Chapter 9 - Companies: Finance

Question 1

Characteristics of Ordinary shares

Answer 1

• e.g £1 ordinary share
• Can have dividends
• Have voting rights
• Have pre-emption rights
• Have rights to share capital on winding up (capital repaid in any surplus profits)
• Have rights to participate in rights issue

Question 2

Characteristics of Preference shares

Answer 2

• e.g 5% preference shares
• No right to compel the payment of a dividend
• Have voting rights
• Do not have pre-emption rights

Have a right to be repaid capital and share in surplus profit

• No rights to participate in rights issue

Question 3

Why would a company need a reduction of share capital?

Answer 3

• Capital exceeds the company’s needs
• Company’s net assets have fallen in value to below amount of its capital

Question 4

How would a company have a reduction of share capital?

Answer 4

• Reducing the liability on partly paid shares
• Reducing the amount of paid up share capital

Question 5

Procedures to reduce share capital for a public company

Answer 5

• Special resolution
• Confirmed by the court
• Notice to creditors
• File resolution and court order with registrar

Question 6

Procedures to reduce share capital for private company

Answer 6

• Special resolution
• Solvency statement
• File resolution and solvency statement with registrar

Question 7

When can a company purchase its own shares?

Answer 7

• If complying with a court order
• Permitted to reduce share capital
• In accordance with Companies Act

Question 8

Redemption of shares

Answer 8

When shares are issued on terms which allow them to be redeemed at a later date.

Detailed terms are set out in articles of association.

Redeemable shares can only be issued when there are other shares issued that are not redeemable.

Question 9

What are the procedures for repurchase or redemption of shares?

Answer 9

To be purchased at fully paid shares

Must be no restriction in the articles

Must be one non-redeemable share in issue after the repurchase

Question 10

Debenture

Answer 10

• Written acknowledgement of a debt by a company, which normally contains provisions as to repayment of capital and interest
• Is a creditor of the company

Question 11

Charges

Answer 11

A charge is security given to the creditor as security for a particular debt. If the debt is unpaid the creditor may take the asset and sell for repayment.

Question 12

Fixed charge

Answer 12

The charge here attaches to a particular asset which cannot be sold without the consent of the charge holder (mortgage)

Question 13

Floating charge

Answer 13

Attached to a class of assets but will not prevent the debtor from selling asset unless the charge crystallises.

Once crystallised it becomes a fixed charge

Question 14

Security - Fixed charge

Answer 14

• Attached to identifiable asset
• Cannot deal with the asset unless the charge holder consents

Question 15

Security - Floating charge

Answer 15

• Does not attach until it crystallises
• Attaches to current and future assets at that time e.g stock
• Can continue dealing until charge crystallises

Question 16

Priority of payment - Fixed charges

Answer 16

• Fixed charges rank first in order of priority in liquidation

Question 17

Priority of payment - Floating charge

Answer 17

Even after the charge has crystallised the following creditors may be paid before floating charge

A judgment creditor
Preferential debts

Question 18

Enforcement - Fixed charge

Answer 18

Grants the holder the right of enforcement against the identified asset in the event of default in repayment

Question 19

Enforcement - Floating charge

Answer 19

Usually by the company or the holder appointing an administrator or liquidator

Question 20

Effect of insolvency - Fixed charge

Answer 20

Created to secure a debt within 6 months before company becomes insolvent

Question 21

Effect of insolvency - Floating

Answer 21

Created 12 months before liquidation, may become void on liquidation