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Orgs Flashcards

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1
Q

What is the difference between an incorporated and unincorporated business?

A 
Incorporated = separate legal entity
Unincorporated = no separate legal entity
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2
Q

Is a sole trader a separate legal personality?

A

NO, the sole trader owns the assets personally

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3
Q

What liability does a sole trader have?

A

Unlimited liability

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4
Q

Who receives the profits for a sole trader?

A

Only the sole trader

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5
Q

Who makes the decisions (sole trader)?

A

Only the sole trader

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6
Q

What are the administrative burdens (sole trader)?

A

Very little

Tax and employment regimeds

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7
Q

What is the flexibility of the structure (sole trader)?

A

There is no set structure so very flexible

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8
Q

What transparency is needed (sole trader)?

A

Do not have to publish accounts or file documentation with Companies House

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9
Q

What is a Partnership?

A

This is when two or more people run and own a business together

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10
Q

What are the two rules of a Partnership?

A
  1. Partnership is when two or more people

2. Carry a business with a common view for profit

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11
Q

Is a Partnership a separate legal entity?

A

NO, partners own the assets

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12
Q

What is the liability for a Partnership?

A

Joint and severally liable

All can be sued for all liabilities

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13
Q

How are profits shared in a Partnership?

A

Equally, unless agreed otherwise

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14
Q

How are decisions made in a Partnership?

A

Equal votes in decision making, unless agreed otherwise

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15
Q

What is the administrative burden (Partnership)?

A

Very little

Need to comply with tax or employment regimes

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16
Q

What is the flexibility of structure (Partnership)?

A

The Partnership Act imposes a structure only if there is no agreement to the contrary

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17
Q

What is the transparency needed (Partnership)?

A

Do not have to punish accounts or file documentation with Companies House

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18
Q

Is an LLP a separate legal entity?

A

YES

LLP owns the assets

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19
Q

What is the liability of partners in an LLP?

A

Limited liability

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20
Q

How are profits shared in an LLP?

A

Shared equally, unless otherwise agreed

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21
Q

How are decisions made in an LLP?

A

Equal votes in decisions

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22
Q

What is the administrative burden for an LLP?

A

Greater than a Partnership as there are registration and on-going filing requirements

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23
Q

What structure must there be for an LLP?

A

The Partnership Act imposes a set structure only if there is no agreement to the contrary

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24
Q

What transparency is needed for administrative tasks?

A

Accounts and details of members need to be filed and go on a public register at Companies House

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25
Q

Is a company a separate legal entity?

A

YES

Company owns the assets in its own rights

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26
Q

What is the liability for members?

A

Shareholders - protected by limited liability

Directors by company being separate legal entity

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27
Q

How are the profits shared in a company?

A

Shareholders paid dividends

Directors paid a wage

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28
Q

Who is involved in decision making?

A

Day to day decisions = directors

Major decisions = shareholders

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29
Q

What is the administrative burden for a company?

A

Highly regulated

Leading to registration and on-going filing requirements

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30
Q

What is the structure of a company?

A

Reasonably rigid, regulated by statute

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31
Q

What transparency must there be for a company?

A

High levels of transparency

Must file details of directors, shareholders and major decisions

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32
Q

What are the advantages of a company?

A
  1. Separate legal entity so limited liability

2. Therefore can take more risks

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33
Q

What was established in Solomon v Solomon?

A

A company is a separate legal person from those who owns the shares and run the company

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34
Q

What was established in Prest v Petrodel?

A

The corporate veil can be pierced when a person under an existing legal obligation or liability is subject to an existing legal restriction, which he deliberately evades

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35
Q

What must a public company have?

A
  1. Constitution which states it is a public company
  2. Plc in the name
  3. £50,000 in share capital
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36
Q

Why would you operate as a public company?

A
  • They are more prestigious
  • They can raise money by offering shares to the public
  • They can be part of the stock market
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37
Q

What are the two things needed for a Partnership?

A

s1 PA 1890

  1. Two ore more persons
  2. Carrying on a business in common with a view for profit
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38
Q

What are certain rules which help to determine the existence of a Partnership?

A
  • Sharing gross profit
  • Decision making
  • Names of title deeds of the property
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39
Q

What is the Partnership Act 1890?

A

This provides a default contract which governs the relationship between partners

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40
Q

Can the PA 1890 be override?

A

s1 and s2 CANNOT

Anything else

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41
Q

What are the advantages of a partnership?

A
  1. Companies are heavily regulated by the CA 2006, whereas Partnerships are not
  2. Partners DO have unlimited liability
  3. Lack of formalities means more time on trading
  4. Tax advantages
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42
Q

What are stipulations of the name of a GP?

A

Any name as long as

  • Does not include LLP/PLC
  • Be offensive
  • Same as an existing trademark
  • Sensitive word
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43
Q

What place and nature of business for a GP?

A

Anywhere, set out place of business and area of geographical operation

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44
Q

When will commencement begin?

A

When the definition is satisfied from s1

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45
Q

What would a fixed term be?

A

Clear date when the Partnership will end

However, if continue as if nothing has changed, will assume they will be on the same terms

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46
Q

What does the PA 1890 say about working hours?

A

Not required to take part in the management of the business

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47
Q

What should be included in a partnership agreement about work input?

A
  • Working hours
  • Full time/part time
  • Whether they can work separate jobs
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48
Q

What does the PA 1890 say about roles?

A

Undefined

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49
Q

What would you include in a Partnership Agreement on roles?

A

Will set out each partner’s role

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50
Q

What does the PA 1890 say about decision making?

A

All decision making should be made by a majority except
1. Changing the nature of the business
2. Introducing a new partner
3. Changing the terms of the partnership agreement
All of these must be UNANIMOUS

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51
Q

What could be set out in the partnership agreement regarding decision making?

A

If any further decisions need to be unanimous

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52
Q

What should partnership agreement say about financial contributions?

A

The initial contribution and whether any contributions are obliged in the future

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53
Q

What is set out in PA1890 regarding profit and losses?

A

ALL SHARED EQUALLY

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54
Q

What should be said in partnership agreement regarding profits and losses?

A

Profits - different if more capital contribution or more hours worked

Losses

  • Salaries still awarded?
  • Will be shared equally?
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55
Q

What is said in PA1890 about salaries?

A

Partners are not employees so do not receive salaries

Anything they take out is known as a drawing

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56
Q

What is said in PA1890 about ownership of assets?

A

Undefined

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57
Q

What should the Partnership Agreement say about ownership of assets?

A

Set out how they are owned

If partner were to leave who would keep the asset

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58
Q

What is said in PA1890 about expulsion?

A

No majority of partners may expel another

Must be ALL including the one being removed

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59
Q

What should be included in a partnership agreement?

A

A clause where if a partner has acted in a certain way, they will be expelled

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60
Q

What is included in the PA1890 about dissolution?

A

There is no requirement for notice to be given regarding dissolution

Therefore a partner can end the partnership with immediate effect by merely saying to the other partners that they wish the partnership to end

This is impractical

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61
Q

How can the partnership agreement prevent this?

A

Notice period for ending the partnership

Not in first year of trading, allowing themselves to become established

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62
Q

When may a partnership dissolve?

A
  • A partner retires
  • On expiry of a fixed term
  • By the death or bankruptcy of partners
  • If the partners give notice of dissolution to a partner
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63
Q

What is the effect of dissolution?

A

The partnership ends, all assets are sold and the outgoing partner must receive their share

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64
Q

What could a partnership agreement state about dissolution?

A

Partial dissolution - when partner leaves, the remaining partners continue partnership

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65
Q

What happens to outgoing partners shares?

A

Entitled to either interest at a rate of 5% per annum or share of profits

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66
Q

How are the proceeds of the sale distributed?

A
  1. Creditors
  2. Partners who have lent money
  3. Partners share of the partnership capital
  4. Surplus shared between the partners
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67
Q

What can be put in place in a partnership agreement regarding restraint of trade?

A

Seeks to restrict outgoing partners in their business dealings after they leave
This can protect
- Business contracts
- Confidential information

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68
Q

What makes a reasonable restriction on trade?

A
  • Protecting interest
  • Duration
  • Geographical area
  • Scope
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69
Q

What can be included regarding dispute resolution?

A

Must first go to arbitration rather than courts

Quicker and cheaper

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70
Q

What is actual authority?

A

Any firm is bound by any contract or deed entered in to by partners in the firms name, provided that the actions were authorised

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71
Q

What is express actual authority?

A

The partners may have expressly given one of the partners permission to enter in to a transaction

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72
Q

What is implied actual authority ?

A

Partners have impliedly accepted that one or more partners have authority to represent the firm in a particular type of transaction

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73
Q

What is apparent authority?

A

Firm may be liable for actions that are not authorised but may have appeared to an outside as authorised

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74
Q

What types of transactions would come under apparent authority?

A
  1. Related to business carried on by the firm
  2. Partner would usually act for this
  3. Other party did not know there was no authority
  4. Deals with a person they think is a partner
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75
Q

How can a partner escape liability?

A
  1. Insurance
  2. Novation agreement
  3. After leaving the partnership
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76
Q

What is a novation agreement?

A

A retiring partner can enter in to an agreement with a creditor/new partner to release them from existing liability

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77
Q

Why would a new partner agree to a novation agreement?

A

It would come as part of a generous joining package

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78
Q

How does a partner escape liability for debts after they have left the partnership?

A

s36

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79
Q

What is s36?

A

Anyone who has dealt with the firm before must be given ACTUAL NOTICE of the partner in question leaving

Anyone who has not dealt with the firm before must be notified of the partners retirement through
- Notice in London Gazette

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80
Q

What is holding out?

A

This is where a creditor of a partnership has relied on a representation of a particular partner when entering in to a contract

In this case they will be liable, even if the person had never been a partner

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81
Q

Who can be sued in a partnership?

A
  1. Partner with whom they made the contract
  2. Anyone who is a partner
  3. The firm
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82
Q

What if the partner cannot pay?

A
  • Obtaining a charge over the partner’s property or properties
  • Order of sale of these properties
  • May seize these assets
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83
Q

What are the advantages to the LLP?

A
  • Limited liability
  • Able to grant fixed and floating charges
  • Leeway with regard to management structure
  • Appoint an administrator
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84
Q

What are the disadvantages to the LLP?

A
  • Administrative and accounting requirements: must file accounts with the Registrar of Companies and must file other information
  • Public inspection of these documents
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85
Q

What is needed in a name of an LLP?

A 
Must end in LLP
Must not
- Be offensive
- Same as existing trade mark
- Contain a sensitive word
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86
Q

How do you incorporate an LLP?

A

LL IN01 at the Companies House, along with the applicable fee

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87
Q

How many members must an LLP have?

A

Must have two members on incorporation

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88
Q

What must the members do?

A
  • Sign and file accounts with registrar
  • Appoint auditors
  • File the annual confirmation statement
  • Send notices to the Registrar of Companies
  • Winding up the LLP
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89
Q

What are the duties and responsibilities of members (LLP 2001)?

A
  • Duty to act in good faith
  • Fiduciary duty
  • Duty to account for any money received on its behalf
  • Duty to members to render true accounts
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90
Q

What is the authority of members of an LLP?

A

They are all agents - actual authority

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91
Q

How are profits and losses shared?

A
  • Profits shared equally

- Losses limited liability

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92
Q

What about management of an LLP?

A

Every member may take part but don’t have to

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93
Q

What about decision making?

A 
Same as GP
All majority apart from
- Nature of business
- New partner
- Terms of the partnership
ALL UNANIMOUS
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94
Q

Leaving the LLP?

A

Same as GP

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95
Q

How do you incorporate a company?

A
  • Form IN01 to Companies House
  • Memorandum of association
  • Company’s articles of association
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96
Q

How do you make the application?

A

Online or by post

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97
Q

What must be at the end of a company name?

A

Limited or Ltd

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98
Q

What are restrictions on similarity of existing names?

A

Cannot be same as current company name

This includes identical things such as £ = pound

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99
Q

What are restrictions on prohibited names?

A

Criminal, offensive

Must not be sensitive words (eg British, University, dental)

Must not be more than 160 characters

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100
Q

What is a trading name?

A

This is a name that is different from their registered name?

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101
Q

What is passing off?

A

Where a company uses an association with an existing company to benefit from its good reputation

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102
Q

What are stipulations on the registered office?

A
  • Need office and address
  • Public
  • Where records must be kept
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103
Q

How many directors needed per company?

A

1

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104
Q

Do director’s residential and service addresses need to be public?

A

Residential NO

Service YES

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105
Q

Can a director prevent their addresses being public?

A

YES to court

There must be a risk of intimidation or violence

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106
Q

What is a company secretary?

A

Don’t have to
But will do all filing work etc
Addresses must be public

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107
Q

What details need to be available for the first shareholders?

A

They are called subscribers

They must have their name, addresses and details of their shareholding’s

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108
Q

What is a statement of capital?

A

The number of each shares and their nominal value

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109
Q

What information must there be regarding the shares?

A
  • What share of dividends they will receive
  • Whether they can exchange their shares for money
  • Whether they can vote on certain company matters
  • How many votes their shares entitle them to
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110
Q

What is someone with significant control?

A
  1. Holds more than 25% of shares
  2. Holds more than 25% voting rights
  3. Holds the right to appoint or remove a majority of the boards directors
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111
Q

What are the categories for a person of significant control?

A
  1. Holds more than 25% but no more than 50%
  2. More than 50% less than 75%
  3. More than 75%
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112
Q

What is a company’s constitution?

A
  • Memorandum of association
  • Articles of association
  • Certificate of incorporation
  • Current statement of capital
  • Shareholder’s agreements
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113
Q

How are members and company bound to each other?

A
  1. Members to company
  2. Company to members
  3. Members to other members
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114
Q

Explain how members are bound to company?

A

As company is bound by members, they can enforce their rights

Wood v Odessa Waterworks: directors refused to pay dividends. Wood achieved injunction

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115
Q

Explain how company is bound to its members?

A

As the members are bound to the company, the company can enforce its rights against the members.

Hickman v Kent: where a member has breached the statutory contract, the company itself must bring an action

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116
Q

Explain how members are bound to each other?

A

Members between them can bring action against another to enforce their personal rights [Rayfield v Hands]

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117
Q

What are the set articles?

A

Articles of Association

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118
Q

What were the set articles pre-2008?

A

Table A articles

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119
Q

What is needed to amend the articles?

A

Majority of 75%

Special resolution

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120
Q

How does a private company convert to a public company?

A
  • Must pass special resolution approving re-registration of company as a public company
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121
Q

What is a shelf company?

A

This is a company ready to go at very short notice

They will already be set up with two directors and two shareholders, each of whom owns one ordinary share

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122
Q

What are key differences between private and public company not yet discussed?

A
  • Company secretary NEEDED in public
  • Must hold AGM public
  • Cannot use written resolution procedure in public
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123
Q

How can a new shareholder be assigned?

A
  1. Obtain shares from existing shareholder
  2. Receiving some of the shares of an existing shareholder as a gift
  3. Receiving shares by way of transmission
  4. Company allotting new shares
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124
Q

What about registration of members?

A
  • Must keep a register of members
  • Central register at Companies House or not
  • Must be done within 2 months
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125
Q

What is the PSC register?

A

Persons of Significant Control

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126
Q

What is important about it?

A

Anyone over 25% voting rights or shares

Even if no one, this can still be important information

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127
Q

What are the two types of share?

A

Ordinary

Preference

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128
Q

What are ordinary shares?

A

They give the right to attend and vote and general meetings

They can receive dividends if they are delcared

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129
Q

What are preference shares?

A

Received enhanced rights, usually for people more concerned about financial returns

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130
Q

What is a cumulative preference shareholder?

A

The preference shareholders have to be paid any missed dividends from previous financial years, as well as current financial year’s dividend

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131
Q

What is a non-cumulative preference shareholder?

A

If a dividend is not paid in a particular year, the shareholder loses the right to that year’s dividend

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132
Q

What is unfair prejudice?

A

Any shareholder can apply to the court for an order or remedy when. they feel they have been unfairly prejudiced

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133
Q

How does the court assess unfair prejudice petitions?

A

It must cause harm to one or more shareholders and it must also be unfair

Objective test

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134
Q

What are remedies for unfair prejudice petition?

A
  • Other shareholders must buy the shares of the unfairly prejudiced shareholder
  • An order of the company to buy back the shares
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135
Q

What is a derivative claim?

A

This is a claim instigated by a shareholder for a wrong done to company which has arisen from an act or an omission of a director

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136
Q

How do shares usually change hands?

A

Allotting
- Company decides to create new shares

Buy back
- Company buys back some of its owns shares

Transfer
- Shareholder gives to another shareholder

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137
Q

Can a company prevent a transfer of shares?

A

YES within a company’s articles, there can be provisions to prevent the transfer of shares to someone

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138
Q

How are shares transferred?

A

Sign and complete a stock transfer form

Send share certificate and stock transfer to company

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139
Q

What should the company do once the shares are transferred?

A
  • Send the new shareholder a share certificate in their name within two months
  • Enter their name on the register of members
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140
Q

How do directors make decisions?

A

At board meetings through board resolutions

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141
Q

Does every single decision by a director have to be made at a board meeting?

A

NO

Can delegate their powers as they see fit

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142
Q

Who can call a board meeting?

A

Any director (MA9)

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143
Q

What notice needs to be given

A
  1. Reasonable notice
  2. To all directors
  3. Include time, date and place
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144
Q

What is reasonable notice?

A

Re Homer

  • Few minutes if all work in same building
  • If multi-national then longer
  • Can be over skype or zoom
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145
Q

What is the quorom of the meeting?

A
  1. At least two directors present

MA 11

146
Q

When may a director not count in the quorom?

A

When decision of the board is

  • Concerned with actual or proposed transaction or arrangement with the company
  • In which the director is involved

MA 14

147
Q

What must the company do in regards to interests?

A

Where a director has a personal interest in a proposed transaction or arrangement with the company, they must declare the nature and extent of the interest

148
Q

What are the exceptions to the rule of interest?

A
  1. If it cannot be reasonably regarded as likely to give rise to a conflict of interest
  2. If the other directors are already aware of it
  3. If it concerns terms of service contract that have been or are considered by a meeting of directors
149
Q

What happens once a resolution has been agreed?

A
  • Approve transaction
  • Enter in to proposed transaction
  • Authorise the execution of any documents
150
Q

How does voting work?

A
  • Simple majority (more than 50%)
  • Each director has one vote
  • Chairperson will have deciding vote if the vote is tied
  • Directors with interest cannot vote
151
Q

What administration needs to be done?

A

Minutes

Forms to Companies House

152
Q

What is an executive director?

A
  • Appointed by the board of directors
  • Employment contracts
  • Sets out director’s job title, duties and responsibilities
153
Q

What is a non-executive director?

A

They are appointed by the board and will be registered as directors at Companies House

HOWEVER

They DO NOT have service agreements
They do not receive a salary but a director’s fee
They are to prevent poor decision making by the board

154
Q

What is a chairperson?

A

A chairperson may be appointed by board resolution

They will run meetings and they have a vote

If the vote is a tie the chairperson will either vote to pass it or decline to vote and it will fail

155
Q

What is a de facto director?

A

They will be carrying out the job of a director even though they are not officially appointed

156
Q

What is a shadow director?

A

a PERSON WHo acts as a director but has not been formally appointed

Eg major shareholder

Shadow directors more likely to be in the background and not carrying out the normal functions of a director

157
Q

What is a sole director?

A

Must have two at a directors meeting, however if only one then can make all the decisions

158
Q

What is an alternative director?

A

Can appoint to attend the meeting and vote as they would want to vote

159
Q

How are directors appointed?

A

Appointed by the board or by ordinary resolution

160
Q

What is usual for appointing a director?

A

By board resolution much quicker, but if already having a general meeting, then may add it on the end

161
Q

What are restrictions on being a director?

A

If a person is disqualified cannot take office

  1. A bankruptcy order has been made against them
  2. Physically or mentally incapable
  3. Disqualified
162
Q

What needs to be filed if a new board director is appointed?

A

Must notify Companies House within 14 days
Fill out form AP01 (individual)
Fill out form AP02 (corporate)

163
Q

What authority do directors have to act on company’s behalf?

A

Actual - consent from other directors
IMplied
- Board has not said they can act in certain way but has and not be stopped
Apparent
- Acts without prior consent but still binds company

164
Q

What comes within a service contract?

A

Board of directors decides under MA3 and their power to decide specific remuneration

165
Q

What are guaranteed term contracts?

A

Any contract that binds a company over two years must be approved by shareholders

166
Q

What must a director do if they want to resign?

A

They must complete form TM01 or TM02 within 14 days of resignation

167
Q

How can a director be removed?

A

The shareholders can remove a director by ordinary resolution passed at a general meeting.

Special notice is required for a resolution to removed a director

168
Q

What is meant by special notice?

A

Ordinary resolution is not effective unless notice of intention has been given 28 days before the general meeting at which the resolution has been proposed

169
Q

What is a Bushell v Faith clause?

A

Can be inserted that if a director is also a shareholder they can have ten times more votes that usual to vote on themselves

170
Q

What are the two types of shareholder resolutions?

A

Ordinary

Special

171
Q

What is needed for an ordinary resolution?

A

50%+

172
Q

What is needed for a special resolution?

A

75%

173
Q

What are the two methods of passing shareholders’ resolution?

A

General meeting or by written resolution

174
Q

How is a general meeting called?

A

Directors, in a board meeting, pass a board resolution to call for a general meeting or written resolution

175
Q

What is an AGM?

A

Public companies must hold this once a year

176
Q

What must be done to give notice?

A
  1. Must give notice to every shareholder and directors and auditor
  2. Must be given in hard copy, electric form or by means of a website
177
Q

What must be included in the notice?

A
  1. The time, date and place of the meeting
  2. The general nature of the business to be dealt with
  3. Exact wording of a special resolution
  4. Each shareholder’s right to appoint a proxy
178
Q

How much notice should be given?

A

14 clear days

179
Q

What is meant by clear days?

A

The day it is sent out and the day of the meeting DO NOT COUNT

180
Q

What is also added if emailed or posted?

A

additional 48 hours

181
Q

What is needed for shorter notice?

A

90% of shareholders need to agree for this to be passed

182
Q

What is the quorom for a general meeting?

A

Two

if the company only has one shareholder then one

183
Q

Does a shareholder have to declare interest?

A

NO

Can still vote

184
Q

What are the two exceptions to this rule?

A
  1. Resolution to buy back some or all of a shareholder’s shares
  2. An ordinary resolution to ratify a breach of duty of a director, where the director is also a shareholder
185
Q

How is voting conducted at a general meeting?

A

Show of hands

Each shareholder has one vote

186
Q

Can a shareholder vote if interests?

A

YES
Two exceptions
In these cases can still vote but will be discounted if deciding vote

187
Q

What is a poll vote?

A

This is when shareholders vote on the basis of one vote PER SHARE rather than PER PERSON

188
Q

How can a poll vote be demanded?

A
  • Chair of the meeting
  • Directors
  • Two or more people who have a right to vote
  • A person representing 1/10 or more of the votes
189
Q

What administrative tasks need to be completed?

A

Internal
- Minutes

External
- Companies House

190
Q

Who can use a written resolution?

A

Private companies, not public

191
Q

What is a written resolution?

A

The board sends out by post or email the ordinary and special resolutions that the board is proposing

Shareholders then send back depending on whether they would like to vote in favour or not

192
Q

What is different about a written resolution?

A

Every eligible member is sent the vote

Therefore the percentages will be different

193
Q

What is a lapse date?

A

28 days from circulation of resolution

The method of circulation is irrelevant to the lapse date

194
Q

What is the default method of voting for written resolution?

A

Written resolutions have each shareholder with one vote to each share that they own

195
Q

What are the Articles of Association?

A

The company’s constitution is a statutory contract between

  • Each shareholder and the company
  • Between each shareholder and every other shareholder
196
Q

What is a shareholder agreement?

A

This is an agreement between particular shareholders

197
Q

What an advantage of a shareholder agreement?

A
  • Privacy and protection of minority shareholders
198
Q

What are voting rights?

A
  1. Right to send a proxy to a general meeting on their behalf
  2. Right to a poll vote
  3. Right to receive notice of general meetings
  4. Right to requisition a general meeting
  5. Right to apply to the court to call a general meeting
199
Q

Who is a corporate shareholder?

A

As companies cannot act without an individual on their behalf, corporate shareholders may authorise a person to act as its representative

200
Q

What is make a company a subsidiary of another company?

A

This is if

  1. The company holds the majority of voting rights
  2. The company is a member of it and has the right to appoint or remove a majority of its board directors
  3. The other company is a member of it and controls alone, pursuant to an agreement with other members, a majority in it
201
Q

What is a joint shareholder?

A

Shares can be held by two or more individuals jointly

- Register of members needs to record both names but only one address

202
Q

What are the three decisions affecting a company’s constitution?

A
  1. Changing articles
  2. Changing company name
  3. Registering as a public company
203
Q

What are decisions that affect directors?

A
  1. Substantial property transactions
  2. Loans to directors
  3. Dismissing a director
  4. Director’s long term contracts
204
Q

What is a substantial property transaction?

A

Where a director (or a member of his close family) is buying or selling major non-cash asset from or to the company

205
Q

What is the definition of a person connected with a director?

A

This is family

  • Spouse
  • Child or stepchild
  • Parents
  • Any person living in an enduring relationship
  • Any children who live in an enduring relationship

OR a company in which the director owns at least 20% of shares or voting rights

206
Q

What is the definition of substantial?

A

over £100,00
OR
Over £5000 and more than 10% of the company’s net asset value

207
Q

What is a non-cash asset?

A

Anything other than cash

208
Q

What is the effect of a breach?

A

The transaction is voidable

May have to account for profit

209
Q

Who would have to account for the profit?

A
  1. Any director of the company
  2. Any person with whom the company entered in to the arrangement who is connected with a director
  3. Any other director who authorised the agreement
210
Q

What is a loan to a director?

A

Where a company is making a loan to a director of the company or its holding company

211
Q

What is the definition of a loan to a director (three things)?

A
  1. Make a loan to a director
  2. Give a guarantee to a loan which a director has entered in to with a third party
  3. Provide security for a loan which a director has entered into with a third party
212
Q

What is the process to authorise this?

A

General meeting setting out the terms of the loan 15 days prior

Written resolution. a copy of the memorandum sent out with written resolution

213
Q

What are 4 exceptions to this rule?

A
  1. Expenditure on company business (loans up to £50,000)
  2. Expenditure on defending civil or criminal proceedings
  3. Expenditure on defending regulatory proceedings by regulatory authorotity
  4. Minor business transactions under £10,000
214
Q

What is the effect of the breach?

A

Transaction is voidable

215
Q

What is payments for loss of office?

A

When the directorship ends, the director will often receive payment

216
Q

What about payments to connected persons?

A

STILL BANNED

217
Q

What is the process to authorise a payment for loss of office?

A

General meeting: a memorandum containing the particulars for the payment made 15 days prior

Written resolution: memorandum sent out to all eligible shareholders

218
Q

What are the three exceptions?

A
  1. Small payments up to £200
  2. Damages for breach of an existing obligation
  3. Damages to settle or compromise claims linked with the termination of office/employment
219
Q

What is the effect of a breach?

A

The recipient holds the payment on trust for the company which made it and any director who authorised the payment must indemnify the company for the loss

220
Q

What is a long term service contract?

A

A provision in a service contract which guarantees a director a term longer than two years

221
Q

What does the long term service contract regard?

A

Only the length, not salary working hours etc

222
Q

What is the process for a long term service contract?

A

General meeting: a memorandum containing the particulars for the payment made 15 days prior

Written resolution: memorandum sent out to all eligible shareholders

223
Q

What also must be kept for long term service contracts?

A

Must be available for inspection by the shareholders at the company’s registered office during their term and until a year after they leave

224
Q

What is the effect of breach?

A

There is an implied term that a contract not approved by shareholders’s is voidable

Only the length - not anything else

225
Q

What other liabilities could they face? (7)

A
  1. Failure to maintain company records
  2. FAilure to file certain documents
  3. Liability for financial records
  4. Liability for health and safety legislation
  5. Bribery
  6. Making political donations without shareholder approval
  7. Civil and criminal liability under environmental legislation
226
Q

What is a dividend?

A

A share or distribution of profits paid to shareholders

Percentage profit

227
Q

What are the two types of dividend?

A

Interim

Final

228
Q

How does a dividend go about being paid?

A
  1. Director’s recommend a final dividend
  2. This is proposed at the general meeting
  3. Shareholder’s agree or disagree
  4. If approved the dividend will be paid
229
Q

How long can a director be disqualified for?

A

2-15 years

230
Q

What could you be disqualified for?

A
  • Conviction of an indictable offence
  • Persistent breaches of companies legislation
  • Fraud
    ETC
231
Q

What could count against a director?

A
  1. Using money meant for paying VAT as the company’s working capital
  2. Paying excessive director’s renumeration
  3. Recklessly trading when insolvent
232
Q

What could help a director?

A
  1. Employing qualified financial staff
  2. Taking professional advice
  3. A person financial investment in the company
233
Q

What is the effect of disqualification?

A

A director is subject to a disqualification order and cannot be a director of any company

234
Q

When could leave be given to a director?

A
  • Honest
  • Business is profitable
  • Other directors can watch over
235
Q

What is s171?

A

A duty to act within powers

236
Q

What is meant by a duty to act within powers?

A
  1. Act in accordance with the company’s constitution

2. Only exercise powers for the purposes for which they are conferred

237
Q

What is usual about director’s rights in a company’s constitution?

A

Usually exclusive managerial power

There may be some restrictions eg size of contracts can enter in to etc

238
Q

What happened in Howard Smith v Ampol Petroleum?

A

Ampol Petroleum controlled 55% of shares in company and wished to take it over. Howard Smith made rival bid.

This was rejected by Ampol, but Howard Smith issued 10m more shares, diluting Ampol’s control to under 50%

239
Q

What was the 4 part test established in Howard Smith v Ampol?

A
  1. Determine what power is being exercised
  2. Determine proper purpose for which that power was delegated to directors
  3. Determine the substantial purpose for which the power was exercised
  4. Whether the purpose was breached
240
Q

What is a remedy for breach?

A

The director will be required to account for any gains made and to indemnify the company for any losses resulting from the relevant act

241
Q

What is s171 CA 2006?

A

Duty to promote the success of the company

242
Q

What does promoting the success of the company mean?

A

A director must act in a way that he considers, in good faith, would be most likely to promote the success of the company for the benefit of members as a whole

243
Q

How will the courts test whether director has breached this duty?

A

SUBJECTIVE TEST

  • As long as the directors honestly believe that they are taking their decisions for the right reasons then the court will not intervene
  • It is not relevant that it was a bad decision

Therefore very difficult to prove

244
Q

What is success of the company?

A

This could be financial or non-financial

Will usually mean the long-term success

245
Q

What is meant by the benefit of members as a whole?

A

The duty does not focus on the company’s success as an end itself, it must promote the success of the company for its members

246
Q

What must a director consider?

A
  • Likely consequences of any decision, long term
  • The interests of the employees
  • Relationships with suppliers customers etc
  • The environment
  • The company’s reputation
  • The need to act fairly between members
247
Q

What are the remedies for breach?

A
  • Any act is voidable at the company’s instance

- Where the act also causes loss to the company, any directors in breach may be required to compensate for such loss

248
Q

What happened in Regentcrest v Cohen?

A

Regentcrest waived a provision for directors to repay money if they worked for free for three years.

Weeks later the company went in to liquidation

NO BREACH as directors believed would not be able to reimburse and better for company

249
Q

What is s173 CA 2006?

A

Duty to exercise independent judgement

250
Q

What are exceptions to the duty to exercise independent judgement?

A
  1. The director simply relies on the advice of another person
  2. The director fetters their discretion and binds themselves to act in a certain way, if they bona fide believed in such action to be in the interests of the company
  3. Acts in a way in line with the company’s constitution
  4. The director does not have to be independent themselves
251
Q

What are remedies for breach?

A
  • Any agreement is voidable

- Any director in breach will be required to account for any gains made and to indemnify the company for loss

252
Q

What is s174?

A

Duty to exercise reasonable care, skill and diligence

253
Q

What is meant by reasonable care, skill and diligence?

A
  1. The general knowledge, skill expected of a person that is a director
  2. The general knowledge of that particular director
254
Q

What other duty is there about maintenance?

A

There is a duty to acquire and maintain knowledge

255
Q

What about delegation and reliance on others?

A

The ability to delegate and rely on others cannot be absolute

256
Q

What are exceptions to delegation?

A
  1. Must exercise reasonable care and skill when choosing who to rely on
  2. Must SUPERVISE the discharge of delegated functions
257
Q

What happened in Dorchester Finance v Stebbing?

A

Stebbing used black cheques signed by other directors to steal £40,000 of company funds
- Breach by all directors as they did not check in on Stebbing

258
Q

What is s175 CA 2006?

A

Duty to avoid conflict of interests

259
Q

What is meant by duty to avoid conflict of interests?

A

Directors must not have direct or indirect conflict of interests with the company

They must not exploit any property, information or opportunity
It is immaterial if the company could take advantage or not

260
Q

What are exceptions to this rule?

A
  1. The duty does not apply to a conflict of interest arising in relation to a transaction with the company
  2. There is no breach if cannot be regarded as likely to give rise to a conflict of interest
  3. If the matter has been authorised by the director (board resolution)
261
Q

What about multiple directorships?

A

This is allowed as long as companies are not in direct competition with one another

262
Q

What about former directors?

A

Directors are free to resign and set up another company

263
Q

What happened in IDC v Cooley?

A

Cooley was a director of a building consultancy that had been confirmed not to win a contract with British Gas. Cooley resigned and accepted work himself
- Breach as had used information

264
Q

What is s176 CA 2006?

A

A director must not accept from a third party a benefit conferred by his reason of being a director

265
Q

What are exceptions to this?

A
  1. Benefits received from the company itself
266
Q

How can s176 be authorised?

A

Must be authorised by members, not directors

267
Q

What are the remedies?

A

Company can rescind and benefits recovered

268
Q

What is s.177?

A

Duty to declare interest in PROPOSED transactions or arrangements

269
Q

How must the director go about declaring interest?

A
  1. The declaration must be made BEFORE the company enters in to the transaction or arrangement
  2. Must declare nature and extent
  3. Must be made at meeting of directors, GM or general notice
  4. If inaccurate, must rectify this inaccuracy
  5. Director need not to obtain their approval
270
Q

What are exceptions to this rule?

A
  1. Director is not aware of this interest
  2. Interest cannot be regarded as likely to give rise to conflict
  3. Other directors are already aware
  4. It concerns the terms of the director’s service contract
271
Q

What are the remedies of this?

A

Transaction is voidable at the company’s instance

This has been criticised as the director is able to keep the profits

272
Q

What is s.182?

A

Imposes a duty in relation to existing transactions

273
Q

How must director go about declaring this interest?

A
  • Meeting of directors or by notice in writing, or general meeting
274
Q

What are exceptions?

A

SAME as s.177

  1. Director is not aware of this interest
  2. Interest cannot be regarded as likely to give rise to conflict
  3. Other directors are already aware
  4. It concerns the terms of the director’s service contract
275
Q

What if the director has already declared under s.177?

A

No need for subsequent

276
Q

What are the remedies for s.182?

A

Criminal liability

277
Q

How do you know if a business is profitable?

A

Look at the profit and loss account

278
Q

How do you know if a business is liquid?

A

Total current assets minus total current liabilities

279
Q

How do you know if a business is insolvent?

A

Total current assets minus total current liabilities + any loans

280
Q

What is debt finance?

A
  • When companies borrow money they will owe money back

- To finance their company

281
Q

Is shareholder approval needed for debt finance?

A

NO (MA3)

282
Q

What is a term loan?

A

Taken out for a specified period

- Will pay interest on it

283
Q

What is an overdraft?

A

Withdraw an agreed amount
Interests are very high
Bank can call back an overdraft at anytime

284
Q

What is a revolving credit facilitiy?

A

Not tied to companies bank account

Companies can drawn down amounts as and when needed

285
Q

What is trade credit?

A

Customers have put down deposit before anything is delivered
Retailers can purchase the goods
This creates a gap between purchases

286
Q

What is debt securities?

A

Company promises to repay loan while paying interest in the mean time
The most common is bonds

287
Q

What is a debenture?

A

A loan agreement in writing between a borrower and a lender

288
Q

What is a charge?

A

This is a security over an asset which is usually given for a loan

289
Q

What is a mortgage?

A

This gives a lender security over a piece of land in return for a loan

290
Q

Does the mortgagee own the land?

A

Has the legal title

But does not involve the transfer of possession

291
Q

Are legal mortgages a good form of security?

A

YES the best

292
Q

What is a fixed charge?

A

Charges placed on specific assets that provide security for a loan

293
Q

How is a fixed charge created?

A

By deed or other charge document

294
Q

Does lender have possession?

A

NO

- Can prevent it being sold or mortgaged

295
Q

What is a floating charge?

A

This is placed on assets that the company needs to deal with all the time
Cash or stock

296
Q

What is crystallisation?

A

This is a process in which the company’s power to deal with charged assets ceases and passes to the charge holder

297
Q

When would crystallisation occur?

A
  • The company goes in to liquidation

- The company ceases to trade

298
Q

What are automatic crystallisations?

A
  1. Judgement against the company
  2. Any steps towards administration
  3. Service of notice on the company
  4. The freedom of the parties to stipulate crystallisation
299
Q

Can a lender have both fixed and floating charges?

A

YES and they usually want this as gives them most flexibility

300
Q

What is perfecting the charge?

A

Registrating company charges

301
Q

What is voluntary registration?

A

Voluntary registration system

302
Q

What charges should be registered?

A

ALL charges

303
Q

Are there time limits for registration?

A

within 21 days of creation

304
Q

What is the effect of registration?

A

The effect of registration is that it gives constructive notice to other creditors.

305
Q

What happens if you fail to register?

A
  • The charge will be void against a liquidator, administrator or other creditors
  • unsecured loan
306
Q

Could the 21 day limit be extended?

A

Yes if accidental failure to deliver documents

307
Q

What is the priority of charges?

A
  1. A fixed charge beats a floating charge
  2. Fixed charges take priority over each other in order of creation
  3. Floating charges take priority over each other in order of creation
308
Q

How are unsecured creditors prioritised?

A

Pari passu (equally)

309
Q

What is subordination?

A

Creditors entering into an agreement between themselves to alter the order of priority of their charges

310
Q

What is a negative pledge?

A

This will prevent any charge from being created after this one without permission (eg to go ahead on the pecking order)

311
Q

What is the main act for insolvency?

A

The Insolvency Act 1986

312
Q

What is the cash flow test?

A

A company is insolvent in the short term if it is unable to pay its debts as they fall due

313
Q

What is the balance sheet test?

A

A company is insolvent in the long term if it has insufficient assets to cover its liabilities

314
Q

What are the two other tests?

A
  1. Creditor serves statutory demand for outstanding sum of £750 or more and company does not pay in 21 days
  2. A creditor has obtained judgement against the company and has tried to enforce that judgement but debt has not been paid
315
Q

What is voluntary liquidation?

A

Where the company is wound by the choice of the directors

316
Q

What is required for voluntary insolvency?

A

Proof of insolvency

317
Q

What happens in voluntary insolvency?

A

Liquidator is appointed to collect the assets of the company and turn them in to cash

Board of directors removed from office

318
Q

What is compulsory liquidation?

A

Where the company is wound up by an order of the court

If unable to pay debts

319
Q

What is receivership?

A

This is available to secured creditors who will take possession of the charged asset and sell it to pay back loan

320
Q

What is administration?

A
  • Administrator is appointed to control company assets
  • However does not own them and will put forward proposals to achieve company resurrection
  • Directors powers cease, but they are not removed from office
321
Q

What does an administrator do?

A
  • Removing and appointing directors
  • Paying creditors
  • Call meeting with shareholders
  • Dealing with property
  • Commencing fraud proceedings
322
Q

What is a CVA?

A

This is an agreement between company and unsecured creditors to get the company out of trouble

323
Q

What percentage of creditors must agree?

A

75% or more in value

324
Q

What is a stand-alone moratorium?

A

Allows a 20 day moratorium giving the company a payment holidat

325
Q

What are the creditor’s rights post insolvency?

A

Any creditor can petition to put a company in liquidation, provided that they can prove they are insolvent

326
Q

What is a problem with this?

A

Most creditors will not have access to an up to date copy of the balance sheet - so cannot prove

327
Q

What else can they do to enforce liquidation?

A
  • Issued statutory demand and unpaid in 21 days

- Obtained judgement against the company and the judgement remains unsatisfied

328
Q

Who is paid out in which order post liquidation?

A
  1. Fixed charge holders
  2. Cost of liquidation (eg liquidator’s fees)
  3. Preferential creditors (HMRC, employees)
  4. Floating charge holders
  5. Unsecured creditors
  6. Shareholders
329
Q

What is a key stipulation of s172?

A

Promote success of company for benefits of its MEMBERS.

However, there are certain circumstances where should act in interest of creditors

330
Q

When does this duty arise?

A

LLC v SEQUANA: when directors known or should know that the company is or likely to become insolvent

331
Q

What actions could a director take to show considerations of interests of creditors?

A
  • Take advice
  • Fully and carefully minute reasoning behind decisions
  • Cease trading immediately and take expert advice
332
Q

What actions could a director take to show that they didn’t take considerations of creditors?

A
  • Selling assets well below what they are worth

- Paying off debts to one creditor over another

333
Q

What is fraudulent trading?

A

The business of the company must have been carried on with intent to defraud creditors or for some other fraudulent purpose.

334
Q

Who can bring an action?

A

Only a liquidator or an administrator

335
Q

What is meant by fraud?

A

Intent - real dishonesty

336
Q

What is a defence?

A

Need to show that the honestly believed that things would get better
Belief DOES NOT need to be unreasonable

337
Q

What can be awarded?

A

If proved, the court can make an order requiring anyone involved to make a contribution

338
Q

Is it a civil or criminal offence?

A

BOTH

339
Q

Why was wrongful trading introduced?

A

As fraudulent trading so hard to prove

340
Q

What is wrongful trading?

A

Where a director or directors fail to act reasonably and responsibly in the period leading up to insolvency

341
Q

Who can bring an action?

A

Administrator or liquidator

342
Q

Who can be guilty of wrongful trading?

A

Only a director

343
Q

What is meant by carrying on trading?

A

Directors actions must have made things worse

344
Q

What is the time limit on checking for wrongful trading?

A

There is no time limit so can go far back

Liquidator must establish when director realised liquidation was inevitable

345
Q

What is meant by trading?

A

No definition

Could be anything - contracts, selling company assets, remuneration pay

346
Q

What are the defences for a director?

A

They took EVERY STEP with a view of minimising the potential loss to the company’s creditors

347
Q

What is the every step test?

A
  1. Whether a director knew or ought to have known that insolvent liquidation could not be avoided
  2. That he took every step to minimise loss
348
Q

What is a remedy?

A

A director can be required to make a personal contribution to the company’s assets
Disqualification of the director

349
Q

What is the Company Director’s Disqualification Act?

A

This allows the court to disqualify a director for 15 years

350
Q

When may a director be disqualified?

A

If their conduct makes them ‘unfit’ to be a director

351
Q

What are the different bands of offences?

A

2-5 years not very serious
6-10 years serious
10+ years for particularly serious

352
Q

What makes a void floating charge?

A

At the relevant time before the onset of the company’s insolvency, a charge was granted without the company receiving fresh consideration in exchange for granting security

353
Q

What does relevant time mean?

A

If the charge was created in favour of a person who is connected with the company during 2 years before

OR

Charge created for any other person 12 months before

354
Q

What is a person connected with the company?

A
  • Director or shadow director
  • someone who is a close relative of director or shadow director
  • An associate of the company
355
Q

What is a preference transaction?

A

Can challenge if transaction puts person in better position even with the onset of liquidation

356
Q

What is the time limit for a preference transaction?

A
  • If connected to the company - 2 years

- If not - 6 months

357
Q

What are transactions undervalue?

A

This is where a company sells off assets etc for way under price

358
Q

What is a defence for this?

A

There is a defence if the transaction was entered into in good faith, for the purpose of carrying on the business, and where, when the transaction was entered into, there were reasonable grounds for believing that it would benefit the company

359
Q

What is an extortionate creditor transaction?

A

Grossly exorbitant payments, three years before liquidation

360
Q

What is a transaction defrauding creditors?

A

A transaction which at an undervalue which puts assets beyond the reaches of creditors

361
Q

What is ring-fencing?

A

This sets aside a portion of the available money for floating charges for the benefit of unsecured creditors

362
Q

What are the numbers for ring-fencing?

A

50% of the first £10,000

20% of the remaining money up to £800,000

Law 2 (4 decks)

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