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Business > Financing a business > Flashcards

Financing a business Flashcards

1
Q

A share in the company is a choice of?

A

action (contractual right).

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2
Q

A company can issue different classes of shares with?

A

different rights attached to them. (examples ordinary shares and preference shares).

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3
Q

Generally, shares will have the following rights attached to them:

A

*A right to a dividend, but only payable if the company has made profits and declared a dividend.
*A right to vote at the general meeting of the company.
*If the company is wound up a right to repayment of the shareholder’s investment
and a right to participate in any undistributed profit.
*Certain rights as a matter of the CA 2006, such as the right to remove directors and to appoint and remove auditors.

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4
Q

All shares have a nominal value AKA?

A

par value, but shares can be issued for more than the nominal value.

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5
Q

The true value of the share will fluctuate either?

A

upwards or downwards depending on the success of the company.

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6
Q

When new shares are created by the company, they are issued or allotted by?

A

the company to the individuals who have contracted to buy them.

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7
Q

A contract for the issue of shares may provide for?

A

payment in cash or for some other non-cash consideration.

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8
Q

If the full amount is paid at the time of allotment, the shares are said to be?

A

fully paid up.
If not, they are partly paid.

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9
Q

The outstanding amount can be asked for by?

A

the company making a call.

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10
Q

If the company goes into liquidation, the shareholder is obliged to?

A

contribute the outstanding unpaid amount to the company.

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11
Q

Shares can be issued at a premium, that is?

A

more than their nominal value.

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12
Q

Once shares are issued, they are said to form part of?

A

the capital of the company.

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13
Q

Distribution means?

A

the distribution of a company’s assets to its members (in cash or otherwise), except returns made out of capital.

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14
Q

The most common form of distribution is?

A

a dividend.

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15
Q

Other examples of distributions include?

A

gifts, transactions at an undervalue, surrender by a subsidiary to a parent of a tax loss, intra-group loans on favourable terms, waiver of loans, upstream guarantees, and assumptions of liability.

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16
Q

A company proposing to make a distribution must satisfy 2 rules in relation to its accounts:

A

It must have profits available to make the distribution (distributable profits or distributable reserves).
The distribution must be justified by reference to the relevant accounts.
Relevant accounts are always individual (not group accounts) and are the company’s most recent annual accounts.

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17
Q

Step one - check if any constitutional restrictions on allotment -
Private company under the CA 2006:

A

Check articles of association for restrictions.
There is no restriction in model articles.
If a restriction in articles, amend by SR.

File SR at CO HSE within 15 days.

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18
Q

Step 2 - check if directors have authority to allot shares -
One class of share:

A

*Private company doesn’t need shareholder authority to allot.
*Board resolution is sufficient, but if there is a restriction in the articles on directors, this can be removed by SR or by passing an OR under s.551 CA 2006 to give new authority to allot. Model articles do not contain such a restriction.

File SR at CO HSE within 15 days.
File s.551 OR at CO HSE within 15 days.

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19
Q

Step 2 - check if directors have authority to allot shares -
More than one class of share:

A

*PLCs and private companies with more than one class of share:
OR needed to grant new authority to allot shares unless they have authority to allot in their articles.
*OR must state maximum number of shares directors can allot, date on which authority will expire, and which must be no more than five years from the date of the OR.

File s.551 OR at CO HSE within 15 days.

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20
Q

Step three, check if any pre-emption rights apply -
Statutory pre-emption rights:

A

equity securities must be first offered in proportion to existing members on the same or more favourable terms.
They have minimum 14 days right of first refusal
Equity Securities means ordinary shares and the rights to subscribe/convert into ordinary shares

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21
Q

Step three, check if any pre-emption rights apply -
Statutory pre-emption rights:
Model articles?

A

do not vary or disapply statutory pre-emption rights.

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22
Q

Step three, check if any pre-emption rights apply -
Statutory pre-emption rights:
Cash?

A

If shares are issued for cash, statutory pre-emption rights apply but also check for special articles to see if statutory position changed.

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23
Q

Step three, check if any pre-emption rights apply -
Statutory pre-emption rights:
On-cash etc?

A

If shares are issued for non-cash consideration or are bonus shares or part of employee share scheme, statutory pre-emption rights do not apply.
But also check the special articles to see if statutory position changed.

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24
Q

Step three, check if any pre-emption rights apply -
Statutory pre-emption rights:
One class of share?

A

Pass SR to disapply pre-emption rights.

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25
Q

Step three, check if any pre-emption rights apply -
Statutory pre-emption rights:
Plcs and private companies with more than one class of share?

A

If shares issued under general authority to allot, pass SR to disapply pre-emption rights.

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26
Q

Step three, check if any pre-emption rights apply -
Statutory pre-emption rights:
If shares issued under specific allotment, pass SR, and?

A

include written approval from directors, purchase amount and justification of purchase.

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27
Q

Step three, check if any pre-emption rights apply -
Statutory pre-emption rights:
File SR at CO HSE within?

A

15 days
or alternatively ask existing members to waive their pre-emption rights avoiding need for SR.
Complete form SH01 (return of allotment and statement of capital) within one month. Amend register of members of company within two months.
Issue new share certificates within two months.

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28
Q

Procedure for payment of dividends in a private company -
Company:

A

Check profits are available for the purpose (accumulated realised profits less accumulated realised losses).
Check for special procedures in the articles.

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29
Q

Procedure for payment of dividends in a private company -
Directors:

A

Directors must decide on the model articles if a dividend should be declared.
They make a recommendation to the GM to pay dividend, including the amount by reference to the most relevant accounts.

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30
Q

Procedure for payment of dividends in a private company -
Members:

A

Members must pass OR to pay dividend as recommended by the directors.
Can’t pay themselves more than the recommended amount.

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31
Q

The maintenance of capital rule states?

A

that capital provided by shareholders must be maintained.

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32
Q

Paid up share capital must not be returned to?

A

shareholders as creditors rely on it for debts owed to them.

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33
Q

There are exceptions to the maintenance of capital rule, but only if?

A

the correct procedure is complied with.

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34
Q

A company may buy back its own shares out of profits/fresh issue of shares or?

A

capital (if no distributable profits available and additional conditions are met). This is known as a share buyback.

35
Q

Procedure for buyback of shares out of distributable profits -
Pre-BM:

A

Check shares are fully paid.
Prepare accounts to determine available profits.
Check articles do not prohibit buyback.

36
Q

Procedure for buyback of shares out of distributable profits -
1st BM:

A

Decide method to finance buyback.
Approve contract terms of buyback.
Call a GM or propose a WR.
Circulate contract to members.
If WR, circulate with WR.
If GM, display contract at registered office.

For GM contract must be displayed at registered office 15 days before GM.

37
Q

Procedure for buyback of shares out of distributable profits -
WR or GM:

A

WR - circulate WR to members with contract (this is an OR to authorise buyback contract)
GM – pass OR at meeting to authorise buyback contract.
WR and GM - holders of shares being bought cannot vote and their votes do not count.

Minutes and resolutions from meetings must be kept for 10 years.

38
Q

Procedure for buyback of shares out of distributable profits -
2nd BM (completion):

A

Board resolves to enter into buyback contract.
Board authorises director(s) to sign buyback contract.
Payment must be made at the time of buyback.

Buyback contract must be kept for 10 years at registered office.
File return of purchase of own shares (SH03) and cancellation of own shares (SH06) within 28 days at CO HSE.
Cancel shares.
Update register of members,
PSC register (if applicable).

39
Q

Procedure for buyback of shares from capital -
Pre-BM:

A

Check shares are fully paid.
Prepare accounts to determine available profits.
Check articles do not prohibit buyback.

Accounts must be prepared no more than three months before the directors prepare S0S.

40
Q

Procedure for buyback of shares from capital -
1st BM:

A

Decide method to finance buyback.
Approve contract terms of buyback.
Approve S0S that the company will remain solvent for one year after transaction and auditor’s report as SOS is not unreasonable.
Call a GM or propose a WR.
Circulate contract, SOS, auditors report to members.
If WR, circulate with WR.
If GM, display contract before at registered office and display contract, SOS, and auditor’s report at GM.
For GM contract must be displayed at registered office 15 days before GM.
SOS and auditor’s report must be signed no earlier than one week before GM or passing of WR.

41
Q

Procedure for buyback of shares from capital -
WR or GM:

A

WR - circulate WR to members with contract, SOS, and auditor’s report (OR to authorise buyback contract and SR to authorise payments out of capital)
or GM - pass OR at meeting to authorise buyback contract and SR to authorise payment out of capital.
WR and GM - holders of shares being bought, cannot vote and their votes do not count.

Minutes and resolutions from meetings must be kept for 10 years.
SOS, auditor’s report kept at registered office for five weeks from date of SR for inspection. File SOS, auditor’s report at CO HSE.
Notice in London Gazette, newspapers to creditors within one week of SR.
File SR within 15 days.

42
Q

Procedure for buyback of shares from capital -
2nd BM (completion):

A

Board resolves to enter into buyback contract.
Board authorises director(s) to sign buyback contract.
Payment out of capital must take place between five and seven weeks after SR passed.

Buyback contract must be kept for 10 years at registered office.
Creditors, dissenting members have up to five weeks to object from date of SR.
File within 28 days return of purchase of own shares (SH03) and cancellation of shares (SH06) at CO HSE.
Cancel shares.
Update register of members.
PSC register (if applicable).

43
Q

If a shareholder wishes to realise their investment, they must?

A

transfer (sell) their shares to another person.

44
Q

The procedure for buying existing shares in a company is called?

A

the transfer of shares.

45
Q

The transferee (for the purchaser) agrees to become a shareholder by?

A

submitting the share transfer (the contract for the sale of the shares) to the company and becomes a shareholder when his name is entered in the register of members.

46
Q

Share transmission is the transfer of shares by?

A

operation of law on death to the personal representatives or on bankruptcy to the trustee in bankruptcy.

47
Q

Procedure for transfer of shares -
Transferor:

A

Complete & sign STF.
Send STF and share certificate to transferee.

48
Q

Procedure for transfer of shares - Transferee:

A

Pay stamp duty on STF based on consideration paid.
Send duly stamped STF and share certificate to the company.

49
Q

Procedure for transfer of shares - Company:

A

Board meeting – pass BR to approve or reject transfer.
Directors have discretion under model article 26 to approve or reject transfer.
Registration if approved by Board, register transfer and issue new share certificate.

Update details of shareholders on the confirmation statement CS01 (annual).
Update register of members and issue new share certificates within two months.
Update PSC register (if applicable).

50
Q

Procedure for transmission of shares on death or bankruptcy of shareholder -
Shareholder:

A

On death - by operation of law (transmission of shares) to personal representatives of the member.
On bankruptcy - by operation of law (transmission of shares) to the trustee in bankruptcy.

51
Q

Procedure for transmission of shares on death or bankruptcy of shareholder -
Personal representative
Trustee in bankruptcy:

A

Do not automatically become members.
Can apply to have themselves registered as members or transferred to another person (subject to any restriction on transfer in the articles).
Entitled to dividends declared on any share, but not a right to vote until registered as members.

52
Q

Procedure for transmission of shares on death or bankruptcy of shareholder -
Company:

A

Board meeting - pass BR to approve or reject transfer.
Directors have discretion under model article 26 to approve or reject transfer.
Registration - if approved by board, register transfer and issue new share certificate.

Update details of shareholders on the confirmation statement (CS01) (annual).
Update register of members and issue new share certificate within two months.
Update PSC register (if applicable).

53
Q

Debt finance is where?

A

a company borrows money, usually in the form of a loan from a bank, to finance its everyday business activities or growth plans.

54
Q

The debt finance may be?

A

unsecured or secured on the assets of the company.

55
Q

A company will have the power to?

A

borrow money and grant security unless there is a limitation (e.g., a cap) or prohibition in its articles of association.

56
Q

If there is a limitation or prohibition, the articles should be amended by?

A

special resolution to remove the limitation/prohibition.

57
Q

The main types of borrowing facilities available to a company are:

A

overdraft facility
term loan
revolving credit facility

58
Q

Overdraft facility?

A

a form of bank facility that allows a company to overdraw on its bank account up to an agreed limit.
Funds may be repaid and reborrowed within the limit.
It is principally used to finance the day-to-day business expenditure or short-term financing needs of the company.
Overdraft facilities are known as uncommitted facilities as they may be withdrawn from the bank on demand (without notice or reason) as they are generally unsecured.

59
Q

Term loan?

A

A loan that is borrowed for a fixed period of time (a committed facility) at the end of which it must be repaid.
If the company defaults on the term loan’s conditions (non-payment of interest or capital), the bank will demand immediate repayment before the end of term or negotiate its conditions (additional fees and higher rate of interest).
Term loans are usually used to purchase capital assets, properties, or finance long term developments.
The term loan will generally be secured against the assets of the company.
Any money repaid by the company cannot be reborrowed.

60
Q

Revolving credit facility?

A

This is a hybrid between an overdraft facility and a term loan.
The revolving credit facility is structured like a term loan in that the bank commits to make the facility available up to the agreed limit for a longer term, but also has the flexibility of an overdraft, as the company can borrow and repay amounts during the life of the facility depending on its financing needs.
By repaying amounts when the facility is not required, the company can reduce the total amount of interest payable.
Revolving credit facilities are generally secured against the assets of the company, though a company with a very strong credit rating and market profile may be able to agree an unsecured revolving credit facility.

61
Q

A bank will generally ask for security from the company and?

A

support of the borrowing facilities they make available to the company.

62
Q

The taking of security increases the chances of re-payment as the company is aware that?

A

by defaulting on the terms of the loan, the bank will have recourse to the assets of the company, which the bank will have the right to sell to repay the loan and any outstanding fees, interest, and associated costs.

63
Q

The main types of security that a company will be asked for by a bank are:

A

Lien
Pledge
Charge
Fixed charge
Floating charge
Mortgage
Legal mortgage
Equitable mortgage
Mortgage over land
Legal title is not transferred but a charge is created over land by s87.
Equitable mortgages

64
Q

Lien?

A

the creditor has the right to retain possession of the asset, but not to sell it.

65
Q

Pledge?

A

Delivery of a tangible movable asset to a creditor and confers possession and the right to sell the asset.

66
Q

Charge?

A

gives security rights over an asset.

67
Q

Fixed charge?

A

rights, but not possession.
The company cannot sell, charge, or dispose of the asset while it is subject to the fixed charge.
This allows the company to continue to use the asset which can be necessary to its business until it defaults, at which point the creditor can take steps to sell the assets.

68
Q

Floating charge?

A

is a charge which floats over a class of assets.
This allows the company to sell the assets in the ordinary course of business (e.g., sell the stock) without the consent of the lender until a crystallisation event occurs,
(e.g., non-payment or insolvency) at which point the floating charge becomes a fixed charge and the asset cannot be disposed of without lender consent.

69
Q

Mortgage?

A

Legal title to the asset is transferred as security.

70
Q

Legal mortgage is where?

A

the title is transferred at the outset.

71
Q

Equitable Mortgage is where?

A

the title is transferred following an event of default.

72
Q

Mortgage over land?

A

Legal mortgage is created by s.87 LPA 1925 with the words charge by way of legal mortgage.

73
Q

Legal title is not transferred but?

A

a charge is created over the land by s.87.

74
Q

Equitable mortgage arises were:

A

Defective legal mortgage
Or informal mortgage.
Future property or equitable interest.

75
Q

Legal assignment by way of security:

A

a transfer of rights (e.g., under an insurance contract) by way of s.136 LPA 1925 but with a condition to reassign on repayment of the debt.

76
Q

In the event of a situation where there are competing security interests against the assets of the company.
The law provides for an order of priority between competing charge holders provided the charges are properly registered:

A

*Successive mortgages rank for priority in the order in they were created if they are registered.
*Successive fixed charges rank for priority in the order in which they were created if they are registered.
*Successive floating charges rank full priority in the order in which they were created if they are registered.
*A mortgage or fixed charge will have priority over earlier floating charge except where the charge holder had notice of a restriction granting security in the document creating the floating charge (negative pledge clause).
*Registration perfects security, it gives notice to the creditors.

77
Q

It is best practise to register a charge created by a company, since failure to register a charge renders?

A

the charge void against a liquidator or an administrator or the company’s other creditors and to protect the order of priority.

78
Q

The following should be delivered to Companies House within 21 days (counting from the day after the creation of the charge):

A

*Form MR01
*Certified copy of the charge document.
*The applicable fee.

79
Q

A certificate of registration will be issued by Companies House as evidence that?

A

the charge has been properly registered.

80
Q

If there is charge over land, the charging document should then be sent to?

A

HMLR for registration.

81
Q

A company must keep the following registers at its registered office for inspection:

A

Register of directors
Register of company secretaries (if any)
Register of directors residential addresses
Register of members
Register of persons with significant control
Register of Director’s interests
Register of charges.

82
Q

A company must keep the following records at its registered office for inspection:

A

*Minutes of directors’ meetings for 10 years.
*Copies of members’ resolutions passed otherwise then at general meetings (such as written resolutions) for 10 years.
*Copies of minutes from general meetings for 10 years.
*Details of decisions by a sole member for 10 years.
*A copy of every contract under which the company bought its own shares within the last 10 years.
*Copies of all directors’ service contracts for one year after the contract expires.

83
Q

A company must deliver (within 14 days after the end of each 12-month period) to Companies House, a confirmation statement (form CS01) confirming:

A

*Company’s main business activities.
*Directors
*Company secretaries (if any).
*Persons with significant control
*Issued share capital
*Details of shareholders.

84
Q

Regarding individual accounts, directors have a duty to:

A

*Prepare a balance sheet that gives a true and fair view of the state of affairs of the company as at the end of the financial year.
*Prepare a profit and loss account, giving a true and fair view of the profit or loss of the company for the financial year.
*Prepare a directors’ report for each financial year to accompany the accounts (including a business review).
*File within nine months from the end of the accounting reference period, the accounts and directors’ report for each financial year at Companies House (micro entities, small and medium sized companies may file abbreviated accounts).
*Appoint auditors to review the company accounts and prepare a report that in the auditor’s opinion the accounts have been properly prepared and give a true and fair view of the company.
*Ensure the auditor’s report is sent to every member of the company.
*A private company’s accounts consist of a balance sheet, profit and loss account, director’s report, and auditor’s reports.

Business (5 decks)

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