COMPANY Flashcards
A 17 year old sixth form student has just inherited £100,000. She is a talented baker and wishes to start a business selling cakes she makes. To do so, she needs to raise more money and has a potential investor waiting. She wants to retain 75% of profits herself. Her recipes are unique and she wants to protect them.
She has little knowledge of business structures and has undertaken some rather patchy research. She has written out the following list to consider. Which option is best for the student?
She should not set up a company because there are obligations to file documents and her unique recipes would not be protected.
She should not set up a company because the contracts with suppliers and purchasers will be in the company’s name and she will lose control of the terms.
She should set up a sole tradership because she can do so immediately, it provides for more privacy and she has the money to start the business.
She should set up a partnership with the investor and enter a partnership agreement to determine distribution of profit because she lacks the legal authority to be a director of a company.
She should set up a company and the investor can buy shares in the company and then enter a shareholder agreement to determine distribution of profit.
She should set up a company and the investor can buy shares in the company and then enter a shareholder agreement to determine distribution of profit.
Correct. This is the best option with the least risk. Risk should be the most important consideration for anyone forming a new business. She should “not set up a partnership” because if the partnership business fails the partners are jointly and severally liable for all debts. There is no obligation on a company to reveal unique recipes. That the company is a separate legal entity and enters contracts is a key advantage. Sole traderships are the most private form of business but otherwise are the most risky.
week 1
incorrect
She should set up a sole tradership because she can do so immediately, it provides for more privacy and she has the money to start the business.
Incorrect. Please review your materials on Legal Forms of Business. You must ensure that you know and understand the relevant principles as derived from statute and caselaw.
Whilst sole traderships do not have the requirements to file accounts etc of companies and so provide for more privacy than companies in that sense, there is the higher risk of personal liability. It is the least preferable option. In a partnership, investment can be sought from partners and in a company, shares can be sold to investors.
Last year a man and a woman qualified as accountants and began trading together. The woman invested 60% of the capital. The man invested 40% of the capital. They have no formal agreements in place.
Which one of the following statements is correct?
They are in a partnership business together and either may give notice to dissolve it at any point.
They are in a partnership business together and profits will be split 60% to the woman and 40% to the man.
They are not in a partnership business together because it has not been properly formed and there is no partnership agreement.
They are in a partnership business together and clients must enter into a contract with the partnership.
They are not in a partnership business together and the woman is liable for 60% of the debts.
They are in a partnership business together and either may give notice to dissolve it at any point.
Correct. They are in a partnership at will and it may be dissolved by either partner giving notice – s 32(c) PA 1890.
While the other answer options might sound plausible, they are each incorrect.
There is a partnership at will here and it does not require a partnership agreement.
Clients enter contracts with the partners as the partnership is not a separate legal entity.
Without a partnership agreement, profits (and losses) are split equally – s 24(1) PA 1890.
There is a partnership at will and the man and woman are jointly and severally liable for all debts - s 24(1) PA 1890.
week 1
incorrect
They are in a partnership business together and clients must enter into a contract with the partnership. Incorrect. Please review your materials on partnerships. You must ensure that you know and understand the relevant legal principles derived from the Partnership Act 1890. Clients enter contracts with the partners as the partnership is not a separate legal entity.
A man and a woman wish to form a business together. They have decided that the woman will run the business on a day to day basis. The man is intending to invest money but will not be involved in the day to day management of the business. The man may want to become involved in running the business in the future.
Which of the following statements best describes what the man and woman should do?
They should set up a Limited Liability Partnership because both the man and woman would be entitled to manage the business.
They should set up a Limited Liability Partnership because as a separate legal entity it is taxed as a business.
They should set up a Limited Partnership because it is a separate legal entity and they will not be liable for any debts.
They should set up a Limited Partnership because the man would always be a Limited Partner with limited liability.
They should set up a Limited Liability Partnership because it is a separate legal entity and the man and the woman could never be liable for any debts.
They should set up a Limited Liability Partnership because both the man and woman would be entitled to manage the business.
Correct
Correct. This reflects Article 7(3) of Limited Liability Partnerships Regs 2001. If a Limited Partnership is set up and the woman becomes involved in management, she loses status as a limited partner with limited liability. Limited Partnerships are not separate legal entities and general partners are personally liable for debts. Members of an LLP may become personally liable for debts. Members of an LLP are taxed as partners would be.
A husband and wife are thinking of forming their own new private limited company together. They want to name it SmallCo in due course. The plan is for only the husband to run SmallCo on a daily basis. The wife will invest 75%, and the husband the remainder in ordinary shares. They plan to adopt the relevant Model Articles.
Which of the following statements best describes the position of SmallCo?
There does not need to be another director appointed. Only the wife is a person of significant control. The wife can pass a resolution to change the name of the company.
There does not need to be another director appointed. Both the wife and husband are persons of significant control. The wife can pass a resolution to change the name of the company.
There needs to be another director appointed. Both the wife and husband are persons of significant control. The wife cannot pass a resolution to change the name of the company herself.
There does not need to be another director appointed. Only the wife is a person of significant control. The wife cannot pass a resolution to change the name of the company herself.
There needs to be another director appointed. Only the wife is a person of significant control. The wife can pass a resolution to change the name of the company.
There does not need to be another director appointed. Only the wife is a person of significant control. The wife can pass a resolution to change the name of the company.
Correct. This reflects that a private company only requires one director, that a PSC has over 25% shares and that a special resolution is required to change the name (require minimum 75% votes).
week 1
incorrect
There does not need to be another director appointed. Both the wife and husband are persons of significant control. The wife can pass a resolution to change the name of the company.
Incorrect. Please review your materials on Introduction to Companies. You must ensure that you know and understand the relevant legal principles derived from Companies Act 2006. Only the wife is a PSC: since the husband does not own over 25% shares he is not a PSC.
An individual client has asked for advice on a new start up business. The client has £60,000 capital to invest in the business. The client’s key concerns are flexibility for raising further finance, low personal risk and confidentiality in relation to the business and finances. The client also has a friend who is interested in helping to run the business but has no money to invest.
Which would be the best business medium for them?
A limited partnership
A limited liability partnership
A private limited company
A sole trader
A public limited company
A private limited company
Correct
A private limited company has limited disclosure obligations, the liability for the shareholders is limited to the paid up share capital and funding can be obtained through the use of equity or debt finance and there is an ability to appoint directors to run the company on a day to day basis.
Person A is the sole director and shareholder of Company A. Person A owns a property in his own name which he agrees to sell to Person B. Contracts are exchanged but Person A later changes his mind. He transfers the property to Company A and later claims he cannot perform the contract as he no longer owns the property.
What order is the court most likely to make?
The court will lift the veil to find person A liable because Company A has been used to help Person A evade a legal obligation.
The court will not lift the veil as an alternative remedy of specific performance is available against Person A.
The court will not lift the veil to find Person A Liable because of the concept of limited liability.
The court will lift the corporate veil to find person A liable because Company A is a facade and Person A is the real owner of the property.
The court will lift the veil to find Person A liable in the interests of justice.
The court will not lift the veil as an alternative remedy of specific performance is available against Person A.
Correct – the scenario is similar to the case of Jones v Lipman where an order of specific performance was made. This is not an example of veil lifting.
Person A is the sole director and shareholder of Company A. Person A owns a property in his own name which he agrees to sell to Person B. Contracts are exchanged but Person A later changes his mind. He transfers the property to Company A and later claims he cannot perform the contract as he no longer owns the property.
What order is the court most likely to make?
The court will lift the veil to find person A liable because Company A has been used to help Person A evade a legal obligation.
The court will not lift the veil as an alternative remedy of specific performance is available against Person A.
The court will not lift the veil to find Person A Liable because of the concept of limited liability.
The court will lift the corporate veil to find person A liable because Company A is a facade and Person A is the real owner of the property.
The court will lift the veil to find Person A liable in the interests of justice.
The court will not lift the veil as an alternative remedy of specific performance is available against Person A.
Correct – the scenario is similar to the case of Jones v Lipman where an order of specific performance was made. This is not an example of veil lifting.
Company B is a wholly owned subsidiary of Company A. An employee of Company B is injured in a work-related accident and the employee wants to bring a claim against Company A.
On what basis may Company A be liable to the employee?
Company A will be liable to the employee on the basis of the tort but only if Company A owed a duty of care to the employee.
Company A will be liable on the basis of the doctrine of lifting the corporate veil as Company A is the controller of Company B.
Company A will be liable to the employee on the basis of the doctrine of lifting the corporate veil because group companies are treated as a single economic entity.
Company A will be liable to the employee on the basis of tort because there is a presumption that a parent company owes a duty of care to the employees of its subsidiary company.
Company A will be liable to the employee on the basis of agency because there is a presumption that a subsidiary acts as agent for its parent company.
Company A will be liable to the employee on the basis of the tort but only if Company A owed a duty of care to the employee.
Correct - a principle established in Chandler v Cape
Director A and Director B are the directors and shareholders of a recently incorporated company. A few days prior to the date of incorporation of the company, Director A signed a lease “as director on behalf of the company”.
Is the lease binding on any of the parties?
The lease is not binding on the company.
The lease is binding on the company and the shareholders.
The lease is not binding on any party.
The lease is binding on the shareholders.
The lease is binding on the company and both directors.
The lease is not binding on the company.
Correct - The lease was entered into prior to the date of incorporation of the company.
A private limited company was incorporated on 19 October 2004. In 2011, the shareholders of the company passed a number of resolutions, including a special resolution to adopt the Model Articles.
Does the company have an objects clause in its constitution?
The company does not have an objects clause as it has amended its articles by special resolution.
The company has an objects clause as it was incorporated under the Companies Act 1985.
The company has an objects clause in its memorandum which is a constitutional document.
The company does not have an objects clause as s 31 of Companies Act 2006 automatically removes the objects clause.
The company does not have an objects clause as it has adopted Model Articles.
The company does not have an objects clause as it has adopted Model Articles.
Correct – the company has adopted Model Articles which has the effect of removing the objects clause.
A chairman of a company negotiated and entered into 3 supply contracts with a supplier over the course of 4 months. The contracts were not approved by the board although they were informed when all the agreements were completed. The chairman has now agreed a further contract with the same supplier.
Why is the company bound by the contract?
The company is bound by the contract because the chairman has statutory deemed authority under s 40 Companies Act 2006.
The company is bound by the contract because the chairman has implied actual authority due to his appointment as chairman.
The company is bound by the contract because the chairman has implied actual authority from a course of dealing.
The company is bound by the contract because the chairman has deemed authority under the ‘indoor management’ rule.
The company is bound by the contract because the chairman has express actual authority under MA 3.
The company is bound by the contract because the chairman has implied actual authority from a course of dealing.
Correct – the board has acquiesced to the transactions. See the case of Hely-Hutchinson v Brayhead.
The articles of association of a company states that the board of directors requires shareholder approval to borrow sums exceeding £200,000. The board resolve to buy a property for £350,000. The purchase price will be part funded by cash reserves and by a secured loan of £250,000 from a bank. Shareholder approval is not obtained for the loan.
Is the loan valid?
The loan is valid as the bank in acting good faith can rely on s 40 Companies Act 2006.
The loan is not valid as the bank is held to have constructive notice of the restriction in the directors’ powers.
The loan is valid as the directors had ostensible authority to bind the company.
The loan is not valid as shareholder approval was not obtained in accordance with the articles.
The loan is not valid as the directors did not have actual authority to bind the company.
The loan is valid as the bank in acting good faith can rely on s 40 Companies Act 2006.
Correct – third parties acting in good faith are entitled to assume the directors’ powers are free of any constitutional limitations.
week 3
incorrect
The loan is not valid as shareholder approval was not obtained in accordance with the articles.
Incorrect – the articles have been breached but this does not affect the validity of the loan under s 40 Companies Act 2006.
A company runs mountaineering trips in Scotland. It provides safety equipment to its guides and customers. A customer dies after a fall caused by faulty equipment.
What elements must be established for the company to be guilty of the statutory offence of corporate manslaughter?
The way the activities of the company are managed by the directors caused the death of a person and was a gross breach of the duty of care owed to the person.
A senior individual in the company is the guiding mind of the company and is guilty of gross negligence.
The way the activities of the company are managed by senior management caused the death of a person and they are guilty of gross negligence.
The way the activities of the company are managed by senior management caused the death of a person and was a gross breach of the duty of care owed to the person.
A senior individual in the company is the controller of the company and is guilty of gross negligence.
The way the activities of the company are managed by senior management caused the death of a person and was a gross breach of the duty of care owed to the person.
Correct. This is required by ss 1 and 3 Corporate Manslaughter and Corporate Homicide Act 2007.
The managing director of a private limited company client is concerned about the status of the company’s operations manager as she has been entering into high value contracts with third party suppliers. The operations manager was instructed to refer any contracts over a certain value to the board of directors for approval. She has not been doing this and has been signing them off on the company’s behalf herself and has been instructing other employees to refer any such contracts to her so she can approve them. The managing director would like to know if the operations manager could be considered to be a director of the company due to her actions.
Which best describes the type of director that the operations manager might be?
Non executive director
The operations manager would not fall within one of the categories of a director as it is clear from her title that she is just an employee of the company.
Executive director
Shadow director
De facto director
De facto director
A de facto director is a someone who has not been appointed as a director but in reality has assumed the responsibility of being a director through their actions. They hold themselves out to third parties as directorial in nature eg here with third party suppliers and the employees as the operations manager is holding herself out as having the power to enter into these types of contracts with suppliers by signing them off on behalf of the company and by approving the employees entering into them.
A private limited company client incorporated in 2014 with unamended model articles would like to appoint a new director as quickly as possible. The proposed terms of the director’s service contract provide for an initial appointment term of 18 months which can be extended for a further 18 months at the option of the new director. The company can only terminate the service contract and the appointment earlier if the new director has committed an act of gross misconduct as specified in the service contract.
Which of the following sets out the best advice to the client in respect of appointing the new director?
If the service contract is not approved by the shareholders of the company the provision in the service contract relating to the length of the contract will be void.
The service contract does not need to be approved by the shareholders of the company as the initial length of the appointment is for less than 2 years.
The service contract needs to be approved by a special resolution of the shareholders as the length of the appointment is for more than two years.
The service contract needs shareholder approval. If this is not obtained, the service contract will be void.
The service contract needs to be approved by a resolution of the directors as the length of the appointment is for more than two years.
If the service contract is not approved by the shareholders of the company the provision in the service contract relating to the length of the contract will be void.
Correct. This is a long term service contract under s 188 and therefore requires shareholder approval by ordinary resolution. Under s 189(a) CA 06 the provision in the service contract relating to the term will be void and under s 189(b) will be replaced by a term as to a reasonable length of term to terminate the agreement.
week 4
incorrect
The service contract does not need to be approved by the shareholders of the company as the initial length of the appointment is for less than 2 years.
Please revisit your notes on the provisions in relation to the term and look at s188 CA 06. This contract will require shareholder approval since there is an initial 18 month period that can be extended at the option of the new director and the company can only terminate the service contract earlier in limited specified circumstances.
A private limited company with unamended model articles is proposing to buy some machinery and equipment from the husband of one of its directors for £105,000. The company’s most recent accounts show that the net asset value of the company is £1.2 million. The company also has a wholly owned subsidiary which is a private limited company.
What would be the best advice to the company to ensure that the transaction is completed lawfully?
The directors will have to approve the purchase of the machinery and equipment by passing a board resolution.
As the company has a wholly owned subsidiary no approval is necessary for the transaction from either the company or its wholly owned subsidiary.
No approval is necessary from either the shareholders or the board of directors as the transaction is not with the director of the company herself.
The shareholders will have to approve the purchase of the machinery and equipment by passing a special resolution.
The shareholders will have to approve the purchase of the machinery and equipment by passing an ordinary resolution.
The shareholders will have to approve the purchase of the machinery and equipment by passing an ordinary resolution.
Correct
Correct. Under s190 CA 06 this will fall within a substantial property transaction as the asset is a non cash asset, it is substantial in nature under s 191 as it exceeds £100,000 and it is an acquisition from a person connected with a director of the company under s 252 and s 253. This requires approval from the shareholders by way of an ordinary resolution. Under s 190 the type of resolution isn’t specified so under 281(3) it will be an ordinary resolution.
week 4
incorrect
As the company has a wholly owned subsidiary no approval is necessary for the transaction from either the company or its wholly owned subsidiary.
A man currently holds 50% of the shares in an energy company and a woman currently holds the remaining 50% of the shares. They are both very wealthy private investors. The man is an experienced investor and is well known in the energy sector. The energy company will issue more shares to raise money to invest in new infrastructure. Both the man and the woman wish to buy the new shares. The number of shares being issued means that whoever buys the shares will become the majority shareholder. The woman has offered to give the directors of the energy company each a holiday villa if they accept her offer. Both the man and the woman make the same offer to buy the new shares at the required price. The directors quickly accept the woman’s offer.
Which option best describes if the actions of the directors can be challenged or not?
The directors are acting against the long term interests of the company so their actions can be challenged.
The directors are acting for a primary purpose outside the scope of their powers so their actions can be challenged.
The directors’ actions as to how to raise finance for infrastructure are considered an internal matter which cannot be challenged.
The directors are acting to defeat the legitimate expectations of the man in breach of their powers so their actions can be challenged.
The directors are acting for a proper purpose by raising money to invest in infrastructure so their actions cannot be challenged.
The directors are acting for a primary purpose outside the scope of their powers so their actions can be challenged.
Correct
Correct. This answer reflects section 171 CA 2006 andHoward Smith v Ampol [1974] AC 821. In accepting the woman’s offer, the directors are motivated by a collateral advantage which is in their interests, not that of the company. The primary purpose of accepting the woman’s offer was a personal benefit, not for her investment into the company.
While the other answer options might sound plausible, they are each incorrect.
“The directors are acting for a proper purpose so their actions cannot be challenged” is contrary to section 171 CA 2006 and Howard Smith v Ampol [1974] AC 821.
“The directors’ actions to raise finance are considered an internal matter which cannot be challenged” is contrary to section 171 CA 2006 and Howard Smith v Ampol [1974] AC 821.
“The directors are acting to defeat the legitimate expectations of the man in breach of their powers so their actions can be challenged” is unproven because there is no evidence that the man has a legitimate expectation to be offered more shares.
“The directors are acting against the long term interests of the company so their actions can be challenged” is unproven because investing in infrastructure is more than likely to be in the long term interests of the company, consistent with s 172 CA 2006. The actions of the directors can be challenged not for this ground, but for breach of s 171 CA 2006.
week 4
incorrect
The directors are acting to defeat the legitimate expectations of the man in breach of their powers so their actions can be challenged.
Incorrect. Please review your materials on section 171 CA 2006. You must ensure that you know and understand the relevant legal principles as derived from the CA 2006 and the leading case law.
There is no evidence that the man has a legitimate expectation to be offered more shares – there is no evidence of an agreement / course of dealings to support this. This point refers to shareholder claims under s 994 CA 2006 and so is at a tangent to this question. The man made the same offer and objectively, as an investor he offers more to the company but this alone does not give him a legitimate expectation that his offer be accepted.
A man is the director of the company which is wholly owned by a holding company (HoldCo) which has a different director. There is a loan account between HoldCo and the company in which the company owes HoldCo £25,000. The company is due to repay a £100,000 loan next month and the company has £100,000 in its bank account. HoldCo is in financial difficulty and needs to pay an overdue debt of £100,000 to a supplier immediately. The man transfers £100,000 from the company to HoldCo to pay its supplier immediately without checking the accounts of the company.
Is the man in breach of any duties he owes as a director to the company?
He acts for a proper purpose because the substantial purpose the power was exercised for was to allow HoldCo to pay a large debt immediately. He fails to promote the success of the company. He fails to exercise independent judgement.
He fails to act for a proper purpose because of the substantial purpose the power was exercised for. He fails to promote the success of the company. He fails to exercise reasonable skill, care and diligence.
He fails to act for a proper purpose because of the substantial purpose the power was exercised for. He fails to exercise independent judgement. He fails to exercise reasonable skill, care and diligence
He fails to act for a proper purpose because of the substantial purpose the power was exercised for. He exercises independent judgement. He exercises reasonable skill, care and diligence.
He acts for a proper purpose because the substantial purpose the power was exercised for was to allow HoldCo to pay a large debt immediately. He promotes the success of the company. He exercises independent judgment.
He fails to act for a proper purpose because of the substantial purpose the power was exercised for. He fails to promote the success of the company. He fails to exercise reasonable skill, care and diligence.
Correct.
The man has committed the following breaches of duty:
Breach of s 171(b) because the substantial purpose (Extrasure) of exercising his power was to assist another company pay its debts, particularly when the company needed the money to pay its own debt to the bank.
Breach of s 172 because if the company cannot repay its debt to the bank, the bank is likely to petition to wind the company up.
Breach of s 174 because transfers £100,000 from the company to HoldCo to pay its supplier immediately without checking the accounts of the company.
week 4
incorrect
He fails to act for a proper purpose because of the substantial purpose the power was exercised for. He fails to exercise independent judgement. He fails to exercise reasonable skill, care and diligence
Incorrect. Please review your materials on Directors’ Duties under CA 2006. You must ensure that you know and understand the relevant legal principles as derived from the CA 2006 and the leading case law.
No breach of s173(1) because he arrives at the decision to pay HoldCo’s debts from the company’s funds himself and was not “bamboozled, manipulated” by others – **Madoff v Raven [2013]. **
A brother and sister formed a private limited company three years ago to run their clothing business and adopted the relevant Model Articles of Association. Two years ago, a friend joined the company. The brother, sister and the friend are all directors. The shares are held by: the brother (50%), the sister (30%) and the friend (20%). The business is flourishing and last month, the brother and sister passed a board resolution to invest most of the company’s profits to expand from one shop to two shops. The friend strongly disagrees and relations have now deteriorated.
The brother and sister will always support each other and vote against the friend in board or shareholder resolutions. Which of the following options best describes the friend’s position?
The friend can call a board meeting using her shareholding and pass a resolution to overturn the decision to invest.
The friend can call a board meeting as a director and pass a resolution to convene a general meeting to overturn the decision to invest.
The friend can call a general meeting of the shareholders as a shareholder but cannot overturn the board resolution to invest.
The friend cannot call a general meeting of the shareholders as a shareholder and cannot overturn the board resolution to invest.
The friend can call a general meeting of the shareholders as a shareholder and can overturn the board resolution to invest.
The friend can call a general meeting of the shareholders as a shareholder but cannot overturn the board resolution to invest.
Correct.
The friend has 20% shares and can call a general meeting (require 5% - s 303(2)(a) CA 2006). To overturn the board decision, shareholders must pass a special resolution (Article 4, 75%) which the brother and sister would block.
A private limited company with unamended model articles has issued 4% participating redeemable preference shares (“New Shares”) in the company to a new investor. The company’s other issued share capital comprises ordinary shares.
Which best describes the position in relation to the New Shares?
Any fixed dividend payments on these shares will be paid in priority to the holders of the existing ordinary shares in the company.
The New Shares will be only be capable of redemption provided that there are still preference shares in issue after the New Shares have been redeemed.
The owner of the New Shares will receive a dividend payment if a dividend is declared and will be an owner of 4% of the company’s assets.
The owner of the New Shares will only have its membership of the company perfected when it receives the share certificates in respect of the New Shares.
The owner of the New Shares will only have its membership of the company perfected when it notifies the registrar of companies that it has been allotted the New Shares.
Any fixed dividend payments on these shares will be paid in priority to the holders of the existing ordinary shares in the company.
Correct. The preference element means that the fixed 4% dividend payment should be paid out in priority to the dividend payments to the ordinary shareholders.
week 5
incorrect
The owner of the New Shares will only have its membership of the company perfected when it receives the share certificates in respect of the New Shares.
Incorrect. Please revisit your notes and check the provisions of s 112 CA 06.
The owner of the New Shares will only have its membership of the company perfected when it notifies the registrar of companies that it has been allotted the New Shares.
Incorrect. Please revisit your notes and check the provisions of s 112 CA 06.
The New Shares will be only be capable of redemption provided that there are still preference shares in issue after the New Shares have been redeemed.
Incorrect. Please revisit your notes and check the requirements under s 684 CA 2006 and remember that the company must have at least one share issued to exist as a company s 7 and s 8 CA 06.
The owner of the New Shares will receive a dividend payment if a dividend is declared and will be an owner of 4% of the company’s assets.
–Incorrect. Please revisit your notes and note that share ownership does not give any entitlement to ownership of company assets, which are owned by the company itself (Macaura v Northern Assurance Co Ltd (1925)).
A private limited company with unamended model articles also has a shareholders’ agreement in place which all of the shareholders of the company and the company itself are parties to. The shareholders’ agreement contains a provision that the company shall not issue any additional shares without the written approval of all of the parties to the shareholders’ agreement. There is a further provision that the shareholders’ agreement shall take precedence over the articles of association.
The company is proposing to issue new shares in the company but one of the shareholders is opposed to the proposal and has approached you for advice.
Which of the following sets out the best advice to the opposing shareholder?
The provision in the shareholders’ agreement in respect of the issue of new shares can be enforced by an injunction against the company being granted to prevent the issue of new shares.
The provision in the shareholders’ agreement in respect of the issue of new shares will only be enforceable if it is replicated in the articles of association of the company too.
The provision of the shareholders’ agreement in respect of the issue of new shares will not bind the company as it is an unlawful fetter on the company’s statutory powers.
The provision in the shareholders’ agreement in respect of the issue of new shares will not be enforceable as the articles of association of a company take precedence over any other contractual agreements between the company and the shareholders.
The provision in the shareholders’ agreement in respect of the issue of new shares will not bind the other shareholders as the provision is an unlawful fetter on the company’s statutory powers.
The provision of the shareholders’ agreement in respect of the issue of new shares will not bind the company as it is an unlawful fetter on the company’s statutory powers.
Correct. In Russell v Northern Bank Development Corporation Limited it was held that the shareholders’ agreement in that case was an unlawful fetter on the company’s statutory powers as it prevented it from issuing shares in the normal way and an injunction would not be enforceable against the company itself.
week 5
incorrect
The provision in the shareholders’ agreement in respect of the issue of new shares will not be enforceable as the articles of association of a company take precedence over any other contractual agreements between the company and the shareholders.
Incorrect. Please revisit your notes regarding the relationship between the articles of association and shareholders’ agreements.
The provision in the shareholders’ agreement in respect of the issue of new shares can be enforced by an injunction against the company being granted to prevent the issue of new shares.
Incorrect. Please revisit your notes and look at Russell v Northern Bank Development Corporation Limited where it was held that the shareholders’ agreement was an unlawful fetter on the company’s statutory powers and an injunction would not be enforceable against the company. However, it was a valid agreement and binding on the individual shareholders.
The board of directors of a private limited company with unamended model articles has received a notice from the shareholders holding 10% of the paid up voting shares of the company requesting that an ordinary resolution to remove one of the company’s directors be placed on the agenda for the next general meeting of the company.
The board of directors do not support the removal are looking to secure some time to deal with this request from the shareholders and to negotiate with the shareholders.
What would be the best advice to the board in respect of dealing with this request?
The board should cooperate with the request to place the proposed resolution on the agenda for the next general meeting as this will give them a longer time to deal with the issue.
The board of directors can wait for 28 days before deciding to call a general meeting which will be held upon the normal notice period for a general meeting of 14 days.
The shareholders don’t hold the requisite number of voting shares to call a general meeting as they need to have more than 50% of the voting shares to call the general meeting themselves.
The board should refuse to cooperate with the shareholders who have requested the resolution be proposed and force the shareholders to call a general meeting as this will give them a longer time to deal with the issue.
The company will pay back the shareholders if they have to call the general meeting themselves and incur expenses for doing so and this cannot be recouped from the board of directors.
week 5
incorrect
The board of directors can wait for 28 days before deciding to call a general meeting which will be held upon the normal notice period for a general meeting of 14 days.
Incorrect. Please revisit your notes and look at the provisions of s 304 CA 06.
A majority shareholder of a private limited company with unamended model articles who holds 70% of the shares in the company is proposing to allot new shares in the company The shareholders have fallen out and the sole purpose of the new share allotment is to dilute the other shareholder’s voting power in the company.
The majority shareholder would like advice before proceeding with the allotment so which of the following best represents the position?
The minority shareholder will not be able to prevent the allotment of the new shares as the corporate principle of majority rule applies to the passing of all shareholder resolutions.
The minority shareholder cannot prevent the allotment if the resolution to grant the authority to allot the new shares was not passed as a special resolution of the shareholders.
The minority shareholder would only be able to challenge the majority shareholder’s actions if it related to the alteration of the company’s articles of association.
The majority shareholder will be able to rely on the Re Duomatic principle in relation to the granting of authority to allot the new shares.
The minority shareholder may be able to bring a claim to prevent the allotment of new shares on the basis that the majority shareholder has acted mala fides and that the allotment is not capable of ratification
The minority shareholder may be able to bring a claim to prevent the allotment of new shares on the basis that the majority shareholder has acted mala fides and that the allotment is not capable of ratification.
Correct. Shareholders generally don’t have a duty to vote on resolutions according to the best interests of the company but they should vote bona fides and there are equitable considerations that need to be taken into account. Motives for actions might be considered as in Clemens v Clemens Bros Ltd.
week 5
incorrect
The majority shareholder will be able to rely on the Re Duomatic principle in relation to the granting of authority to allot the new shares.
Incorrect. Please revisit your notes and consider theRe Duomatic principle and the circumstances in which it applies.
A shareholder who holds 8% of the voting shares in a company serves a request on the directors of the company to call a general meeting in order to move an ordinary resolution to remove one of the directors.
What action should the directors take?
The directors must call a general meeting within 21 days of the request and hold the general meeting within 28 days of calling the meeting.
The directors must call a board meeting within 21 days of the request and hold the board meeting within 28 days of calling the meeting.
The directors should ignore the request and allow the shareholders to call the general meeting themselves.
The directors must call a board meeting on reasonable notice and hold a general meeting within 14 clear days of calling the meeting.
The directors may call a general meeting within 21 days of the requisition and hold the general meeting within 28 days of calling the meeting.
The board should cooperate with the request to place the proposed resolution on the agenda for the next general meeting as this will give them a longer time to deal with the issue.
Correct. Under s 304 CA 06 the board can wait until 21 days after receipt of a valid s 303 request to call a general meeting which then must then be held no later than 28 days after the date it is called. Section 303 states that members holding at least 5% of the paid voting shares in a company can request a general meeting and here 10% have served the notice.
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The directors must call a board meeting within 21 days of the request and hold the board meeting within 28 days of calling the meeting.
Incorrect – The directors will have to pass a board resolution at a board meeting to call the general meeting but this can be done on reasonable notice (Browne v La Trinidad).
Person A, Person B and Person C are the 3 directors and shareholders of Company F. They own 30% of the shares each. The remaining 10% of the shares is owned by Person D. Company F has unamended Model Articles. Person A failed to declare an interest in a transaction between Company F and Company G, in which Person A also owns shares. Person D wants to bring a derivative claim against Person A in respect of his breach of duty.
Assuming Person D has established a prima facie case for permission under stage 1, for what reason will the court refuse permission at the second stage?
The court will refuse permission if, after the transaction was entered into, Person B and Person A ratified the breach by ordinary resolution.
The court will refuse permission if Person D is not acting in good faith in seeking to continue the claim.
The court will refuse permission if, after the transaction was entered into Person C and Person B ratified the breach by ordinary resolution.
The court will refuse permission if, after the transaction was entered into Person A resigns as a director.
The court will refuse permission if, after the transaction was entered into, Person C and Person B authorised the breach by board resolution.
The court will refuse permission if, after the transaction was entered into Person C and Person B ratified the breach by ordinary resolution.
Correct – Under s 263(2) Companies Act 2006, ratification of the breach by the company is an absolute bar to granting permission.
Person A, Person B, Person C and Person D are the directors and shareholders of a company. They each hold 25% of the shares in the company. The company has unamended Model Articles. Person D falls out with the other directors over the direction of the business. Person D accuses them of mismanagement and breaching their duty to promote the success of the business. At a general meeting Person D is removed as a director by the other shareholders. Subsequently the company fails to declare a dividend and instead increases directors’ salaries.
Person D applies to court under s 994 Companies Act on the grounds of unfair prejudice. Which ground is least likely to be successful for establishing unfairly prejudicial conduct?
Mismanagement
Failure to declare a dividend
Breach of directors’ fiduciary duties
Excessive remuneration
Exclusion from management
Mismanagement
Correct – The courts are very reluctant to find that mismanagement decisions amount to unfair prejudice (Re Elgindata Ltd).
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Failure to declare a dividend
Incorrect – The case of Re A Company established that failure to declare a dividend can be unfairly prejudicial conduct.
Person A, Person B, Person C and Person D establish a business together which they then incorporate. The company has Model Articles. They are all directors and each own 25% of the shares in the company. There is a disagreement and Person A is removed as a director by the other shareholders.
Person A applies to court for the just and equitable winding up of the company. What order is the court likely to make?
The court is likely to make the winding up order provided Person A can show that the commercial object for which the company was formed has failed or not been fulfilled.
The court is likely to dismiss the petition unless Person A can show that either the company is unable to pay its debts as and when they fall due or that the company’s liabilities exceed its assets.
The court is likely to dismiss the petition as Person A has another remedy available under s 994 Companies Act 2006 and Person A is being unreasonable in seeking to have the company wound up.
The court is likely to make the winding up order provided Person A can show that the company is a quasi-partnership and that there is a justifiable loss of confidence in the company’s management.
The court is likely to make the winding order provided Person A can show that the company had been formed on the understanding that Person A would remain in management and his exclusion was in breach of that understanding.
The court is likely to dismiss the petition as Person A has another remedy available under s 994 Companies Act 2006 and Person A is being unreasonable in seeking to have the company wound up.
Correct – just and equitable winding up is a draconian remedy so under s 125(2) Insolvency Act 2006 the court will not make a winding up order if there is another remedy available to the petitioner.
Person A, Person B, Person C, Person D and Person E are the shareholders of a company. Their shareholdings are set out below. The shareholders are voting to pass a special resolution at a general meeting. They are all present at the meeting. Persons A and D will vote against the resolution. Persons B, C and E are in favour of the resolution.
Person A - 3%
Person B - 6%
Person C - 9%
Person D - 22%
Person E - 60%
Can the company pass the special resolution?
The company can pass the special resolution if Person B demands a vote by poll.
The company can pass the special resolution if Persons B, C and E vote for it on a show of hands.
The company can pass the special resolution if Persons B and C demand a vote by poll.
The company can pass the special resolution if Person C demands a vote by poll.
The company cannot pass the special resolution as Persons A and D can block a vote on a show of hands and by poll.
The company can pass the special resolution if Persons B and C demand a vote by poll.
Correct – Persons B and C hold 15% of the voting rights in the company so they can demand a poll vote.
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The company can pass the special resolution if Persons B, C and E vote for it on a show of hands.
Incorrect – On a show of hands 4 shareholders must vote in favour of the special resolution.
A company granted a debenture containing fixed charges and a qualified floating charge over its assets to its bank on 28 May 2015 to secure a term loan and overdraft facility. The company is in financial difficulties and it has failed to pay a scheduled term loan repayment to the bank. The bank is owed £300,000.
A valuation has estimated that the assets will realise the following amounts on a going concern basis:
Assets subject to the fixed charge £145,000
Stock £130,000
Book debts £70,000
Cash £50,000
TOTAL = £395,000
On a break up basis, the value of the assets will be as follows:
Assets subject to the fixed charge £125,000
Stock £80,000
Book debts £35,000
Cash £50,000
TOTAL = £290,000
What should the bank do to ensure it is repaid in full?
The bank should appoint an administrative receiver.
The bank should petition for the winding up of the company.
The bank should commence legal action for the unpaid debt.
The bank cannot do anything here since the company has not entered into any formal insolvency procedure.
The bank should appoint an administrator.
The bank should appoint an administrator.
Correct – Administrators can sell the business as a going concern so it is more likely that the bank will be repaid in full. The bank is a qualifying charge holder so it can appoint an administrator.
week 9
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The bank should appoint an administrative receiver.
Incorrect – The bank’s security was created after the relevant date so the bank cannot appoint an administrative receiver. Please review your materials relating to insolvency options and procedures.
A company granted its lender a fixed charge and a qualifying floating charge over its assets in June 2010. The charges were properly registered at Companies House. The company is in financial difficulties following the loss of a key contract. One of the company’s creditors is threatening to issue a winding up petition in relation to an unpaid debt. However, the board of the company is confident that given time the company can trade out of its present difficulties. The company is in talks with the lender about its insolvency options.
What is the most appropriate insolvency procedure for the company?
Compulsory liquidation.
Administrative receivership.
Administration.
Creditors’ voluntary liquidation.
Members’ voluntary liquidation.
Administration.
Correct – The company will have the benefit of the moratorium so a winding up petition cannot be presented by any unhappy creditor. Administrators can trade the business.
A company granted its lender a debenture containing fixed and floating charges over its assets as security for a term loan and overdraft facility. The company is now in liquidation. The liquidator has realised all of the company’s assets.
The lender is owed £285,000. There are no other secured creditors and no preferential creditors.
Fixed charge realisations amount to £215,000 and floating charge realisations amount to £160,000.
The liquidator’s costs in realising the fixed assets are £8,000 and their costs in realising the floating charge assets are £6,000. The prescribed part is £33,800.
Which of the following correctly describes how this company’s assets will be distributed to the unsecured creditors?
The unsecured creditors are paid out of the fixed and floating charge realisations. They are entitled to the prescribed part and any sums remaining after payment of the liquidator’s costs and the lender.
The unsecured creditors are paid out of the floating charge realisations. They are entitled to the prescribed part and any sums remaining after payment of the liquidator’s costs and the lender.
The unsecured creditors are paid out of the floating charge realisations. They are entitled to any sums remaining after payment of the prescribed part, the liquidator’s costs and the lender.
The unsecured creditors are paid out of the fixed and floating charge realisations. They are entitled to any sums remaining after payment of the prescribed part, the liquidator’s costs and the lender.
The unsecured creditors are paid out of the floating charge realisations. They are entitled to the prescribed part and any sums remaining after payment of the liquidator’s costs.
The unsecured creditors are paid out of the floating charge realisations. They are entitled to the prescribed part and any sums remaining after payment of the liquidator’s costs and the lender.
Correct
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The unsecured creditors are paid out of the fixed and floating charge realisations. They are entitled to any sums remaining after payment of the prescribed part, the liquidator’s costs and the lender.
Incorrect. The fixed charge realisations will all be paid to the lender here. The unsecured creditors are also entitled to the prescribed part. Please review your materials relating to the order of priority.
A company is in liquidation. The company granted a floating charge to its lender to secure an overdraft facility on 14 March 2008 which was registered at Companies House on 17 March 2008. There are no fixed charge holders. There are two employees with claims for unpaid salary. The liquidator has realised all the company’s assets. There will be insufficient sums to pay unsecured creditors in full.
Which statement best describes the order in which the liquidator should distribute this company’s monies after payment of their costs?
The liquidator should distribute in the following order (1) preferential creditors (2) the lender (3) the unsecured creditors.
The liquidator should distribute in the following order (1) set aside the prescribed part (2) the lender (3) the unsecured creditors.
The liquidator should distribute in the following order (1) the lender (2) set aside the prescribed part (3) the unsecured creditors.
The liquidator should distribute in the following order (1) preferential creditors (2) set aside the prescribed part (3) the lender (4) the unsecured creditors.
The liquidator should distribute in the following order (1) the lender (2) preferential creditors (3) set aside the prescribed part (4) the unsecured creditors.
The liquidator should distribute in the following order (1) preferential creditors (2) set aside the prescribed part (3) the lender (4) the unsecured creditors.
Correct – The employees will rank as preferential creditors for part of their claim. The lender will be paid after the prescribed part has been set aside.
Here, “the lender” is the floating charge creditor.
A company obtained a term loan from its lender to purchase a property. The loan is secured by a charge by way of legal mortgage over the property. The company is struggling to meet the monthly payments under the loan. The company is also experiencing cash-flow problems. A creditor is threatening to issue a winding up petition in respect of an overdue invoice. The board of directors want to enter into a formal agreement to reschedule its debts with all the company’s creditors to enable the company to carry on trading as a going concern.
What is the best option for a formal agreement for the company?
A company voluntary arrangement.
A restructuring plan.
A standstill agreement with its lender.
A creditors’ voluntary liquidation.
A pre-insolvency moratorium.
A restructuring plan.
Correct – a restructuring plan, if approved and sanctioned by the court will bind all creditors and enable the company to continue trading as a going concern.
A company goes into liquidation. Upon reviewing the company’ accounts, the liquidator discovers the company had been trading at a time when the directors knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation.
What is the most likely action that the liquidator can take against the directors?
The liquidator can sue the directors for wrongful trading.
The liquidator can sue the directors for misfeasance.
The liquidator can sue the directors for fraudulent trading.
The liquidator can sue the directors for negligence.
The liquidator can sue the directors for breach of directors’ duties.
The liquidator can sue the directors for wrongful trading.
correct
A company is in financial difficulties. The company’s sole director decides to sell an air-conditioning unit owned by the company to his brother for £18,000. The market value of the unit is £30,000. Two months after the sale the company goes into liquidation. The liquidator decides to challenge the transaction.
Which elements must the liquidator establish?
The liquidator must show that the company was insolvent at the time of the transaction.
The liquidator must show that the transaction took place in the two year period before the onset of insolvency.
The liquidator must show that the transaction was not for market value.
The liquidator must show that the company did not act in good faith.
The liquidator must show the company was influenced by a desire to prefer the brother.
The liquidator must show that the transaction took place in the two year period before the onset of insolvency.
Correct – This is the relevant period for transactions at an undervalue.
A company is experiencing cash-flow problems and it cannot pay its debts as they fall due. The company has two directors and 6 shareholders. In order to continue trading, the directors sell the company’s van to a friend for £10,000. The van is worth £18,000. The company later goes into liquidation.
What is the most likely personal liability of the directors in relation to the transaction?
The directors may be liable for misfeasance and a disqualification order will be made under the Company Directors Disqualification Act 1986.
The directors may be liable for misfeasance unless the court grants relief under s 1157 Companies Act 2006.
The directors may be liable for misfeasance unless the shareholders of the company ratify the breach under s 239 Companies Act 2006.
The directors may be liable for wrongful trading unless they can show that they took every step to minimise the loss to creditors.
The directors may be liable for fraudulent trading unless they can show they had no intention to defraud creditors.
The directors may be liable for misfeasance unless the court grants relief under s 1157 Companies Act 2006.
Correct – the directors have breached their duties in allowing the company to enter into a transaction at an undervalue. The court may grant relief if it believes the directors acted reasonably and honestly and ought to be excused.
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The directors may be liable for wrongful trading unless they can show that they took every step to minimise the loss to creditors.
Incorrect – wrongful trading might be likely on the facts but this liability does not arise as a consequence of the transaction.
A company is in financial difficulties, but the directors have decided the company should continue to trade. The directors agree to the early payment of an invoice in favour of a supplier as a condition of the supplier fulfilling an essential order. Two months after the payment was made, the company goes into liquidation.
The liquidator decides to challenge the payment. What order if the court likely to make?
The payment is a preference as the payment was made two months prior to the onset of insolvency which is the relevant time.
The payment is a preference as it put the supplier in a better position that it would otherwise have been in a liquidation.
The payment is not a preference as the company was not insolvent at the time the payment was made.
The payment is not a preference as the company was acting in good faith and for the purpose of carrying on the business.
The payment is not a preference as the company in making the payment was not influenced by a desire to prefer the supplier.
The payment is not a preference as the company in making the payment was not influenced by a desire to prefer the supplier.
Correct – an absence of the desire to prefer is a defence to a preference claim. The company made the payment because of commercial pressure.
A company granted a floating charge to its bank as a condition of the bank increasing the company’s overdraft facility. The existing overdraft was £50,000 which was secured by a fixed charge over the company’s property. The facility was increased by £20,000. The floating charge was properly registered at Companies House within the time limits.
Eight months later the company goes into liquidation. Is the floating charge valid?
The floating charge is valid as it secured fresh consideration advanced to the company by the bank.
The floating charge is not valid and can be challenged by the liquidator as a preference.
The floating charge is not valid and can be challenged by the liquidator as transaction at an undervalue.
The floating charge is not valid as it was granted eight months prior to liquidation which is the relevant time.
The floating charge is valid as the company was not insolvent at the time or became insolvent as a result of it.
The floating charge is valid as it secured fresh consideration advanced to the company by the bank.
Correct – the floating charge will be valid in respect of new consideration advanced to the company on or after its creation.
A new investor is keen to buy shares in a public limited company (the “Target”) but does not have the necessary funds to purchase the shares without the aid of a bank loan. The bank has requested security for the bank loan from the Target, the Target’s public limited company subsidiary (the “Public Subsidiary”) and the Target’s private limited company subsidiary (the “Private Subsidiary”).
Which would be the best advice to the Target?
Only the security given by the Private Subsidiary would be unlawful financial assistance.
Only the security given by the Public Subsidiary would be unlawful financial assistance.
The security given by the Target, the Public Subsidiary and the Private Subsidiary would be unlawful financial assistance.
Only the security given by the Target will be unlawful financial assistance.
Only the security given by the Public Subsidiary and the Private Subsidiary would be unlawful financial assistance.
The security given by the Target, the Public Subsidiary and the Private Subsidiary would be unlawful financial assistance.
Correct. By virtue of s 678(1) CA 06 where a person is acquiring or proposing to acquire shares in a public limited company it is not lawful for that company (i.e. the Target) or a company that is a subsidiary of that company (i.e. the Public Subsidiary and the Private Subsidiary) to give financial assistance either directly or indirectly for the purpose of the acquisition.
A private limited company with unamended model articles has 100 ordinary £1 shares as its issued share capital. The company would like to issue an additional 100 ordinary £1 shares to a new shareholder as quickly as possible so ideally without shareholder approval.
Would it be possible to issue the shares without passing any shareholder resolutions?
No, since an ordinary resolution giving the directors authority to allot the new shares under s 551 CA 06 and a special resolution is required to disapply pre-emption rights under s 570 CA 06.
No, since a special resolution is required to disapply pre-emption rights under s 570 CA 06.
No, since a special resolution is required to disapply pre-emption rights under s 569 CA 06.
No, since an ordinary resolution giving the directors authority to allot the new shares under s 551 CA 06 and a special resolution is required to disapply pre-emption rights under s569 CA 06.
Yes, as the directors already have authority to allot the new shares under s550 CA 06.
No, since a special resolution is required to disapply pre-emption rights under s 569 CA 06.
Correct. As the company has model articles there is no limit on the number of shares that can be issued so no shareholder approval is needed in respect of that, the directors have authority to allot the new shares under s 550 CA 06 as the company only has one type of shares in issue and more of the same are being issued. As the shares are ordinary shares there is no limit on the amount of dividends that the shareholder might receive and no limit on the amount of capital on a solvent winding up of the company so the shares are equity securities by virtue of s 560 CA 06. This means to protect the existing shareholders rights of pre-emption can only be disapplied by those existing shareholders passing a special resolution under s 569 CA 06.
week 7
incorrect
Yes, as the directors already have authority to allot the new shares under s550 CA 06.
Incorrect. As the company has model articles there is no limit on the number of shares that can be issued so no shareholder approval is needed in respect of that, the directors have authority to allot the new shares under s 550 CA 06 as the company only has one type of shares in issue and more of the same are being issued. As the shares are ordinary shares there is no limit on the amount of dividends that the shareholder might receive and no limit on the amount of capital on a solvent winding up of the company so the shares are equity securities by virtue of s 560 CA 06. This means to protect the existing shareholders rights of pre-emption can only be disapplied by those existing shareholders passing a special resolution under s 569 CA 06.
The directors of a private limited company with unamended model articles resolved to recommend that a dividend be declared after a successful first half year’s trading. Unfortunately, there was a downturn in economic activity in the second half of the financial year and as a result the year-end accounts showed there were no distributable profits. Notwithstanding the year-end accounts the directors resolved to pay the shareholders the dividend and the shareholders approved a declaration of the dividend and payment by an ordinary resolution.
The company’s non-executive director has found out about the payment of the dividend and has asked the directors to sort out repayment of the dividend to the company.
What would be the best advice to the directors?
The dividend payment is a lawful payment as the company was performing well financially when the directors resolved to recommend a dividend be declared.
The dividend payment is an unlawful payment. The shareholders will have to repay it to the company as they passed the ordinary resolution approving the payment.
The dividend payment is an unlawful payment. The directors will have to repay it to the company as they passed the board resolution declaring the dividend.
The dividend payment is an unlawful payment and both the shareholders and the directors could be liable to repay it to the company.
The dividend payment is a lawful payment as the shareholders approved the declaration and payment of the dividend by an ordinary resolution.
The dividend payment is an unlawful payment and both the shareholders and the directors could be liable to repay it to the company.
Correct. The shareholders will be liable to repay the dividend if they knew or had reason to believe that it was an unlawful distribution s 847 CA 06. The directors may be in breach of their duties to the company and can be required to repay unlawful dividends.
A private limited company has distributable profits of £25,000. The company has 10,000 £1 ordinary shares and 500 £1 redeemable preference shares in issue, all of which are fully paid up. All of the shares were issued on formation of the company and the company has model articles with one amendment to set out the rights attaching to the redeemable preference shares. The company has agreed to redeem the redeemable preference shares at £60 per share.
Which of the following best represents the advice to the company in respect of this share redemption?
It would be unlawful for the company to proceed with the redemption of shares as there are insufficient distributable profits to fund the redemption.
The shareholders would need to pass a special resolution approving the terms of the redemption.
The shareholders need to pass a special resolution approving a payment out of capital to part fund the redemption of the shares.
The directors need to pass a board resolution to approve the use the distributable profit to fully fund the redemption of the shares.
It would be unlawful for the company to proceed with the redemption of shares as there would only be one class of shares in issue following the redemption.
The shareholders need to pass a special resolution approving a payment out of capital to part fund the redemption of the shares.
Correct. The cost of the redemption to the company is 500 x £60 = £30,000 and the amount of distributable profit is £25,000 so the company will have to use some capital to fund the redemption. This requires a special resolution of the shareholders s 687(1). All of the shares are fully paid up so a redemption is possible.
A solvent private limited company which is in a strong financial position would like to reduce its share capital. The directors of the company would like advice upon how to deal with the reduction as quickly and informally as possible.
What would be the best advice to the company?
The company could reduce its capital by reaching an agreement with all of the creditors of the company without the need for a court application.
The company can reduce its capital by the directors filing a statement of solvency at the court.
The company could reduce its capital by filing a directors’ solvency statement and a special resolution of the shareholders.
The company can reduce its capital by filing a special resolution of the shareholders approving the reduction at court.
The company could reduce its capital by applying to the court for an order confirming the reduction.
The company could reduce its capital by filing a directors’ solvency statement and a special resolution of the shareholders.
Correct. The company as a private limited company could take advantage of the simplified reduction of capital procedure under s 642, s 643 and s 644 CA 06 by passing a special resolution under s 641 CA 06 and filing the directors’ statement of solvency.
A lender has entered into a loan agreement and security document with a private limited company in respect of a term loan of £100,000. The lender has taken a fixed and floating charge (the “Charge”) over the assets of the company. The documentation was signed off and the loan was completed four weeks ago.
The lender’s in-house lawyer has contacted you as he is concerned that the Charge has not been registered yet.
Which of the following represents the best advice to the lender?
The Charge is still capable of being registered in time as it must be registered within 28 days beginning with the day after the date of its creation.
The Charge will only be void so far as any security on the company’s property is conferred by it against the liquidator or administrator of the company.
The Charge will be voidable so far as any security on the company’s property is conferred by it against any creditor of the company.
The Charge will be void so far as any security on the company’s property is conferred by it against any creditor of the company.
The Charge does not need to be registered as it has been evidenced in a loan agreement and security document which clearly sets out the security on the company’s property.
The Charge will be void so far as any security on the company’s property is conferred by it against any creditor of the company.
Correct. Section 859H CA 06 provides that any charge will be void so far as any security on the company’s property is conferred by it against any liquidator, administrator or creditor of the company if the documents set out in s 859A are not delivered to the registrar within the period for delivery.
A private limited company took out a term loan with a lender and secured by way of a fixed and floating charge over its assets including book debts. Any monies owed by creditors are paid direct into the company’s bank account which is not subject to any controls by the lender. The company is in financial difficulties and may miss the next interest payment due to the lender.
The company is concerned about whether the lender would be able to enforce its security by way of a fixed charge over the book debts. Which represents the best advice to the company?
The lender can only ever take a floating charge over the book debts as it is a class of assets which in the ordinary course of the business of the company will be fluctuating.
The lender would only have a fixed charge over the book debts if they were paid into the company’s bank account and the company was free to distribute the money from that account freely.
The lender would only have a fixed charge over the book debts if they were paid into a separate blocked account that the lender had control over.
The lender would only have a floating charge over the book debts if they were paid into a separate blocked account that the lender had control over.
The lender’s ability to enforce a fixed or floating charge over the company’s book debts is irrelevant as the lender controls the company’s bank account so can access those funds whenever it chooses.
The lender would only have a fixed charge over the book debts if they were paid into a separate blocked account that the lender had control over.
Correct. From the case of National Westminster Bank plc v Spectrum Plus Limited and others [2005] UKHL 41 it is only possible to have a fixed charge over book debts if they are paid into a blocked account which gives the lender the degree of control required.
A private limited company needs additional funding and has approached a lender to provide finance in the form of a loan. The company has the following assets:
Freehold property
Plant and machinery
Finished product stock
Raw materials stock
Cash at bank
Which of the following would give the lender the best protection in the event of a default in repayment of the loan by the company?
A fixed charge over the freehold property and plant and machinery and a floating charge over the finished product stock, the raw materials stock and the cash at bank.
A floating charge over all of the listed assets of the company.
A fixed charge over the freehold property and a floating charge over the plant and machinery, the raw material stock, the finished product stock and the cash at bank.
A fixed charge over the freehold property, the finished product stock and the plant and machinery and a floating charge over the raw material stock and the cash at bank.
A fixed charge over all of the listed assets of the company.
A fixed charge over the freehold property and plant and machinery and a floating charge over the finished product stock, the raw materials stock and the cash at bank.
Correct. The lender cannot take a fixed charge over the fluctuating assets of the company so must take a floating charge over those assets that will then crystallise upon an event of default.
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incorrect
A fixed charge over the freehold property and a floating charge over the plant and machinery, the raw material stock, the finished product stock and the cash at bank.
Incorrect. Please revisit your notes and consider the types of assets that might be appropriate to take a fixed and floating charge over.
A private limited company with unamended model articles needs to raise additional finance. The company is a small family owned business and, all its directors are also shareholders. The only shares issued in the company are ordinary shares and none of the current shareholders have any further funds available to invest in the company. The company has a small overdraft facility and no other debt finance provisions in place.
Which of the following best represents the advice to the company about using debt or equity finance to fund its expansion plans?
The company will be able to claim any dividends paid to its shareholders and any interest paid in respect of a term loan as tax deductible expenses.
If the company enters into a term loan with a lender to fund its expansion plans, the company will become more highly geared.
The company will have to pay dividends to the shareholders and interest on any term loans entered into and, therefore the cost of financing the expansion will be the same.
If the company enters into a term loan, the shareholders will need to pass a special resolution to approve the terms of the loan.
If the company enters into a term loan, the shareholders will need to pass an ordinary resolution approving the terms of the loan.
If the company enters into a term loan with a lender to fund its expansion plans, the company will become more highly geared.
Correct. The gearing of a company is the relationship between the long-term loans of a company and the total shareholder funds so if the company took out a term loan this would increase its long-term liabilities resulting in a higher gearing ratio.
A private limited company has entered into an agreement with a lender for a total advance of £50,000. The company is in control of when it draws down the money and then repays it giving it full flexibility in how it uses this facility.
What type of debt finance is this?
Debenture
Revolving credit facility
Term loan
Overdraft
Debt security
Revolving credit facility
Correct. The borrower has flexibility to borrow and repay. It allows a company to draw down money, repay it and then re-draw it down again, then repay it. Unlike a term loan, with an RCF, the borrower has flexibility to choose when it borrows and repays as against a maximum aggregate amount of capital provided by the lender.
Which ONE of the following correctly represents the characteristics of an LLP?
The LLP is a separate legal entity and enters into contracts on its own behalf. All partners have limited liability. An LLP is a better structure for investment than a traditional partnership as it can issue shares and therefore attract investment.
The LLP is a separate legal entity and enters into contracts on its own behalf. Certain partners can have limited liability, but these partners must not be involved in the management of the business and are known as sleeping partners.
The LLP is a separate legal entity and enters into contracts on its own behalf. All partners have limited liability. LLPs must be registered at Companies House and must submit annual accounts.
The LLP is a separate legal entity and enters into contracts on its own behalf. All partners have limited liability. Although LLPs must be registered at Companies House there are no further filing requirements for LLPs.
The LLP is a separate legal entity and enters into contracts on its own behalf. All partners have limited liability. Only professional firms such as law firms and accountancy firms may become LLPs.
The LLP is a separate legal entity and enters into contracts on its own behalf. All partners have limited liability. LLPs must be registered at Companies House and must submit annual accounts.
Which ONE of the following is correct in relation to a traditional partnership?
A partnership is formed when two or more persons sign a Partnership Agreement.
Partnerships must be registered at Companies House but there is no requirement to file annual accounts.
In the absence of an express written Partnership Agreement, the Partnership Act 1890 provides that all profits are shared equally, partners are jointly and severally liable for debts of the partnership and all partners can participate in management.
Under the Partnership Act 1890, in the absence of express agreement, partners will cease to be liable for debts incurred by the partnership at a time when they were partners once they leave the partnership.
In the absence of express agreement, the Partnership Act 1890 provides that all profits are shared equally, partners are jointly and severally liable for debts of the partnership and all partners can participate in management.
In the absence of express agreement, the Partnership Act 1890 provides that all profits are shared equally, partners are jointly and severally liable for debts of the partnership and all partners can participate in management.
Correct. Although any express agreement will override the default provisions of the Partnership Act 1890 (written or oral), partners should ensure that they draw up a written express Partnership Agreement to regulate their partnership as they require which will provide for certainty. The default provisions of the Partnership Act 1890 are rarely appropriate for modern businesses.
incorrect
In the absence of an express written Partnership Agreement, the Partnership Act 1890 provides that all profits are shared equally, partners are jointly and severally liable for debts of the partnership and all partners can participate in management.
Incorrect. Have another look at this element. You will see that the Partnership Act 1890 applies in the absence of agreement to the contrary by partners. Such agreement may be verbal.
Which ONE of the following is correct?
A limited partnership can be formed without any required formalities.
A partnership can be described as two or more people forming an intention to work together with a view to profit.
A sole trader requires a certificate of incorporation to start trading.
LLPs are required to file annual accounts at Companies House.
LLPs are required to file annual accounts at Companies House.
incorrect
A partnership can be described as two or more people forming an intention to work together with a view to profit.
This is incorrect. Intention is not a requirement for a partnership.
Which ONE of the following is correct?
All companies are required to have one annual general meeting each year.
A private company can raise equity finance by offering to sell its shares to the public.
Private limited companies are required to have at least two directors.
Directors of a company can also be shareholders in the same company.
Directors of a company can also be shareholders in the same company.
Directors of a company can also be shareholders in the same company.
Jason, Kim and Sophia have set up a brand consultancy business (Branded). The business is doing well and they now are looking to expand. They have a number of family members and friends who are willing to invest in the business. They seek your advice as to whether to incorporate the business as a private limited company. Which of the following is correct?
Branded can only be incorporated as a private limited company if it has at least £50,000 of share capital.
A key advantage of incorporation is that shareholders are able to invest in shares in the company with their liability being limited to the amount unpaid on their shares (if any).
An advantage of incorporating the business as a private limited company is that Branded will be able to offer shares to the public in order to increase the capital available to the business.
A key advantage of incorporation is that the directors of the company are able to run the company without any input from the shareholders.
A key advantage of incorporation is that shareholders are able to invest in shares in the company with their liability being limited to the amount unpaid on their shares (if any).
Which ONE of the following is correct in relation to a listed company?
A listed company is a public limited company whose shares are listed on a regulated investment exchange such as the London Stock Exchange.
All public companies are listed.
The requirements of CA 2006 do not apply to listed companies.
Any company can list its shares on the London Stock Exchange.
A listed company is a public limited company whose shares are listed on a regulated investment exchange such as the London Stock Exchange.
Which ONE of the following is correct in relation to the company’s articles of association?
The articles take effect as a contract between the members themselves only.
The articles take effect as a contract between the company and its members and between the members themselves.
The articles take effect as a contract between the directors and the shareholders.
The articles will always override the provisions of CA 2006.
The articles take effect as a contract between the company and its members and between the members themselves.
Which one of the following correctly states the position with regards to provisions in the Memorandum restricting the objects of companies formed under the Companies Act 1985?
Any restrictions in the Memorandum of companies incorporated under the 1985 Act continue to bind the company and cannot be removed.
Any restrictions in the Memorandum of companies incorporated under the 1985 Act are no longer binding, since under the CA 2006, the Memorandum has no constitutional significance.
Any restrictions in the Memorandum of companies incorporated under the 1985 Act take effect as if they were contained in the Articles and are binding until the Articles are amended or new Articles adopted.
Any restrictions in the Memorandum of companies incorporated under the 1985 Act take effect as if they were contained in the Articles and are binding until the Articles are amended or new Articles adopted.
Which one of the following correctly describes the position of the objects clause (the clause setting out the purposes for which the company was formed) of companies incorporated under the Companies Act 2006?
Companies formed under CA 2006 have unrestricted objects. It is not possible to restrict the objects of a company formed under CA 2006.
Companies formed under CA 2006 have unrestricted objects, unless a specific restriction is inserted into the company’s articles.
All companies formed under CA 2006 will contain a provision in the Memorandum setting out the purposes for which the company was formed. This is known as an “objects clause”.
Companies formed under CA 2006 have unrestricted objects, unless a specific restriction is inserted into the company’s articles.
Correct. Section 31 CA 2006 confirms this.
When incorporating a company from scratch, which one of the following correctly states the documents that must be filed at Companies House?
The Articles of Association (unless Model Articles are used without amendment), fee, Share Certificates and form IN01.
The Memorandum, Articles of Association (unless Model Articles are used without amendment), fee and form IN01.
The Memorandum, Articles of Association (unless Model Articles are used without amendment), Certificate of Incorporation and fee.
The Articles of Association (unless Model Articles are used without amendment), fee and form IN01.
The Memorandum, Articles of Association (unless Model Articles are used without amendment), fee and form IN01.
When does a company become a legal entity?
From the date on which the company is allocated a registered number.
From the date on which the incorporation documents are received by Companies House (if this is different from the date of filing).
From the date of incorporation as set out on the certificate of incorporation.
From the date on which the incorporation documents are filed at Companies House.
From the date of incorporation as set out on the certificate of incorporation.
Your client has purchased a shelf company which has been incorporated with Model Articles and seeks your advice as to how to effect a change of name of the company. Which one of the following is correct in relation to the procedure required to change the name of the company?
An ordinary resolution of the shareholders is required.
It is not possible to change the name of a company.
A special resolution of the shareholders is required.
The name may be changed by a board resolution of the directors.
A special resolution of the shareholders is required.
Correct. See s 77(1) CA 2006.
What is the ‘nominal value’ of a share?
The amount over and above £1 that the shareholder pays for the share on subscription.
The minimum subscription price for that share.
The maximum subscription price for that share.
The amount paid by the shareholder for the share at the time of purchase.
The minimum subscription price for that share.
What is the ‘issued share capital’ of a company?
The total amount in value that has been paid up on all shares in issue at that time.
The total number of shares that the company is permitted to allot.
The total amount in value (nominal and premium) of all shares in issue at that time.
The total number of shares in issue at that time.
The total amount in value (nominal and premium) of all shares in issue at that time.
incorrect
The total amount in value that has been paid up on all shares in issue at that time.
Incorrect. The issued share capital represents the total amount in value of all shares in issue. The paid up share capital may be less as it is not necessary for shareholders to pay the total amount for shares on issue.
Which one of the following would be a Person with Significant Control in relation to a company?
Any director.
A shareholder who holds 30% of the voting share capital of the company.
A shareholder who holds 25% of the voting share capital in the company, who is also a director.
A shareholder who holds 30% of the voting share capital of the company.
What is the meaning of “quorum” for a board or general meeting?
A representative of a shareholder who is unable to attend the meeting.
The minimum number of people that must be present for the meeting to be valid.
The notice period required for the meeting to be valid.
The number of attendees at a meeting of the board or shareholders.
The minimum number of people that must be present for the meeting to be valid.
Which of the following correctly sets out the thresholds for ordinary and special resolutions of the shareholders?
An ordinary resolution is passed by 50% or more of the votes. A special resolution is passed by 75% or more of the votes.
An ordinary resolution is passed by more than 50% of the votes. A special resolution is passed by 75% or more of the votes.
An ordinary resolution is passed by more than 50% of the votes. A special resolution is passed by more than 75% of the votes.
An ordinary resolution is passed by 75% or more of the votes. A special resolution is passed by more than 50% of the votes.
An ordinary resolution is passed by more than 50% of the votes. A special resolution is passed by 75% or more of the votes.
Which ONE of the following is correct ?
The chairman has a casting vote under MA 13, but this may be removed. The chairman is chosen by the board of directors.
All private limited companies must appoint a chairman.
The chairman has a casting vote under MA 13, but this may be removed. The chairman is chosen by the shareholders.
The chairman has a casting vote under MA 13, but this may be removed. The chairman is chosen by the board of directors.
Bill, Paul, Simon and Ben are all shareholders of Magic Music Limited (‘Magic’). They have recently decided to rebrand Magic as they feel that the company’s name is outdated. As part of the rebranding they will need to change Magic’s name. They each hold the following number of shares in Magic:
Bill - 28 shares
Paul - 48 shares
Simon - 20 shares
Ben - 4 shares
Magic’s Articles of Association do not deal with changes to Magic’s name and Magic intends to deal with the change of name at a forthcoming GM. Which ONE of the following statements is correct?
On a poll the resolution could be passed if only Bill and Paul voted in favour of it.
If only Bill and Paul voted in favour of the resolution on a show of hands then it could be passed.
On a show of hands all of the shareholders would need to vote in favour of the resolution in order for it to be passed.
On a poll the resolution could be passed if Bill, Simon and Ben all voted in favour of it.
On a poll the resolution could be passed if only Bill and Paul voted in favour of it.
This is the correct answer. Changing the name of the company requires a special resolution (s 77 CA 2006). A special resolution requires the approval of 75% or more of the votes. Bill and Paul together hold 76% of the shares so on a poll vote they can pass a special resolution.
Major decisions affecting the company (such as the power to remove a director and the power to change the company’s name) will be taken by which ONE of the following?
The shareholders
The partners
A committee of directors.
The board of directors
The shareholders
This is the correct answer. The shareholders take the important decisions and the examples given are reserved for them by CA 2006.
Which of the following correctly represents the documents that must be filed at Companies House when a company votes to amend its articles?
Copy of a special resolution, copy of the amended articles.
Copy of the amended articles, copy of the GM and BM minutes.
Copy of an ordinary resolution, copy of the amended articles.
Copy of the amended articles, copy of the GM minutes.
Copy of a special resolution, copy of the amended articles.
This is the correct answer. A special resolution is required in order to amend a company’s articles of association pursuant to s 21(1) CA 2006, not an ordinary resolution. All special resolutions must be filed at Companies House, together with the amended articles.
Which one of the following is the correct meaning of limited liability?
Limited liability means that the company will not be liable for its debts beyond the amount of its share capital.
Limited liability means that the shareholders have no liability for debts and liabilities of the company.
Limited liability means that the directors have no liability for debts and liabilities of the company.
Limited liability means that the shareholders’ liability for debts and liabilities of the company is limited to the amount (if any) unpaid on their shares.
Limited liability means that the shareholders’ liability for debts and liabilities of the company is limited to the amount (if any) unpaid on their shares.
What is the significance of section 16 CA 2006?
It states that a company becomes a legal person on the date when the Form IN01, articles and memorandum are filed at Companies House. This means that from this date the company is capable of exercising all the functions of an incorporated company.
It states that a private limited company can be formed with just one director and one shareholder.
It confirms that registered companies are legal persons.
It confirms that a company becomes a legal person on the date of incorporation. This means that from this date the company is capable of exercising all the functions of an incorporated company.
It confirms that a company becomes a legal person on the date of incorporation. This means that from this date the company is capable of exercising all the functions of an incorporated company.
What is the significance of the House of Lords decision in the case of Salomon v Salomon & Co Ltd (1897)?
This decision confirmed that a validly formed company has a separate legal personality and therefore even where there is effectively one person running the business and receiving the profits, that person will not be personally liable for the debts of the company.
This decision confirmed that in certain circumstances (for example where the company is effectively a trustee and the principal shareholder a beneficiary), a shareholder may be personally liable for the debts of the company.
The House of Lords confirmed that the company in certain circumstances may be found to be an agent of the principal shareholder, and in those circumstances that shareholder will be personally liable for the debts of the company.
The House of Lords stated that a company may not be validly formed where the business is in reality controlled and run by a single person.
This decision confirmed that a validly formed company has a separate legal personality and therefore even where there is effectively one person running the business and receiving the profits, that person will not be personally liable for the debts of the company.
Which one of the following correctly summarises the circumstances in which the courts may ‘pierce the corporate veil’ to find shareholders liable according to the decision in Prest v Petrodel?
Where there is a cause of action in tort against the company.
Where a person under an existing legal obligation or restriction deliberately evades or frustrates that obligation or restriction by setting up a company.
Where there is concealment or evasion.
Where a statute allows members of a company to become liable.
Where a person under an existing legal obligation or restriction deliberately evades or frustrates that obligation or restriction by setting up a company.
What was the outcome of the Supreme Court judgment in the case of Prest v Petrodel?
The Supreme Court concluded that, although this was not a case in which the corporate veil should be pierced, since the properties were found to be illegally held by the company, an order was made for the sale of the property and for the money to be given to the wife.
The Supreme Court concluded that in this case the corporate veil should be pierced and therefore an order was made for the sale of the property and for the money to be given to the wife.
The Supreme Court concluded that the company in certain circumstances may be found to be an agent of the principal shareholder, and in those circumstances that shareholder will be personally liable for the debts of the company.
The Supreme Court concluded that, although this was not a case in which the corporate veil should be pierced, the properties were found to be held on trust by the company for the husband (the principal shareholder) and therefore an order was made for the sale of the property and for the money to be given to the wife.
The Supreme Court concluded that, although this was not a case in which the corporate veil should be pierced, the properties were found to be held on trust by the company for the husband (the principal shareholder) and therefore an order was made for the sale of the property and for the money to be given to the wife.
What is the best explanation of the meaning of the phrase ‘piercing the corporate veil’?
It refers to the situation in which the courts may go behind the corporate framework and a parent company may be found liable for the acts of its subsidiary.
It refers to historic cases on liability of shareholders which are no longer good law following the case of Salomon.
It refers to situations in which the courts may go behind the corporate framework and the company’s separate legal personality to make shareholders of a company liable for the liabilities of the company.
It refers to the circumstances in which the courts may go behind the corporate framework and the directors of a company may be found liable for the liabilities of the company.
It refers to situations in which the courts may go behind the corporate framework and the company’s separate legal personality to make shareholders of a company liable for the liabilities of the company.
