Company Law - Capital & Financing

Question 1

What is the definition of a share?

Answer 1

A share is a unit of ownership, where a shareholders buys a unit of a company

Question 2

Does a shareholder have voting rights?

Answer 2

Ordinary shareholders have voting rights, whereas preference shareholders don’t as they forfeit this to be higher in the hierarchy if the business fails.

Question 3

Who is a member of the company?

Answer 3

Shareholders

Question 4

What type of shareholder has fixed dividends and what type doesn’t?

Answer 4

Ordinary - fixed
Preference - not fixed

Question 5

What is the difference between original acquisition and derivative acquisition?

Answer 5

Original acquisition - when newly issued shares are bought

Derivative acquisition - when existing shares are bought from previous shareholders

Question 6

What can a company do when they need to raise capital?

Answer 6

Issue shares
Take Loans

Question 7

What is capital maintenance? (verbatim)

Answer 7

That capital once raised must be maintained intact for the benefit of the creditors and cannot be returned to the members, except where the safeguards for the protection of the creditors allow.

Question 8

What are the exceptions under CA 2006 s641 for which a company may reduce its share capital?

Answer 8

1. reduce or cancel liabilities on party-paid shares - ie, giving up claim of owning money
2. return capital excess of the company’s needs - ie, the company reduces its assets by repaying cash to the shareholders
3. cancel the paid up capital that isn’t represented by assets - ie, if company has debit balance on reserve, it can write it off by reducing capital

Question 9

What is the procedure for public companies to make exceptions on reducing share capital?

Answer 9

1. Pass a special resolution (75%)
2. Apply to court to confirm special resolution
3. Court must require company to settle a list of creditors entitles to object
4. Court can’t confirm unless everyones happy
5. Company must file documents to registrar

Question 10

What is the procedure for private companies to make exceptions on reducing share capital?

Answer 10

1. Pass a special resolution with solvency statement (where directors say they can meet their debts in a year)
2. A solvency statement made without reasonable grounds is an offence resulting in a fine and/or imprisonment
3. Documents filed to registrar

Question 11

Name 3 types of loan capital.

Answer 11

1. Permanent overdrafts in the bank
2. Unsecured loans from bank/other party
3. Loans secured on assets from bank/other party

Question 12

Is an investor in a company a shareholder?

Answer 12

No, they are a creditor.

Question 13

What is the company’s responsibility related to unsecured borrowing?

Answer 13

Where the company is under a personal obligation to repay. If it defaults, it can be sued in a civil action or it can be put into administration or liquidation.

Question 14

What is the company’s responsibility related to secured borrowing?

Answer 14

The company has granted rights to a lender in security over some of its property. If the company defaults in its repayments, in additional to the remedies for unsecured borrowing, the lender can enforce rights over the property to obtain repayment of the sum owed.

Question 15

What is a fixed security?

Answer 15

1. granted over specific and identifiable property
2. the debtor cannot sell the property without the lenders permission
3. if debtor fails to pay, lender can take possession and sell it for the amount of debt due
4. once loan is paid, property is handed to debtor

Question 16

What is a floating security?

Answer 16

1. not fixed on particular assets
2. it ‘floats’ so the debtor can buy and sell assets in the course of trade

Question 17

When can floating securities become fixed?

Answer 17

1. Appointment of a receiver by a floating charge creditor
2. The commencement of the winding up of a company
3. Appointment of an administrator

Question 18

What are the advantages of a floating charge?

Answer 18

1. The company can deal freely with the assets
2. a wider class of assets can be charged

Question 19

What are the disadvantages of a floating charge?

Answer 19

1. the value of the security is uncertain until it crystallises
2. it has a lower priority in order of repayment
3. it may be challenged by a liquidator