381
What happens to the bankrupt's estate in the event of bankruptcy?
* It **vests automatically in the trustee** in bankruptcy. There are **no legal formalities** to transfer those assets e.g. completing a stock transfer form. * The trustee **collects in** and **sells** the bankrupt's assets to raise money which is then **used to pay off the creditors**.Note, **certain assets are exempt** from the bankruptcy estate and there are sometimes **special rules** regarding the bankrupt's **home**.
382
What is the exemption from the Bankruptcy Estate?
* The bankrupt is entitled to keep some assets needed for **day-to-day living**, such as **furniture** and any **tools required for their job**. Note, expensive furniture and clothing could theoretically be included in the estate and replaced with less expensive versions.* The bankrupt is also entitled to **retain any salary** they make, subject to the trustee applying for an **income payments order**, if the salary exceeds the amount needed for the reasonable needs of the bankrupt and their family. The payments order can last for a maximum of three years.
383
What happens to the bankrupt's home in the event of bankruptcy?
The bankrupt's interest in their home **will pass to the trustee**, but there may be **other legal or equitable interests** in the home. * The home could be held in **joint names*** A partner/spouse may have an **equitable interest** arising from a trust * A **spouse** may have a **right of occupation** under legislation* **Children under 18** may live in the home, giving the bankrupt and their spouse/partner a right ofoccupation.If any of these interests exist, the **trustee cannot sell the home without a court order**, and the court will **consider all the interests** before making an order for sale. However, **after one year**, the **interests of the creditors are paramount**, and so will take precedence over any of the other people claiming an interest and the house can be sold.
384
What restrictions are placed on a bankrupt during the bankruptcy?
In order to protect creditors and prevent the bankrupt getting into further financial difficulties, thebankrupt is **restricted** from:* **Applying for credit** of more than a prescribed amount* Acting as a company **director*** Being a **partner*** **Trading under another name without disclosure** of the bankruptcy.
385
What is the order of priority for distribution to creditors in bankruptcy?
1. **Costs** of the bankruptcy2. **Preferential debts** (i.e. holiday pay due to employees and wages of employees due in the last four months and HMRC in respect of VAT, PAYE, and National Insurance contributions owed)3. Ordinary **unsecured creditors**4. **Postponed creditors** (spouse or civil partner).If there is **not enough money to fully satisfy** all the creditors at one level, then the **debts rank and abate equally**. This means all the creditors in that category will receive the **same percentage of their original debt**.
386
What happens at the end of bankruptcy?
If the bankrupt **complies** with the restrictions and has **not caused the bankruptcy** by their own dishonesty, negligence, or recklessness, then the bankruptcy will be **automatically discharged after one year**.
387
What happens to culpable bankrupts?
'Culpable' bankrupts cause the bankruptcy by their own **dishonesty**, **negligence**, or **recklessness** They can be subject to a **court bankruptcy order** for **up to 15 years**. This order can **extend the restrictions** intended to protect the public from the bankrupt so that they continue after the bankruptcy is discharged.
388
If the bankrupt is a partner in a partnership, what are the consequence for the partnership?
**Partnership at Will*** Partnership will be **dissolved**.* The **trustee in bankruptcy** (or liquidator if the insolvent partner is a company) will **receive any money due** to the insolvent partner, to be **used for the benefit of the partner's creditors**.**Partnership Not at Will*** If the partnership agreement provides that the partnership will not terminate on bankruptcy of a partner, the partnership will continue* Usually the **remaining partners will purchase the insolvent partner's interest** from the trustee in bankruptcy (or liquidator if the insolvent partner is a company), **in accordance with the retirement provisions** in the partnership agreement.**Limited Liability Partnership*** An undischarged bankrupt cannot be a member/take part in the management of an LLP **without the agreement of the court*** The trustee in bankruptcy will seek to **realise the member's interest** for the benefit of his creditors, usually by **selling theinterest to the remaining members** in accordance with the **retirement provisions** in the partnership agreement.
389
If all partners in a partnership are made bankrupt, what happens to the partnership?
Partnership is **wound up** using:* the same processes as for **bankruptcy**, if it is comprised of **individuals**, or * for **liquidating** a limited company, if it is comprised of **companies**, or* **both** if it is a **mixture**.The **official receiver or insolvency practitioner** will:* Make sure **all contracts** are completed, transferred or otherwise ended* **Cease the business*** Settle any **legal disputes*** **Sell any assets*** **Collect money owed** to the partners or partnership* **Distribute any funds** to the creditors.
390
What happens to an insolvent LLP?
If an LLP were to be made the subject of a winding-up order, it would be **administered by the official receiver** as a limited company
391
What are the 3 purposes of corporate insolvency law?
* **Protect the creditors** and balance the interests of competing groups of creditors* Promote **corporate rescues*** If necessary, **control or punish** the company's directors.
392
What are the 7 options for an insolvent company or LLP?
**Informal*** **Negotiate** with creditors to extend the time to pay or reduce its debts**Formal*** **Receivership**: This enables secured creditors to recover what is owed solely to them (techically not an insolvency procedure but often leads to insolvency)* **Restructuring plan**: This allows companies to restructure their debts with the sanction of the court (not a formal insolvency procedure)* **Moratorium**: This halts most actions by creditors to enforce their rights (not a formal insolvency procedure)* **Administration**: seeks to rescue the company * **Company voluntary arrangements**: seeks to rescue the company* **Liquidation**: This causes the company's assets to be sold to pay off debts and the company will cease to exist.
393
What is Fixed Asset Receivershp?
* **Technically not an insolvency procedure** but can often lead to insolvency.* If a company **breaches a secured loan** agreement, it will usually give the lender the **right to appoint an administrative receiver** who takes **possession of the asset** securing the loan (the 'charged asset') and **(usually) sells it** to pay the secured lender. **Once the asset is sold, the receiver has no further role** in the company.* The receiver **does not need to be an insolvency practitioner**.* It is **not necessary for the company to be insolvent** for the administrative receiver to be appointed, it may have breached another term of the loan e.g. failing to pay a judgment debt. * Often security is taken over **important assets** (e.g. premises, or plant and machinery). If those assets are turned over to a receiver and sold, the company usually will collapse into liquidation.
394
What is a restructing plan?
* A restructing plan is **not a formal insolvency procedure**, and it is **very broad** in scope* Company/LLP that has encountered or expects financial difficulties may **propose a compromise or arrangements** with its creditors or members. * Usually, the plan involves the **creditors agreeing to accept less** than they are owed but more than they would likely receive in bankruptcy. * The plan must be approved by those **owed at least 75% in value of the unsecured debt**. * The **court may approve the plan even if one or more classes disagrees** with it and the **dissenting creditors will be bound** (known as a cram down).
395
What is a moratorium?
* The purpose is to **rescue** the company **as a going concern** and **return it to profitable trading** through a Company Voluntary Arrangement, restructuring plan, refinancing or an injection of new funding. * It is **not a formal insolvency procedure** but is designed to encourage businesses in financial distress to **act early** to restructure their debt. * It is **not available** for companies which are, or have within the previous 12 months been, **subject to an insolvency procedure** and certain types of companies are **excluded** (e.g. banks and insurance firms).* A insolvency practitioner called a '**monitor**' is apppointed and a **procedure** must be followed to enter into a moratorium.* The moratorium **restricts the ability of third parties to enforce** their rights against the company and (ii) **prevents the commencement of formal insolvency procedures**.
396
What is the role of a 'monitor' in a moratorium?
* The monitor **oversees** the company's affairs and **ensures that it is likely that the moratorium will result in its rescue** as a going concern. * The **directors remain in charge** of running the business. * The monitor must **ensure the purpose of the moratorium continues to be achievable** and that **creditors' interests are protected**.
397
What is the procedure for directors of an eligible company to enter a moratorium?
* The **directors** and the **monitor** **file certain documents** with the court* Where the company is subject to an **outstanding winding-up petition**, a court order is made. * Where a court order is required, the court can make the order only if it is satisfied that the **moratorium would achieve a better result for the creditors as a whole** than is likely to be achieved through the winding-up. * The **monitor notifies Companies House** and the **creditors** of the moratorium. * The moratorium lasts for an **initial period of 20 business days**, which may be **extended** or **terminated** in certain circumstances.
398
What are the effects of a moratorium?
The free-standing moratorium* **restricts the ability of third parties to enforce their rights** against the company (including under security granted to creditors) and * **prevents the commencement of formal insolvency procedures**. **Landlords may not forfeit any lease** of the company's premises and a **floating charge holder may not crystallise their floating charge**.During the moratorium, the **corporate entity has a payment holiday** in relation to debts, subject to **certain exceptions** including wages and other amounts owed to staff.
399
What is administration of a company?
Administration is a procedure which enables the **administrator** (an independent insolvency practitioner) to **run, reorganise, and/or sell the company as a going concern** while a **moratorium** is imposed. The **aim** of administration is for the administrator to (in order of importance):* **Rescue** the company as a going concern* Achieve a **better result for the company's creditors** than would be achieved if the company were to be wound up* **Realise property to distribute** to one or more secured creditors.The administrator acts in the **interests of the creditors as a whole** (unlike a receiver)It is **possible for a solvent company** to go into administration and a company can go into administration through a **formal court hearing** or by a **company/directors/holder of a qualifying floating charge**.
400
What is the procedure for a company to go into administration?
Either:* Through a **formal court hearing** ('in court route'). If this is used, then the court can make the order only if it is **satisfied the company is unable to pay its debts** and that the **order is likely to achieve a better result** for the company's creditors than liquidation.* By the **company**, its **directors**, or the **holder of a qualifying floating charge** **filing certain documents** with the court ('out of court route'. The **directors and the company (the members) can appoint an administrator after filing papers if no winding up petition has been issued**. They must **notify any qualifying floating charge holder** who will agree or appoint an alternative administrator.
401
What is a qualifying floating charge?
A charge over the **whole or substantially the whole** of the company's assets. It will contain a **provision empowering the lender to appoint an administrator or an administrative receiver** if a breach has occurred which allows the lender to enforce its security under the terms of the credit agreement (usually this is non payment of interest or capital).
402
What is the role of an administrator
The administrator must be a **licensed insolvency practitioner**.* They have the power to **take control of the company's property** and **sell it, bring or defend legal proceedings** on behalf of the company, **carry out the company's business**, **remove or replace directors**, etc.* The administrator also has the **power to investigate previous transactions** of the company to seek to increase the value of the assets for the creditors and can **take action against the directors** for wrongful and fraudulent trading. Generally, a **majority in value of the creditors must approve** the administrator's proposals
403
What is "pre-pack administration"?
When the company's **managers pre-arrange the sale** to a buyer and the **administrator immediately sells the company** to the buyer on their appointment. It is a bit controversial as there is not much participation by the unsecured creditors who often go largely unpaid
404
What is a CVA?
* A **Company Voluntary Arrangement** is similar to an IVA; it is a **compromise between the company and its creditors** under which each **creditor usually agrees to take less** than the full debt owed them. * It is used when the company has a **short-term cash flow problem but is generally financially sound**. * Although the creditors might not be paid in full, they are **likely to receive more money than if the company went into liquidation**. * Note, there is **no automatic moratorium** but small companies can apply to the court for one. * There is a **process** for entering a CVA and there are both **advantages and disadvantages**
405
What is the process for entering a CVA?
* Process is **started by the directors** of the company if it is not already in administration or liquidation (if it is, the administrator or liquidator can propose it). They make a **written proposal to the creditors** including a **statement of affairs** and nominate an **insolvency practitioner** to **supervise** the CVA (called a nominee until proposals are agreed and thereafter a supervisor)* As with an IVA, **75% or more in value of the unsecured creditors** must agree to the CVA in order for it to be implemented. Unsecured creditors who **did not vote in favour will be bound**. * If the CVA fails, the company **could still end up in liquidation** or **administration** (supervisor can petition for this). * As with an IVA, at least for small companies, it is **possible to have a moratorium** by applying to the court which restricts the ability of third parties to enforce their rights and prevents the commencement of other insolvency procedures which can give the company a breathing space.
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What are the advantages and disadvantages of a CVA?
**Advantages**:* CVA is **relatively cheap**. * If successful, the **company will survive**, which means in the long term the creditors can continue to trade with the company. **Disadvantages**:* A disadvantage is that the **CVA only binds unsecured creditors** and so secured and preferential creditors can still put the company into administration or liquidation.
407
What is voluntary liquidation and what are the 2 types?
Volunatary liquidation is essentially **voluntary death** of a company. It is **started by the directors or members** of the company. Following liquidation, the company is wound up and struck off the register.The two kinds are:* voluntary **members**' liquidation * voluntary **creditors**' liquidation
408
What is a statutory declaration of solvency?
The declaration confirms that after the directors have made a **full enquiry** into the company's affairs, they are satisfied that the company will be **able to pay its debts in full and any interest** wihin a **period of not more than 12 months after the commencement of winding up**.
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What are the 5 steps in the process for Members' Voluntary Liquidation?
The **members and directors control the process** from start to finish. It is only available to **solvent** companies and may be used if the owners of a small company wish to retire.* Directors must make a **statutory declaration of solvency**. If this is made without reasonable grounds, they are liable to a fine or imprisonment.* Members will pass a **special resolution** to **start the liquidation** and an **ordinary resolution** to **appoint a liquidator** within 5 weeks of the declaration.* The appointment of the liquidator is advertised in the **London Gazette**, and **Companies House is notified**.* The liquidator **investigates**, **reports to creditors** and **asks for details of all debts**. They take over the powers of the directors and have a **duty of good faith** to exercise the power with reasonable care and skill and for their proper purpose.* The liquidator **collects in the assets** of the company and **distributes funds** to the creditors in the **statutory order**. **Final accounts** are sent to creditors and members, and the **final return** is filed at Companies House. The company is **dissolved after 3 months**.
410
What are the 5 steps in the process for Creditors' Voluntary Liquidation?
It is **started by the directors** but then **taken over by the creditors**. * **Directors** resolve that the **company is insolvent** and should be placed into liquidation, and the **members pass a special resolution** to start the liquidation.* The **resolution** is advertised in the **London Gazette**. **Within 7 days** of the day following the members' resolution, the **directors** must make out a **statement in the prescribed form as to the affairs of the company** and send that statement to the company's creditors. The directors also seek a **nomination from the company's creditors** for a person to be the liquidator.* The **appointment of the liquidator** is advertised in the **London Gazette** and **Companies House is notified**.* The liquidator **investigates**, **reports to creditors** and asks for **details of all debts**.* The liquidator **collects in the assets** of the company and **distributes funds** to the creditors in the **statutory order** (not all will be paid). **Final accounts** are sent to creditors and members, and the **final return** is filed at Companies House. The company is **dissolved after 3 months**.
411
For what reason does a Creditors' Voluntary Liquidation begin?
It will usually be commenced because the directors are **advised that the company is insolvent** and if they continue trading, they could be **personally liable for the debts** of the company through **fraudulent or wrongful trading**. The directors resolve that the company is insolvent and should be placed into liquidation, and the members pass a special resolution to start the liquidation.
412
What is compulsory liquidation of a company?
* A **creditor/creditors** who can **show that the company is unable to pay its debts** can **petition** for the company to be wound up. An automatic presumption of insolvency applies if the evidence is an unsatisfied statutory demand or an unsatisfied statutory judgment debt unless proven otherwise. * The petitioner must give a **copy of the petition** and a **notice** of the hearing at court to the company. It must also **advertise** the hearing. * The court will consider **all relevant factors**. It does not have to accept the petition. * If the company is **able to convince the court it may recover** financially or that the debt on which the petition is based is disputed, the court may dismiss the petition. **Otherwise**, a **liquidator will be appointed** (this will be the official receiver but the creditors can appoint their own), and there is a **strict order of distribution** to creditors.
413
What is the role of the liquidator in a compulsory liquidation of a company?
To **collect in the assets** of the company and **distribute funds** to the creditors in the **statutory order** and the company is dissolved.
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What is the order of priority for distribution to creditors in a compulsory liquidation of a company?
* Where a company enters liquidation **within 12 weeks of the end of a moratorium**, certain **moratorium debts** and **priority pre-moratorium debts*** **Expenses of winding up** (the liquidator's and professional advisers' fees e.g. solicitors)* **Preferential debts** (these are holiday pay due to **employees** and wages of employees due in the last **four months** (up to a maximum amount), and **HMRC** in respect of VAT, PAYE, and National Insurace contributions)* Debts secured by **floating charges** in order of priority (subject to **ring fencing**)* **Unsecured debts*** **Shareholders**If there is not enough money to fully satisfy all the creditors at one level, then the **debts rank and abate equally**. This means all the creditors in that category will receive the same percentage of their original debt.
415
What happens to fixed charges when a company goes into compulsory liquidation?
* Any creditor with a fixed charge will be paid from the **proceeds of selling the secured asset** on which the charge is fixed.* If the asset is sold for **more than what is owed**, the **surplus is available for other creditors**. * If the secured asset is sold for **less than the amount owed**, the chargeholder becomes an **unsecured creditor for the unpaid amount**.
416
A liquidator has £25,000 remaining to pay unsecured creditors totaling £100,000. How much is a creditor owed £5,000 receive?
Each creditor will receive 25,000/100,000 of their original debt. This is often referred to as receiving x pence in the pound. Here a creditor would receive 25p for every £1 owed. So, a creditor owed £5,000 would receive £1,250.
417
What is claw back of assets/review of antecedent transactions?
The liquidator, administrator, or trustee in bankruptcy has a duty to the creditors and has **powers to investigate the company or individual's actions** prior to the insolvency to maximise the funds available and to **ask the court to set aside transactions that violate law**This includes: * **preferences** * **transactions at an undervalue*** **fraudulent and wrongful trading*** certain **floating charges**
418
What is a preference?
A preference arises when a **debtor does something** that puts a **creditor, surety, or guarantor** in a **better position** on liquidation or administration than they would have been if the event had not occurred.* It **must have been intentional** * It must have occurred **within 6 months** of the onset of insolvency (or **2 years** if it was made to a connected person)Example: * paying a certain creditor ahead of others * subsequently granting a charge over premises to a director who loaned money to the companyThe transaction will be **voidable** at the discretion of the court.
419
What does 'a preference must have been intentional' mean?
* The company or individual must have **desired to prefer** the creditor, surety, or guarantor of the company. * The desire to prefer is **presumed** if the preference is in favour of a **connected person** (such as a director, their spouse, or other close family member or an associate of the bankrupt).* If a supplier **threatens** to stop supply unless they are granted a charge over an asset or are paid in full, this **would not be a preference** as the desire element would be missing.
420
When must a transaction be made in order to be considered a preference?
**Within six months** of the onset of insolvency (**two years if the preference was made to a connected person** (i.e. a director, shadow director, close relative or partner of a director or person in control of the directors) or associate of the bankrupt).* For a company **compulsory liquidation**, the onset of insolvency is the **date of presentation of the petition** * For a **CVL**, it is the **date the company enters liquidation**.* For **administration**, it is the **date the company files a Notice of Intention to Appoint an Administrator** or the **date when it enters administration**, whichever is earliest.* For an individual, it is the **presentation of the bankruptcy petition**.
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What is a connected person of a company?
Someone who can **exert significant control** over a debtor* **Director*** **Shadow Director*** **Close relative** or **partner** of a director or a person in control of the directors
422
What is the consequence of a transaction being a preference?
The transaction will be **voidable** at the **discretion of the court**. The court can order that any **property be returned**, any **proceeds of sale be returned**, or any **security discharged.**
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What are transactions at an undervalue?
A transaction at an undervalue arises when: * **property that would have otherwise been part of the bankruptcy estate** was * given as a **gift** or sold for **significantly less than market value** * **within two years** of a **company**'s insolvency or **five years** of an **individual**'s bankruptcy. The consequences of an undervaluetransaction are that the transaction will be **voidable** at the **discretion of the court** (assuming **insolvency requirements** are met and no **defence** is available) and the court can order that any **property be returned**, any **proceeds of sale be returned**, or any **security discharged.**
424
What are the insolvency requirements for transactions at an undervalue?
For a transaction to be set aside (or otherwise remedied) as an undervalue transaction: * for a **company**, it must have been **insolvent at the time** of the transaction or **become so as a result**, but there is a **presumption of insolvency** if the transaction is to a **connected person** * for an **individual**, there is **no requirement to prove the debtor was insolvent at the time** the transaction was made **if it was made within two years** before the petition, but **insolvency is presumed** if the transaction was made at any time in favour of a **close relative or business associate**.
425
Are there any defences available for transactions at an undervalue?
For a **company**, there is a defence if the transaction was **entered into in good faith**, for the **purpose of carrying on the business**, and when it was made there were **reasonable grounds for believing it would benefit the company**.
426
Can granting security in a company asset be a transaction at an undervalue?
Granting a security interest in a company asset is **not considered to be a transaction at an undervalue** as this **does not change the value** of the company's assets, and so does not reduce their value. (Note, it can be a preference)
427
What is fraudulent trading?
* Fraudulent trading arises when a **director** (or **any other person** who knowingly participates) **carries on business** of the company with the **intent to defraud creditors** e.g. putting assets beyond their reach. * An action can be brought by a **liquidator** or an **administrator**. * If fraudulent trading is established, the **directors may be liable** to make such personal contribution to the company's assets as the court orders.* Fraudulent trading is also a **criminal offence**. In actual practice, fraudulent trading is **rarely proved** because of the difficulty in establishing the required intent to defraud (dishonesty is required).* A defence exists if the director **genuinely believed things would get better** even if the belief was unrealistic
428
Are there any defences for fraudulent trading?
A defence exists if the director **genuinely believed things would get better** even if the belief was unrealistic.
429
What is wrongful trading?
A civil claim that:* **at some time before a company/LLP became insolvent** (not relevant to partners or sole traders), * the **directors** **knew or ought to have known** that * there was **no reasonable prospect** that the company would avoid insolvency and * **failed to take adequate steps** to minimise the losses to the company's creditors **and no defence is available**.Once a director knows or ought to know that insolvency is unavoidable, their **duty shifts** from what is best for the shareholders to what is best for the creditors.A wrongful trading action can be brought by a **liquidator** or **administrator**. May arise in the context of compulsory or voluntary creditors' liquidationIf the claim is successful, the court may order the **director to contribute** to the company's assets as the court deems appropriate.
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Are there any defences available to wrongful trading?
A director can defend the action by showing they took **every step with the view to minimising potential loss** (using reasonably diligent person test for directors' duties) to the company's creditors after becoming aware that the company had no prospect of avoiding liquidation. A director **should not do nothing** if faced with the possibility of insolvency. At the least they should **take (and follow) professional advice**. They should cease to buy on credit, rigourously chase debts, hold regular minuted meetings, reconsider payment of directors salaries.
431
When is a floating charge automatically voidable?
A floating charge is **automaticallyvoid** (i.e. a liquidator or administrator need not apply to court for a declaration of invalidity or an order to set the floating charge aside) if the floating charge was created:* For **no consideration** within **12 months ending with the onset of insolvency** (or **two years for a connected person**) **and*** At a time the **company was insolvent or became insolvent as a result** if the charge was given to a **person unconnected** to the company (there is no requirement to show insolvency at the time of the charge if the floating charge is to a connected person)
432
A company has an unsecured overdraft at the bank. The bank, worried about the company's cash flow, requires a floating charge to secure the overdraft. The company goes into liquidation 10 months later. Is the floating charge valid?
The floating charge will be **invalid** and the bank will be an unsecured creditor.
433
A company has an unsecured overdraft at the bank. The bank, agreeds to increase the overdraft limit from £100,000 to £200,000 in return for the floating charge, and the company's overdraft was £150,000 on liquidation. Is the floating charge valid?
The floating charge would be **valid for the fresh consideration** but **not for the original overdraft**. Therefore, the bank would have a **floating charge in respect of £50,000** and would be an **unsecured creditor for £100,000.**
434
What is ring fencing?
A **liquidator** is required to **set aside part of the assets subject to a floating lien** for the benefit of unsecured creditors. (The assets are figuratively ringed by afence.) The amount is **50% of the first £10,000** in value of the property subject to floating charges and **20% on amounts above**, up to a **maximum ring-fenced fund of £800,000**.
435
When is a company deemed unable to pay its debts?
The company will be deemed unable to pay its debts if it is proved:* a creditor owed **more than £750**, serves a **statutory demand** which is **not paid within 21 days*** a creditor has obtained a judgment against the company and has **attempted to execute the judgement but the debt is not fully satisfied*** the company is unable to pay its debts as they fall due to, the **cash flow test**, or * the value of the company’s assets are less than its liabilities, the **balance sheet test**.
436
What is the cash flow test?
For the cash flow test, the creditor is showing that the **company's current assets are less than its current liabilities**. In some situations, the company might admit that to a creditor e.g. an email that says, sorry, we cannot afford to pay you until we get paid ourselves next month.
437
What is the balance sheet test?
The balance sheet test shows that the **company’s overall assets, including its fixed assets, are less than the overall liabilities**. Again, the **creditors do not have this information**. The directors, however, might have information, which means they have to adjust the accounts e.g. if one of their customers has gone into liquidation, then the **debt showing in current assets has to be adjusted as that money will not be paid** and so shouldn’t be recorded as an asset. Or if the board realised that the **stock is overvalued on the balance sheet and wont be sold for that value, they need to adjust the value**. This could result in the company being balance sheet insolvent.
438
How does a creditor usually show a company is insolvent?
Statutory demands and judgement debt.
439
How does a director usually show a company is insolvent?
Cash flow and balance sheet tests
