Finance

Question 1

How do Companies raise finance?

Answer 1

1. Debt – loans or debt securities such as bonds
2. Equity – ownership interests or shares

Question 2

What is the process for raising finance when forming a company?

Answer 2

Subscribers agree to buy a certain number of shares, the board of directors will allot the agreed shares to the subscribers and receive payment for the shares.
The money received becomes the company’s share capital which cannot be returned to the shareholders.

Question 3

What are the general conditions for allotting additional shares?

Answer 3

Generally directors have this power if only one class of shares and no restriction in the articles (model articles doesn’t have this restriction).

Question 4

What are the conditions for allotting additional shares if more than one class of shares or there is a restriction in the articles?

Answer 4

The directors will need permission from the existing shareholders through an ordinary resolution.

Question 5

What is the pre-emption right?

Answer 5

When a company proposes to issue additional shares in exchange for cash unless the articles provide otherwise (model articles don’t) the shares must first be offered to the existing shareholders

Question 6

What is the purpose of the pre-emption right?

Answer 6

Existing shareholders can maintain their proportional share of ownership and voting strength.

Question 7

What are the conditions of the pre-emption right?

Answer 7

• Shares must be offered on same terms as would in the open market
• Existing shareholders must be given at least 14 days to accept
• Doesn’t apply for shares issued for non-cash consideration
• Pre-emption right may be disapplied by special resolution

Question 8

What is the transfer of shares?

Answer 8

Shareholder selling shares to a third party

Question 9

How is the right to transfer shares governed?

Answer 9

Is governed by the companies articles

Question 10

How is the right to transfer shares governed under the Model Articles for private companies?

Answer 10

The directors have an absolute power to refuse to allow a transfer of shares.

Question 11

Who decides how much money to borrow on behalf of the company?

Answer 11

Model Articles gives the directors the power to decide

Question 12

What is an unsecured loan?

Answer 12

A promise (contract) to repay the money borrowed.

Question 13

What is a secured loan?

Answer 13

A promise to repay a loan with the right of the lender to take collateral (property) specified in the load if it is not repaid.

Question 14

Types of secured loans?

Answer 14

• Mortgage
• Fixed charge
• Floating charge

Question 15

What is a mortgage?

Answer 15

Type of secured loan for high value assets the title is transferred to the lender who has the right to take possession if there is a default

Question 16

What is a fixed charge?

Answer 16

Type of secured loan – loan secured by an interest in an asset the company will hold for a long time eg. machinery or shares, allows the charge holder to sell the asset if company defaults on the loan

Question 17

What is a floating charge

Answer 17

Type of secured loan – loan secured by an interest in a group of assets that change regularly eg inventory, this crystallises in the assets on hand if the company defaults on the secured loan

Question 18

What must be registered at Companies House within 21 days of their creation?

Answer 18

Charges and mortgages against company assets

Question 19

What is the order of priority for types of security?

Answer 19

Fixed charges take priority in date order of their creation, followed by floating charges also in date order of their creation.

Question 20

What is a debt security?

Answer 20

A document which evidences that a loan was made to a company, this may be traded and is not secured.

Question 21

How are profits and gains distributed?

Answer 21

Via dividends to its shareholders. Dividends can only be paid from profits available for this purpose.

Question 22

How do classes of shares impact profits?

Answer 22

Different classes of shares can have varying rights to dividends for example preference shares have a right to be paid the stated preference before dividends can be paid to common shareholders.

Question 23

Who decides the amount of profits distributed?

Answer 23

Directors will decide if there are profits available for dividends and will recommend a dividend for approval by the shareholders. This is under an ordinary resolution. Shareholders may approve a smaller dividend than recommended but not a larger one.

Question 24

When are dividends unlawful?

Answer 24

If paid out of funds other than profits available for the purpose. A shareholder who has reason to know it is unlawful is liable to repay it.

Question 25

Which companies must prepare accounts?

Answer 25

All companies

Question 26

Which companies must hire auditors to prepare accounts?

Answer 26

Large companies (annual turnover greater than £10 million and more than 50 employees)