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

Chapter 9 - Companies: Finance Flashcards

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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).

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

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.

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.

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).

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).

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.

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

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.
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

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

ICAEW - CERTIFICATE LEVEL 1 - LAW (13 decks)

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