Business Law and Practise Flashcards
Who has liability for debts in a sole proprietorship or general partnership?
the sole proprietor or general partner has unlimited personal liability
Who has liability in a LLP or company?
companies and LLPs are legal entities in their own right and liable
How are the different business models formed? (company, llp, Sole Partnership, General Partnership)
Sole Proprietor, General Partnership - no filing requirements
LLP, Company - filing needed at Companies House
How is a General Partnership formed?
1) if two or more persons (includes business entitles e.g. companies)
2) carry on a business in common
3) with intention to make profit
What is considered prima facie evidence of a partnership?
Sharing of profits unless the receipt is:
-repayment of debt
-employment
-annuity
- agreement to share losses not prima facie
-joint owned property
-financial contribution or sharing gross returns
When does a partner have Actual Authority
1) Expressly granted in partnership agreement
2) Expressly, from vote
3) Impliedly, from failure to object to previous action
= can bind partnership in contract
When does a partner have Apparent Authority
1) To carry on the usual way of business of the kind carried by the business unless:
- partner has no actual authority to act and
- third party knew partner lacked authority or/
- third party did not know they were a partner/ or though they were a sole trader
objective test - reasonable third party think a business of this kind would usually do this act?
Examples of what third parties can assume partners have authority to do.
- Buy and sell firm goods
- Receive debt payments
- Hire Employees
- Employ a solicitor
ALSO if third party gives notice to a partner wh0 habitually acts in the partnership business, notice will also be to the firm
If a Partner does not have Actual or Apparent Authority, who is bound by the contract?
the Partnership will not be bound but the partner will be
Liability for Incoming and Outgoing Partners
New Partner - not liable for obligations incurred before they were admitted
Outgoing Partner - Remains liable on all obligations incurred before they left. Will also be liable for obligations after the leave unless: 1) gave actual notice to creditors and 2) gave publication notice on London Gazette
Firm can agree to indemnify retiring partner for liabilities (hold harmless agreement)
What happens if someone who is not a partner holds themselves out to be a partner
They may be held liable as if they were a partner to any third party who gave credit to partnership on strength of their holding out
What is considered Partnership property
Money or property contributed to the firm and earned by the firm, bought by firm
No right to use this for personal use
Property owned by partner used by firm will still be partner property unless parties agree otherwise
How do Partners share losses and profits
Equally
Partner can assign their right to receive distributions to another but that person does not become a partner unless all parties agree
If partner lends money to partnership, entitled to interest at 5% per annum
What are the Rights of a Partner?
1) Inspect partnership books and records
2) Not entitled to be paid for work done but is entitled to be indemnified for payments made on behalf of business
3) Have an equal vote in decision making
Division of Losses - typically shared like profits
Rights to share of profits assignable
No right to distribution except as agreed
Entitled to interest on loan made by Partnership at 5% per annum
What decisions require unanimous consent by the partners?
1) Admission of New Partner
2) Change in Nature of Business
3) Alteration in Partnership Agreement
What are the Duties of a Partner?
1) To disclose information relevant to the firm
2) To not compete with the firm’s business
3) Account to firm for any benefit or profit from transaction concerning partnership, its business or use of partnership property
How can a Partnership be dissolved?
1) Expiration of term or acccoomplishment of goal
2)Partnership gives notice to withdraw partnership at will
3) Death or Bankruptcy
4) Court order
When a Partnership is dissolved, in which order is its assets distributed?
Partnerships assets first used to pay off partnership debts, remainder is paid personally by partners.
If partnership property sufficient:
1) Repay debts owed to outside creditors
2) Repay loans made by partner to the firm
3) Return partners contributions
What must registration of an LLP include?
1) Name of LLP - must end in LLP
2) Location and address of LLP’s registered office
3) The names and addresses of the LLP’s members who will serve as designated members
4) Details of people with significant control
When can an LLP change its name
At any time by giving notice of change to the Registrar of Companies, who will then issue a certificate of the name change
What happens if an LLP carries on business without having two members
If it carries on for more than six months, person who carried on business is jointly and severally liable with the LLP for its debts incurred after initial six months.
How can new members be added to an LLP and how can a person cease to be a member
Added:
1) Through unanimous consent of existing members
2) Registrar of Companies at CH must be notified within 14 days
Leave:
1) Give reasonable notice to other members and to Registrar at CH within 14 days
How many members of an LLP must have the duty to submit filings at Companies House
2 Designated members
LLPs are required to hold a registrar of people with significant control, who is considered a person with significant control?
1) Holds 25% of surplus assets on winding up
2) 25% voting rights
3) Hold right to appoint or remove majority of management
4) Who can exercise significant influence/control over a trust or the members but is not a legal person
What documents must an LLP file at Registrar of Companies
- Annual Accounts
- Annual Confirmation Statement
- Details of Appointment and Removal of members
- Changes to details of the members
- Changes to registered name and registered office
What are the difference kinds of companies?
Private Limited (by shares) Company: private shares and shareholders personal liability limited to what they agreed to pay for their shares
Companies limited by guarantee: shareholders liability limited by amounts they guarantee
Public Limited Companies (PLC): required to have minimum nominal share capital of £50,000.
Unlimited Companies: members personally liable for all debts of company
Who is a promotor and what are their liability on a pre-incorporation contract?
Promoters are those who go about arranging to bring company into existence
They are personally liable for contracts they enter on behalf of company being formed
They remain liable on these contracts even after incorporation unless there is an novation agreement:
- agreement among company, third party. promotor to substitute company for promotor
What is a shelf company?
Company already registered but never traded, often made by solicitors.
Allows corporation to be set up quickly by promotor.
For a company to be incorporated what must a promotor file with the Registrar of Companies?
Memorandum of Association: authenticated/signed agreement of person wishing to become members of a company on formation
Application of Registration
What must an Application of Registration for a company include?
Memorise using abbreviation: DISCLOCFIN: (dis-cloc-fin):
1) Directors (proposed directors or officers)
2) Initial shareholding statement (total number shares, aggregate nominal value, class, amount unpaid))
3) Significant Control (persons of SC)
4) Capital statement
5) Limited (shares or guarantee)
6) Office (Location of registered office)
7) Compliance with Companies Act 2006
Fee
8) INc. (Name of company, interpreted as “Inc.”) must end in Ltd, Limited, Plc etc
When does a company come into existence
When the registration finds the documents are in order, they issue a Certificate of Incorporation, and the date stated on it is the date it comes into existence.
What are the Articles of Association and what happens if a company doesn’t file any?
The company’s constitution.
If a company doesn’t file Articles of Association, the Model Articles will apply unamended.
Allows companies to pursue any object and carry on any business
can be amended to restrict its objects
Serves as contract between company and shareholders and shareholders with each other
- shareholders can only enforce articles relating to their membership rights
How can a company amends its articles?
By Special Resolution, 75% approval
Shareholders can vote to entrench articles which require additional conditions
- can be included in original articles with notice given on filing
- provision preventing amendment is ineffective
Shareholders can also enter into agreements apart from articles which are binding on all who sign them
How can an amendment be challenged?
If a shareholder makes an amendment that no reasonable person would consider for the benefit of the company, shareholder who did not vote in favour can challenge it in court
What is the rule on the Veil of Incorporation?
The veil of incorporation protects members against personal liability from obligations of the company.
This will not be lifted to reach the assets of the members unless the company form is being used for fraud or to avoid existing obligations e.g. transfer assets to a company to keep them off creditors
How many directors must public and private companies have?
Public: 2
Private: 1
What are de facto and shadow directors?
Directors are natural persons at least 16 years of age who run the day to day management of a company.
1) De jure director: appointed
2) De facto director: acts as a director, claims to be a director, but never been appointed
3) Shadow director: influences other directors but does not claim to be a director
How can new directors be appointed under the Model Articles?
By directors or shareholders through an ordinary resolution. Registrar of Companies must be notified within 14 days
Difference between executive and non-executive directors
Executive: responsible for day to day running of the company and are employees of company
Non-Executive: consultants, supervisory role, oversee activities of executive directors
What is a nominee director
Director appointed the board to represent interests of a particular stakeholder, usually a shareholder
Must still act in the best interests of the company
What powers do directors have under the model articles?
To exercise all the powers of the company except where article provides otherwise
Power to:
- appoint or remove a director or auditor
- exercise power collectively as a board
- day-to-day decisions can be made by directors alone
- power to decide how much money to borrow on behalf of company
- power to borrow
Limitations:
- fundamental decisions about the company require shareholder approval
- Certain decisions, such as changing articles, reserved for shareholders only
When can actual authority and apparent authority arise for directors?
Directors are agents of the company and can bind in contract or tort
Individual director has ACTUAL AUTHORITY granted by board resolution
Apparent authority could arise through past dealings - rare
How may a company execute documents?
1) Affixing their seal
2) Signature of 2 directors; director and secretary; single director in the presence of a witness
What duties do directors have to uphold?
Common law fiduciary duty to act in good faith and in the best interest of the company as a whole
Enlightened shareholder value: in addition to profit, directors must consider effects of decisions on interests of shareholders, suppliers, customers, community etc
Must not accept a benefit from a third party given to them because they are a director
Duty to disclose their interests in proposed or existing transactions
Former director cannot exploit property information or opportunities of which they became aware as a director
Can a director avoid liability for breach of duty, negligence or trust
Liability for breach of duty, negligence or trust cannot be exempted but;
1) Company may purchase insurance for directors
2) Company can indemnify directors against claims by third parties except in respect to criminal or regulatory fines
If the company is insolvent, or on the brink of insolvency, how do the directors duties change?
Directors must consider or act in the interests of the creditors of the company
Duty to shareholder displaced
What is the standard of care, skill and diligence for a director?
Director must exercise a higher standard of care, skill, diligence that would be exercised by a reasonably diligent person
Objective test: general knowledge, skill and experience that would be expected of person carrying out duties of a director
Subjective test: general knowledge, skill and experience the director in question actually has
What conflicts of interest do no breach the duty of the director
Director should avoid conflicts of interest but no duty breached:
1) Relates to transaction with company itself and board knows and director has interest
2) Not likely to cause conflict
3) Authorised by directors after full disclosure
NOTE: If director has a personal interest in a transaction, the director cannot be counted as forming part of quorum
director can also not obtain loan from company unless approved by board
Under the Model Articles, how can a Directors meeting be called?
Any director can call a meeting by giving reasonable notice of the meeting
Notice need not be in writing but must indicate:
- proposed date, time and location
Can be by telephone or other means
Under the Model Articles, how many directors must attend the meeting for it to be valid?
At least 2 directors make a quorum for it to be valid
Director cannot be counted on a quorum regarding their service contract.
How can resolution be approved
- By majority vote of the directors
- Directors can pass written resolutions without meeting if all directors approve
How can shareholders remove directors
By a majority vote. Removal must not violate service contract
Can be removed for no cause but will be disqualified from office for misconduct in connection with company eg
- conviction of an indictable only offence
- promotion, formation, management
- liquidation of a company
- fraudulent trading
Notice to adopt resolution to remove director must be given at least 28 days before meeting
- director must be given notice
- right to response in writing and orally at meeting
What is the Bushell v Faith clause?
Articles can be modified to add a clause giving weighted voting to a director who is also a shareholder
When are you required to have a secretary
If you are a public company
No prescribed duties by legislation
Must fulfill statutory requirement for qualification:
1) 3 years experience as company secretary
2) member of regulated accounting or secretarial body
3) barrister or solicitor
apparent authority given to enter in to contracts for administrative services
Rule on preparing accounts
All companies must prepare accounts
Large companies (annual turnover of £10million and 50+ employees): must hire an auditor
What are the rights of shareholders?
Shareholders provide financial backing to a company
They have a right to inspect service contracts of directors, which must be kept for a year after they leave - kept at registered office
Right to inspect register of members - also kept at registered office
- shareholder must have a proper purpose to inspect
- company have five days to comply with request
What can dividends be paid from
profts available for the purpose: accumulated realised profits less losses
Rights of preference shares and cumulative preferred shares
have right to be paid the stated preference before dividends can be paid to common shareholders
preference on cumulative preferred shares accumulates and is carried forward if not paid in any year
How are dividends authorised?
Directors decide if profits available and recommend dividend for approval to shareholders
passed by ordinary resolution
When can a derivative claim be made against a director?
A shareholder may bring a derivative claim if they believe a director has or will breach a duty owed to the company and the board will not assert rights to prevent or remedy action.
Court will dismiss case if it is not prima facie, but even if shown, it will dismiss unless claim will promote the best interest of company
Damages recovered belong to the company but shareholder can be indemnified
If a minority shareholder feels that company affairs are being conducted in a prejudicial manner to that shareholder, what can they do?
Petition the court for remedy
- usual remedy is to force majority shareholders to buy minority interest at fair value
Shareholder can also apply to have company wound up if solvent, if they can show it is just and equitable to do so
Rule on General Shareholders’ meeting for private and public companies
Private: not obligated to hold annually
1) Directors can call general meeting
2) Shareholders owing shares of at least 5% paid up voting capital shares can demand a meeting
- if shareholder requests a meeting, director must call it within 21 days of request and it must be held within 28 days
Who must be given notice of a shareholder’s meeting and what does it include?
Given to all shareholders, directors, personal representatives of deceased shareholders, trustees in bankruptcy of any bankrupt shareholders
Given in writing, electronically, email, website
Includes: COPT
C: Company name
O: Occasion (Time, date, and place)
P: Proxy (Statement of right to appoint proxy)
T: Topic (General nature of business to be discussed)
R: Resolution (Full text of any special resolution)
When must notice be given for general shareholder meeting and public company annual meeting
Notice must be give:
14 days in advance of meeting if hand delivered
16 days in advance if not hand delivered
Annual meeting of a public company requires 21 days clear notice
When can a meeting be held on shorter notice
If agreed by a majority in number of shareholders who hold 90% of shares (95% for non-traded public companies)
How are ordinary and special resolutions approved
Ordinary: majority of members (50%)
Special: 75% or more
What is the method of voting to approve resolutions
Normal method: show of hands
A poll vote (one vote per share) can be requested by five or more shareholders or shareholders with at least 10% voting rights/paid up capital
How can written resolutions be passed
Purpose:
- Pass ordinary and special resolutions (not for dismissing directors or auditors).
Initiation:
- Board decides or shareholders with 5% voting rights can request it.
Process:
1) Circulate to all voting members.
2) Explain how to signify.
3) Resolution lapses after 28 days if unamended articles are used.
Voting:
- One vote per share.
Summarise procedure requiring both director and shareholder approval
1)Board meeting and resolution approving matter
2) Board passes resolution to call general shareholder meeting or circulate written resolution
3)Shareholders vote to pass or not
4) If passed, another board resolution may be necessary to facilitate decision
What requires shareholder approval by ordinary resolution?
1) Appointment or removal of director or auditor
2) Adoption of annual accounts and reports of the directors and auditors
3) Approval of a declaration of dividend
4) Approval of director’s decision to allot shares
5) Approval of substantial property transactions (SPT)
6) SPT’s involving directors with a personal interest (more than £100k or more than 5k and contract value exceeds 10% company assets)
7) Ratification of a directors breach of duty
8) Entering a service contract with a director for more than two years
9) Making loan to a director
10) Giving director a payment for loss of office (gift)
What requires shareholder approval by special resolution?
BCN
B: Buy back shares (Decisions to buy back shares)
C: Company name change (Changes to company name)
N: New articles (Changes to company’s articles of association)
What happens if a resolution affects information filed at Companies House?
Copy of changes must be filed at Companies House within 14 days
How can companies raise finance?
Equity: ownership interest, shares
Debt: loans, debt securities
Who are the companies subscribers?
Persons who have signed the company’s Memorandum of Association and agreed to purchase a number of shares
Once company formed, the board will allot shares to subscribers in return for payment
Money received on account for nominal or par value becomes share capital - cannot be returned to shareholders
Who has the power to allot additional shares?
Generally, Directors IF:
1) there is only one kind of share
2) no restrictions in articles
In other situations, directors must seek permission from existing shareholders through ordinary resolution
What is the General Procedure for allotting additional shares?
1) Directors determine price and number of shares
2) Shares issued in exchange for cash, but directors may accept property
3) Model articles: full value must be paid on allotment
4) Any amount beyond nominal value is known as a premium
- premium is still share capital but must be recorded separately in a share premium account
What is a pre-emption right?
When company decides to issue additional shares, they must first be offered to existing shareholders so that they can maintain their proportional share of ownership and voting strength in company
Existing shareholders must be given 14 days to accept
What are the restrictions to a pre-emption right
Does not apply to shares issued for non-cash consideration
Can be disapplied by special resolution
What happens if a shareholder decides to sell shares to a third party?
If a shareholder decides to sell shares to third party it is not an allocation
Right to make such transfer governed by articles
Model articles for private companies grant directors absolute power to refuse to allow transfer of shares
What are the different types of loans?
Unsecured loan: promise to repay the money borrowed
- debt security: document which evidences loan made to company and may be traded
Secured loan: promise to repay and right of lender to take collateral property specified in loan if not repaid:
- Mortgage
- Fixed Charge: e.g. machinery, shares
- Floating Charge e.g. inventory
Must be registered at Companies House within 21 days of creation
Fixed charge take priority in order of creation
Floating charge takes priority in order of creation
Fixed charge priority over floating charge even if made after floating charge
Under the Companies Act 2006, what registers must be kept available for inspection
Kept for members of the company to inspect, for free, and public, for a fee.
Registrar of MDSCC
1) Members
2) Directors
3) Secretaries
4) Charges against assets
5) Persons of Significant Control
How long must minutes from all general shareholders’ meeting must be kept
10 years
What must a company submit yearly to Companies House?
Annual Confirmation Statement confirming information at CH is up to date. Must be filed within 14 days of end of review period and failure is a criminal offence
When must private and public companies sent copies of their accounts to Companies House
Private: no later than 9 months after the relevant accounting reference period
Public: Six months
Must include a
1) balance sheet
2) profit and loss statement
- giving true and fair view of company’s financial year
3) Approved by Directors
What must medium and large companies file at Companies House?
Annual Directors Report
Annual Strategy Report
What must a letterhead of a company disclose?
1) Registered Name
2) Part of UK in which company is registered
3) Registered Number
4) Address of registered office
5) All directors IF ANY director is displayed
What must a letterhead of a partnership disclose
1) Name of Partnership
2) Name of each Member
3) Partnerships business address
What must a letterhead of a sole trader disclose
1) Individuals business name
2) Real name if different from business
3) Business address
What are the options if a sole proprietor or partnership become insolvent?
1) Negotiating with creditor
2) IVA - Individual Voluntary Arrangement
3) Bankruptcy
To draft an IVA, what must a debtor do?
Debtor cannot draft themselves but must instruct an insolvency practitioner
Insolvency practitioner will:
1) Have debtor prepare a statement of affairs
2) Apply to bankruptcy court for an interim order preventing creditors from filing bankruptcy petition
3) Prepare report advising if accepted proposal can be crafted
4) call meeting of creditors
How can an IVA be approved?
Requires approval of creditors owed at least 75% of the unsecured debt.
-If approved, becomes binding on all ordinary unsecured creditors
Preferential creditors and secured creditors aren’t bound unless they agree
What is a bankruptcy order
Judicial process in which assets of the bankrupt pass to a third party, the trustee in bankruptcy, who liquidates assets and uses money from liquidation to pay off as many debts as possible
Once applied for. creditors must stop chasing debtor and most debts will be discharged in one year.
Who can petition for a bankruptcy order
1) Debtor can apply online
2) One or more Unsecured creditor owed at least £5000
- must prove debtor is insolvent by:
a) debt payable immediately
b) debtor does not have funds; or
c) debt payable in future and debtor has no reasonable prospect of being able to pay
3) supervisor of IVA can apply if debtor in default of IVA
Is the debtor owes a liquidated debt for £5000+ or owes a future liability of £5000+, what can a creditor do?
Liquidated debt: creditor can make statutory demand for payment and if not paid in three weeks or debtor does not apply to set aside demand, will be deemed insolvent
Future Liability: creditor can serve statutory demand for proof of ability to pay and if debtor does not show reasonable prospect of being bale to pay or apply to court to set aside, will be deemed insolvent
What happens when a bankruptcy order is made?
Official receiver is appointed who will act has trustee in bankruptcy unless creditors seek to appoint their own trustee,
Most of debtors property vest in the trustee
What is the debtor entitled to keep during bankruptcy
- things needed for day-to-day living
- tools required for job
- salary
During bankruptcy proceedings, what CAN’T the bankrupt do
- Apply for credit over certain amount
- Act as company director
- Be a Partner
- Trade under another name
If they are a partner in general partnership: if made at will, will be dissolved and assets will be turned over to the trustees
If member of LLP, they cannot participate in management
In which order does the trustee pay the creditors?
- Costs of bankruptcy
- Preferential debts e.g. wages for 4 months and money owed to HMRC for VAT, PAYE, NI contributions
- Ordinary Unsecured creditors
- Postponed creditors - spouse/civil partner
Can a Bankruptcy order be longer than one year?
If a Bankrupt caused bankruptcy by their own dishonesty, negligence, recklessness, they are considered ‘culpable’ and can be subject to court bankruptcy order for 15 years
What are the insolvency options of an LLP or company
CRAMRL stands for:
1. CVA (Company Voluntary Arrangement)
- process started by directors who make written proposal to creditors, nominate insolvency practitioner to supervise
- 75% or more in value of unsecured creditors must agree to CVA
- Receivership:
If creditor taken charge over fixed asset, creditor can appoint receiver to take charged asset and sell it if company defaults
- proof of insolvency not needed - Administration:
Administrator run, reorganise. sell company.
- acts in the interests of creditors as a whole
- can be done through court hearing or by company filing papers to court
-court will make order only if it is likely it will achieve a better result for creditors than liquidation - Moratorium:
Court order halting actions by creditors to enforce their rights
Insolvency practitioner appointed by directors as monitor to oversee company affairs and ensure rescue of company
Directors remain in charge - Restructuring plan:
Allows restructure of debts with sanction of court, if approved by those 75% in value of unsecured debt - Liquidation: causes company assets to be sold to pay off debts. company ceases to exist
What are the types of Voluntary Liquidation
Members Voluntary Liquidation:
- members and directors control process completely
- only available if company is solvent but those running wish to wind it up
Creditors Voluntary Liquidation
- started by directors but taken over by creditors
- directors are advised company is insolvent and if trading continues they can be personally liable for debts through fraudulent or wrongful trading
- Members pass special resolution to start liquidation
What is a Compulsory Liquidation
When a creditor, who can show that the company is unable to pay its debts, petitions the company to be wound up
1) Liquidator is appinted
2) Debts are paid in this order: ESPUS
Expenses of winding up
Secured debts
Preferential debts
Unsecured debts
Shareholders
When can a Preference arise
When a debtor does something that intentionally puts a creditor in a better position on liquidation than they otherwise would have been
What is Claw back?
A trustee in bankruptcy has power to claw back a preference paid within 6 months, or two years if made to connected person.
Date of onset of Insolvency:
Company Compulsory Liquidation: date of presentation of petition
CVL: date company enters into liquidation
Administration: date of filing notice or entering administration, whichever is earlier
Individual: presentation of bankruptcy petition
What is a Transaction at Undervalue
Property that would have been part of bankruptcy estate but was given as gift or sold for less than market value
- within two years of insolvency or
- five years of individuals bankruptcy
can be set aside
Company - must have been insolvent at time of transaction or become so as a result
Defence:
a) entered into in good faith
b) for purpose of carrying on business
c) when made there was reasonable grounds for believing it would benefit company
NOTE: grant of security interest not an undervalue
When does Fraudulent Trading arise?
When a director or any other knowing person carries on business of the company with intent to defraud creditors
- if established, directors personally liable
- criminal offence
When does wrongful trading arise?
When directors carry on business when they knew or ought to know that
- company had no prospect of avoiding insolvency
- failed to take adequate steps to minimise loss for creditors
- court order can make directors personally liable
