M4: COMPANY LAW

Question 1

What are the main business structures?

Answer 1

• Sole trader
• General partnership
• Limited liability partnership
• Company

Question 2

What are the key features of a sole trader?

Answer 2

• Easy to set up, little paperwork
• Control of the business
• Flexibility and privacy

Question 3

What are the key features of a company?

Answer 3

• Separate legal personality
• Limited liability of members for the debts of the company
• Separation between ownership and control
• Ease with which a company can issue transferable shares to investors

Question 4

What is a company limited by guarantee?

Answer 4

A company limited by guarantee does not have shares.

Each of the company’s owners agree that if the company runs into financial difficulty, they will pay a certain sum of money to the creditors. By law, the members will owe no more than this guaranteed amount.

Question 4

What are the differences between public limited companies and private limited companies?

Answer 4

• PLC can offer shares to public. Private cannot
• Minimum two directors in a PLC. Only one required in a private.
• PLC have 6 months to file accounts. Private has 9 months,
• PLC must have an AGM. Private is not required.
• PLC must have a qualified company secretary. Private is not required to appoint one.
• PLC must have share capital not less than £50k.

Question 5

In what ways can agency be created?

Answer 5

Agency can be created through a binding legal arrangement with a third party.

Question 5

What is agency?

Answer 5

Agency is a relationship that exists when one person (the principal) instructs another person to act for them (the agent) in situations that will or could give rise to a binding legal arrangement with a third party.

Question 6

What is ‘agents’ authority’ and what are the differences between actual and apparent authority?

Answer 6

Agents authority is when agents have been instructed by the principal to act on their behalf.

An agent’s authority may be:
* Actual – express or implied
* Apparent – from behaviour of the principal

Question 7

What are the agent’s duties and liabilities?

Answer 7

Fiduciary duties:
* avoid conflicts of interest
* not profit from their position at the expense of the principal

General duties:
* keep the principal’s information confidential
* cannot delegate their own duties
* follow the reasonable instructions of the principal and exercise reasonable skill and care
* disclose material facts to the principal
* keep accounts

LIABILITIES:

Question 8

How does agency come to an end?

Answer 8

An agency relationship can end:
* by agreement of the agent and the principal
* by the terms of the contract if the task has been completed
* by frustration (where an unforeseen event makes performance of the contract impossible)

Question 8

What are the principal’s duties?

Answer 8

The duties of a principal to an agent include compensation and indemnification.

Question 9

What is the difference between a company’s owners and managers?

Answer 9

Owners are the shareholders of the company.

Managers can be shareholders but also can be just managing the day to day operations of the business, on behalf of the shareholders.

Question 10

What are the key duties of shareholders?

Answer 10

• Ensure that the directors do not go beyond the powers conferred upon them by the Companies Act 2006 and the company’s articles of association.
• Amending the articles of association
• Appointing or removing a director

Question 11

What are the key duties of directors?

Answer 11

• Act in good faith in the interest of the company not to make secret profits
• act within the company’s powers
• promote the success of the company for the benefit of its members (s172 duties)
• exercise independent judgement
• exercise reasonable skill and care
• avoid conflicts of interest
• not to accept benefits from third parties
• declare any interests in proposed transactions

Question 12

What happens if a director breaches their duties?

Answer 12

If a director breaches their duties towards their company, a claim can be brought against the director.

This claim will usually be brought by the company for the financial loss or damage suffered.

Question 13

What are the key duties of the company secretary?

Answer 13

• Ensuring the smooth administration of the company.

Question 13

What are the key duties of auditors?

Answer 13

• To obtain reasonable assurance about whether the financial statements are free from material misstatement.
• To issue an auditor’s report

Question 13

How do you incorporate a company?

Answer 13

Do the following documents and then wait to receive certificate of incorporation.

1. Memorandum of association - legal statement signed by initial shareholders to form the company
2. Articles of association - internal rule book on how the company is going to be run, governed and owned.
3. Statement of initial significant control – any individual who holds more than 25% of the
   shares
4. Statement of capital
5. Statement of compliance with requirements of CA2006.

Question 14

How are decisions within a company made?

Answer 14

Within annual general meetings or general meetings.

Question 15

What is the requirement for statutory books and registers?

(What must a company make available for inspection once incorporated?)

Answer 15

1. Register of members:
   - The name and address of each member
   - A statement of the shares each member holds distinguishing each share by its number and class (if applicable) and the amount paid (or agreed to be considered as paid)
   - The date of becoming a member and ceasing to be a member
2. Register of directors (and secretaries):
   - Names of present and former directors
   - A service address (which can be the company’s registered office)
   - Directors’ country of residence and nationality
   - Date of birth
3. Copies of charges:
   - Copies of fixed and/or floating charges, including any instruments varying or amending charges
4. Accounting records
5. Confirmation statement
6. Register of people with significant control

Question 15

What sources of long-term finance are available to companies?

Answer 15

• Share capital – where members subscribe for shares in the company
• Loan capital – debenture holders lending money to the company

Question 16

What is meant by the term ‘share capital’?

Answer 16

The nominal value of the shares which have been issued to new or existing shareholders of a company.

Question 17

What are the rules around payment for shares and maintaining capital?

Answer 17

Companies must maintain share capital and any money paid to shareholders must be paid out of profits available for distribution.

Question 18

What are the different classes of share and what are the features of each?

Answer 18

Ordinary shares
* right to attend and vote at general meetings
* right to a dividend where the directors declare a dividend
* right to participate in any surplus assets on a winding up of the company

Preference shares:
* no right to attend and vote at general meetings
* prior cumulative right to receive an annual fixed dividend
* prior right over ordinary shareholders to the return of capital on a winding up of the company

Redeemable shares:
* can be bought back by the company in the future at the option of the company or the shareholder

Question 19

What are the differences between a debenture holder and a shareholder?

Answer 19

- Debenture holder is a creditor of the company. A shareholder is a member of the company. - Debenture holds have no voting rights. Shareholders do. - Debenture holders get repaid in full before shareholders get anything. - Interest at agreed rate has to be paid even if there is no profits. i.e. take from share capital. Shareholder can only get money out of profits available for distribution.

Question 20

What is loan capital?

Answer 20

debenture holders lending money to the company

Question 21

What are the features of fixed and floating charges?

Answer 21

Fixed charge: - Attaches to a specific asset as soon as the charge is created. - When the asset is sold, the debt is repaid out of the proceeds or passed to the purchaser. - a fixed charge ranks first in a liquidation. If more than one fixed security, they will rank in order. - will usually take priority for payment over all subsequent charges. Floating charge: - over present and future assets. - only a company may grant a floating charge. - assets subject to a floating charge will change over time and only become fixed when the charge crystallises. - fixed charge will take priority for payment even where the floating charge was created before the fixed charge. - if there is a negative pledge clause - floating charge will take priority over any subsequent fixed charge

Question 21

How does a debenture holder recover their money?

Answer 21

* Sue the company for the debt and obtain a court order requiring payment * Apply to the court to have the company compulsorily wound up (owed more than £10,000 o/s for 21 days) * Apply to the court for an administration order

Question 22

How are valid charges created?

Answer 22

Created by registering that charge within 21 days of creation, otherwise they are put amongst the unsecured creditors. Thus that charge is void.

Question 23

What is the priority of charges?

Answer 23

Fixed over floating charges generally. Unless, there is a negative pledge clause and thus floating will take priority over any subsequent fixed charges.

Question 24

What is involved in winding up a solvent company?

Answer 24

Either striking off by directors or Members voluntary liquidation Striking off - There are three specific requirements to be met before a company can be struck off: - Ceasing business activities for three months prior to being struck off. - Keeping the company name unchanged for the three-month period before being struck off. - Remaining solvent – the directors will have to sign a statement of solvency. Before applying to strike off a company, the directors will need to: - Announce their plans to all interested parties, including shareholders, employees and creditors. - Follow employment legislation on redundancy and pay staff their final wages. - Ensure that all debts are repaid and share any remaining business assets among the shareholders. Members voluntary liquidation - - Requires the consent of 75% in value of the shareholders to agree and pass a special resolution. - Done by a licensed insolvency practitioner who will complete the winding up process and ensure the company cannot be reinstated - There is no risks that the directors may be held personally liable for any unpaid debts.

Question 24

How does a company come to an end?

Answer 24

20 years after its closure if a creditor makes a claim when the directors inform them of striking off Or When an insolvency practitioner completes the wind-up

Question 25

Why might a business get into financial difficulty and what happens when it does?

Answer 25

Difficulty if there is cashflow problems, poor management, lack of skills, Need to appoint an insolvency practitioner to settle all debts and return any remaining to shareholders.

Question 26

What is insolvency and what should a director do if a company is insolvent?

Answer 26

Insolvency is where a company owes more money than it actually has, this net liability on the SFP or Where a company is unable to pay its debts as they fall due. If insolvent directors should try to do the following: - Raising additional long-term debt finance. - Selling off assets which can then be leased back to the company. - Issuing shares. - Improving cashflow through working capital management by reducing the cash which is tied up in inventory, reducing the length of time it takes to recover money from trade receivables and where possible agreeing more favourable payment terms with trade payables.

Question 27

What is the purpose of insolvency law?

Answer 27

To produce the best possible outcome for those with an economic stake in the company

Question 28

What options are available to companies that are experiencing financial difficulties?

Answer 28

1. Liquidation 2. Administration 3. Company voluntary arrangement (CVA) 4. Scheme of arrangement 5. Restructuring plan

Question 29

What is the purpose of liquidation and how are assets distributed?

Answer 29

The purposes of liquidation procedures are as to: - Allow for an equitable and fair distribution of the assets among the creditors. - Remove companies that are insolvent from the market. - Allow for an investigation of the company’s affairs, particularly to scrutinise the behaviour of the directors and their professional advisers. Creditors are ranked as follows when assets are distributed: 1. Creditors who benefit from a fixed charge 2. The fees of the liquidator appointed to deal with the liquidation procedure 3. Creditors benefitting from a preferential status (for example, pension funds, employees) 4. HMRC with respect to certain taxes (for others it ranks as an unsecured creditor) 5. Creditors who benefit from a floating charge 6. Unsecured creditors: Creditors who do not have any security over any of the company’s assets (for example, suppliers or customers) 7. Shareholders

Question 30

What processes can be used to rescue a company?

Answer 30

1. Administration 2. Company voluntary arrangement (CVA) 3. Scheme of arrangement 4. Restructuring plan

Question 31

What is administration and what does this process involve?

Answer 31

Administration is when a company wants to be rescued and appoints a professional insolvency practitioner to take over day-to-day running to "Rescue the company as a going concern." Process involves the administrators having 8 weeks to prepare a plan for court approval to give company legal breathing space aka Moratorium. The administrations comes to an end either 12 months from date of order or when purpose of order has been achieved.

Question 32

What is a company voluntary arrangement and when would this be used?

Answer 32

CVA is where a company tries to convince its creditors to accept a part payment of its debts by using a professional supervisor who negotiates on the companies behalf. E.g. 50p in the £ on its debts with them. It involves minimal court involvement and less time. It would be used by either a solvent or insolvent company that is experiencing financial difficulties but can still pay its debts as they fall due.

Question 33

How well do you know the forms of business insolvency?

Answer 33

Where company is insolvent: - They want to be rescued their options are: Administration and CVA - Where they need to exit the marketplace: Liquidation Where the company is solvent: - Want to avoid insolvency their options are: CVA, Scheme of arrangement or restructuring plan.

Question 33

What is a restructuring plan and when would this be used?

Answer 33

A restructuring plan is a formal arrangement between a company and its creditors and/or its shareholders where the company is encountering or likely to encounter financial difficulties. It would be used when the court agrees that none of the creditors would be worse off under the plan than a relevant alternative and the business is viable to continue but not with its debts.

Question 34

What is a scheme of arrangement and when would this be used?

Answer 34

Scheme of arrangement is a court-supervised commercial deal between a company and its creditors or members (or any class thereof), whose debt claims against the company will be modified by virtue of the scheme. It would be used to restructure debts so that the company avoids insolvency altogether.

Question 35

What are the duties of directors during insolvency?

Answer 35

To minimise loss to creditors as when a company becomes insolvent, their primary duty of care is to the companies creditors. Before this point of insolvency, their duty of care is to shareholders.

Question 36

What are the threee causes of action for brining a derivative claim to court?M

Answer 36

1. Negligence 2. Breach of duties by a director 3. Breach of trust by a director

Question 37

What is the minimum and maximum period of disqualification for a director?

Answer 37

Min 2 years. Max 15 years.