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ICAEW - CERTIFICATE LEVEL 1 - LAW (2024) > Chapter 9 - Companies: Finance > Flashcards

Chapter 9 - Companies: Finance Flashcards

1
Q

What are the two types of finance a company can have?

A

Shares - Equity

Loan - Debt

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2
Q

What is the main difference in dividend rights between preference and ordinary shares?

A

Preference Shares: Preferential right to a dividend, often cumulative, but no right to compel payment if not declared.
Ordinary Shares: Right to a declared dividend.

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3
Q

Do preference shares typically have voting rights?

A

Yes, but these rights are commonly disapplied in the articles.

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4
Q

Do ordinary shares typically have voting rights?

A

Yes

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5
Q

Which type of shares grants pre-emption rights?

A

Ordinary shares have pre-emption rights, while preference shares do not.

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6
Q

In the event of a company winding up, how do the rights differ between preference and ordinary shares?

A

Preference Shares: Right to repaid capital, often before ordinary shares, but usually no right to surplus profits. Undeclared dividends will not be paid when liquidation occurs.

Ordinary Shares: Right to repaid capital and a share in surplus profits (as long as there is money left)

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7
Q

Which of the following characteristics apply to preference shares?

A) Pre-emption rights.
B) Cumulative dividends.
C) Right to participate in rights issues.
D) No right to surplus profits in liquidation.

A

B) Cumulative dividends, D) No right to surplus profits in liquidation.

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8
Q

What must a public limited company’s articles include to issue redeemable shares?

A

Specific authority to issue redeemable shares.

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9
Q

Can all issued shares in a company be redeemable?

A

No, redeemable shares can only be issued when there are non-redeemable shares in existence.

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10
Q

How can the rights attached to a class of shares be varied? 2

A

A special resolution of the relevant class.

Written consent from ≥75% in nominal value of the issued shares of that class.

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11
Q

What notice and filing requirements apply to a variation of class rights?

A

Notice of variation or new class creation must be delivered to the Registrar within one month.

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12
Q

What options do holders of at least 15% of affected shares have regarding a variation of class rights?

A) Accept the variation.
B) Apply to court within 21 days to cancel the variation.
C) Modify the terms of the variation.

A

B) Apply to court within 21 days to cancel the variation.

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13
Q

Can the court modify the terms of a variation in class rights?

A

No, the court can only confirm or cancel the variation.

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14
Q

Interactive question 20: Types of share

Which type(s) of share……… ordinary/preference

A Carries statutory rights of pre-emption in the absence of any express provision?
B Carries a right to a dividend at a specified rate which is deemed to be cumulative in the absence of any express or implied provision to the contrary?
C Carries an automatic right to have capital repaid in the event of the company being wound up?
D Carries a right to vote in the absence of any express provision?

A

A Ordinary shares
B Preference shares
C Ordinary and preference shares
D Ordinary and preference shares

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15
Q

Under Section 551, what authority is required for directors to allot shares?

A

Authority must be given in the articles or by ordinary resolution (>50%).

The authority must state:
1. Maximum number of shares to be allotted.
2. Expiry date (not more than 5 years).

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16
Q

What is a rights issue?

A

An allotment of additional shares made to existing members, pro-rata to their existing holdings, allowing them to buy shares or sell their rights.

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17
Q

What is a bonus issue?

A

Issuance of additional shares to existing shareholders, proportional to their holdings, fully paid up from the company’s reserves.

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18
Q

What is an example of a variation of class rights?

A

Issuing preference shares that are prioritized over existing ordinary shares.

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19
Q

TRUE OR FALSE Subdividing share classes is considered a variation of class rights.

A

TRUE

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20
Q

What might shareholders object to as an unfair variation of class rights?

A

A change that disproportionately affects their voting power or dividend rights.

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21
Q

Define Pre-emption

A

Pre-emption refers to the legal right of existing shareholders to be given the first opportunity to purchase new shares issued by a company before they are offered to external investors. This ensures that current shareholders can maintain their proportional ownership and voting rights in the company.

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22
Q

What is the right of pre-emption?

A

It is the right of existing shareholders to have first refusal on new equity shares issued by the company, on a pro-rata basis.

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23
Q

How long must the offer remain open under the right of pre-emption?

A

At least 21 days.

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24
Q

What happens if pre-emption rights are breached?

A

Affected members may recover compensation for losses within 2 years from the return of allotment.

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25
Q

Which securities are exceptions to pre-emption rights?

A) Bonus shares
B) Shares issued for non-cash consideration
C) Employee share schemes
D) Pre-emptive rights cannot be excluded

A

A) Bonus shares, B) Shares issued for non-cash consideration, C) Employee share schemes.

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26
Q

What new exceptions to pre-emption rights? 4

A

Exceptions:
Bonus shares
Shares issued for non-cash consideration
Employee share schemes
Exclusions set out in the company’s articles of association or approved by special resolution.

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27
Q

Can shares be issued at a discount to their nominal value?

A

No, shares cannot be issued at a price less than their nominal value under Section 580.

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28
Q

What happens if shares are issued at a discount?

A

The allottee must pay the amount of the discount and interest to the company.

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29
Q

What is a share premium?

A

The amount paid for shares above their nominal value.

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30
Q

How is the share premium recorded?

A

Credited to a share premium account, which is part of the company’s paid-up capital.

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31
Q

What are the permissible uses of a share premium account? 3

A

Write off share issuance expenses.

Issue fully paid bonus shares to members.

Apply special rules for group reconstructions or mergers.

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32
Q

TRUE OR FALSE A company can distribute funds from the share premium account as a dividend.

A

FALSE

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33
Q

Journal entry for and increase in share premium

A

DR CASH
CR SC
CR SP

remember SC + SP = CASH

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34
Q

Where can’t a company use its SP account? 3

A

A company cannot distribute part of its share premium account:
 As a dividend
 To write off expenses incurred in connection with the formation of the company
 To write off expenses incurred in connection with an issue of debentures

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35
Q

What forms of payment are acceptable for shares? 4

A

Cash
Non-cash consideration (e.g., property or assets) of sufficient value.
Cheques
A release of liability for a liquidated sum.

MUST BE SUFFICIENT VALUE/MONEYS WORTH

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36
Q

What are the restrictions for public companies on payment for shares? 4

A

Shares must be paid for in cash.

At least one-quarter of the nominal value and the full premium must be paid.

Payments cannot be in the form of long-term services or obligations (exceeding five years).

Non-cash payments must be independently valued.

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37
Q

For public companies, which payment methods are valid?

A) Cash
B) Promissory notes
C) Release of liability
D) Independent valuation of non-cash payments

A

A) Cash
D) Independent valuation of non-cash payments

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38
Q

To determine a payment for a share as sufficient in a limited company how is this done?

A

Directors valualtion
Can be used to determine if the non-cash item is of sufficient value

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39
Q

To determine a payment for a share as sufficient in a plc company how is this done?

A

Must be independently verified,

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40
Q

INTERACTIVE QUESTION 21: ISSUE OF SHARES

The directors of Starwake plc propose to allot 1,000 shares with a nominal value of £5 each for cash.

YES OR NO

A Can the company amend its articles of association to incorporate a provision excluding the statutory rights of pre-emption?
B Is an authority to allot shares given by ordinary resolution sufficient?
C Can any of the shares be sold for £4.50 each on a fully paid-up basis?
D Can any of the shares be sold for £5.50 each?

A

A No. Only a private company may do so.
B Yes. Authority may be given either in the articles or by ordinary resolution.
C No. Shares cannot be allotted at a discount.
D Yes. Shares may be allotted at a premium.

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41
Q

What governs the transfer of shares in a company?

A

Any restrictions outlined in the company’s articles of association.

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42
Q

What steps are required for transferring unlisted shares?

A

The transferor executes a stock transfer form in favor of the transferee.

The form and the share certificate are sent to the company for registration.

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43
Q

What must the company do after receiving a proper instrument of transfer for unlisted shares?

A

Either register the transfer and prepare a new share certificate.
Or provide notice of refusal, with reasons, within two months.

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44
Q

Is certification required for shares transmitted by operation of law?

A

No, examples include cases where a trustee in bankruptcy or a deceased member’s personal representative becomes entitled to the shares.

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45
Q

How are listed shares transferred?
A: Using a paperless system under the CREST system.

A

Using a paperless system under the CREST system.

Contact a broker and they deal with it for you

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46
Q

How long does it typically take to complete a share transfer under the CREST system?
A: Normally completed within three days.

A

Normally completed within three days.

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47
Q

Can regulations require companies to adopt a paperless system for transferring shares?

A

Yes, regulations under the Act (by the Treasury or Secretary of State) may mandate the adoption of paperless systems for shareholding and transfer (Section 785).

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48
Q

Portions Ltd has 100 £1 shares of which it has issued 80. It has received 25p per share on application and has called on the holders for a further 15p per share.

Its share capital is
Its issued share capital is
Its called up share capital is
Its paid up capital is

A

Share capital £100
Issued capital £80
Called up capital (80p × 25p) + (15 × 80P) =£32
Paid up capital is 80 × 25p =£20

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49
Q

What is the purpose of capital maintenance rules?

A

To protect creditors by maintaining shareholders’ funds in the company and ensuring these funds are not easily diminished.

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50
Q

Why might a company reduce its share capital?

A

Its capital exceeds the company’s needs. (lots of surplus cash in business)

Net assets fall below the recorded value of capital, likely to be permanent.

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51
Q

How does the law maintain capital?

A

Restricting dividends to distributable reserves.
Prohibiting the issuance of shares at a discount.
Imposing restrictions on reductions in share capital (e.g., reductions, repurchases, and redemptions).

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52
Q

How can share capital be reduced? 2

A

By reducing liability on partly paid shares.

By reducing the amount of paid-up share capital (e.g., returning it to shareholders or reallocating it).

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53
Q

What’s the procedure to reduce SC in a public company? 4

A

Public company

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

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54
Q

What’s the procedure to reduce SC in a private company? 3

A

Private company

Special resolution
Solvency statement (signed by all directors within 15 days of SR)
File resolution and solvency statement with registrar.

Solvency statement = directors say they can’t see any reason why debts won’t be paid in next 12 months

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55
Q

Under what conditions can a company purchase its own shares? 4

A
  1. Court order (e.g., buying out an unfairly prejudiced minority).
  2. Forfeiture or surrender of shares (articles allow).
  3. Redemption or repurchase per the Companies Act.
  4. Acquisition in permitted share capital reduction.
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56
Q

If a plc purchases its own shares what happens?

A

Shares then held as treasury shares so can be held onto for reissuing in the future

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57
Q

If an ltd purchases its own shares what happens?

A

Cancelled/removed completely

58
Q

What is a market purchase of shares?

A

A purchase made on a recognized investment exchange, authorized by a company resolution specifying the maximum and minimum number of shares and the price range.

59
Q

What is an off-market purchase of shares?

A

A purchase not conducted through a recognized investment exchange, authorized by a contract approved (or conditional on approval) by a special resolution. The voting rights of affected shares are disregarded in the resolution.

60
Q

What must the company do after purchasing its own shares? 2

A

Send a return to the Registrar within 28 days.
Decide to either cancel the purchased shares or, if it is a quoted company, hold them in treasury pending reissue.

61
Q

What happens when shares are redeemed or purchased out of profits? 2

A

The company’s issued share capital decreases.

An equivalent amount must be transferred to the capital redemption reserve, treated as part of the company’s paid-up share capital.

62
Q

How can the capital redemption reserve be used?

A

It can only be used to issue fully paid bonus shares to members.

63
Q

What are redeemable shares?

A

Shares issued on terms allowing the company to buy them back at a later date.

64
Q

What conditions must be met for a company to redeem shares? 2

A

Terms must comply with the Companies Act and be stated in the articles of association.

There must be at least one non-redeemable share in issue after redemption.

65
Q

What are the requirements for public companies to repurchase or redeem shares? 3

A

Shares to be purchased must be fully paid.

There must be no restriction in the articles.

There must be at least one non-redeemable share in issue after the purchase.

66
Q

What additional options do private companies have for repurchase or redemption? 5

A

They may use capital for the purchase if:
1. All available profits are used first.
2. A special resolution is passed.
3. Directors provide a solvency statement supported by an auditor’s report.
4. Creditors are notified.
5. Payment is made within 5-7 weeks of the resolution.

67
Q

How can a company increase its share capital?

A

By allotting more shares.

68
Q

What is a subdivision or consolidation of shares? 2

A

Subdividing shares into smaller nominal values.
Consolidating shares into larger nominal values while maintaining the proportion between paid and unpaid amounts.

69
Q

What is redenomination of shares?

A

Adjusting the nominal value of shares (e.g., rounding up to 10%) through a special resolution.
Change currency therefore maybe be rounded.

70
Q

What action must directors take if the net assets of a public company fall to half or less of its called-up share capital?

A

They must call a general meeting to consider necessary steps to address the situation.

71
Q

If the nominal value of a public company issued shares falls below £50,000 what needs to happen?

A

A public company will also need to register as a private company if nominal value of issued shares falls below £50,000.

72
Q

Is a private company allowed to give financial assistance for the purchase of its shares?

A

Yes, private companies are now permitted to give financial assistance.

73
Q

Can public companies give financial assistance for the purchase of shares?

A

Generally, no, except:

If the principal purpose is something other than the share acquisition.
If the assistance is incidental to a larger purpose.

74
Q

What are examples of permitted financial assistance? 3

A

Lending money in the company’s ordinary course of business.
Assistance in good faith for employees’ share schemes.
Loans to employees to acquire fully paid shares in good faith (excluding directors).

75
Q

What conditions must be met for financial assistance to be valid? 2

A

It must:
- Not reduce the company’s net assets.
- Be given in good faith and in the company’s interest.

76
Q

Breach of the financial assistance can lead to?

A

Breach of the financial assistance rules is a criminal offence punishable by fine and/or imprisonment, and is also likely to affect the contracts concerned and result in civil liability for breach of directors’ duties.

77
Q

Why are public companies or its subsidiary’s generally prohibited from giving financial assistance at or before the time of an acquisitions of shares in the public company?

A

As company can manipulate share prices as higher demand (fictitious demand) as I have given someone money

78
Q

INTERACTIVE QUESTION 22: MAINTENANCE OF CAPITAL

PUBLIC OR PRIVATE
Might the following transactions by limited company be permitted under the Companies Act 2006?
A The buy-back of redeemable shares out of capital
B The purchase of a company’s own shares out of capital
C The provision of a loan to a director for the purpose of acquiring shares in the company
D A reduction of capital authorised by the court

A

A Private Company
B Private Company
C Private company
D Both types of company may use the court approved route

79
Q

What is a dividend?

A

A dividend is a distribution of a company’s assets to its members, typically derived from profits available for distribution.

80
Q

From what reserves can dividends be distributed?

A

Only from distributable reserves, which include:

Accumulated realized profits (not previously distributed or capitalized)
Less accumulated realized losses.

81
Q

What are examples of distributable reserves?

A

Profits that exceed the aggregate of the company’s called-up share capital and undistributable reserves.

82
Q

What are examples of undistributable reserves? 4

A

Share premium account
Capital redemption reserve
Revaluation reserve (surplus of unrealized profits)
Any reserve prohibited from distribution by statute or articles.

83
Q

Can a shareholder compel the company to pay a dividend?.

A

No, a dividend is not a right unless it has been declared by the company in accordance with its procedures.

84
Q

When does a dividend become a debt of the company?

A

Only when it has been formally declared and the due date for payment has arrived.

85
Q

When does a dividend become a debt of the company?

A

Only when it has been formally declared and the due date for payment has arrived.

86
Q

What must a public company ensure before making a distribution?

A

Its net assets must not fall below the aggregate of its called-up share capital and undistributable reserves after the distribution.

Any negative revaluation reserve needs to be taken into account

87
Q

What is a debenture?

A

A written acknowledgment of a company’s debt, typically containing terms for the repayment of capital and interest.

88
Q

Can a debenture be secured?

A

Yes, a debenture can be secured on some or all of the company’s assets through a charge or remain unsecured.

89
Q

Is a debenture a formal document?

A

Yes, it is a formal legal document.

90
Q

How do debentures differ from shares from an investor’s standpoint?

A

Debentures offer greater security and yield a fixed income compared to preference shares.

91
Q

What is the company’s main disadvantage in issuing debentures?

A

The company incurs liability for interest payments and any charges created to secure the loan.

91
Q

Can debentures be issued at a discount?

A

Yes, unlike ordinary and preference shares, debentures can be issued at a discount.

92
Q

What is the role of a debenture holder compared to ordinary and preference shareholders?

A

Ordinary/Preference Shares: Owns the company.
Debenture: Acts as a creditor.

93
Q

Do debenture holders have voting rights?

A

No, debenture holders do not have voting rights, unlike ordinary shareholders.

94
Q

What is the return for debenture holders compared to shareholders?

A

Ordinary/Preference Shares: Dividends.
Debentures: Interest.

95
Q

Are there restrictions on redeeming debentures?

A

No, there are no statutory restrictions on redeeming debentures, unlike with shares.

96
Q

What is a charge?

A

A charge is security given to a creditor for a debt. If unpaid, the creditor may take the asset and sell it to recover the debt.

97
Q

In what order are debenture holders paid during liquidation?

A

Secured debenture holders are paid first.
Unsecured debenture holders are paid before shareholders

98
Q

What is a fixed charge?

A

A charge that attaches to a specific asset, which cannot be sold without the creditor’s consent (e.g., a mortgage).

99
Q

What is a floating charge?

A

A charge that attaches to a class of assets (e.g., stock or book debts) and allows the debtor to deal with the assets until the charge crystallizes (e.g., upon default).

100
Q

Can the debtor deal with the asset under a floating charge?

A

Yes, until the charge crystallizes.

100
Q

How does a fixed charge differ from a floating charge in terms of security?

A

Fixed: Attaches to a specific asset from the outset; suited for long-term assets like buildings.
Floating: Attaches to current and future assets but only crystallizes upon certain events (e.g., insolvency).

100
Q

Can the debtor deal with the asset under a fixed charge?

A

No, not without the charge holder’s consent.

101
Q

What is the priority of fixed charges in liquidation?

A

Fixed charges rank first in priority of payment.

102
Q

Which creditors can rank above a floating charge holder after crystallization? 5

A
  • Judgment creditors or landlords who seized goods before the debenture holder’s receiver was appointed.
  • Preferential debts (e.g., employee wages, holiday pay).
  • Holders of fixed charges over the same assets.
  • Creditors with Romalpa clauses (retain ownership until payment).
  • Funds ring-fenced under the Enterprise Act 2002.
103
Q

How does a fixed charge holder enforce their security?

A

By realizing the specific identified asset in case of default. If the asset is insufficient, the holder becomes an unsecured creditor for the balance.

103
Q

What does the Enterprise Act 2002 prescribe about floating charges?

A

A portion of the company’s net property is ring-fenced for unsecured creditors, regardless of existing charges.

104
Q

How does a floating charge holder enforce their security?

A

Enforcement is typically carried out by appointing an administrator or liquidator.

105
Q

What happens to a floating charge created within twelve months before liquidation?

A

It may become void automatically on liquidation.

105
Q

What happens to a fixed charge created within six months before insolvency?

A

It may be invalid as a preference if created within six months before insolvency.

106
Q

Why might a lender prefer a fixed charge?

A

Fixed charges provide strong security by attaching to a specific asset, which reduces the debtor’s freedom to use the asset.

107
Q

Why might a borrower prefer a floating charge?

A

A floating charge allows more flexibility, enabling the business to deal with the assets until the charge crystallizes.

108
Q

What records must a company maintain for charges? 2

A

A copy of every instrument creating a registrable charge.

A register of all fixed and floating charges, with details of the chargee, charge amount, and property charged.

109
Q

What are the company registrar’s requirements for charge registration?

A

The company must deliver prescribed details and instruments of the charge to the registrar within 21 days of creation.

110
Q

What are the consequences of failing to register a charge? 3

A

It is an offence punishable by a fine.

The charge becomes void against liquidators, administrators, and creditors.

The secured money becomes payable on demand.

111
Q

What remedies does an unsecured creditor have? 2

A

Apply to the court for a compulsory winding-up.
Appoint an administrator.

112
Q

What can a secured creditor do to realize their security?

A

Appoint an administrative receiver.

Realise the security = Sell assets and get money back

113
Q

1 Which type of share carries the right to demand payment of a dividend?
(1) Ordinary share
(2) Preference share
A (1) only
B (2) only
C (1) and (2)
D Neither (1) nor (2)

A

Correct answer(s): D Neither (1) nor (2)
Ordinary shareholders are entitled to dividends if and when they are declared by the directors but they cannot compel the directors or the company to pay them a dividend. Preference shareholders are (typically) entitled to receive a dividend at a specified rate before any other dividend is paid or declared but they do not have the right to compel payment of a dividend.

114
Q

2 Slither Ltd has both ordinary and preference shares. The articles of Slither Ltd do not specify what is to happen to surplus assets on winding up, after all creditors have been paid.
Requirement
Which shareholders, if any, are entitled to these surplus assets?
(1) Ordinary shareholders
(2) Preference shareholders
A (1) only
B (2) only
C (1) and (2)
D Neither (1) nor (2)

A

Correct answer(s): C (1) and (2)
Both groups of shareholders have the same rights and so both get their capital repaid and share equally if there is anything left over after repayment of capital. Where the articles state that the preference shareholders have a preferential right to the return of capital, that is all they receive (before payment to ordinary shareholders) with any surplus being exclusively for the ordinary shareholders.

115
Q

3 Atlas Ltd has ordinary and preference shares. The articles provide that the preference shares, carry a 10% preference dividend and that these shareholders have the right to appoint a consultant who is entitled to attend board meetings and speak on behalf of the preference shareholders. Only the preference shares carry these rights.
Requirements
Is the right to receive a 10% dividend a class right?
A Yes
B No
Is the right to appoint a consultant a class right?
C Yes
D No

A

Correct answer(s): A Yes
Correct answer(s): C Yes

116
Q

4 Following a variation of class rights, the holders of a certain percentage of the issued shares of the class in question may apply to the court to have the variation cancelled.
Requirement
What is that percentage?
A 20%
B 15%
C 10%
D 5%

A

Correct answer(s): B 15%
The members making this application to the court must not have voted for the variation.

117
Q

5 Widgets Ltd had two classes of ordinary shares, £1 shares and 50p shares, each share carrying one vote. A resolution was passed to subdivide each £1 share into two 50p shares, thus doubling the votes of that class.
Requirement
Has there been a variation of the class rights of the 50p shares?
A Yes, because the voting rights attached to the 50p shares have been affected.
B Yes, because other shares have been created that have the same nominal value and voting rights as the 50p shares.
C No, because the 50p shares still carry one vote per share.
D No, because rights attaching to a class of ordinary shares cannot be varied.

A

Correct answer(s): C No, because the 50p shares still carry one vote per share.
The fact that the value of existing rights may be affected does not constitute a variation of those rights.

118
Q

6 Are the following statements true or false?
LO 2d
A company’s ‘called up share capital’ is so much of the share capital as equals the aggregate amount of the calls made on its shares plus share capital that is paid up without being called and share capital to be paid at a specified future date under the articles or terms of allotment of the relevant shares.
A True
B False
A company does not need to issue all its share capital.
C True
D False
LO 2d

A

Correct answer(s): A True
Correct answer(s): C True
Any part of the share capital that is not issued is called ‘unissued share capital’.

119
Q

7 How is authority to allot shares required to be given to the directors of a public limited company?
(1) By ordinary resolution
(2) By special resolution
(3) By the articles of association
A (1) or (3) only
B (2) or (3) only
C (3) only
D (2) only

A

Correct answer(s): A (1) or (3) only
The authority can be general or specific, conditional or unconditional.

120
Q

8 Wayfar Ltd is a private company limited by shares and it has only one class of shares (ordinary shares). Its articles of association give no specific authority for the allotment of shares.
Requirements
Are the directors empowered to allot ordinary shares of the company in the absence of any members’ resolution?
A Yes
B No
In the event that the directors make a lawful allotment but fail to register it, are they guilty of an offence?
C Yes
D No

A

Correct answer(s): A Yes
The directors of a private company with only one class of shares may allot shares of that class unless such an allotment is prohibited by the company’s articles.
Correct answer(s): C Yes
Failure to register the allotment within two months is an offence punishable by a fine.

121
Q

10 In which of the following cases, do statutory rights of pre-emption apply?
(1) The allotment of equity securities for cash
(2) The issue of bonus shares
(3) The allotment of equity securities otherwise than for cash
(4) The allotment of securities in relation to an employee’s shares scheme
A (1) only
B (3) only
C (2) and (4) only
D All of the above
LO 2d

A

Correct answer(s): A (1) only
The pre-emption rights are expressed (by the Companies Act 2006) not to apply to (2), (3) and (4).

122
Q

12 Jill and Naomi plan to set up Indigo Ltd, a private company limited by shares. They have some concerns over the payment for shares and ask you whether the following are true:
Requirements
The shares taken by the company’s original subscribers must be paid for in cash.
A True
B False
Any shares subsequently allotted must be paid up at least as to one-quarter of the nominal value together with the whole of any share premium payable in respect of them.
C True
D False

A

Correct answer(s): B False
This is true in respect of public companies but not private companies.
Correct answer(s): D False
Again, this is true only for public companies.

123
Q

13 Anita wishes to purchase 100 shares with a nominal value of £1 each in Lovages plc.
Requirements
By way of payment for those shares, can she:
agree to act as the company’s legal adviser for a period of three years?
A Yes
B No
pay 20p per share now, with the remaining 80p per share to be paid at a later date?
C Yes
D No

A

Correct answer(s): B No
Shares in a public company cannot be paid for by an undertaking to perform work or services for the company.
Correct answer(s): D No
Shares in a public limited company must be paid up by at least one-quarter of the nominal value when issued.

124
Q

14 In relation to the transfer of shares by electronic means:
Requirements
Does the CREST transfer system operate in respect of all shares?
A Yes
B No
Are companies obliged to permit paperless transfers of shares?
C Yes
D No
LO 2d

A

Correct answer(s): B No
Only in respect of listed shares.
Correct answer(s): D No
However, regulations may be made (under the Companies Act 2006) by the Treasury or Secretary of State which will make it compulsory.

125
Q

18 According to the rules on redemption of shares, are the following statements true or false?
In order for a private limited company to issue redeemable shares, the company’s articles of association must contain the relevant authority.
A True
B False
Redeemable shares may only be issued where there are other shares issued that are not redeemable.
C True
D False

A

Correct answer(s): B False
The company’s articles may, however, restrict or exclude the issue of redeemable shares.
Correct answer(s): C True

126
Q

19 Are the following statements true or false?
LO 2f
When shares in a limited company are redeemed, they are treated as cancelled and the amount of the company’s issued share capital is diminished by the amount of the redemption payment.
A True
B False
A company must file notice of redemption and a statement of capital with the Registrar of Companies within one month following a redemption of shares.
C True
D False
LO 2f

A

Correct answer(s): B False
The amount of the company’s issued share capital is diminished by the nominal value of the shares redeemed.
Correct answer(s): C True

127
Q

20 Rugs plc has recently purchased 500 of its own shares with funds which comprised part of the company’s distributable profits. The shares have been cancelled and the company’s issued share capital has reduced by £1,000, which amount has been transferred to the company’s capital redemption reserve.
Requirements
Are the following statements true or false?
The capital redemption reserve of Rugs plc is treated as part of the company’s paid up share capital.
A True
B False
The capital redemption reserve of Rugs plc may not be used to pay up new shares which are allotted to members as fully paid bonus shares.
C True
D False
LO 2f

A

Correct answer(s): A True
Correct answer(s): D False
The capital redemption reserve may be used for this purpose.

128
Q

21 In which of the following situations may a public limited company lawfully offer financial assistance for the purchase of its shares (provided its net assets are not thereby reduced)?
(1) Where the company lends money as part of its ordinary business
(2) Where the company lends money to a director without a service contract in good faith to enable them to acquire fully paid shares in the company
(3) Where the company gives assistance in the interests of the company for the purposes of an employee’s share scheme
A (1) and (2) only
B (1) and (3) only
C (2) and (3) only
D All of the above

A

Correct answer(s): B (1) and (3) only
The company may lend to its employees for this purpose but not to directors who are not also employees.

129
Q

22 Which of the following best defines a debenture?
A A charge over a company’s goodwill
B The registration document used to register a fixed or floating charge
C A document that records the terms of any loan
D A document that records the terms of any secured loan
LO 2f
LO 2n

A

Correct answer(s): C A document that records the terms of any loan
Whether a loan is secured or unsecured, the written acknowledgement of its terms is called a debenture.

130
Q

23 A charge may be avoided by a liquidator as a preference where it is created within a specified time before a company becoming insolvent.
Requirements
What is the specified time for a fixed charge?
A 6 months
B 9 months
What is the specified time for a floating charge?
C 9 months
D 12 months

A

Correct answer(s): A 6 months
Correct answer(s): D 12 months

131
Q

24 Are the following statements true or false?
A floating charge created over the ‘undertaking and assets’ of a company applies only to current assets at the time of the charge.
A True
B False
A floating charge is converted into a fixed charge upon crystallisation.
C True
D False
LO 2n

A

Correct answer(s): B False
The charge will also apply to future assets.
Correct answer(s): C True

132
Q

26 A characteristic of a floating charge is that:
Requirements
It is a charge over a class of assets present and future.
A Yes
B No
LO 2n
It is a charge over a class of assets, which, in the ordinary course of the business of the company, will change.
C Yes
D No

A

Correct answer(s): A Yes
A floating charge is typically over a class of assets of a company present and future with which the company may continue to deal before crystallisation of the charge.
Correct answer(s): C Yes
A floating charge typically covers assets that change in the ordinary course of business and only fixes to those assets at the time of crystallisation.

133
Q

27 Rules in relation to the issue of shares at premium include:
Requirements
LO 2n
A company may not, without the authority of its articles, issue its shares at a premium.
A Yes
B No
Shares can be issued at a premium not only for cash but also for consideration other than cash.
C Yes
D No

A

Correct answer(s): B No
A company may issue shares at a premium. No express authority is required in the company’s articles.
Correct answer(s): C Yes
Shares can be issued at a premium for cash or a non-cash consideration (although there are specific rules relating to valuation of non-cash consideration for public companies).

134
Q

29 A company has adopted model articles of association.
Requirement
Which of the following is required for it to vary class rights?
A An agreement of the directors
B An ordinary resolution of the relevant class
C An alteration of the articles
D A special resolution of the relevant class

A

Correct answer(s): D A special resolution of the relevant class
Out of the options available, a special resolution is required. Otherwise, written consent from at least 75% in nominal value of the issued shares of that class should be obtained.

135
Q

30 If a company makes a rights issue to members, how long do members have to accept the offer of new shares once it is made?
A 7 days
B 14 days
C 21 days
D 28 days

A

Correct answer(s): C 21 days
Members have 21 days to accept a rights issue. After that, the shares may be allotted on the same (or less favourable) terms to non-members.

ICAEW - CERTIFICATE LEVEL 1 - LAW (2024) (13 decks)

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