Chapter 5: Company Compliance Flashcards

Question

What are Right to Manage Companies (RTMs), and how are they structured?

Answer 1

RTMs are private companies limited by guarantee that: Were introduced under the Commonhold and Leasehold Reform Act 2002. Must adopt Articles prescribed by the RTM Companies (Model Articles) (England) Regulations 2009 (SI 2009/2767).

Answer 2

Registration is the process by which a company is incorporated and becomes a legal entity separate from its owners (members).

Answer 3

A company is formed when one or more persons: Subscribe their names to a memorandum of association Comply with the registration requirements under the Companies Act

Answer 4

By delivering the relevant documents to the Registrar of Companies.

Answer 5

Guidance is available from the Registrar by post or online at www.companieshouse.gov.uk.

Answer 6

Electronic software filing Uses approved software £10 for standard service (processed within 24 hours) £30 for same-day service Paper filing £40 for standard service (processed within 5 working days) £100 for same-day service Web Incorporation Service £12 fee No same-day service available Only for private companies limited by shares Must adopt Model Articles without amendments Cannot use a company name that requires approval

Answer 7

The Registrar of Companies maintains an index of company names, which must be checked to ensure the proposed name is not identical or too similar to an existing company name.

Answer 8

Sensitive words require Secretary of State approval and include words that: Imply pre-eminence, status, or function Suggest a connection to the government or public bodies Indicate regulated activities Could constitute an offence

Answer 9

Within 12 months if the name is identical or too similar to an existing one (CA2006, s. 67(1)). Within five years if misleading information was provided at registration (CA2006, s. 75). At any time if the name is misleading and likely to cause public harm (CA2006, s. 80).

Answer 10

Opportunistic registration occurs when a name is registered to extract money or prevent another business from using it. Under CA2006, ss. 69–74, complaints can be made to the Company Names Tribunal, which can: Order a change of name Assign a new name if the company fails to comply

Answer 11

Public companies must end with "public limited company" / "plc" or the Welsh equivalent "cwmni cyfyngedig cyhoeddus" / "ccc" (CA2006 s. 58). Private companies must end with "limited" / "ltd" or the Welsh equivalent "cyfyngedig" / "cyf" (CA2006 s. 59). Charities, non-profits, and CICs may apply for an exemption from including "limited" (CA2006 ss. 60–62).

Answer 12

Memorandum of Association At least one subscriber must agree to take at least one share or be a member (if no share capital). Must be signed by a witness. Articles of Association Companies must register Articles, choosing one of three options: (a) Adopt Model Articles in full (b) Adopt Model Articles with modifications (c) Create a bespoke set of Articles Form IN01 Includes details of: Proposed company name Registered office location Proposed directors and secretary (if any) Service addresses of officers Name Approval (if required) Registration Fee Paid by cheque (for paper filings) or account payment (for electronic filings).

Answer 13

Date of incorporation Company registration number Company type

Answer 14

Immediately after incorporation.

Answer 15

A public company must have at least two directors (CA2006 s. 154). A public company must also have a company secretary.

Answer 16

No, unlike a private company, a public company cannot immediately commence business after the issue of the certificate of incorporation. The company must first obtain a trading certificate before it can begin business or exercise any borrowing powers.

Answer 17

The company must deliver an application for a borrowing certificate using Form SH50. This application includes confirmation that the company complies with CA2006 s. 761, which is necessary for the trading certificate to be issued.

Answer 18

The company must confirm that the authorised minimum share capital has been subscribed. For each share issued, it must be paid up as follows: Minimum 25% of the nominal value of each share. 100% of any premium on the shares.

Answer 19

If the company commences business or exercises borrowing powers before the trading certificate is issued, both the company and any officer in default may be subject to criminal penalties. The company and officers may also be jointly and severally liable to indemnify any affected third parties for loss or damage caused by the failure to comply with s. 761.

Answer 20

Yes, the transactions themselves are not affected by the failure to comply with CA2006 s. 761. However, the company and its officers may face legal consequences.

Answer 21

A CIC can be registered under the Companies (Audit, Investigations and Community Enterprises) Act 2004 (C(AICE) 2004). It must also comply with the Community Interest Company Regulations 2005 (SI 2005/1788).

Answer 22

The Memorandum and Articles of a CIC must comply with the provisions set out in the Community Interest Company Regulations 2005. These provisions include details on the asset lock and other important features of a CIC.

Answer 23

If the CIC is not a public company, its name must end with ‘Community Interest Company’ or ‘CIC’. If the registered office is in Wales, the Welsh equivalent is used: ‘Cwmni Buddiant Cymunedol’ or ‘CBC’. If the CIC is a public company, its name must end with ‘Community Interest Public Limited Company’ or ‘Community Interest plc’, or the Welsh equivalents.

Answer 24

A CIC must clearly demonstrate how it will benefit the community. One way to do this is by defining its objects in a specific manner, rather than using a general commercial objects clause.

Answer 25

The CIC must submit Form CIC36 to confirm that the company will benefit the community. This form outlines the intended activities of the CIC and shows how these activities will benefit the community.

Answer 26

The Excluded Company Declaration (ECD) is a form approved by the Regulator of Community Interest Companies. It confirms that the company is not excluded from being eligible to be a CIC.

Answer 27

The incorporation documents for a CIC are filed at Companies House. The filing fee for incorporating a CIC is £35.

Answer 28

No, same-day CIC incorporations are not possible because the Regulator must confirm that the proposed company meets the eligibility criteria.

Answer 29

The company must be a private company limited by guarantee. The company must ensure that its Articles of Association comply with the provisions specific to RTM Companies.

Answer 30

The company must hold a freehold or leasehold interest in qualifying premises.

Answer 31

The company cannot be a commonhold association.

Answer 32

The members of the RTM company must be either: Tenants of flats in the premises, or Landlords under leases of those premises.

Answer 33

The company ceases to be an RTM company if it no longer continues to meet any of the conditions outlined above.

Answer 34

The registration of a private or public company is typically completed within five days of receipt of the registration documents by post. If one of the online services is used, registration can be completed within 24 hours.

Answer 35

ame-day registration can be achieved if: The documents are sent to Companies House (Cardiff) or the London Information Centre, addressed to the ‘New Incorporation Section – same day incorporations’. Alternatively, the online service can be used, with the same-day option selected.

Answer 36

Upon incorporation, every company is allocated a registered number, which consists of one or more sequences of figures or letters.

Answer 37

The Registrar has the power to change a company’s registered number. For a period of three years, the company may use either: The old registered number, or The new registered number on business letters and order forms (CA2006 s. 1066).

Answer 38

Re-registration is the process through which a company can change its type, provided certain conditions are met.

Answer 39

Private to public (unless previously re-registered as unlimited) – CA2006 s. 90. Public to private limited – CA2006 s. 97. Private limited to unlimited (unless previously re-registered as limited) – CA2006 s. 102. Unlimited to limited (unless previously re-registered as unlimited) – CA2006 s. 105. Public to unlimited (unless previously re-registered as limited or unlimited) – CA2006 s. 109.

Answer 40

A company cannot re-register: To or from a company limited by guarantee. From or to being a Community Interest Company (CIC).

Answer 41

A special resolution is required to re-register a private company as a public company. A copy of the resolution and an application form (RR01) must be delivered to the Registrar within 15 days of the resolution being passed. The Articles of Association must also be reviewed and amended as needed to comply with the change.

Answer 42

A similar procedure is required to re-register a public company as a private company. A special resolution must be passed, and form RR02 must be filed. If members representing not less than 5% in nominal value or not less than 50 members object to the resolution, they may apply to the court to cancel it within 28 days of it being passed.

Answer 43

If the share capital of a public limited company falls below the statutory limit, action must be taken to either: Increase the capital, or Re-register as a private company.

Answer 44

Unanimous shareholder consent is required to re-register either a public or private limited company to an unlimited company. Resolutions and forms must be filed at Companies House, and the Articles should be reviewed for necessary amendments.

Answer 45

Britain, Insurance & Royal

Answer 46

Public company limited by shares; private company limited by shares; private company limited by guarantee; private unlimited company with or without a share capital.

Answer 47

To ensure that the amount paid up on the aggregate nominal value of its issued share capital is not less than the authorised minimum.

Answer 48

Companies must notify the Registrar of any changes to: Constitution (e.g., Articles of Association). Officers (e.g., directors or company secretaries). Members (e.g., shareholders). People with Significant Control (PSC). Accounting information. Charges over assets.

Answer 49

Notice is given by submitting the relevant statutory form, copy resolution, financial statements, or other documents as required by the Companies Act. These documents are submitted to the Registrar for registration and to be placed on the company’s public file.

Answer 50

Paper versions of statutory forms are available free of charge from Companies House.

Answer 51

Almost all forms can be completed and submitted online through the WebFiling service on the Companies House website.

Answer 52

Certain filings such as: Incorporations, Changes of name, Re-registrations, and Confirmation statements, require a fee. The fee is reduced if the forms or documents are submitted electronically.

Answer 53

All forms must be authenticated or signed, but hard copy documents do not need an original 'wet' signature. Automated signatures are allowed, provided they are subject to internal controls. Fax submissions are not accepted due to concerns about document quality.

Answer 54

The Registrar may reject documents if they are: Incorrectly completed, Not signed, Received late, or Illegible.

Answer 55

A document is considered illegible if: It cannot easily be read. It is not capable of being captured electronically or would result in an unacceptably large file. Documents may also be rejected if they contain: Shading, Colour text or images, or Glossy paper (which causes issues in scanning).

Answer 56

Many companies find online filing more convenient due to several advantages over paper-based filing.

Answer 57

Quicker process compared to paper-based filing. Cheaper – online filing fees are typically lower than paper-based filing fees. Lower rejection rates due to built-in checks and the pre-population of data. Automatic confirmation of filing is provided. It offers an environmentally friendly alternative to paper filings.

Answer 58

Users can opt to receive email reminders for the submission of: Annual accounts. Confirmation statements. Users can opt into the PROtected Online Filing (PROOF) service.

Answer 59

The PROOF service helps combat corporate identity theft by making certain changes (e.g., changes of registered office or director) only notifiable using WebFiling or software filing.

Answer 60

Registering for the WebFiling service is straightforward and involves: Online registration of a username and password. Requesting an authentication code for the company.

Answer 61

The authentication code is sent by post to the company’s registered office address. The authentication code acts as the signature on the forms submitted via WebFiling.

Answer 62

The software filing service allows companies to file most Companies House forms, certain forms of accounts, and incorporation documents. Companies can file using an approved third-party software package or develop their own bespoke solution in-house.

Answer 63

Registration with Companies House is required to use the service. An account must be set up for the payment of fees, which are invoiced monthly.

Answer 64

The service operates via electronic transmission of documents to Companies House using an HTTPS link. Documents are submitted in Extensible Markup Language (XML) format. These documents must comply with the structure approved by the Registrar for electronic submission.

Answer 65

Prosecutions for failure to file statutory returns are rare, typically occurring only for: No filing or late filing of confirmation statements or annual accounts.

Answer 66

Fines for failure to file are usually modest, but the consequences of a successful prosecution are much more serious: A criminal record is created. This can lead to difficulties in obtaining bank loans and mortgages. It may also result in being denied entry to certain foreign countries.

Answer 67

Even if no prosecution is brought, a director’s failure to file documents on time or at all is considered: When assessing other regulatory breaches. In situations like insolvency or disqualification proceedings. It affects the director’s overall track record and behavior.

Answer 68

Online filing; webfiling and software filing.

Answer 69

No, as any documents filed at one registry that relate to a company registered at another will be forwarded.

Answer 70

The Companies Act 2006 (CA2006) outlines several situations where a company or its officers may be criminally liable for offences committed under the Act. The Act holds companies and their officers accountable for misconduct, including failure to file statutory returns on time.

Answer 71

Some common criminal offences under CA2006 include: Failing to file accounts on time (CA2006 s. 451). Failure to enter or update a director’s details in the register (CA2006 s. 162). Not filing an amended copy of the Articles after an amendment (CA2006 s. 26). Not responding to requests for confirmation that company details are up to date (CA2006 s. 128F). Failing to display registered office and registered number on emails (reg. 25 of the Trading Disclosures Regulations 2015).

Answer 72

The general rule is that if the only victims of the breach are the company or its members, the officers are held personally liable. If the breach harms others outside the company (e.g., third parties), the company itself is liable. Officers include directors, managers, company secretaries, or anyone treated as an officer under the relevant provisions of the Act.

Answer 73

Section 1121 of CA2006 specifies that liability for a breach typically rests with officers in default. An officer can be a director, manager, company secretary, or anyone defined as an officer for the specific provision causing the breach.

Answer 74

Under CA2006 s. 1126, the consent of the Secretary of State or Director of Public Prosecutions (DPP) is required before criminal proceedings can begin in England and Wales or Northern Ireland.

Answer 75

Penalties for a breach under the Companies Act can range from fines to imprisonment, depending on the severity of the offence. Criminal proceedings must be brought within three years from the date of the offence or within 12 months of when the evidence sufficient for prosecution is discovered (CA2006 s. 1128).

Answer 76

Criminal prosecutions under the Companies Act are rare, with civil penalties for late filing of accounts far outnumbering criminal cases.

Answer 77

Even if no prosecution is brought, a director’s track record for timely filing is considered when assessing other breaches or in insolvency or disqualification proceedings.

Answer 78

Companies face fines for late filing: Private companies face fines starting at £150 (one month), $375 (up to three months); $750 (Up to six months); and $1500 (more than six months. Public companies face fines starting at $750 (up to one month late); $1500 (Up to three months late); $3000 (up to six months late); and $7500 (over six months late. Consecutive late filings result in doubled fines.

Answer 79

Yes, even if the company is fined for late filing, a director can face personal criminal prosecution for failing to submit accounts on time.

Answer 80

If a company fails to file an amended copy of its Articles after an amendment, and fails to deliver the required documents within 28 days after the Registrar has given notice requiring the delivery of the missing documents, it will face a £200 fine (CA2006 s. 27).

Answer 81

Yes, the Companies Act 2006 provides a mechanism for companies to apply for an extension to the filing period for accounts.

Answer 82

In practice, extensions are extremely rare. This is because companies often fail to file accounts on time due to poor planning or delayed preparation, rather than any exceptional circumstances. Most companies fail to file on time because they did not start the process early enough or did not plan ahead adequately.

Answer 83

Exceptional circumstances might include situations such as the death of a sole director or shareholder, where the director cannot sign the accounts and the shareholder cannot appoint a new director until probate is granted. In cases like a director’s death, the company may not be able to file accounts because the director cannot sign the accounts, and the shareholder cannot exercise their voting rights to appoint a new director until probate is granted.

Answer 84

No. The requirement is that they must be received, and be acceptable for filing, prior to the deadline.

Answer 85

Corporate governance gained importance due to financial crises and corporate scandals, particularly: The late 1980s financial crisis and corporate failures. The 2007–08 global financial crisis and concerns over corporate excesses. Issues such as the gender pay gap and lack of boardroom diversity.

Answer 86

UK Corporate Governance Code – Focuses on governance for publicly listed companies. UK Stewardship Code – Aims to ensure responsible investment practices by institutional investors. Wates Corporate Governance Principles – Developed for large private companies.

Answer 87

The Cadbury Report (1992), officially known as the Report of the Committee on the Financial Aspects of Corporate Governance. It was developed in response to corporate failures and financial scandals. It set a benchmark for governance best practices worldwide.

Answer 88

Governance Code of Best Practice, based on the ‘comply or explain’ approach. Companies must either comply with governance provisions or provide a valid explanation for non-compliance.

Answer 89

The FRC monitors and assesses corporate governance trends. It evaluates if new developments require changes in governance frameworks.

Answer 90

The UK Corporate Governance Code (2018) was published in July 2018 and applies to companies with a premium listing. It is effective for accounting periods starting on or after 1 January 2019. It is supplemented by additional guidance issued by the Financial Reporting Council (FRC).

Answer 91

No, it follows the ‘comply or explain’ approach. Companies must comply with the code or explain why they do not. Compliance should not be a box-ticking exercise, as some provisions may not be suitable for all companies.

Answer 92

The code consists of five key sections with 18 main principles: Board Leadership and Company Purpose Division of Responsibilities Composition, Succession, and Evaluation Audit, Risk, and Internal Control Remuneration

Answer 93

The board should be effective and entrepreneurial, ensuring long-term sustainable success. It must generate value for shareholders while contributing to society.

Answer 94

Define the company’s purpose, values, and strategy. Ensure these align with corporate culture. All directors must act with integrity and lead by example.

Answer 95

Maintain clear engagement with shareholders and stakeholders. Encourage participation and dialogue with them. Ensure workforce policies align with the company’s long-term success and provide a mechanism for employees to raise concerns.

Answer 96

Leads the board effectively. Ensures objective judgement and facilitates open debate. Encourages constructive relationships between executive and non-executive directors (NEDs).

Answer 97

It must have an appropriate mix of executive and independent non-executive directors. No individual or small group should dominate decision-making. There should be a clear distinction between board leadership and executive management.

Answer 98

They must have enough time to fulfill their roles. Provide constructive challenge and strategic guidance. Hold management accountable and offer specialist advice.

Answer 99

Ensures the board has proper policies, processes, and resources to function effectively.

Answer 100

Through a formal, rigorous, and transparent process. A succession plan should be maintained for board and senior management. Selection should be based on merit while promoting diversity (gender, ethnicity, cognitive ability, etc.).

Answer 101

The board should have a diverse combination of skills, experience, and knowledge. Membership should be regularly refreshed to prevent stagnation.

Answer 102

Annual board evaluations must be conducted. Evaluations should consider board composition, diversity, and effectiveness in achieving objectives. Individual director evaluations should determine if they continue to contribute effectively.

Answer 103

Establish formal, transparent policies for both internal and external audits. Ensure the integrity of financial and narrative statements.

Answer 104

Provide a balanced, fair, and understandable view of the company’s financial position. Establish procedures to manage risks and oversee internal controls. Define the level of risk the company is willing to take in achieving long-term goals.

Answer 105

It should support company strategy and long-term success. It must be linked to company performance and values.

Answer 106

Through a formal and transparent process. A remuneration committee must decide on director and senior management pay. No director should decide their own pay.

Answer 107

Directors must exercise independent judgement when authorizing remuneration. Consideration should be given to company performance and wider circumstances.

Answer 108

The Guidance on Board Effectiveness (July 2018) complements the code. Many previous provisions have moved into guidance documents rather than the main code.

Answer 109

There is now greater emphasis on principles rather than just compliance. Companies must: - Demonstrate how they implement governance principles. Audit compliance effectively. Report on changes in behavior and outcomes resulting from governance improvements.

Answer 110

The UK Corporate Governance Code is divided into five sections, each containing principles and provisions to ensure good corporate governance: Board Leadership and Company Purpose – Ensuring effective leadership, company purpose, and stakeholder engagement. Division of Responsibilities – Defining roles of the chair, board, and non-executive directors (NEDs). Composition, Succession, and Evaluation – Managing board appointments, diversity, and performance evaluations. Audit, Risk, and Internal Control – Establishing financial integrity, risk management, and internal controls. Remuneration – Ensuring fair and transparent executive pay linked to company performance.

Answer 111

The ‘comply or explain’ principle allows companies to either follow the governance code or explain why they do not comply. It recognizes that one-size-fits-all governance does not work and encourages companies to adopt best practices suited to their business model. Governance is not just about ticking boxes but demonstrating how governance principles are effectively applied in decision-making. Example: A company may not follow a specific provision (e.g., not having an independent chair) but must explain why this is justified.

Answer 112

The board is responsible for: Providing long-term strategic direction and ensuring corporate sustainability. Ensuring corporate purpose, values, and culture align with company strategy. Managing risk, internal controls, and financial transparency. Engaging with shareholders and other stakeholders to maintain trust. Overseeing workforce policies to ensure ethical treatment and employee concerns are heard.

Answer 113

Chair: Leads the board and ensures open debate and objective decision-making. Promotes a culture of transparency and constructive board relations. Ensures timely and clear communication between executive and non-executive directors. Non-Executive Directors (NEDs): Provide independent oversight and challenge management decisions. Offer specialist advice and strategic guidance. Monitor executive performance and hold them accountable. Executive Directors: Handle day-to-day management of the company. Implement the board’s strategic decisions and operational plans. Example: The chair ensures that all directors contribute effectively, while NEDs challenge and guide executives to ensure good governance.

Answer 114

Board appointments must be formal, rigorous, and transparent. Companies should maintain a succession plan for key leadership roles. Appointments should be based on merit, skills, and diversity (gender, ethnicity, cognitive abilities, experience, etc.). Annual board evaluations assess how well the board functions, its diversity, and individual director contributions. Example: A company should periodically refresh its board members to prevent stagnation and bring in new perspectives.

Answer 115

The board must establish formal and transparent procedures to ensure the independence and effectiveness of audits. Companies must ensure fair and accurate financial reporting. A risk management framework should be implemented to assess potential threats to business operations. The board must define the level of risk the company is willing to take to achieve long-term goals. Example: A financial services company should have strong internal controls to prevent fraud and misreporting.

Answer 116

Pay should be linked to long-term success and company performance. The remuneration policy should be transparent and aligned with company values. No director should decide their own remuneration. The remuneration committee ensures that executive pay is fair and justified. Directors must use independent judgement when approving pay packages. Example: A CEO’s bonus should be tied to long-term company growth rather than short-term stock price increases.

Answer 117

The Guidance on Board Effectiveness (2018) provides detailed recommendations on implementing the Code. Some previous provisions have moved into supplementary guidance rather than the main Code. Example: The guidance provides more detail on how to conduct effective board evaluations.

Answer 118

Greater emphasis on governance principles rather than just compliance. Companies must now: - Demonstrate how they apply governance principles rather than simply confirming compliance. Audit governance practices and ensure they are effective. Report on outcomes of governance changes and their benefits to the company. Example: A company must explain how its governance practices improve corporate culture and financial performance rather than just stating compliance.

Answer 119

The UK Stewardship Code sets high standards for stewardship among asset owners, asset managers, and service providers. The current version was published in 2020 by the Financial Reporting Council (FRC). It aims to improve engagement between institutional investors and the companies they invest in.

Answer 120

The FRC’s goal is: To enhance the quality of engagement between institutional investors and investee companies. To improve long-term shareholder returns. To ensure that investors exercise their governance responsibilities efficiently. To promote best practices for stewardship and engagement.

Answer 121

Like the UK Corporate Governance Code, it follows the ‘comply or explain’ approach. This means institutions must comply with the principles or explain why they do not. Recognizes that best practices may not apply to all institutions.

Answer 122

The Stewardship Code includes two sets of principles: 12 Principles for Asset Managers and Asset Owners. 6 Principles for Service Providers.

Answer 123

These principles are divided into four key areas: 1. Purpose and Governance (Ensuring a strong foundation for stewardship) Purpose, strategy, and culture – Defining the institution’s purpose and aligning strategy with stewardship responsibilities. Governance, resources, and incentives – Ensuring strong governance structures and properly incentivizing employees. Conflicts of interest – Identifying and managing conflicts of interest that may impact stewardship decisions. Promoting well-functioning markets – Contributing to the stability and efficiency of financial markets. Review and assurance – Regularly reviewing stewardship activities and ensuring compliance. 2. Investment Approach (Aligning stewardship with client and beneficiary interests) Client and beneficiary needs – Understanding and prioritizing the interests of clients and beneficiaries. Stewardship, investment, and ESG integration – Incorporating environmental, social, and governance (ESG) factors into investment strategies. Monitoring managers and service providers – Overseeing investment managers and third-party service providers to ensure responsible stewardship. 3. Engagement (Interacting with investee companies) Engagement – Maintaining ongoing dialogue with companies to influence their governance and decision-making. Collaboration – Working with other investors when necessary to strengthen engagement efforts. Escalation – Taking further action (e.g., voting against resolutions) when engagement does not lead to improvements. 4. Exercising Rights and Responsibilities (Using voting rights to drive change) Exercising rights and responsibilities – Ensuring voting rights and shareholder powers are used effectively.

Answer 124

Service providers (such as proxy advisory firms and research firms) follow a separate set of six principles, which ensure they support investors in fulfilling their stewardship roles: Purpose, strategy, and culture – Defining their purpose and aligning strategy with stewardship services. Governance, resources, and incentives – Ensuring they have strong governance structures. Conflicts of interest – Managing potential conflicts that may arise in their advisory roles. Promoting well-functioning markets – Contributing to market stability and good governance. Supporting clients’ stewardship – Helping clients (asset owners/managers) meet their stewardship responsibilities. Review and assurance – Monitoring and improving their services over time.

Answer 125

The UK Stewardship Code (2020) was created to set high standards of stewardship among asset owners, asset managers, and service providers. It was developed by the Financial Reporting Council (FRC) to ensure that institutional investors actively engage with the companies they invest in. The goal is to enhance the quality of engagement, improve long-term shareholder returns, and ensure responsible corporate governance. Example: An asset manager investing in a company should engage with its board to influence governance decisions and ensure ethical business practices.

Answer 126

The Stewardship Code, like the UK Corporate Governance Code, follows a ‘comply or explain’ approach. This means that companies must follow the Stewardship Code or provide a valid explanation for non-compliance. Recognizes that not all best practices apply to every institution, allowing flexibility in implementation. Example: If an investment firm does not follow a particular principle, it must explain why it is not applicable to its business model.

Answer 127

The 12 principles are grouped into four categories: 1. Purpose and Governance Purpose, strategy, and culture – Firms must define their stewardship role and align it with investment strategy. Governance, resources, and incentives – Companies must have strong governance structures and sufficient resources. Conflicts of interest – Identifying and managing potential conflicts in investment decisions. Promoting well-functioning markets – Ensuring financial markets remain stable and ethical. Review and assurance – Conducting regular reviews to improve stewardship practices. 2. Investment Approach Client and beneficiary needs – Understanding and prioritizing investor and client interests. Stewardship, investment, and ESG integration – Embedding environmental, social, and governance (ESG) factors into investment decisions. Monitoring managers and service providers – Overseeing third parties to ensure responsible investment practices. 3. Engagement Engagement – Engaging with investee companies to drive good corporate governance. Collaboration – Working with other investors to strengthen influence over company decisions. Escalation – Taking further action (e.g., voting against management) if engagement fails to bring change. 4. Exercising Rights and Responsibilities Exercising rights and responsibilities – Using voting powers and shareholder rights to promote ethical business practices. Example: A pension fund that follows ESG principles may vote against a company’s board if it fails to meet environmental targets.

Answer 128

Service providers (e.g., proxy advisory firms, research firms, and ESG rating agencies) must follow these six principles: Purpose, strategy, and culture – Align business strategy with stewardship objectives. Governance, resources, and incentives – Maintain a strong governance structure and avoid conflicts of interest. Conflicts of interest – Ensure transparency in advisory services. Promoting well-functioning markets – Encourage responsible corporate behavior and fair markets. Supporting clients’ stewardship – Help investors meet their stewardship responsibilities. Review and assurance – Conduct audits and improve services based on industry standards. Example: A proxy advisory firm should avoid conflicts of interest when recommending shareholder voting decisions.

Answer 129

Engagement: Investors communicate directly with company boards to influence governance decisions. Collaboration: Investors work together to amplify their influence over companies. Escalation: If engagement does not lead to change, investors may escalate their actions (e.g., voting against directors, filing shareholder resolutions). Example: If a company ignores investors’ concerns about executive pay, they may vote against the board’s remuneration policy.

Answer 130

Listed companies should apply the principles of the UK Governance Code and explain any non-compliances with teh provisions of the code.

Answer 131

Board leadership and company purpose; division of responsibilities; composition, success and evaluation; audit, risk and internal control; remuneration

Answer 132

When a public company undergoes reconstruction involving its creditors or members, it can take the form of either a merger or a division (Companies Act 2006, s. 902). These processes involve the transfer of assets, liabilities, and ownership to another company. In most cases, shareholders receive shares in the new or acquiring company, sometimes with an additional cash payment.

Answer 133

Mergers occur when one or more companies combine their assets and liabilities into another company. There are two types: 1. Merger by Absorption (CA2006, s. 904) The assets, liabilities, and business of one or more public companies are transferred to an existing public company. The existing company continues operations with the combined resources. Example: Company A acquires Company B, and Company B ceases to exist. 2. Merger by Formation (CA2006, s. 904) Two or more public companies merge to form a newly incorporated company (public or private). The new company takes over the combined assets, liabilities, and operations of the merging companies. Example: Company X and Company Y combine to create a new entity, Company Z.

Answer 134

A division (CA2006, s. 919) occurs when a company’s assets, liabilities, and operations are split and transferred to two or more companies. Each resulting company can be either: An existing public company. A newly incorporated company (public or private). Example: Company A splits into Company B and Company C, each taking a portion of the original company’s assets and liabilities.

Answer 135

Mergers between public companies involve significant financial and structural changes, which can impact shareholders, creditors, and the market. The legislation ensures that members (shareholders) receive full disclosure of all relevant information before approving the merger. Key goal: To promote transparency, informed decision-making, and fairness in corporate mergers.

Answer 136

The Companies Act 2006 (ss. 905, 908–911) requires a minimum set of disclosure documents, which must be: Made available at the company’s registered office OR published on a website. Accessible for at least one month before any member or class meetings. Notified to the Registrar, who will publish the draft merger agreement in the Gazette. Example: A company planning a merger must publish financial reports, legal agreements, and impact assessments at least one month before the shareholder vote.

Answer 137

Each class of shareholders in the merging companies must approve the terms of the merger. Approval is given by special resolution, which requires: 75% of votes in favor from members present in person or by proxy at a general meeting. Example: If a company has 1,000 shareholders attending the meeting (in person or via proxy), at least 750 must vote in favor for the merger to proceed.

Answer 138

Under CA2006 s. 911B, directors of each merging company must: Report to their own members at the meeting where the merger is discussed. Report to the directors of the other merging companies if there are any material changes to the company’s assets or liabilities between the date the merger terms were drafted and the members’ meeting. Example: If Company A’s financial situation changes significantly (e.g., unexpected debt or asset sales), its directors must inform Company B’s directors before the merger is finalized.

Answer 139

The division of a company only applies when the company being divided is a public company. The receiving companies (those acquiring assets and liabilities) must be either: Public companies, or Newly incorporated companies (which can be either public or private). Example: If a public company splits into two separate entities, the resulting companies must be either public companies or newly created private/public companies.

Answer 140

The Companies Act 2006 (ss. 920–925) requires that key documents be disclosed by: Making them available at the company’s registered office OR Publishing them on a website for at least one month before the shareholder vote. The Registrar must be notified, and the draft division agreement is published in the Gazette. Example: A company undergoing division must provide shareholders with financial documents, legal agreements, and restructuring details one month in advance.

Answer 141

Each class of shareholders in the companies involved must approve the division. This is done through a special resolution, requiring: 75% approval of members present in person or by proxy at the general meeting. Example: If 800 shareholders attend a meeting (in person or via proxy), at least 600 must vote in favor for the division to proceed.

Answer 142

Under CA2006 s. 927, directors of each company involved in the division must: Report to their own members at the meeting discussing the division. Report to the directors of the other involved companies about any material changes to assets or liabilities between the draft terms' approval and the members’ meeting. Example: If Company A, which is being split, suffers unexpected losses or sells key assets, its directors must inform the directors of Companies B and C before finalizing the division.

Answer 143

A company can acquire another through: Liquidation under the Insolvency Act 1986 (IA1986 s. 110) – The target company is liquidated, and its assets are transferred to the acquiring company. Scheme of compromise or arrangement under CA2006 (ss. 895–901) – A structured agreement between the acquiring and target companies, often used when a full 100% acquisition is needed. Direct acquisition of assets or shares – The acquiring company buys the business of the target company using cash or shares. Example: If Company A wants to take over Company B but cannot reach 90% share acceptance for a compulsory purchase, it might use a scheme of arrangement instead.

Answer 144

A scheme of arrangement is a court-approved agreement between a company and its members or creditors. It is useful when the acquiring company wants to acquire 100% of the target company but cannot achieve the 90% acceptance level required for compulsory acquisition. Requires court involvement and legal documentation prepared by both companies’ legal advisers. Example: If an acquiring company only receives 85% of shareholder acceptances, it can use a scheme of arrangement to gain full control instead of a compulsory acquisition.

Answer 145

Meetings to approve the scheme must be authorized by the court (CA2006 s. 896). The acquiring company must apply to the court, which will: Set the requirements for notifying shareholders. Approve the meeting notice and circular before sending them to members. The scheme is then voted on at a member or creditor meeting, conducted like a general meeting. After the vote, a report of the meeting and votes cast is submitted to the court. Example: Before a company can vote on a scheme of arrangement, the court must approve all meeting notices and documents to ensure transparency.

Answer 146

Any notice convening a member or creditor meeting must include a statement (CA2006 s. 897) explaining: The effects of the scheme. Any material interests of directors and how the scheme impacts them. Example: If the scheme increases the value of a director’s shareholding, this must be disclosed to shareholders before they vote.

Answer 147

A scheme of compromise or arrangement must be approved by: 75% of members present at the meeting. 75% of creditors by value of claims. If the scheme meets this threshold, the court may sanction it (CA2006 s. 899). Example: If 800 shareholders vote and at least 600 approve, the scheme can proceed with court approval.

Answer 148

Achieving a 90% threshold permits an acquiring company under CA2006 to compulsorily acquire all remaining shares on the same terms if it wishes.

Answer 149

The goal of a takeover is for one company (the offeror/acquirer) to acquire a controlling interest in another company (the target/offeree). The acquirer usually aims to gain control over the target company’s operations, assets, and decision-making. This is typically done by purchasing all or a majority of the issued share capital of the target company. Example: If Company A wants to take over Company B, it will aim to acquire more than 50% of Company B’s shares.

Answer 150

The acquiring company can offer shareholders of the target company: Shares or other securities in the acquiring company. Cash payments for their shares. A combination of both shares and cash. Example: A takeover deal may offer shareholders two new shares in the acquiring company plus £5 in cash per share owned in the target company.

Answer 151

There are four main ways a company can acquire another: Share Sale Agreement – Used when a small number of shareholders agree to sell their shares in a private company. Public Purchase – Acquiring blocks of shares on a public market to gain a controlling stake. Takeover Offer – A direct public offer to shareholders to acquire their shares. Scheme of Arrangement – A takeover completed through a court-approved corporate restructuring process. Example: If a private company is being acquired, a share sale agreement is the most common method. If a public company is targeted, a public purchase or takeover offer is typically used.

Answer 152

This is a formal agreement between the shareholders of the target company and the acquirer. Typically used for private companies with a small number of shareholders. The Articles of Association and shareholder agreements must be reviewed to check for: Pre-emption rights (existing shareholders may have first refusal on shares). Drag-along or tag-along rights (rules requiring all shareholders to sell if a majority agrees). Example: If Company A wants to buy a private company with five shareholders, it will negotiate a share sale agreement rather than making a public offer.

Answer 153

The acquirer buys large blocks of shares in the target company on the stock market. Helps build a sizeable stake before launching a full bid. If the target is a public company, the offeror must comply with the City Code on Takeovers and Mergers. Example: If Company X wants to take over Company Y, it may secretly buy shares on the market to gain a 30% stake before launching a takeover bid.

Answer 154

The acquiring company sends an offer to all shareholders of the target company. The offer outlines the terms of the acquisition (e.g., price per share, cash or stock payment). Shareholders then decide individually whether to accept. Example: A company making a hostile takeover attempt may send a direct offer to shareholders, bypassing the target company’s board.

Answer 155

A takeover can be structured as a court-approved scheme of arrangement. This involves a formal restructuring process where shareholders vote on the takeover. Court approval is required to finalize the scheme. Example: If an acquiring company wants to buy 100% of a target company, but cannot reach the 90% threshold for compulsory acquisition, a scheme of arrangement may be used instead.

Answer 156

The simplest way to transfer ownership is by making agreements with individual shareholders. The transfer occurs when consideration (payment) is exchanged for: Duly executed share transfer documents (signed by the seller). Share certificates (proof of ownership). Example: If an investor wants to buy 10% of a company, they can pay the shareholder directly in exchange for the signed transfer form and share certificate.

Answer 157

While shares can be transferred with minimal documentation, a formal agreement is typically drafted with legal assistance. The agreement should specify: Which shares are being transferred (exact number and class). The consideration (payment) being offered. The timeline for completing the transaction. Who pays for legal costs, duties, and other expenses. Example: In a private company sale, the agreement will specify whether the buyer or seller is responsible for legal fees and stamp duty.

Answer 158

Warranties are promises or guarantees given by the directors of the target company about its financial and legal status. Warranties typically cover: Financial information (accuracy of accounts, debts, profitability). Property ownership (clear legal title to assets). Pending litigation (any ongoing or expected legal disputes). Material changes since the last financial statements. Example: A buyer purchasing a company will want warranties to ensure the company has no hidden debts or legal issues before completing the deal.

Answer 159

A company can acquire a large proportion of shares in a publicly listed company by buying shares on the stock market. This method involves fewer formalities compared to full takeovers but must comply with regulations. Example: A company wanting to gain influence over a competitor may gradually buy its shares on the market instead of making a direct takeover bid.

Answer 160

The City Code on Takeovers and Mergers (administered by the Panel on Takeovers and Mergers) regulates such transactions. The rules start applying when: A takeover bid is confirmed. A shareholder reaches 30% ownership of the company’s shares. Example: If an investor quietly buys 29% of shares, they must follow strict takeover rules if they acquire just 1% more.

Answer 161

Under the Disclosure and Transparency Rules (DTR): If a shareholder reaches 3% ownership, they must notify: The company. The Financial Conduct Authority (FCA) within two days. Additional notifications are required at each whole percentage point thereafter (e.g., at 4%, 5%, 6%, etc.). The company receiving the notification must inform a regulatory information service. Example: If an investor increases their holding from 3% to 4%, they must notify the company and FCA within two business days.

Answer 162

When calculating shareholdings for notification requirements, the shares held by: The acquiring company, and Any persons acting in concert (e.g., investors working together) Must be combined to determine total ownership. These individuals or entities must keep each other informed to ensure compliance with notification rules. Example: If Company A owns 2% and a partner company owns 1.5%, they must report a total 3.5% holding to the FCA and company.

Answer 163

If a shareholder acquires a certain percentage of shares, they may be required to make a general offer for all remaining shares in the company. This could affect the market price of the shares. Example: If an investor crosses the 30% threshold, they may be forced to offer to buy out all other shareholders at a fair price.

Answer 164

A public offer is a takeover bid made to all shareholders of a company. The acquirer offers to buy shares in the target company in exchange for: Cash Shares and/or other securities in the acquiring company This is the most common method of taking over a publicly traded company. Example: Company A makes a public offer to buy all outstanding shares of Company B, offering either cash or shares in Company A.

Answer 165

Public offers require more procedural steps than: Takeovers by private agreements with individual shareholders. Limited market purchases of shares on a stock exchange. If the target company is or was recently public, the offeror must comply with: City Code on Takeovers and Mergers Listing Rules (LR) and market regulations Example: If a company attempts a public offer for a former public company that recently went private, it may still need to follow City Code rules.

Answer 166

Private shareholders tend to accept early in the process. Institutional shareholders (e.g., investment funds) usually wait until the final days before the closing date. To prevent double counting of acceptances, the Panel on Takeovers and Mergers enforces strict acceptance procedures. Example: A pension fund holding 5% of shares may wait until the last moment to accept the offer, whereas retail investors often accept immediately.

Answer 167

The total number of acceptances (both complete and incomplete) is calculated to determine if the offer meets the minimum acceptance threshold. The board of the offeror company then decides whether: To declare the bid unconditional if enough acceptances have been received. To extend the offer period to allow more shareholders to accept. To improve the offer terms (e.g., increasing the cash payout or offering more shares) to attract more acceptances. Example: If an offeror receives only 45% acceptances, they might extend the offer and increase the bid price to encourage more shareholders to sell.

Answer 168

The offer period can be extended indefinitely as long as it is declared unconditional by the 60th day after posting the offer. An offer becomes unconditional when the acquirer reaches the minimum acceptance threshold. The minimum acceptance level is typically: 50% or more → Gives the acquirer a majority stake. 75% or more → Grants full control over key company decisions. 90% or more → Allows the acquirer to compulsorily acquire the remaining shares. Example: If an acquirer reaches 90% acceptance, they can force the remaining 10% of shareholders to sell their shares.

Answer 169

The acquiring company must finalize payments to accepting shareholders, which may include: Issuing new shares in the acquiring company. Preparing cash payments (cheques or bank transfers). Once unconditional, the acquirer officially gains control over the acquired shares. Example: If the acquirer promised a cash and stock deal, they must now issue the agreed number of shares and arrange bank transfers for cash payments.

Answer 170

Employee share options and incentive schemes may automatically become exercisable once the offer is unconditional. This allows employees with stock options to convert them into actual shares in the acquiring company. Example: If employees had share options in the target company, they might now be able to exercise them immediately, potentially benefiting from the takeover price.

Answer 171

A bulk transfer is a single transfer document executed by or on behalf of the offeror company to cover all shares accepted in a takeover. It consolidates individual acceptances into one document, simplifying the process of transferring ownership. It is used alongside the individual forms of acceptance and transfer submitted by each shareholder. Example: If 10,000 shareholders accept an offer, instead of processing 10,000 individual transfers, the acquiring company executes one bulk transfer covering all accepted shares.

Answer 172

Without a bulk transfer, the acquiring company would need to process each individual form separately, which would: Require separate HMRC stamping for each form. Cause delays and administrative burden. A bulk transfer allows the offeror company to complete the ownership change in one step rather than handling each transaction individually. Example: Instead of stamping 5,000 forms, HMRC stamps one bulk transfer document, saving time and effort.

Answer 173

CREST is the electronic settlement system used for UK securities transactions. When takeover acceptances are processed through CREST: Stamp duty is automatically calculated and deducted. The transfer is settled electronically without needing physical paperwork. Example: If a takeover is settled via CREST, there is no need for physical HMRC stamping, as duties are calculated and deducted automatically.

Answer 174

The Panel on Takeovers and Mergers supervises and regulates takeovers and related transactions under the City Code on Takeovers and Mergers. It ensures compliance with fair treatment rules in accordance with: The Directive on Takeover Bids (2004/25/EC). Companies Act 2006 (ss. 942–965). The Panel does not assess whether a takeover is financially or commercially beneficial—it only ensures fair treatment of shareholders. Example: If a company attempts an unfair takeover (e.g., offering better terms to certain shareholders), the Panel intervenes to enforce fair treatment.

Answer 175

The City Code ensures that: Shareholders are treated fairly and not denied the chance to vote on a takeover. Shareholders of the same class receive equivalent treatment from the offeror. Takeovers follow an orderly and transparent process. Example: If an acquirer offers £10 per share to some shareholders and £8 per share to others, the City Code ensures all shareholders get equal treatment.

Answer 176

Major shareholders often acquire up to 29.9% of a company’s shares, stopping just short of the 30% threshold. Even without buying more shares, a shareholder may accidentally cross 30% if: The company buys back shares, reducing the total number of shares in circulation. This makes the existing percentage holding increase automatically. Example: If Company X repurchases 10% of its shares, an investor’s previous 29.9% stake could suddenly represent 31% of voting rights, triggering a mandatory offer.

Answer 177

If a single shareholder or group of shareholders ("concert party") acquires 30% or more of a company’s voting rights, they must make a takeover offer to buy out all remaining shares. This prevents investors from gaining control without giving all shareholders a chance to sell. Example: If Investor A owns 29.9% of shares, they must be careful not to accidentally cross the 30% threshold, or they will be required to make a mandatory offer.

Answer 178

Yes, but only with prior approval from: The Panel on Takeovers and Mergers. Independent shareholders (i.e., shareholders who are not part of the acquirer’s concert party). The exemption must be obtained before the 30% threshold is crossed. Example: If Investor B plans to acquire 32% of shares, they can apply for a Panel exemption before doing so.

Answer 179

The City Code represents the collective opinion of professionals involved in takeovers. It establishes business standards to ensure: Fairness to shareholders. An orderly and structured takeover process. Compliance with the City Code helps maintain market stability and investor confidence. Example: The City Code prevents secretive takeovers by requiring clear disclosure of major share acquisitions.

Answer 180

The Enterprise Act 2002 (EA2002) established a new merger control regime in the UK. Unlike the previous public interest test, decisions are now based on a competition-based test. The Competition and Markets Authority (CMA) is responsible for reviewing mergers to ensure they do not harm competition in the market. Example: If two large supermarket chains plan to merge, the CMA will assess whether this reduces consumer choice and creates a monopoly.

Answer 181

A merger must be referred to the CMA for investigation if either of the following conditions under EA2002 s. 23 is met: Turnover Test: If the UK turnover of the target company exceeds £70 million, the CMA must review the merger. Share of Supply Test: If the merger creates or increases a 25% or greater share of supply in any goods or services sector in the UK, it must be reviewed. Example 1 (Turnover Test): If a company with £80 million in UK revenue is acquired, the CMA must review the deal. Example 2 (Share of Supply Test): If a merger gives a company 30% control of the broadband market, the CMA will investigate.

Answer 182

The CMA prevents anti-competitive practices, such as: Monopolies (where one company dominates a market). Price-fixing (where competition is reduced, leading to higher prices). Reduced consumer choice. The CMA has the power to: Block mergers. Approve mergers with conditions (e.g., requiring a company to sell off certain assets). Example: If two major UK airlines plan to merge, the CMA may force them to sell flight routes to maintain competition.

Answer 183

Compulsory acquisition refers to the legal process under CA2006 ss. 974–987, which allows an acquiring company to force remaining minority shareholders to sell their shares once a takeover bid has been accepted by at least 90% of shareholders. These laws also protect minority shareholders, ensuring they are treated fairly and have a right to resist forced acquisition if they have reasonable grounds. Example: If an acquiring company gains 90% acceptance, it can compel the remaining 10% to sell their shares at the same price.

Answer 184

The squeeze-out notice must be issued: At least 3 months after the last acceptance date of the offer. No later than 6 months from the start of the offer. (CA2006 s. 980). Example: If the takeover offer closes on 1st June, the squeeze-out notice can be issued between 1st September and 1st December.

Answer 185

If the offeror company secures at least 90% acceptance of the offer, it can force the remaining minority shareholders to sell their shares. To do this, the offeror must: Issue a Form 984 notice to non-assenting shareholders stating its intention to acquire their shares (CA2006 s. 979). Send a copy of the notice and a statutory declaration confirming the 90% acceptance level to the offeree company (CA2006 s. 980(4)). Example: If an acquirer secures 95% of shares, it can use the squeeze-out rule to acquire the remaining 5%.

Answer 186

If an acquiring company reaches 90% ownership but does not wish to force acquisition, it must notify remaining minority shareholders of their right to sell their shares at the offer price. (CA2006 s. 984). The sell-out notice must be given within one month of reaching 90% acceptance. Minority shareholders can choose to exercise their right to sell out, provided they notify the company within: Three months after the acceptance period ends, or Three months after receiving the sell-out notice, whichever is earlier. Example: If an acquirer reaches 90% acceptance on 1st July, it must issue a sell-out notice by 1st August. Minority shareholders then have until 1st November to sell their shares.

Answer 187

If the company has many untraceable shareholders, it may be impossible to enforce a compulsory acquisition (CA2006 s. 979). This can happen when shareholders: Have outdated contact details. Have inherited shares but do not claim them. Example: If 5% of shareholders cannot be contacted, the acquiring company may struggle to reach 100% ownership through compulsory acquisition.

Answer 188

Some takeovers and schemes of arrangement can qualify for stamp duty exemptions under specific conditions. These exemptions usually apply when the takeover involves a company restructuring where the ultimate ownership does not change. The relevant law is Finance Act 1986 (FA1986) s. 77. Example: If a parent company restructures its subsidiaries by transferring shares within the group, it may be exempt from stamp duty.

Answer 189

Exemptions apply only when the takeover does not result in a change of ultimate ownership. This typically includes: Internal group restructurings (e.g., merging two subsidiaries under the same parent company). Reorganisations where ownership remains within the same group. Example: If Company A owns Company B and merges it with Company C (which Company A also owns), the transaction may qualify for stamp duty exemption.

Answer 190

Stamp duty is usually payable on the transfer of shares at 0.5% of the transaction value. Exemptions reduce costs for businesses undergoing internal restructuring. Example: A company avoiding a £1 million stamp duty charge on a £200 million internal share transfer would benefit significantly.

Answer 191

All public companies or companies that have been public in the previous 10 years.

Answer 192

These thresholds provide different degrees of control: 50% allows the holder to pass all ordinary resolutions and is treated as the holding company for accounting provisions 75% permits the passing of special resolutions as well as ordinary resolutions and gives control to the holder 90% is the level at which dissenters in a takeover can be compulsory acquired under procedures in the Companies Act 2006

Answer 193

‘Setting the tone from the top’ refers to board leadership in establishing ethical corporate governance. First officially included in the 2014 UK Corporate Governance Code preface. It emphasizes that boards must set and follow ethical standards to promote integrity and prevent misconduct. Example: A company’s board must adhere to ethical policies (e.g., avoiding conflicts of interest) so that employees follow the same standards.

Answer 194

Companies must not only report on governance but also disclose their environmental and social impact. Environmental, Social, and Corporate Governance (ESG) reporting is a major focus for investors and regulators. ESG is now a key boardroom agenda item because it affects long-term corporate success. Example: A company with poor environmental policies may lose investors who prioritize sustainability and ethical business practices.

Answer 195

ESG consists of three main categories: Environmental – How a company impacts nature: Climate change policies. Use of natural resources and sustainability. Pollution control. Social – How a company interacts with people: Workplace diversity and inclusion. Corporate culture and stakeholder engagement. Community involvement. Governance – How a company is managed: Board composition and leadership. Audit processes and shareholder rights. Implementation and review of corporate policies. Example: A company may report carbon emissions (E), gender diversity (S), and executive pay transparency (G) in its ESG disclosures.

Answer 196

The United Nations (UN) established 17 Sustainable Development Goals (SDGs) in 2015. SDGs aim to address global challenges like poverty, inequality, climate change, and responsible business practices. Investors now use SDGs to assess whether companies align with ethical and sustainable development. Example: A company investing in renewable energy projects aligns with SDG 7 – Affordable and Clean Energy.

Answer 197

Investors and stakeholders demand greater transparency in corporate responsibility. Failure to integrate ESG and SDG principles can lead to: Reputational damage. Loss of investor confidence. Regulatory scrutiny. Companies that align with ESG and SDGs are seen as more sustainable, responsible, and profitable in the long run. Example: A company that ensures fair wages and ethical supply chains supports SDG 8 – Decent Work and Economic Growth.

Answer 198

The goal is to create a corporate environment where all employees take ownership and responsibility for ethical business practices. This culture must be embedded at all levels to be effective. Example: A company encouraging employees to reduce waste and improve sustainability ensures ESG principles are followed across all departments.

Answer 199

Senior executives must actively support ESG policies and act as role models. Leadership should be seen following ESG commitments, not just sponsoring them. Employees are more likely to follow ESG principles if they see leadership doing the same. Example: If executives use sustainable practices (e.g., avoiding single-use plastics), employees will be more inclined to do the same.

Answer 200

A strong ESG culture means employees act ethically because they believe in it, not just because it is a rule. Ethical behavior should become second nature rather than something that needs enforcement. Example: Employees should report unethical behavior because it is the right thing to do, not just because of compliance policies.

Answer 201

While corporate culture is shaped by actions, it must also be supported by policies and training. This includes: Clear ESG policies outlining expectations. Regular training and refresher courses to keep employees updated. Implementation strategies to ensure policies are integrated into daily operations. Example: A company with a strong diversity policy should provide diversity training to employees to ensure real-world application.

Answer 202

A company should provide a working environment that promotes equality, respect, and dignity. The policy ensures zero tolerance for unlawful or unfair discrimination against: Employees Contractors Job applicants Visitors Discrimination can include: Harassment (unwanted conduct that violates dignity). Victimisation (retaliation against someone who reports wrongdoing). Intimidation or bullying (verbal or physical abuse). Example: A company should have clear procedures to report and address cases of workplace harassment or discrimination.

Answer 203

The Employment Rights Act 1996 (as amended) protects employees from being victimised or dismissed for whistle-blowing. However, whistle-blowing must relate to a matter in the public interest and not a personal grievance. Personal grievances (e.g., pay disputes, promotions) are not protected under whistle-blowing laws. While a whistle-blowing policy is not legally required, having one: Demonstrates the company’s commitment to ethical behavior. Encourages employees to report wrongdoing internally before going public. Example: If an employee reports fraud or unsafe working conditions, they are legally protected. If they complain about being overlooked for a promotion, they are not protected under whistle-blowing laws.

Answer 204

Quoted companies (publicly listed) must have a remuneration policy for directors. This policy must be approved by shareholders at least every three years. If a director approves payments outside the approved policy, they may have to repay the amount. The UK Corporate Governance Code states that: Remuneration committees should set executive directors’ pay. Pay should promote the long-term success of the company. Pay structures should be transparent and sensitive to pay levels within the company. However, the Code does not require salary increases to be consistent across all levels. Example: A company cannot increase executive bonuses without shareholder approval, but it can raise junior staff salaries without approval.

Answer 205

Companies are not legally required to have an employment handbook. Instead, they can place all terms in individual employment contracts, but this creates issues when updating policies. Problems with including everything in contracts: Any change (even minor) requires employee consent. Some employees may refuse consent, leading to different rules for different employees. Why companies use handbooks: Handbooks can be updated without needing employee consent. They cover administrative rules such as: Grievance procedures Holiday request process Sickness absence notification Employment contracts should only contain major contractual terms, such as: Salary and bonuses Holiday entitlement Sick pay entitlement Pension entitlement Example: If a company changes its holiday request process, it can update the handbook without needing employee approval. However, if it reduces sick pay, employees must agree, as it is a contractual term.

Answer 206

Winding up a company is the process of selling assets and paying creditors before the company is closed. This protects the interests of creditors, employees, and shareholders. A licensed insolvency practitioner is appointed as the liquidator to manage the process on behalf of creditors. Example: If a company cannot repay its loans, it may need to liquidate its assets to settle debts.

Answer 207

A company is deemed insolvent if any of the following conditions apply: Failure to comply with a statutory demand: If the company owes more than £750 and does not settle the debt after receiving a statutory demand. Failure to satisfy enforcement of a judgment debt: If a creditor wins a court judgment but the company fails to pay. Inability to pay debts as they fall due: If the company cannot meet its financial obligations on time. Liabilities exceed assets: If the company’s total debts are greater than its total assets (balance sheet insolvency). Example: If a company owes £10,000 but only has £5,000 in cash and assets, it is insolvent.

Answer 208

If directors realise the company is not yet insolvent but will become so, they can appoint an administrator. The administrator manages the company with three possible outcomes: Rescue the company so it can continue trading. Sell the company to another business. Wind up the company if recovery is not possible. Example: If a retail company is struggling financially, an administrator may try to sell it to a competitor instead of liquidating it.

Answer 209

A Members’ Voluntary Winding Up (MVWU) is a solvent liquidation process where a company chooses to wind up while still able to pay its debts. The directors must declare that the company can pay all debts (with interest) within 12 months of winding up. This process is governed by Insolvency Act 1986 (IA1986) ss. 89 and 90. Example: A company that wants to close but has no financial trouble may use an MVWU to distribute assets to shareholders after paying creditors.

Answer 210

Directors must prepare a statutory declaration of solvency within five weeks before passing the resolution to wind up. This declaration must confirm that the company: Is solvent (i.e., can pay all debts). Will pay its debts (plus interest) within 12 months of the winding-up process starting. Example: Before voluntarily liquidating, a company must prove it has enough funds to clear all liabilities.

Answer 211

The liquidator is responsible for following detailed liquidation procedures (e.g., prioritising creditor claims). The company secretary does not need to be involved in these technical processes. Example: The liquidator, not the company secretary, ensures creditors are paid in the correct order

Answer 212

If a director declares solvency without reasonable grounds, and the company fails to pay its debts within the 12-month period, they can face: A fine; Imprisonment; Both The burden of proof is on the director to prove their innocence (IA1986 s. 89(4)). Example: If a director misjudges financial stability and the company later defaults on debts, they could be held personally liable.

Answer 213

A Creditors’ Voluntary Winding Up (CVWU) occurs when a company cannot make a declaration of solvency and needs to be wound up because it cannot pay its debts. The process is governed by Insolvency Act 1986 (IA1986) s. 98. Example: A business that owes more than it can repay must use a CVWU instead of a Members’ Voluntary Winding Up.

Answer 214

A meeting of creditors must be called within 14 days after members pass a resolution to wind up the company. Liquidation officially begins when the resolution is passed (IA1986 s. 86). A licensed insolvency practitioner is appointed as the liquidator to handle asset sales and debt repayments. Example: If a company’s members pass a resolution to liquidate on 1st July, creditors must be notified and a meeting held by 15th July.

Answer 215

A company may be forced into liquidation by the court under certain conditions (IA1986 ss. 122 and 124). This can happen if: The company passes a special resolution to be wound up. A creditor petitions the court because the company owes over £750 and has ignored a formal payment demand. The court decides it is just and equitable to wind up the company. The company fails to meet statutory requirements, such as maintaining the minimum number of members. Example: If a company fails to pay a £10,000 judgment debt, the creditor can petition for compulsory liquidation.

Answer 216

The following parties may petition the court to wind up a company: Creditors (if debts over £750 remain unpaid). A contributory (shareholder). The Official Receiver. The Secretary of State. The Bank of England. The Attorney General. A petition may be filed even if the company is solvent under certain statutory provisions. Example: If a company is fraudulently trading, the Secretary of State can request the court to wind it up for public interest reasons.

Answer 217

The liquidator, not the company secretary, handles: Prioritising creditor claims. Selling assets to repay debts. Ensuring compliance with insolvency laws. The company secretary does not need to be involved in these technical processes. Example: The liquidator, not the company secretary, ensures creditors are repaid in the correct order.

Answer 218

A liquidator is appointed to manage the company’s affairs, sell its assets, and distribute proceeds to creditors. The liquidator takes full legal control of the company during the winding-up process. Example: If a company is in liquidation, the directors no longer control the business—the liquidator makes all decisions.

Answer 219

The liquidator must: Take control of company assets, books, and records Ensure all company property is accounted for. Secure financial statements and legal documents. Protect and realise assets Take necessary steps to secure and sell company assets to repay creditors. Disclaim onerous property or unprofitable contracts (IA1986 s. 178 and IR1986 reg. 4.187–4.194) Cancel any contracts or property arrangements that would increase company liabilities. Stop legal proceedings against the company (IA1986 s. 130(2)) A winding-up order halts all lawsuits against the company unless a court grants permission. Provide information to the Official Receiver Give the Official Receiver access to company records and any other required assistance. Example: If a company in liquidation has a lease for an unprofitable building, the liquidator can cancel the lease to reduce debts.

Answer 220

All legal proceedings are halted when a winding-up order is made. If a creditor wants to continue a legal claim, they must get court approval. Example: If a supplier sues a company for unpaid invoices, they cannot proceed with their claim unless a court allows it.

Answer 221

Under Company Directors Disqualification Act 1986 (CDDA1986) s. 7(3), a liquidator or the Official Receiver must immediately report a director to the Secretary of State if they believe their conduct makes them unfit to manage a company. This ensures unethical directors can be investigated and potentially disqualified from acting as company directors.

Answer 222

A formal return must be submitted to the Secretary of State within six months of the liquidator’s appointment. This return must state: Whether there is evidence of unfit conduct by directors. If no such evidence exists. If the investigation is still ongoing and the return will be delayed. Example: If a liquidator needs more time to investigate a director’s actions, they must notify the Secretary of State before the six-month deadline.

Answer 223

If found guilty, a director can receive a disqualification order of up to 15 years. This means they cannot serve as a director or be involved in company management during the disqualification period.

Answer 224

Certain provisions of the Insolvency Act 1986 (IA1986) apply specifically to Scotland and govern winding-up procedures. These are outlined in IA1986 ss. 120–121, 122(2), 142, 157, 161–162, 169, 185, 193, 198–199, 204, and 243. Differences may include court procedures, creditor rights, and administrative processes unique to Scotland. Example: The Scottish courts may follow different rules for handling creditor claims compared to England and Wales.

Answer 225

Although UK company law is largely uniform, Scotland has separate legal systems and certain insolvency rules differ. Legal professionals handling insolvency cases in Scotland must ensure compliance with these specific provisions. Example: A company with operations in both England and Scotland must follow Scottish-specific provisions for assets located in Scotland.

Answer 226

Directors of an insolvent company cannot become directors of a new company with a "prohibited name". A prohibited name is one that is: Identical to the name of the insolvent company. So similar that it suggests an association with the failed company. Example: If XYZ Ltd goes insolvent, its former director cannot set up XYZ Solutions Ltd if it suggests a connection.

Answer 227

To prevent directors from misleading creditors and customers by creating a new company that appears linked to the failed business. This stops directors from avoiding liabilities by shutting down an insolvent company and restarting under a similar name. Example: A restaurant called Gourmet Dining Ltd goes into liquidation. The same director cannot open a new restaurant called Gourmet Dining & Co. to mislead creditors.

Answer 228

Under Companies Act 2006 (CA2006) s. 1000, the Registrar of Companies can remove a company from the register if they believe it is defunct. A company may be struck off if: It fails to file accounts or confirmation statements. It does not respond to official letters sent to its registered office. Once struck off, the company is dissolved. Example: If a company ignores multiple warnings from Companies House about overdue filings, it may be struck off and dissolved.

Answer 229

Under CA2006 s. 1003, a private company that is not trading can apply for voluntary striking off. This method cannot be used if, in the last three months, the company has: Changed its name. Traded or disposed of assets for value. Carried out any activity except those necessary for dissolution. Been involved in an insolvency procedure (e.g., a scheme of arrangement or liquidation petition). Example: A dormant company with no debts or ongoing business may apply to be struck off using this process.

Answer 230

Board resolution – The board decides to apply for striking off. Recommended: Obtain shareholder consent – Since shareholders own the company, their agreement should be sought. Submit Form DS01 to Companies House. Notify all interested parties, including: Creditors Shareholders Employees HMRC (if VAT-registered) Notice of strike off is published in The Gazette to allow objections. If no objections are received after two months, the company is struck off and dissolved. Example: A company with no debts that has stopped trading for a year can apply for strike off using DS01.

Answer 231

HM Revenue & Customs (HMRC) is the most common objector to strike-offs. HMRC will object if they believe the company owes or might owe tax. Any person can object by contacting the Registrar and giving valid reasons. Directors can halt the process by submitting Form DS02. Example: If a company owes unpaid corporation tax, HMRC will block its dissolution until the debt is settled.

Answer 232

Any property or rights held by a dissolved company automatically pass to the Crown, the Duchy of Lancaster, or the Duke of Cornwall as bona vacantia (ownerless assets). The Crown estate that receives the assets depends on the company’s registered office location before dissolution. If it is later discovered that the dissolved company had assets, the company must be restored to deal with them properly. Example: If a dissolved company still owns land, that land becomes Crown property unless the company is restored to reclaim it.

Answer 233

A company that has been struck off and dissolved can be restored to the register using two methods: Administrative Restoration (CA2006 ss. 1024–1028) – A simplified process available only if the company was struck off by the Registrar. Court-Ordered Restoration (CA2006 ss. 1029–1032) – Used when administrative restoration is not available or if the company was dissolved for other reasons. Example: If a company was struck off for failing to file accounts, it may apply for administrative restoration instead of going to court.

Answer 234

Administrative restoration is a cost-effective way to restore a company without going to court. It is only available if the company was: Struck off and dissolved by the Registrar under CA2006 ss. 1000 or 1001. Still trading at the time it was struck off. The application must be made by a former director or member within six years of dissolution (CA2006 s. 1024(4)). Example: If a company was trading but failed to file accounts, it can apply for administrative restoration within six years.

Answer 235

Yes, the Secretary of State can apply to restore a company by court order if it is in the public interest. Example: If a dissolved company is found to have been involved in fraud, the government may seek restoration to recover assets.

Answer 236

If administrative restoration is not an option, the company must apply for restoration by court order (CA2006 ss. 1029–1032). This applies to all dissolved companies, regardless of why they were struck off, including: Voluntary strike-off by directors. Formal winding-up proceedings. Example: If a company was formally liquidated, it cannot use administrative restoration—it must apply to court.

Answer 237

Applications for administrative restoration must be made within six years of the company’s dissolution (CA2006 s. 1024(4)). Court-ordered restoration does not have a fixed deadline but must be justified by strong legal grounds. Example: If a company was dissolved seven years ago, it cannot apply for administrative restoration but may still apply for court-ordered restoration.

Answer 238

A court application for restoring a dissolved company must be made: At any time if the application is for the purpose of bringing a claim for personal injury against the company. Within six years from the date of dissolution for other reasons. Example: If a former employee suffered an injury caused by a dissolved company, they can apply for restoration at any time to sue for damages.

Answer 239

If administrative restoration is denied, the applicant has 28 days from the Registrar’s decision to apply to the court for restoration, even if the six-year period has expired. Example: A company applies for administrative restoration after five years, but the Registrar rejects the request. They now have 28 days to apply to court.

Answer 240

The applicant (the person requesting the restoration) must cover: Government Legal Department costs. Registrar’s fees. Any late filing penalties for accounts or confirmation statements. Example: If a company was struck off for failing to file accounts, the applicant must pay late penalties for missing financial reports.

Answer 241

The period when the company was dissolved is ignored when calculating late penalties. However, the company must still file all missing accounts and confirmation statements to maintain a continuous record. Example: If a company was dissolved in 2020 and restored in 2024, it must file accounts for 2020–2024, but the penalty is only calculated based on pre-2020 deadlines.

Answer 242

The company is restored when the court order (with seal) is delivered to the Registrar. The company is then treated as if it had never been dissolved. Example: A company is restored on March 1, 2025, when the sealed court order is submitted to Companies House.

Answer 243

Three months

Answer 244

The Registrar will contact the company with a warning giving the company an opportunity to respond and to remedy any deficiency (e.g. overdue filings). If there is no response from the company or if the deficiencies are not remedied, the Registrar may take action to strike the company off the register and dissolve it

Answer 245

A dormant company is one that has had no significant accounting transactions since: The end of its last financial year, or Its incorporation, if newly formed (CA2006 s. 1169). Example: A company that stops trading but does not engage in financial transactions can be classified as dormant.

Answer 246

The following do not count as significant transactions, meaning they do not affect dormant status: Payment for shares by the initial subscriber(s). Fees paid to the Registrar of Companies (e.g., for annual returns). Civil penalties from the Registrar (e.g., late filing penalties). Example: If a company only pays Companies House fees, it can still be considered dormant.

Answer 247

Any other transactions that must be recorded in accounting records, such as: Bank interest or charges. Business transactions (e.g., receiving payments, making purchases). Example: If a company has cash reserves in an interest-bearing account, it is not dormant because the bank pays interest, which is a financial transaction.

Answer 248

If a company stops trading but has cash reserves, it must ensure the reserves do not generate interest. Possible solutions: Transfer the funds to a parent company or subsidiary (if part of a group). Move the funds to a non-interest-bearing account (if a standalone entity). Example: A dormant company with £100,000 in reserves should switch to a non-interest-bearing account to maintain dormant status.

Answer 249

Companies remain dormant for various strategic reasons, such as: Protecting a trading name for future use. Holding valuable assets (e.g., intellectual property, property rights). Reserving a corporate structure for later business activity. Example: A company may register "FutureTech Ltd." as dormant to prevent competitors from using the name.

Answer 250

Directors must still file accounts and returns on time, even if the company is dormant. A simplified format of dormant accounts is available to reduce administrative work. Example: A dormant company must submit annual confirmation statements and dormant company accounts to avoid penalties.

Answer 251

No, a dormant company cannot be dissolved simply because it is not trading. However, the company can be voluntarily dissolved if it no longer serves a purpose. Dormant companies may still hold valuable assets, making them useful. Example: A dormant company owning trademarks or patents still has value and should not be dissolved unless necessary.

Answer 252

A dividend being paid by a non-trading entity.