Business Law & practice Flashcards
What is a Substantial Property Transaction (SPT)?
It occurs when a director buys something from or sells something to the company they are a director of.
What is required for a Substantial Property Transaction (SPT) to proceed?
Shareholders must approve the transaction by ordinary resolution.
Can directors buy or sell things for the company without shareholder approval?
Yes, as long as it does not qualify as an SPT
Why are there extra rules for SPTs?
Because the director is making a decision on behalf of the company that could personally benefit them.
Who else is considered part of an SPT?
Immediate family of the director (spouse, children, parents) if they buy or sell something to the company
When is a transaction between two companies considered an SPT?
If the director has 20% or more voting power in the second company
When is a transaction considered “substantial”?
- If the value is over £5,000.
- If between £5,000 and £100,000, it must exceed 10% of the company’s net asset value.
- If over £100,000, it is always substantial.
What types of assets qualify for an SPT?
Any property that is not a cash asset, such as a car or land
Does an SPT apply to consultancy fees?
No, consultancy fees are not considered property.
Who makes decisions on behalf of a company?
Directors handle day-to-day decisions, while shareholders are involved in specific major decisions
How are the roles of shareholders and directors different?
Directors run the company, and shareholders provide funding and make some key decisions that directors cannot reverse
What are two categories of shareholder decisions?
- Sole decisions (e.g., changing the company name or articles of association).
- Decisions granting directors permission for contracts with potential risks or personal benefits.
Can shareholders enter into contracts on behalf of the company?
No, shareholders can only authorize directors to enter contracts; directors have the sole power to execute contracts.
How do directors make decisions collectively?
In board meetings, where decisions are called board resolutions
Can directors delegate their powers?
Yes, under MA 5, directors can delegate powers to employees or specific directors with specialized responsibilities (e.g., finance or HR directors).
What happens if shareholders disagree with directors on strategy?
Shareholders can remove or appoint directors to influence company strategy.
What is required to call a board meeting?
Directors must give reasonable notice including the time, date, place, and communication method if remote (e.g., Zoom).
What is a quorum in a board meeting?
A minimum of two directors must be present for the meeting to be valid (quorate).
Why is a quorum important?
It ensures decisions are not made unilaterally or fraudulently by a single director.
Can directors vote on matters where they have a personal interest?
No, they cannot count in the quorum or vote on such decisions.
How are board resolutions passed?
By a simple majority vote, with each director having one vote. The chair has a casting vote in case of a tie.
What is a unanimous decision under MA 8?
A board resolution passed without a meeting, where all eligible directors agree in writing or through another method
What are the two types of shareholder resolutions?
- Ordinary resolutions (over 50% approval needed).
- Special resolutions (75% or more approval needed).
How can shareholder resolutions be passed?
Either in a general meeting or by written resolution.
Who calls a general meeting?
The board of directors by passing a board resolution.
What is required in a notice of a general meeting?
- Time, date, and place of the meeting.
- General nature of business.
- Exact wording of a special resolution, if proposed.
- Shareholders’ right to appoint a proxy.
What is the minimum notice period for a general meeting?
14 clear days, excluding the day notice is received and the day of the meeting.
What is a poll vote?
A vote based on the number of shares owned, giving shareholders proportional voting power.
Can a general meeting be held on short notice?
Yes, if 90% (95% for public companies) of voting shareholders consent.
What is the quorum for a general meeting?
Two shareholders (or one if there is only one shareholder).
Can shareholders vote if they have a personal interest?
Generally, yes, except in specific cases like voting on share buybacks or ratifying a director’s breach of duty.
When can a poll vote override a show of hands vote?
If called before or after a show of hands vote, the outcome of the poll will override the initial result.
What is a written resolution, and when is it used?
A written resolution is an alternative to a general meeting, where shareholders pass resolutions in writing without attending a meeting. It is used when convening a meeting is inconvenient or unnecessary
How is a written resolution distributed?
It is distributed by hand, post, email, or placed on a website, with details on how to signify agreement and the lapse date for returning the resolution.
What is the lapse date for written resolutions?
Unless otherwise stated in the articles, the lapse date is 28 days from the circulation of the written resolution, including the circulation date as one day.
Can written resolutions be used to remove a director?
No, written resolutions cannot be used to remove a director. Such decisions must be made at a meeting.
What percentage of votes is needed for an ordinary resolution via written resolution?
Over 50% of eligible members’ votes are needed for an ordinary resolution to pass via written resolution.
Who can demand the circulation of a written resolution?
Shareholders with 5% or more of the company’s voting rights can require the company to circulate a written resolution.
What must a company do after certain resolutions are passed?
Notify the Registrar of Companies, as required by the Companies Act 2006, to avoid fines
What internal records must a company maintain?
Registers of members, directors, and secretaries, as well as minutes of board meetings, general meetings, and outcomes of written resolutions for 10 years.
What is the time limit for filing accounts at Companies House for private and public companies?
Private companies: 9 months;
Public companies: 6 months.
What is a confirmation statement?
A statement filed on form CS01 within 14 days of the confirmation date, ensuring Companies House has updated information on directors, shareholders, and persons with significant control.
Is a company secretary mandatory for private companies?
No, private companies are not required to have a secretary, but public companies must have one.
Who appoints an auditor in a private company?
Initially, the directors appoint the auditor, but subsequently, shareholders can appoint or remove the auditor by ordinary resolution
How can a new shareholder join a company?
By buying shares, receiving them as a gift, via transmission (e.g., inheritance), or through the company issuing new shares.
What is the deadline for entering new shareholders in the register of members?
New shareholders must be entered within two months of allotment.
What is the penalty for refusing inspection of the register of members?
Refusal to allow inspection is a criminal offense.
What rights do shareholders have regarding share certificates?
Shareholders must receive a share certificate within two months of allotment, confirming their ownership.
Can a written resolution be sent to all shareholders?
No, it can only be sent to eligible members.
How are votes counted in a written resolution?
Only positive votes are counted. Abstentions, negative votes, or failure to vote are disregarded.
What happens if the required majority consents before the lapse date?
The resolution is effective immediately without waiting for the lapse date or all votes.
What majority is required to pass a special resolution via written resolution?
75% or more of the votes of eligible members are required.
What happens if shareholders want a general meeting, but directors refuse?
Shareholders holding 5% or more of voting rights can request a general meeting or the circulation of a written resolution.
What must a company do after appointing or removing a company secretary?
Notify the Registrar of Companies on forms AP03 or AP04 within 14 days.
How long must companies retain statutory records?
Statutory records, such as board minutes and GM outcomes, must be retained for 10 years.
What is the definition of a micro-entity?
A company with a balance sheet total of no more than £316,000, turnover of no more than £632,000, and no more than 10 employees.
How can auditors be removed?
Auditors can be removed at any time by ordinary resolution of the shareholders
What is the time limit for filing accounts for newly incorporated companies?
Newly incorporated companies must file accounts within 3 months after the end of their accounting period.
Are dormant companies required to have an audit?
No, dormant companies are exempt from statutory audit requirements and may file abbreviated accounts.
What companies are required to keep a PSC register?
All private companies and non-traded public companies must keep a PSC register.
Who must be listed in the PSC register?
Shareholders who own more than 25% of the shares or control more than 25% of the voting rights
Must companies maintain a PSC register if no shareholders qualify as having significant control?
Yes, they must keep the register even if it is empty.
What is the time limit for recording and reporting changes to the PSC register?
Changes must be recorded within 14 days and sent to Companies House within a further 14 days.
What is the company’s constitution?
A statutory contract between the company and shareholders, and among shareholders themselves
What does a shareholder’s membership rights include?
Voting rights and the right to receive dividends.
What are the main documents that form a company’s constitution?
The memorandum of association and the articles of association.
What is a key advantage of a shareholders’ agreement?
It provides privacy and protects minority shareholders
Who is bound by the company’s articles of association?
Every shareholder, both present and future
What right do shareholders have if the company acts against its constitution?
They can seek an injunction to prevent prohibited actions
What right do shareholders have regarding removing directors or auditors?
They can remove them by ordinary resolution
Can a company act as a shareholder?
Yes, a corporate shareholder may authorize a representative for meetings.
What makes a company a wholly owned subsidiary?
It has no members except the holding company and its wholly owned subsidiaries.
What is typical for single-member companies?
One individual is both the sole director and sole shareholder.
What is the difference between cumulative and non-cumulative preference shares?
Cumulative shares guarantee unpaid dividends, while non-cumulative shares do not.
What additional right might participating preference shareholders have?
The right to receive additional profits or assets.
What is the most common remedy for unfair prejudice?
The court orders the other shareholders to buy out the affected shareholder’s shares.
What test does the court use to determine unfair prejudice?
An objective test based on what a hypothetical bystander would consider unfair.
What is a derivative claim?
A claim brought by a shareholder for a wrong done to the company.
Who is typically the defendant in a derivative claim?
A director, but it can also be another person
What must a shareholder do first when initiating a derivative claim?
Apply to the court for permission to continue the claim.
What must a director do if they have a personal interest in a proposed transaction or arrangement with the company?
They must declare the nature and extent of this interest to the board.
When is a director NOT required to declare their personal interest in a transaction?
- If it cannot reasonably be regarded as likely to give rise to a conflict of interest.
- If the other directors are already aware of it.
- If it concerns terms of a service contract considered by a meeting of the directors.
What does MA 14 prohibit?
It prohibits directors with a personal interest in a resolution from voting or counting in the quorum.
Can a company disapply MA 14?
Yes, a company can disapply MA 14 in its articles, allowing directors with a personal interest to vote and count in the quorum.
If a GM notice is given by post or email - when is it received ?
Notice is deemed received after 48 hours after notice is posted or emailed. 48 hours must be added on to the 14 clear days.
What are non trading companies known as ?
Dormant companies
What right do cumulative shareholders have ?
Shareholders have to be paid any missed dividends from previous financial years as well as the current financial years dividends as long as their are profits.
What is a de facto director ?
A person who acts as a director although they have never been appointed or validly appointed.
What is a shadow director ?
A person who has a great deal of influence and control over other Directors and actions even though they are likely to be in the background.
What is an Alternative director
A director who has been appointed by a director who cannot attend a board meeting to vote and attend that meeting.
What authority do directors have ?
Actual and apparent authority to bind the company into contracts with third parties
What are the two main ways companies obtain finance?
- Equity finance: Prospective shareholders pay money or give property to the company in return for shares.
- Debt finance: Companies borrow money to fund expansion or day-to-day operations.
What are the three ways shares can change hands?
- Allotment: Creation of new shares given in return for payment.
- Transfer (or transmission): Ownership of shares is transferred between parties.
- Buy-back: Company buys back shares from shareholders.
What happens during the allotment of shares?
The company creates new shares, issues a share certificate, and updates the register of members to include the new or existing shareholder.
When does a company allot shares?
When a person acquires the unconditional right to be included in the register of members for those shares.
What must the board decide when allotting shares to raise equity finance?
The price and the number of shares to be allotted, often with advice from an accountant or banker.
When can directors of a private company with one class of shares allot shares without shareholder approval?
If the company was incorporated under the CA 2006, all that is needed is a board resolution under **s 550 CA 2006
Why do businesses often require debt finance?
To purchase items necessary for starting trading, enable expansion, or help through temporary cash flow difficulties.
What are the two main types of debt finance?
- Loans
- Debt securities
What are debt securities?
IOUs issued by a company to investors in return for a cash payment, which must be repaid at an agreed future date.
What must a company check before borrowing?
If borrowing is allowed under its constitution
What if a company’s articles restrict borrowing?
Shareholders must pass a special resolution under s 21 CA 2006 to amend the articles
How is debt finance regulated compared to equity finance?
Debt finance is largely governed by contract law, while equity finance is tightly controlled by the CA 2006.
What is the difference between secured and unsecured loans?
- Secured loan: The borrower provides security over assets to the lender.
- Unsecured loan: No security is provided over the borrower’s assets
What is an overdraft facility?
A contract with a bank allowing a business to go overdrawn on its current account up to a pre-agreed limit.
What is a term loan?
A fixed amount of money borrowed for a specified period (term), with repayment due at the end of the term along with regular interest payments.
What are the common durations of term loans?
Short-term: Up to 1 year.
- Medium-term: 1 to 5 years.
- Long-term: Over 5 years
What is the difference between bilateral and syndicated loans?
Bilateral loan: Between the business and one lender.
- Syndicated loan: Involves multiple lenders sharing the risk and jointly providing the funds.
What is a revolving credit facility?
A facility where a bank provides a maximum amount of money that a business can borrow, repay, and re-borrow within the agreed period, as long as the overall limit is not exceeded.
What are covenants ?
A contractual promise to do or not to do something.
What is a debenture ?
Generally used to describe a loan agreement in writing between a borrower and a lender that is registered at companies house
Why are debentures used ?
It gives security over the borrowers assets
Who can enter into a debenture
Only companies and LLP’s can enter into a debenture (sole traders and general partnerships cannot)
What is secured debt ?
A lender with security may claim the secured assets of the business if the business fails to meet its obligations under the facility agreement.
Can sole traders and general partnerships grant floating charges ?
No, only a fixed charge
Can LLP’s grant floating charges and fixed charges
Yes
What are the 3 main types of security for a company or LLP?
1) mortgages
2) fixed charges
3) floating charges
What is a mortgage ?
A transfer of legal ownership from the mortgagor( the company/llp) to the mortgagee ( the lender)
What is a charge ?
Gives the lender rights over the asset should the borrower fail to repay the money borrowed.
Can you create more than one fixed charge over the same asset ?
Yes
If there are two fixed charges over the same asset, who has priority?
The holder of the fixed charge which was created first will be able to sell the asset and pay itself out of the proceeds.
What is a Floating charge?
A floating charge is security interest over the companies assets that can change over time such as stock
What is a book debts ?
Money owed to the company by its debtors.
Does a fixed charge take priority over a floating charge?
Yes, even if it is for the same asset
What are personal guarantees ?
Directors or partners in an LLP can give personal guarantees for a loan incase the lender is unable to recover the loan in full from the company/ LLP. They risk losing their personal assets if the business fails.
What is a pledge ?
When an asset is physically delivered by the debtor to the creditor to serve as security until the debtor has paid their debt.
What is a lien?
Creditor has the right to physical possession of the assets until debt is paid. However, there is no right to sell the asset to settle the debt owed.
What is a retention of title ?
On goods the buyer does not have full title to the goods until they pay the full price to the seller. If buyer defaults then the goods are repossessed by the seller.
When and where should you register a charge ?
- Within 21 days of creation of the charge
- Filed at companies house with a statement of particulars, a certificate copy of the instrument creating the change and the fees.
What happens if you do not register the charge ?
It is void against a liquidator or an administrator of the company and other creditors
What is subordination ?
Creditors can enter into an agreement between themselves to alter the order of priority of their charges
Can a floating charge rank behind a later fixed charge or mortgage over the same asset ?
Yes, provided that the fixed charge and mortgage is registered properly
What is a negative pledge ?
This prevents companies/LLP from creating later charges with priority to the floating charge without the floating charge holders permission.
What is double entry booking ?
The idea that in every business there are two aspects to every transaction. ( DR- debt column) and (CR- credit column)
What is a profit and loss account ?
Shows how profitable the business is in its day to day operations.
How do you calculate Profit?
Income — Expenses = Profit
What is a balance sheet ?
A balance sheet shows the worth or value of the business by listing its assets and liabilities on the last day of the accounting period.
What is the balance sheet calculation ?
Assets — Liabilities = Net worth of the business
What are the possible outcomes for an insolvent company?
. 1. Liquidation
2. Administration
3. Company voluntary arrangement (CVA)
4. Creditors may force the company to:
• Appoint an LPA receiver
• Appoint an administrator out of court
• Appoint an administrative receiver (for security created before 15 September 2003).
What is liquidation?
Liquidation (or winding up) is the process where:
• The business stops trading. • Assets are sold, and the company ceases to exist. • A liquidator is appointed to run the company. • The liquidator distributes the assets to creditors in a statutory order. • The company is dissolved at Companies House within a few months.
What are the three types of liquidation?
- Compulsory liquidation: Started by a third party against an insolvent company.
- Creditors’ voluntary liquidation (CVL): Initiated by the company due to insolvency.
- Members’ voluntary liquidation (MVL): commenced by a solvent company because it wishes to cease trade or it is dormant and wants to bring its affairs to an end
What is compulsory liquidation?
- Initiated by a third party presenting a winding-up petition at court.
- The most common ground is the company’s inability to pay its debts.
- The petitioner is the party presenting the petition.
- Proceeds from asset sales are used to pay creditors.
- A statutory demand or judgment is often issued to prove insolvency.
- The Official Receiver (OR) becomes the liquidator if the court orders liquidation.
What is creditors’ voluntary liquidation (CVL)?
- Initiated by the company.
- Directors and shareholders discuss and agree to the process.
- Creditors take control at an early stage.
- Typically occurs under creditor pressure.
What is members’ voluntary liquidation (MVL)?
- Available only to solvent companies.
- Used for dormant companies or owner-managed businesses ceasing trade.
- Directors must swear a statutory declaration of solvency.
- If the company is found insolvent, the MVL converts to a CVL.
What is the liquidation process?
- Duration: A few months to years.
- Directors lose their powers.
- Liquidator takes over with powers to:
• Run the business.
• Handle litigation.
• Investigate past transactions and director conduct.
• Collect and distribute assets. - Liquidator applies for release upon completion.
- Company dissolved three months later by the Registrar of Companies.
What duties do liquidators and administrators have?
Maximize assets available to creditors.
Investigate the company’s affairs and directors’ actions.
Bring claims on behalf of the company to increase assets.
What is the avoidance of certain floating charges?
A charge is automatically void if created at the “relevant time” before insolvency without fresh consideration.
Relevant time:
• Two years if the charge benefits a connected party.
• One year if the charge benefits any other party.
What does ‘onset of insolvency’ mean?
- Compulsory liquidation: Date of winding-up petition.
- CVL: Date company enters liquidation.
- Administration: Date of filing notice of intention to appoint an administrator or earlier appointment date.
What is a transaction defrauding creditors?
- A transaction at an undervalue entered into to:
- Put assets beyond the reach of someone making a claim against the company.
- Prejudice the interests of that person regarding any claim they might make.
Who decides challenges to transactions defrauding creditors?
Challenges are brought at the discretion of the court.
Is there a time limit for bringing a claim regarding transactions defrauding creditors?
No, there is no time limit for bringing such claims.
How are a company’s assets distributed during liquidation?
- Fixed charge holders:
• Paid from the sale of the asset subject to the fixed charge. - Preferential debtors:
• Paid before all unsecured creditors.
• Includes wages/salaries for work done in the four months before the winding-up order, up to £800 per employee.
