Financing a business, financial records and accounting requirements

Question 1

The directors of a private company, with unamended model articles of association, will always be able to authorise the issue of shares without recourse to the members. True or false?

Answer 1

False, authority is required by ordinary resolution. Authority not needed if class of shares is the same.

Question 2

What is pre-emption in the context of share issue?

Answer 2

The right for existing shareholders to have a right of first refusal on the issue of new shares. They must first be offered to existing shareholders on the same or more favourable terms.

Question 3

A fixed charge will usually have priority over a floating charge, and only companies and LLP’s may grant floating charges. True or false?

Answer 3

True

Question 4

A charge against a company’s assets must always be registered at companies house. True or false?

Answer 4

False, registration is optional, but failure to do so has serious consequences.

Question 5

What is a profit and loss account and a balance sheet?

Answer 5

Profit and loss shows the profit or loss a business has made over a period of time. A balance sheet shows the worth of a business at a time.

Question 6

What is equity finance?

Answer 6

The issue of new shares in exchange for consideration. It usually generates money/assets for a company.

Question 7

What is debt finance?

Answer 7

Borrowing money in order to finance a business.

Question 8

When issuing new shares via Ordinary Resolution, does this need to be filed at companies house?

Answer 8

Yes

Question 9

What is a share transfer?

Answer 9

Simply transferring shares to another person. No new money or assets are generated.

Question 10

What is share transmission?

Answer 10

Transfer of shares by operation of law on death, or a trustee in bankrupcy.

Question 11

What is a dividend?

Answer 11

A payment a company makes to its members, which provides them with a return on their financial investment.

Question 12

Can dividends be paid when a company makes a loss?

Answer 12

A dividend can only be paid out of profits. However, if profits exceed losses in recent years, even if this year it has made a loss, dividends can still be paid.

Question 13

What is buyback of shares?

Answer 13

When a company buys back its own shares, and they are then cancelled

Question 14

What is capital maintenance?

Answer 14

Capital provided by shareholders must be maintained and must not be returned to them, as creditors rely on it.

Question 15

Can a company borrow and grant securities?

Answer 15

Yes, unless articles say otherwise

Question 16

What is a revolving credit facility?

Answer 16

A hybrid between a loan and an overdraft. A business can borrow up to a certain amount and repay and re-borrow, when needed.

Question 17

What is security?

Answer 17

Security for a loan, collateral.

Question 18

What is a fixed charge?

Answer 18

A charge taken over a particular asset. Consent of the lender is required in order to deal with the asset.

Question 19

What is a floating charge?

Answer 19

A charge taken over a particular class of assets and can only be granted by a company or LLP.

Question 20

What is crystallisation?

Answer 20

When a floating charge fixes on the assets. Occurs when a company becomes insolvent.

Question 21

Can a company sell an asset with a floating charge?

Answer 21

Yes

Question 22

What is a debenture?

Answer 22

A document which includes security in the form of a floating charge. Sometimes both fixed and floating charges. Can only be granted by a company or LLP.

Question 23

When will a floating charge take priority over a fixed charge?

Answer 23

When the floating charge contains a negative pledge clause.

Question 24

What is a negative pledge clause?

Answer 24

A clause prohibiting the creation or later fixed charges without permission

Question 25

Consequences of failure to register a charge at companies house?

Answer 25

It will be void.

Question 26

What does drawings mean in the context of business accounts

Answer 26

Money withdrawn by the business.

Question 27

What are prepayments in the context of business accounts?

Answer 27

Payments that a business has made in advance, on account of a service or something that will not be used until the next financial year. These are deducted as an expense in the profit and loss account and included as a current asset in the balance sheet.

Question 28

Five years ago, a company created a floating charge over its entire undertaking in favour of a bank. Three years later, the company
completed a debenture in favour of a lender, which created a floating charge over all of its assets. The lender was aware of the prior
charge, but it was not registered at Companies House. Both charges were duly executed by the parties and the lender’s charge was
registered at Companies House. The company is now in insolvent liquidation.

Which of the following best describes the position?

A. The lender’s charge takes priority as the bank’s charge is void against the liquidator and the lender.

B. The lender’s charge takes priority as the bank’s charge is void against the liquidator.

C. The bank’s charge takes priority, because the lender had actual notice of the prior charge.

D. The bank’s charge takes priority, because the date of creation determines the order of priority.

E. The bank’s charge takes priority, because the date of creation determines the order of priority and registration is voluntary.

Answer 28

A. The lender’s charge takes priority as the bank’s charge is void against the liquidator and the lender.

Question 29

A company has a fixed charge over its freehold premises and a floating charge over its stock. Both charges were duly executed and
registered and the fixed charge was granted first. The company is not in breach of either charge and is solvent.

Which of the following best describes the position as to dealing with the assets?

A. The company may sell the freehold premises and stock without recourse to the lender(s).

B. The company may sell the freehold premises but will need the bank’s consent. It may sell the stock when the floating charge has
crystallised.

C. The company may sell the freehold premises but will need the bank’s consent. It may sell the stock without recourse to the bank.

D. The company may sell the freehold premises but the bank will need to be added as a party to the sale. It may sell the stock when
the floating charge has crystallised.

E. The company may sell the freehold premises but will need the bank’s consent. It may sell the stock without recourse to the bank
unless and until crystallisation occurs.

Answer 29

E. The company may sell the freehold premises but will need the bank’s consent. It may sell the stock without recourse to the bank
unless and until crystallisation occurs.

Question 30

A private limited company, formed in December 2010, with model articles of association and 100k ordinary shares, wishes to issue 50k
new ordinary shares for cash. All of the shareholders are directors. Since incorporation, there have been no resolutions authorising the
issue of shares.

Which of the following best describes the position?

A. The board can issue the shares without recourse to the members.

B. The members can issue the shares without reference to the board.

C. An ordinary resolution will be required to authorise the issue of shares and a special resolution will be required to disapply the
statutory pre-emption rights.

D. An ordinary resolution will not be required to authorise the issue of shares, but a special resolution will be required to disapply the
statutory pre-emption rights.

E. An ordinary resolution will not be required to authorise the issue of shares and a special resolution will not be required to disapply
the statutory pre-emption rights.

Answer 30

D. An ordinary resolution will not be required to authorise the issue of shares, but a special resolution will be required to disapply the
statutory pre-emption rights.

Question 31

A private limited company with unamended model articles of association wishes to authorise the purchase of some of its own shares for
the sum of £50k. Distributable profits are £200k and net assets are £1m.

Which of the following best describes the position?

A. A special resolution will be required to authorise the purchase out of capital.

B. The company may choose to purchase the shares out of profits, by way of ordinary resolution, or to purchase them out of capital, for
which a special resolution will be required.

C. The company may only purchase the shares out of profits and an ordinary resolution will be required.

D. The company may only purchase the shares out of profits and a special resolution will be required.

E. An ordinary resolution will be required to authorise the purchase out of profits.

Answer 31

C. The company may only purchase the shares out of profits and an ordinary resolution will be required.

Question 32

A business has fixed assets of £200k, current assets of £40k, current liabilities of £20k and long-term liabilities of £100k.

Which of the following best describes the position?

A. Net assets are £20k and net current assets are £120k.

B. Net assets are £120k and net current assets are £20k.

C. Net assets are £100k and net current assets are £20k.

D. Net assets are £20k and net current assets are £100k.

E. Net assets are £300k and net current assets are £60k.

Answer 32

B. Net assets are £120k and net current assets are £20k.