company DA Flashcards
A private limited company is made up of four shareholders. One owns a 7% stake and is just a shareholder; the other three own equal shares and are also directors. The 7% shareholder is becoming concerned at the level at which the director-shareholders are paying themselves and does not like the way they make decisions in board meetings. They are also concerned about the company’s finances but haven’t been able to access the accounts after the directors said they were not yet ready. The company uses the Model Articles.
What should the 7% shareholder do?
A. Attempt to resolve the issue through company procedural rights such as circulating a written statement or calling a general meeting; if that fails, offer to sell the shares or submit an unfair prejudice claim.
B. Submit a derivative claim.
C. Attempt to resolve the issue through company procedural rights such as circulating a written statement or calling a general meeting; if that fails, offer to sell the shares or submit a derivative claim.
D. Try and amend the articles of association to resolve the director management issue and vote to draw up proper director services contracts.
E. Call a general meeting.
Answer: A. The best answer. Remember that a shareholder has a number of rights with just one share: looking into company filings, and inspecting minutes, but they also have greater rights with 5%, such as calling a general meeting, circulating a written statement and circulating a written resolution. The shareholder should try these actions first and generally talk to the company before submitting any claim in court. But if these steps don’t work, best to make an unfair prejudice claim after offering to sell their stake (unfair prejudice likely to result in shares being sold anyway).
Two individuals have been running a small bakery business together for several years. They share profits equally and make business decisions jointly, but they have never formally registered their business as a partnership, nor have they written any formal agreement stating that they are partners. Recently, a supplier to whom the business owes money has threatened legal action. The supplier claims that, under the Partnership Act 1890, the two individuals are partners and thus are jointly and severally liable for the business’s debts. The individuals seek legal advice to understand if they are indeed considered partners under the law.
Which of the following statements best reflects the legal position of the two individuals under the Partnership Act 1890?
A. They are not partners because they have not formally registered their business as a partnership or written a formal partnership agreement.
B. They are considered partners only if they have shared personal assets invested in the business, which is not indicated in the scenario.
C. A partnership under the Partnership Act 1890 is only constituted if there is an intention to form a legal partnership, which must be expressly stated.
D. They are only partners if the supplier can prove that they have represented themselves to others as partners in the business, which is not clear from the scenario.
E. They are partners under the Partnership Act 1890, as they share profits and jointly make business decisions, which meets the criteria for a partnership even without a formal agreement.
Answer: E. According to the Partnership Act 1890, a partnership is the relation which subsists between persons carrying on a business in common with a view of profit. The individuals in this scenario are running a bakery business together, sharing profits and making business decisions jointly. These factors are indicative of a partnership, even in the absence of a formal agreement or registration.
A man is a director of a private limited company that aims to rewild wolves in England. The company has been struggling over the last few months and has been late on most of its debts. His brother lent some money to the man a year ago. The man, knowing that it is likely his business would fail soon, felt that he needed to pay his brother back before everything went wrong, so he gave the brother one of the wolf packs the company was looking after. As a result of this loss of assets, the company soon went into insolvent liquidation.
What action could the liquidator take to claw back the company’s assets?
A. Set aside a floating charge.
B. Action for preference and transaction at undervalue.
C. A transaction at undervalue.
D. Fraudulent trading against the man.
E. None.
Answer: B. We don’t have the evidence to conclude that there is fraudulent trading here. These only apply if the directors continue to trade just before insolvent liquidation, knowing or ought to have known that there is no avoiding it. We don’t have evidence of the director actually trading; indeed, he gives the company’s main asset away, presumably because he wasn’t bothering to trade. We can say that we have a TUV and a preference. As this is a connected person, it is easy to prove both: longer timespan; “desire” for preference is presumed, insolvency caused by the wolf pack sale for the TUV presumed.
The directors of a small private limited company with 1,000 issued shares want to hold a general meeting as soon as possible. They approach the shareholders for the necessary consent to issue a short notice so the meeting can be held the next day. The company has 4 shareholders: Oscar, who holds 600 shares; Edgar, who holds 200 shares; Daniel, who holds 100 shares; and Drew, who has 100 shares. Only Drew does not want to give consent to the short notice. The company has unamended Model Articles.
Advise the directors on whether they can issue a short notice for the general meeting.
A. No, as they do not have the 95% shareholdings required to get the necessary consent.
B. Yes, as Drew is a single shareholder and therefore cannot object if there is near unanimous consent to short notice.
C. Yes, as they have consent from a majority in number of the shareholders who hold 90% of the shares.
D. Yes, as they have consent from a majority in number of the shareholders who hold 80% of the shares.
E. Yes, as they have consent from a majority in number of the shareholders and the overall shareholding consent percentage is a majority in total.
Answer: C. According to the unamended Model Articles, for a company to issue short notice for a general meeting, it must obtain the consent of a majority of shareholders who hold at least 90% of the total voting rights of the company. In this case, the directors have obtained consent from three out of the four shareholders, who together hold 90% of the total voting rights (600 + 200 + 100 = 900 shares, which is 90% of the total 1000 issued shares), and they are a majority. Therefore, the directors can issue short notice for the general meeting. Option A is incorrect because it refers to a 95% threshold, which is not applicable in this case. Option B is incorrect because a single shareholder can object to the short notice regardless of the number of other shareholders who agree to it. Option D is incorrect because it refers to an 80% threshold, which is also not applicable in this case. Option E is incorrect because it is too vague and does not specify the required threshold for consent.
You are acting for a bank that is negotiating a loan with a start-up company. The client wants to take a charge over the company’s IT equipment which is based at their offices. The company is arguing that they can only give a floating charge as they often use this IT equipment and do not want to be restrained in any way.
How would you best advise your client?
A. The client should take a floating charge. If they take a fixed charge, this could restrict the business too much, meaning it will not be able to pay its debts.
B. The client should take a floating charge as they will not be able to prove sufficient control over the IT equipment to prove a fixed charge.
C. The client should take a fixed charge over the IT equipment. The company does not need to deal with or sell the equipment like stock, so a floating charge is not needed. Also, a floating charge is low on the order of priority.
D. The client should take a fixed charge over the IT equipment. The company does not need to deal with or sell the equipment like stock, so a floating charge is not needed.
E. The client should take a fixed charge as that is high on the statutory order of priority meaning the client is likely to recoup their debt.
Answer: C. There are two elements here: 1) whether a floating or fixed charge should be used in relation to the asset, which is about control and practicalities, and 2) the statutory order of priority. Floating charges are only appropriate for assets a company needs to deal with and get rid of/sell, like stock or money in a bank. This is not the case here, so a fixed charge should be used. Why? Because it is higher on the order of priority. E does not deal with issue 2).
A very small IT start-up private limited company that is looking to expand. It is looking to involve experts in both business and IT to help the company grow but doesn’t have the cash to pay any expert or consultancy fees. It needs more cash to pay for a larger office space and more employees. It is looking to get more investment in the future once its product launches on the market. Its cash flow is small at the moment. However, the founder of the IT company wants to maintain control over the business and does not want the running of the business to be interfered with
What kind of finance should the company get?
A. A term loan.
B. Share issuances of ordinary shares only.
C. Share issuances of ordinary and preference shares.
D. A revolving credit facility.
E. An overdraft.
Answer: C. The facts show that this start-up has a real emphasis on future investment. Worth noting also that they will likely need expertise on board, which a shareholder can bring. Debt has a negative effect on the balance sheet, which could deter further money. Also, any debt must be paid back. The start-up has not launched their product, so won’t have money coming in to pay off debt. Preference shareholders do not get a vote, so this also allows the founder to have full control.
A law student is setting up a doughnut-making company as a side hustle to their law job. They have not yet incorporated the company, but are planning to do so in the next few weeks. They enter into a contract with a graphic design company to design their logo before the company is incorporated and registered on Companies House. The graphic design company invoices the law student, but by the time they do so, the company is set up.
Who has liability for the invoice and the logo contract?
A. The company that is now incorporated.
B. No one, it is invalid.
C. The company and the law student.
D. The law student.
E. The directors of the newly incorporated company.
Answer: D. Under the Companies Act 2006, a contract entered into by an individual before the company is set up bears personal liability for that contract. Therefore, the law student who signed the contract is personally liable, and cannot rely on limitations of liability if the logo designers were to enforce their contract.
The directors call a board meeting to vote on a payment being made to one of the directors who is retiring. The company uses Model Articles. The company is made up of four directors. One of them cannot make it. The other three attend the board meeting, one of whom is the director getting the pay-out. One of the directors (not the conflicted one) is appointed chair at the meeting.
Can the board meeting and resolution go ahead?
A. No, the company is not quorate.
B. No, there would not be a majority vote.
C. Yes, all directors are quorate and can vote.
D. No, the chair cannot make a casting-vote on a disagreement.
E. Yes, provided that the director receiving the pay declares their interest under section 177 of the Companies Act 2006 and doesn’t vote.
E. Under MA, a conflicted director cannot vote or be counted as part of the quorum. Under s177, a director must declare their interest in any transaction. There would actually be a majority (technically unanimous) consent at the board meeting. Remember: decisions only have to be majority at the board meeting; if you have three at the meeting, and one doesn’t count, then actually you have two. If both vote for the resolution, you have unanimous (and therefore majority) voting at the BM. If one of the directors doesn’t agree, the chair will get a casting vote under the Model Articles.
You are acting for a company that is negotiating a loan with a bank. The bank has asked to take a fixed charge over the company’s business company account, which it uses for day-to-day spending. They have also asked to take a floating charge over the company’s stock.
Which of the below statements offers the best advice to the client with respect to these proposed charges?
A. A fixed charge and a floating charge are standard security demands from a bank, so should be accepted.
B. Only the fixed charge is acceptable, as the client will want the flexibility to deal with the stock and will not want to ask the company for permission to do so.
C. Both the fixed charge and floating charge should be accepted, but in return the client should be able to demand a lower rate of interest.
D. Neither charges should be accepted as they allow the bank to take a level of control over the assets, especially with regards to the client’s bank account.
E. The fixed charge is unacceptable, as they will need to ask the bank for permission to use their money. Although the floating charge should be resisted, it is acceptable.
Answer: E. A fixed charge should only be used on assets that are themselves fixed – e.g., machinery, not assets that the company needs to move around or deal with often, as they will need the bank’s permission every time they do. A floating charge allows for exactly that: as stock will be moved around, this is acceptable.
The directors of a private limited company want to draw up and approve a service contract for one of their directors. The salary will be £27,000 per annum with standard director expenses included. The director’s appointment will be for an initial term of 7 months, and then either the company or the director can give 18 months’ notice to terminate. The company’s net asset value is £50,000. The company uses the Model Articles.
What do the directors need to do to enter into this contract under the Companies Act 2006?
A. Pass a board resolution.
B. A unanimous vote of the directors.
C. Pass a board resolution and a shareholders’ special resolution.
D. Pass a board resolution and shareholders’ ordinary resolution.
E. A shareholders’ written resolution.
Correct
Answer: D. When calculating the guaranteed term, look at the aggregate. The director has a 7-month term when the company can’t get rid of him. He then has an extra 18 months’ notice period where he can stay on. This totals 25 months of actually being a director, giving a guaranteed term of 2 years. This therefore requires an OR. Note: no need to make a s177 declaration for service contracts, but still can’t vote or be part of the quorum.
After many years working for a partnership, a partner is finally retiring. After retirement, the partner intends to have a consulting role, consulting businesses in the same industry that the partnership operates.
What steps should the partner take on retirement in respect of any debts incurred by the partnership?
A. Enter into a novation agreement with the existing partners; and send a “s36” notice to all existing creditors.
B. Send a “s36” notice to all existing creditors and publish a notice in the London Gazette.
C. Get an indemnity from the existing partners, use a novation agreement, get an indemnity from the other partners and publish a notice in the London Gazette.
D. Get an indemnity from the existing partners, use a novation agreement, and publish a notice in the London Gazette. Remove all references to him on the website and letterheads.
E. Get indemnity from the existing partners, enter into a novation agreement to remove him as a party to the debts, publish a notice in the London Gazette, send a “s36” notice to anyone that deals with the firm, and remove all references to him on the website and letterheads.
E The most comprehensive and correct answer. A partner who retires remains liable for all debts incurred before they retire, and all debts after, unless they take steps. That’s why they must get an indemnity from the partners to deal with any risk of liability for past and future debts, as well as take steps to give people notice that they are no longer a partner. Removing the name from the firm website etc. also reduces the risk of “holding out” after retirement.
You are advising an individual who is being offered to invest in a private limited company and be a director. This individual will only get a 9% stake in the company from their investment. The individual wants to know how they can protect their position within the company so that their investment and role as a director are as secure as possible.
How would you advise the individual?
A. In addition to the statutory protections and powers the individual will receive under the Companies Act 2006 as a result of their holding in the company and as a director, they should also negotiate for a service contract to get employment rights.
B. Because the protections under the Companies Act 2006 are limited, the individual should insist on a service contract with strong protections against removal as a director.
C. The individual will get a number of powers and protections under the Companies Act 2006, but as these are limited, they should negotiate a strong service contract and enter into a shareholders’ agreement to get protections under contract law, as well as weighted voted rights under the shareholders’ agreement.
D. The individual should ensure that they enter into a shareholders’ agreement and service agreement under which they can only be removed as a director by their own resignation and any attempts to remove them as a director or shareholder will therefore be a breach of contract.
E. The individual will get a number of powers and protections under the Companies Act 2006, but as these are limited, they should negotiate a strong service contract and enter into a shareholders’ agreement to get protections under contract law. They should also push to get weighted voted rights under the company’s articles of association.
Answer: E. There are statutory protections under the CA06 that the individual should be advised on: for example, protections against the removal of a director (special notice required, they can only be removed by OR and s169 rights). However, the director can also try and get protections under contract law (via the service contract and shareholders’ agreement) to protect their position and should push for Bushell rights under the articles of association (not the shareholders agreement).Z\ZZ\
A company wants to enter into a loan agreement with a bank. The company uses the Model Articles. The company has three directors, who are all based in different countries. Because of the various time differences, and the fact that they are in a rush to get this loan, they decide to send an email to each other stating that they approve the entry into the loan. One of the directors then signs the loan agreement (which is a contract) on behalf of the company.
Has the loan been validly entered into?
A. No, a board resolution is required.
B. No, the director has not validly executed the agreement.
C. No, a written resolution is required.
D. No, a shareholder resolution is required.
E. Yes, the directors have unanimously agreed to enter into the loan.
Answer: E. Under the Model Articles, instead of holding a board meeting to make a decision, the directors can unanimously communicate in writing (or by any other means) to each other that they agree to a decision – this can therefore be an email (as here) or phone call. Also, as the loan is a contract, it is fine for one director to sign; you do need to comply with the formalities of a deed.
A logistics company (private limited liability) has three directors. The three directors get on very well and believe they have all been doing a good job to get the company through the difficulties of the pandemic. However, a few of the shareholders are not happy and want one of the directors removed. They have sent a special notice to the board informing them they want to hold a general meeting to get the director removed and this was sent with a s303 notice. The directors do not want to remove one of their own and are refusing to call the general meeting. The company uses the Model Articles.
What should the directors do?
A. Propose a written resolution procedure.
B. Call a general meeting within 21 days from the receipt of the notice.
C. Call a general meeting within 14 days from the receipt of the notice.
D. The directors should wait until 21 days have passed and then not call the general meeting.
E. Call a board meeting to approve the removal of the director.
The directors have a choice to cooperate or not cooperate. Whatever they choose to do, after a s303 notice has been served the shareholders will be able to call the GM. Because the directors don’t want a director being removed, they should cooperate as this gives them more time: a total of 49 days from the date the s303 notice was sent (as opposed to a total of 37 days if the shareholders call the GM). They can use this time to try and persuade shareholders to back down
Call a general meeting within 21 days from the receipt of the notice.
Three friends want to set up a business together as a partnership. The business will be providing data analytics to insurance firms. They know that the business will need time and perseverance to get clients and start making a profit and that their brand will need reliability and continuity to succeed.
In relation to the duration of the partnership, what should be drafted in the partnership agreement?
A. There is no need to draft any duration clause as the Partnership Act 1890 has provisions that deal with this.
B. Partners cannot draft duration clauses as the sections of the Partnership Act 1890 that cover this cannot be excluded or limited in any way.
C. Express provisions setting out how the partnership should come to an end with the exclusion of the ability to dissolve at will.
D. Retain the partners’ ability to dissolve the partnership at will but allow for a minimum term until the partnership can be dissolved.
E. Adopt the provisions of the Partnership Act 1890 which state that a partnership can only end on 6 months’ notice by one of the partners.
Answer: C. Under PA 1890, any partner can dissolve a partnership at will by serving notice on the other parties. This is obviously unacceptable to the client as they need continuity. The answer is to draft express provisions really limiting how and when the partnership can be dissolved. Note that the partnership can also be dissolved at will by a partner leaving the partnership – so all dissolution clauses should be removed.
