SQE 2 Business Advice (Interview/Writing/C&M) Flashcards
Your client operates a business with their friend. It isn’t incorporated. They ask you to explain whether they are a partnership?
Yes they are a partnership.
They are at least two people carrying out a business in common with a view to a profit.
There is no intention or form necessary. Evidence of profit & decision making sharing sufficient.
Your client, a partner in a commercial partnership, is concerned about their liability. They ask you to explain what their possible tortious liability is?
Every partner is personally liable jointly and severally for all debts & obligations incurred whilst they are partner.
C can sue any one or all of the partners for the full amount, but as between the defendants themselves, if C pursues one party, and receives payment in full, that party can pursue the other partners for a contribution to his share of the liability.
Your client, a partner in a commercial partnership, is concerned about their liability. They ask you to explain their contractual liability?
Each partner is jointly liable.
There is one obligation and all parties are each fully liable for the performance. Performance by one discharges the other.
However, the Civil Liability Act allows the court to order a partner to make contribution towards judgment debt if appropriate, in effect upgrading it to joint and several liability.
Your client is part of a partnership.
They ask you to explain the libility of a new partner for old debts incurred before they joined the partnership.
They will not automatically be liable to debts incurred before joining
Your client is part of a partnership.
They ask you to explain the libility of retired partners or those who leave the partnership.
Before: Still jointly liable after retirement//leaving for debts incurred when they were partners unless there is relief with the consent of creditors (e.g. novation agreement).
After: Generally liability ceases for future debts of the partnership .
However, a third party party can treat all apparent partners as jointly liable to pay new debts unless they have been notified of the change by (i) actual; or (ii) constructive notice.
For example, if a partner is still listed on the website after departure, this may be sufficient for them to be jointly liable, unless the former partner was not known to be a partner to the 3rd Party (per s. 36).
Your client is part of a partnership.
They ask you to explain the libility of persons who are not partners but hold themselves out as such.
A non-partner can be liable if they held themselves out as partner; or have knowingly let themselves be held out. E.g. D is described as a partner whilst negotiating.
Your client believes that only someone with actual authroity can bind their partnership.
Is this correct?
It is incorrect.
The partnership will be bound by a contract if….
- D had actual (express or implied) authority to contract; or
- Apparent Authority: If the act is (i) for carrying out business of the kind carried out by the firm; and (ii) in the usual way. However, it won’t be bound if (i) the 3rd party knew the partner was not authorised; or (ii) the 3rd party did not know or believe the partner was a partner
Your client is a partner in a partnership. They ask you to set out their tax liability.
The partners are individually (personally) liable to pay both income tax and capital gains tax. The partnership does not itself pay since there is no seperate legal entity.
- Income Tax: Every partner personally liable for income tax on their share of the profits
- Capital Gains Tax: Each partner is treated as owning a fractional share of the asset based on the agreed profit sharing ratio. Upon disposal, they make a disposal of their share.
- Tax Return: Although not paying tax, partnership makes a single tax return to HMRC of pr
Your client is considering entering into a partnership agreement
They ask you to explain the default PA position should they not enter into such an agreement in relation to Partnership Property.
All property brought into the partnership is partnership property and each partner has a share of each property.
An agreement would allow your client to agree what assets are partnership and personal.
Your client is considering entering into a partnership agreement
They ask you to explain the default PA position should they not enter into such an agreement in relation to shares in income, capital, profits, losses.
All partners are entitled to share equally.
*Partners can made an expressly agreed profit sharing ratio to alter equal entitlement. *
Your client is considering entering into a partnership agreement
They ask you to explain the default PA position should they not enter into such an agreement in relation to salaries.
Without an agreement, a partner is not entitled to a salary.
Agreements can allow salaries as ‘drawings’ - an advance share of the profit, often setting out limits to drawings.
Your client is considering entering into a partnership agreement
They ask you to explain the default PA position should they not enter into such an agreement in relation to mamagement.
Every partner may take art in management.
Agreement can set out roles/limits
Your client is considering entering into a partnership agreement
They ask you to explain the default PA position should they not enter into such an agreement in relation to Decision Making.
Decisions are decided by majority unless they are one of the three exceptions requiring unanimity:
- changes to the nature of the partnership business;
- introducing or expelling a new partner;
- varying rights or duties of partners.
Agreements often set out reserved matters requiring unanimity.
Your client is considering entering into a partnership agreement
They ask you to explain the default PA position should they not enter into such an agreement in relation to a partner leaving the partnership or dying.
If there’s no agreement, a partner leaving means the partnership is dissolved.
To prevent dissolution, the agreement can state that the partnership continues between remaining partners and nor will there be automatic dissolution on death or bankruptcy.
You represent a client looking to enhance the protections for their partnership
They ask you to explain what an LLP is.
An LLP is a hybrid vehicle
- Legally it is a body corporate
- It is treated as a separate legal entity
- But it is also a partnership: tax transparency; high levels of participation; with limited liability
Your client wishes to formally incorporate their partnership and form an LLP.
How can they do this?
- File Form LL IN01 at CH
- Continuing registration regime (CRR): keep filing info and keep in-house records
- Membership: LLP must always have two formally appointed members. No limit on maximum membership.
Your client is a partner in an LLP.
They are concered because a partner just died. They have three remaining. They seek clarification on the effect of the death on the partnership.
If one person decides to leave the partnership or dies, the LLP will continue.
If there are only 2 members and one leaves, the LLP is allowed to drop one designated member for up to 6 months before the sole member will be jointly and severally liable for any debts incurred after the 6 month period.
Your client is the sole remaining member of the LLP. The second member just left.
What is the best advise to give?
The LLP is allowed to drop one designated member for up to 6 months with the benefits of limited liability.
The sole member will be jointly and severally liable for any debts incurred after the 6 month period.
Your client is incorporating a company.
They ask you to explain whether they need a memorandum of association, and if so, the purpose and effect.
Post 1 October 2009:, the memorandum no longer forms part of the company constitution.
It is still required as part of the procedure to register at Companies House but simply declares that subscribers wish to form a company.
However, companies formed under CA 2006 have unrestricted objects per s.31 unless specifically restricted in the Articles.
Your client is incorporiating a company from scratch.
What must be sent to Companies House
- Copy of Company Memorandum
- Articles of Association (if not using Model Articles un-amended)
- Fee; and
- Application for Registration (Form IN01)
Your client has submitted IN01. They ask you to explain when the company becomes a legal entity?
Once the Registrar has approved the application, the company is sent a certificate of incorporation with the official seal.
The company becomes a legal entity from the date on which the certificate is issued as set out in the certificate itself.
Your firm offers shelf-company incorporations.
Explain to your client the process to convert a shelf company?
Do not tell them all the filing and updating.
First Board Meeting
Board Resolutions to…
* Appoint New Directors
* Accept Existing Directors Resign
* Appoint Chairperson
* Accept Existing Secretary Resign
* Appoint Secretary
* Approve share transfer.
* Approve Notice and Call GM
General Meeting
- Change Name - Special Resolution
Second Board Meeting
Board Resolution to…
* Change Registered Address
Your firm offers shelf-company incorporations.
Explain to your client the process to convert a shelf company.
Only explain the filing and register requirments.
File Forms….
* Appoint Directors: AP01
* Directors Resign: TM01
* Secretary Resign: File TM02
* Appoint Secretary: Form AP03
* Change Shares: PSC02 and PSC07
* Name Change: File NM01 and fee
* Change of Address: AD01
Update Registers….
* Directors Register
* Secretary Register
* Members Register
Ensure Share Transfers….
* Stock Transfer Form
* Update Register of Members;
* Cancel old share certificates
* Re-Issue share certificates
* File PSC02 and PSC07
Your client entered into a contract for the supply of goods before the incorporation of the company.
The supplier is seeking to hold your client personally liable. They ask you to explain the position.
If a contract is entered into before incorporation, then since the company is not a legal entity, it is not possible for the company to have legal rights or duties.
However, s.51 protects third parties who believe they are entering into a contract with a company which is incorporated, making the director personally liable if they entered into the contract.
Your asked to explain how shareholders vote in General Meetings.
(a) Show of hands: Regardless of number of shares held, each shareholder present has one vote.
(b) Vote on a Poll: Every shareholder has one vote in respect of each share held by them.
A poll can be demanded either in advance of GM, at the GM before a show of hands, or immediately after the result of that vote by….
* Chairperson
* Director
* 2 or more with right to vote; or
* Represent 10% of the voting rights
Your client asks you whether they can demand a vote on a poll in the general meeting.
If they are a….
- Chairperson
- Director
- 2 or more with right to vote; or
- Represent 10% of the voting rights
Your client is a director of a private company. They ask you to explain whether the shareholders can pass resolutions by way of special resolution/
Yes, only private companies may pass a shareholder resolution by way of written resolution.
Every member has one vote in respect of each share held by them when voting on a written resolution.
Note, removal of directors and removal of auditors cannot be passed by written resolution.
Your client, a director, wantds to call a board meeting.
What are the notice, quorum and voting requirments?
Notice: Any director may call a board meeting with Reasonable Notice of the Board Meeting (whatever is usual for the directors)
Quorum: Must be a quorum of at least 2 directors (can be increased by articles)
Board Resolutions: passed by majority vote on a show of hands. Chair may have a casting vote to prevent deadlock (Model Articles)
Your client, a private company, asks you to explain the notice requirments to call a general meeting
14 clear days notice excluding date of the meeting, and day the notice is served. If notice is posted or emailed, it is deemed served 48 hours after sending.
Explain how a client company can call a GM on short notice.
The following must agree to hold a GM on shorter notice: A majority (51%) in number of the members who together hold shares with a nominal value of no less than….
(a) Private Companies: 90% of the total nominal value of the shares that give them the right to vote. This can be increased to 95% by a provision in the Articles.
(b) Public Companies: 95% of the total nominal value of the shares that give them the right to vote.
Your approached by a company wanting to remove a director.
How can they do this?
The shareholders can remove a director by ordinary resolution before the expiration of their office under s.168(1). Special notice of 28 days is required for a removal resolution.
The Board cannot remove a director unless the Articles specifically allow for this.
Your client, a company, has been approach by a newspaper alleging that they may be in breach of s.172 CA.
Explain this provision.
A director must act in a way which they consider, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole considering:
- likely long term consequences;
- employees interests;
- suppliers/customers;
- impact on the community
- impact on the and environment;
- desirability of maintaining a reputation;
- act fairly between members
A director has a conflict of interest. He seeks your legal advice on whether the directors can authorise this conflict.
It depends on the conflict.
(a) s.175 requires directors to avoid situations in which they have/can have, a interest that conflicts with the interests of the company. The duty is not infringed if the conflict arises in relation to a matter authorised by the directors
(b) However, s.176 establishes that a director must not accept a benefit from a 3rd party which is conferred by reason of them being a director. The other directors cannot authorise a s.176 arrangement
A company is to give a loan of £25,000 to a director so they can buy a flat.
A baord meeting is to be hold to approve the loan. What must the director do at the start of the meeting?
The director interested must declare the nature extent of interest to other directors at a board meeting or in writing in advance of the meeting.
The meeting minutes should state that it was delared by virtue of s.177 CA.
A director who is interested cannot vote or count in the quorum for board resolutions unless the company misapplies MA14 by ordinary resolution
A company wants to give their director a long term service contact in excess of two years.
What is required to ensure theprovision guaranteeing a term over two years is not void? Do not explain the procedure.
Shareholder approval by ordinary resolution is required for any director service contract which is, or may be, for a guaranteed period in excess of two years.
Exception: Approval is not required by the members of any company which is a wholly owned subsidiary of another company.
A company wants to give their director a long term service contact in excess of two years.
What is required to ensure theprovision guaranteeing a term over two years is not void?
Only explain the procedure.
- Memorandum setting out the proposed contract (available to members for 15 days)
- 15 days notice of the GM to approve the contract to be given - Ordinary Resolution.
- Alternatively, written resolution could be used if sent to every member.
A company wants to give their director a long term service contact in excess of two years.
Can the director participate in the quorum or vote on their contract in any board meeting?
A director will not be permitted to vote or count in quorum on any resolution relating to contract.
The board of directors ask you to explain whether their transaction with a director requires shareholder approval.
It is for property worth £3,000.
It does not.
This is because it is not a substantial non-cash asset since assets worth £5,000 or less are not a substantial asset
The board of directors ask you to explain whether their transaction with a director requires shareholder approval.
It is for property worth £9,000.
Assets between £5,000 - £100,000 is substantial if worth more than 10% of company’s net value.
If this is the case, an ordinary resolution of the shareholders is required unless the company is a wholly owned subsidiary of another company.
The board of directors ask you to explain whether their transaction with a director requires shareholder approval.
It is for property worth £199,000.
Asset worth more than £100,000 is a substantial asset. Therefore, an ordinary resolution will be required
Exception: Approval is not required by the members of any company which is a wholly owned subsidiary of another company. However, if a transaction is between a company and director of a holding company, the holding company will still need to approve the transaction.
The board of directors of an private company unassociated with a public company, seek to make a loan worth £9,000 to a director.
They ask you whether shareholder approval is required.
No approval needed for minor transactions.
For loans the limit is £10,000.
The board of directors of a public company seek to make a quasi loan worth £9,000.
The company agrees to pay off outstanding accounts owed by the director to a third party on the view that the director will reimburse the company.
They ask you whether shareholder approval is required.
No approval needed for minor transactions.
For quasi loans limit is £10,000.
The board of directors of a public company seek to enter into a credit transactionbetween the company and a director where the company provides goods/services on a credit basis.
It is worth £12,000.
They ask you whether shareholder approval is required.
No approval needed for minor transactions.
For credit transactions, the limit is £15,000.
The board of directors of a private company unassociated with a public company seek to make a loan worth £25,000 to a director.
They ask you whether shareholder approval is required.
The company is not a wholly owned subsidiary.
Shareholder approval is needed for by way of ordinary resolution
The board of directors of a private company unassociated with a public company seek to give a guanrantee for a director.
They ask you whether shareholder approval is required.
The company is not a wholly owned subsidiary.
Shareholder approval is needed for by way of ordinary resolution
The board of directors of a private company unassociated with a public company seek to enter into a credit transaction for a director.
They ask you whether shareholder approval is required.
The company is not a wholly owned subsidiary.
No approval required.
The board of directors of a
Private Company unassociated with a public company, asks you to explain what loans and related transactions may require shareholder approval?
Shareholder approval is needed for…
- Loans to directors
- Loans to directors of holding company.
- Guarantees/Security to directors
- Guarantees/Security to directors of holding company.
Note, for unassociated private companies, there is no approval needed for connected persons or any transactions relating to quasi loans or credit transactions.
The board of directors of a
Private Company associated with a public company, asks you to explain what loans and related transactions may require shareholder approval?
Approval needed for…
Loans, quasi loans, credit transactions, guarantees or securities with….
- Directors
- Directors of Holding Company
- Persons Connected
The board of directors of a
Public Company asks you to explain what loans and related transactions may require shareholder approval?
Approval needed for…
Loans, quasi loans, credit transactions, guarantees or securities with….
- Directors
- Directors of Holding Company
- Persons Connected
There is a loan transaction between a If the transaction is between a company and a director of a company’s holding company, who must approve?
The holding company will always need to approve the transaction
Approval is not required by the members of the company which is a wholly owned subsidiary
You are approached by a group of shareholders wishing to remove a director.
They tell you that the board are unlikley to put a removal resolution on the agenda.
They ask for you to set out, simply and without detail, the procedure they can expect to follow.
- Shareholders propose a removal resolution by giving special notice to Board at least 28 clear days before proposed General Meeting.
- Board Responds and refuses to add to the agenda.
- Unhappy shareholders serve a s.303 request on board to call GM.
- The directors must call the GM within 21 days from the s.303 request; and the GM must be held within 28 days of the shareholder proposal.
- If the directors fail to call a GM,the shareholders can call a GM themselves within 3 months of the s.303 request.
- At the GM, director can be removed by Ordinary Resolution.
You are approached by a group of shareholders wishing to remove a director.
They tell you that the board are likely to put a removal resolution on the agenda.
They ask for you to set out, simply and without detail, the procedure they can expect to follow.
- Shareholders propose a removal resolution by giving special notice to Board at least 28 clear days before proposed General Meeting.
- Board decides to place the resolution on the agenda.
- Board gives shareholders 14 clear days notice of the removal resolution and general meeting.
- GM held - removal rsolution passes by ordinary resolution
Note, subsection (4) is a ‘saving provision’ that states that a passed OR is valid even if the special notice period is not observed (i.e only need 14 days not 28)
You represent a shareholder bringing a derivative claim (s.206) against the company.
They ask you to explain the procedure and their interest should it suceed.
Stage 1: The member must obtain court permission.
- The court must refuse permission if the a person acting in accordance with s.172 would not continue the claim.
- If no specific s.263(2) bar, the court consider factors listed such as whether the member is acting in good faith.
Stage 2: If the court holds a prima facie case exists, the court have “particular regard” to any evidence it has as to the views of the members who have no personal interest in the matter.
If satisfied, the case will then proceed to trial.
Interest: Your client fronts the cost (can recover from company later) but any reward goes to the company.
You represent a shareholder bringing an unfair prejudice claim (s.994) against the company.
They ask you to explain the procedure and their interest should it suceed.
- Shareholder must show that the company’s affairs are being conducted in a manner unfairly prejudicial to their interests. For exaxample, negligent or inept management.
- Contrary to the derivative, the shareholders sue for themselves.
- The court has the power to grant orders as it sees fit. Often, an order to purchase the petitioner’s shares.
Your client asks you to advice on the procedure for varying class rights.
The default position to vary class rights is by:
(a) Written permission of holders of at least 75 % of the issued shares of that class or by means; or
(b) Special resolution passed at a separate general meeting of the holders of that class.
Shareholders holding 15% of the relevant share can apply to court within 21 days of the resolution cancelled if it unfairly prejudices the shareholders of the class.
You represent a company with sufficient distributable profits.
The directors have recommended a final dividend but are concerned the sharheolders will reject the prposal and increase the dividend.
They approach you for advice.
Final Dividends are recommended by directors and declared by ordinary resolution of shareholders following financial year end.
The shareholders may approve or reject the recommendation, or declare a dividend smaller than the recommended dividend.
They may not issue one greater than one suggested.
You represent a company with sufficient distributable profits.
The directors ask you to explain whether they need shrareholder approval to issue an interim dividend.
Directors have power to pay interim dividends if there are sufficient distributable profits without the need for a shareholder resolution.
The board of directors wish to allot shares.
They ask you to explain the procedure.
Follow CADCA:
- Is there cap on the number of shares issued? If so, issue exceeding it will need cap to be removed. If incorporated under CA 2006, there is (by default) no cap.
- Do the directors have authority to allot?
- Private company with 1 class of shares = automatic authority
- All other = authority by ordinary resolution of GM
- Must pre-emption rights be disapplied on allotment? If it is an Equity Security (e.g. not ordinary shares) the pre-emption rights will need to be dis-applied by special resolution.
- Must new class rights be created? If so, insert in the Articles by special resolution of the shareholder.
- Directors must pass a board resolution to allot the shares. File SH01 and update register of members.
You represent a public company (A)
They have a private subsidiary (B)
Company C is acquiring shares in A.
Advise A whether A or B can give financial assistance (e.g. a loan to assist C acquire their shares).
Since the target company (A) is a public company, neither the
- target company (A); nor
- any subsidiary of the target company (B) (private or public)
can give assistance. It is prohibited.
You represent a private company (A)
They have a public subsidiary (B)
They have a private subsidiary (C)
Company D is acquiring shares in A.
Advise A whether A, B or C can give financial assistance (e.g. a loan to assist D acquire their shares).
Since the target company (A) is a private company the following can give assistance:
- The Target Company (A)
- The Private Subsidiary (C)
The public company subsidiary (B) cannot give financial assistance
Your client, a private company, wishes to buyback shares.
It asks you to explain whether this is possible.
General Rule: Companies must not purchase their own shares. However, this is subject to the exception using the CA 2006 ‘buy back’ procedure
Exceptions:
- A company can use its distributable profits
- A company may use proceeds of a fresh issue of shares provided the shares are fully paid up; and the company continue to issue shares other than redeemable and treasury shares following purchase.
- A private company may use its capital subject to restrictions
Note, a public company may NOT buyback using capital
Your client, a private company, wishes to buyback shares.
It asks you to explain when it can use its capital.
A company may use its capital to buyback shares subject to the following restrictions…
- First use any money from distributable profits or proceeds of a fresh issue
- The shares must be fully paid up
- Company continue to issue shares other than redeemable & treasury shares
- Accounts must have been prepared no more than 3 months before the directors statement of solvency
- Follow the strict procedure including OR to approve contract and SR to approve payment within a week of the directors signing a statement of solvency + within 7 days SR, notice to creditors in the Gazette; and a national newspaper
Your client is confused by taxation terminology.
Explain what income receipts mean.
Money received on a regular basis (e.g. trading profits)
Your client is confused by taxation terminology.
Explain what capital receipts mean.
Money received from a one off transaction (e.g. sale of a premises)
Your client is confused by taxation terminology.
Explain what Income Expenditure mean.
Money spent as part of regular day-to-day trading (e.g. bills and wages)
Your client is confused by taxation terminology.
Explain what Capital Expenditure mean.
Money spent on a one off transaction (e.g. new equipment)
You are asked to calculate a client’s income tax.
How do you calculate total income?
Add together receipts from all sources of income.
Do not include capital receipts. Income tax is only concerned with income receipts.
Include the following:
* Interest received on savings
* Dividends Income
* Benefits in Kind
For sole traders, income expenditure wholly and exclusively for business can be deducted to decrease the ‘total income’ (e.g. salaries, rent).
You are asked to calculate a client’s income tax.
How do you calculate net income?
Deduct the available tax reliefs from the Total Income:
(a) Deduct interest paid on qualifying loans received during the tax year:
This includes loans to…
* Buy an interest in a partnership
* Contribute or loan to a partnership
* Buy shares in a ‘close’ company
* Buy shares in an employee-controlled company or invest in a co-operative
(b) Deduct an amount equivalent to any pensions scheme contribution during the tax year
You are asked to calculate a client’s income tax.
How do you calculate taxable income?
Deduct the taxpayer’s personal allowance (£12,570) from net income
The Personal Allowance is reduced by £1 for every £2 of Net Income above £100,000
This ‘final’ figure determines which tax band the taxpayer falls within:
- Basic Band (up to £37,700)
- Higher (£37,701 - £125,140)
- Additional (+£125,140)
You are asked to calculate a client’s income tax.
How do you apply the tax rates?
Explain the basic principle, as opposed to the different rulesfor each category.
The different types of income must be separated and taxed in the order of
(1) non-savings;
(2) savings;
(3) dividend
… since different rates apply.
Remember, always use up the lower band first and then move to the higher bands.
For example, a higher tax band payer still gets their first £37,700 taxed at the basic band rate for each category.
You are asked to calculate a client’s income tax.
How do you apply the tax rates for non-savings income?
- Calculate non-savings income:
Taxable — Savings — Dividend - Apply non-savings rate depending on the tax-payers tax band.
- Basic (20%)
- Higher (40%)
- Additional (45%)
You are asked to calculate a client’s income tax.
How do you apply the tax rates for savings income?
- Calculate savings income and tax the following at 0%
- Basic Band: £1,000 at 0%
- Higher Band: £500 at 0%
- Additional Band: No 0% Rate
- Apply rate to the remaining sum:
- Basic (20%)
- Higher (40%)
- Additional (45%)
You are asked to calculate a client’s income tax.
How do you apply the tax rates for divident income?
- Tax the first £500 at 0% irrespective of tax band.
- Apply rate to the remaining sum:
- Basic (8.75%)
- Higher (33.75%)
- Additional (39.35%)
You are advising a client on Capital Gains Tax.
Explain what property is subject to CGT.
All property is subject to CGT except:
- Principal Private Residence: occupied as main residence during whole period of ownership.
- Motor cars for private use
- Government securities
- Shares held in ISAs
- Life Assurance Policies
- Currency held for personal needs
You are advising a client on Capital Gains Tax.
You are calculating the value of the consideration received in order to calculate the gain.
It was a Disposal at Arms Length.
What is the value?
Price paid by the buyer
You are advising a client on Capital Gains Tax.
You are calculating the value of the consideration received in order to calculate the gain.
It was a Disposal at Undervalue between Unconnected Persons.
What is the value?
Market value at date of disposal
You are advising a client on Capital Gains Tax.
You are calculating the value of the consideration received in order to calculate the gain.
It was a Disposal between Connected Person.
What is the value?
Market value irrespective of the actual proceeds
You are advising a client on Capital Gains Tax.
You are calculating the value of the consideration received in order to calculate the gain.
It was a Gift.
What is the value?
Market value at the date of the gift
You are advising a client on Capital Gains Tax.
You are calculating the value of the consideration received in order to calculate the gain.
It was a Spousal Disposal.
What is the value?
Neither a gain nor a loss has occurred. No CGT is payable.
You are advising a client on Capital Gains Tax.
What allowable expenditure can be deducted from the gain?
- Disposal Expenditure: Incidental costs of disposal (e.g. agents commission)
- Initial Expenditure: The base cost of the asset & the incidental cost of acquisition
- Subsequent expenditure on (1) enhancing the asset value; or (2) or incurred establishing, preserving or defending title to the asset. Repairs and maintenance are not allowable.
+ Annual Exemption (£3,000) if available.
You are advising a client on Capital Gains Tax.
Who has the benefit of an annual exemption that can be deducted from the gain?
Every individual is entitled to an annual exemption of £3,000. All individuals can make up to £3000 of gains tax free.
Companies do not have the benefit of AE.
You are advising a client on Capital Gains Tax.
What impact do capital losses have on the calculation?
After deducting allowable expenditure form the gain, you can carry across any capital losses an individual made in the same tax year and deduct from capital gains made in the next tax year.
There is no time limit on taking a loss forward, but it must be used against the first available gains .
You are advising a client on Capital Gains Tax.
What is the applicable tax rate if taxable income + total chargeable gains after deductions is less than the basic band of £37,700,?
The rate of CGT is 10%
You are advising a client on Capital Gains Tax.
What is the applicable tax rate if taxable income (without chargeable gains) exceeds basic band?
The rate of CGT is 20%
You are advising a client on Capital Gains Tax.
What is the applicable tax rate if taxable Income is less than the basic rate, but after the gains are added the combined total exceeds £37,700?
The part of the gains within the unused part of the basic rate tax band will be charged at 10%
Any part exceeding the threshold is charged at 20 %.
You are advising a client on Capital Gains Tax.
When applying the tax rate, what four reliefs could you consider?
- Business Asset Disposal Relief reduced the higher rate of CGT from 20% to 10% for gains arising on qualifying disposals subject to a lifetime allowance of £1 million.
- Investor Relief reduced the higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying shares, subject to a lifetime limit of £10 million.
- Rollover Relief: Taxpayer can postpone CGT liability on the sale of a business asset sold and replaced by rolling over the gain into the replacement asset.
- Hold Over Relief: Where an individual disposes (gift) of a business asset, the donor and donee can claim hold over relief that postpones CGT until the donee disposes of the asset. The donee will have to pay their own and the donors tax liability on disposal.
You are advising a corporate client on VAT.
Explain when is VAT is charged?
VAT is charged on supplies of goods or services in the UK where it is
(a) a taxable supply;
(b) made by a taxable person;
(c) during the course of business.
You are advising a corporate client on VAT.
They ask whether they must be VAT registered.
They must be registered for VAT if, at the end of any month the value of taxable supplies in the period of one year or less either (i) has exceeded; or (ii) there is reasonable grounds for believing it will exceed within 30 days, the threshold of £90,000.
You are advising a corporate client on VAT.
They ask you to explain the interaction between output and input tax.
Businesses charge ‘output tax’ on the taxable supplies they make, and pay ‘input tax’ on the taxable supplies they receives
The seller can deduct input VAT that it has incurred and pay the difference.
Price X 0.2 = Output Tax - Input Tax = VAT to Account
You are advising a corporate client on VAT.
They ask you to explain the VAT tax rates.
- Standard (Taxed at 20%) - all businesses unless subject to one of the below.
- Reduced (Taxed at 5%) - Domestic Heating, Mobility Aids, Smoking Cessation, Child Seats.
- Zero (Taxed at 0% but can recover input VAT suffered) - includes sewage, books, new houses, public transport, children clothing.
- Exempt Supplies do not pay nor recover any VAT - insurance, finance, education health services, sale of land and buildings except new commercial buildings.
You are advising a corporate client on VAT.
They ask you to explain when they must issue VAT invoices
Issue VAT invoice to supplies to other businesses within 30 days of supply.
You are advising a corporate client on VAT.
They ask you to explain when they must submit VAT returns
Submit VAT Return to HMRC every 3 months unless the company pays more than £2.3m in VAT.
If they pay more than £2.3m in VAT, they must make monthly payments, with quarterly returns.
You are advising a corporate client on corporation tax, .
Advise how you reduce the taxable income profits with capital allowances.
- Capital Allowance on Plant and Machinery: Deduct 18% of the value of plant and machinery on a reducing balance basis each year
- Annual Investment Allowance: Deduct 100% expenditure on new, used or refurbished plant and machinery up to £1 million for any qualifying purchase each year in the year of expenditure.
Taxable Income Profits (Step 1) - Capital Allowances (Step 2) = Income Profit
You are advising a corporate client on corporation tax, .
They ask you to explain what constitutes ‘taxable income profits’
Explain what you include, and what is deducted.
Aggregate all chargeable income receipts (e.g. rental income, trading income, interest received) and deduct all tax-deductible expenditure
You deduct expenditure exclusively incurred for the purpose of trade, and of a recurrent income nature.
Note…
- Do not deduct dividends nor include as income receipts.
- Interest paid on business loans are deductible.
You are advising a corporate client on corporation tax, .
Advise how you calculate any chargeable gains. Consider any CGT exemptions.
- Deduct Allowable Expenditure: Initial, Disposal and Subsequent Expenditure. Note, there is no annual exemption for companies.
- Substantial Shareholding Exemption: 100% relief of a chargeable gain when a company disposes of shares in a trading or holding company if the company held at least 10% of the ordinary share capital for at least 12 consecutive months in the last 6 years.
- Rollover Relief: Tax on gain is postponed when the company purchase a replacement asset within 12 months before, or 3 years after the sale of the old asset until the replacement asset is sold and no new replacement asset purchased.
You are advising a corporate client on corporation tax, .
Once you have calculated Chargeable Gains and Income Profit, what is the next step?
Reduce the ‘Income Profit’ and ‘Chargeable Gain’ figures by ‘setting off’ losses.
(a) Trading losses can be set off against BOTH income profit and chargeable gain of
* The same accounting period.
* Profits of previous accounting period.
* If unused, they are carried forward and set against future profits.
(b) Capital losses can generally only be set off against chargeable gains in the current year, but not carried back. However, if there are capital losses unused in the current year, they can be carried forward and set against future capital gains
Reduced Income Profit + Reduced Chargeable Gain = Total Taxable Profit
You are advising a corporate client on corporation tax, .
What tax rate is applies on the TTP?
Apply Tax to the Total Taxable Profit. If the TTP is…
- £50,000 or less > 19% of the TTP
- £50,000 - £250,000 > Tapering Effect between 19% and 25% of the TTP
- £250,000 + > 25% of the TTP
You are advising a corporate client on corporation tax. They have a TTP of £2,000,000.
They ask you to explain when they have to submit the self assessment to HMRC?
Companies with TPP of more than £1,500,000:
Pay tax bills in four instalments over the course of the relevant accounting period and the next one.
You are advising a corporate client on corporation tax. They have a TTP of £1,000,000.
They ask you to explain when they have to submit the self assessment to HMRC?
Company with TTP of £1,500,000 or less:
Pay within 9 months and 1 day of the end of accounting period. File a tax return within 12 months.
Your client is considering their trial balance.
They ask you to explain what a fixed asset consists of.
Any asset, tangible or intangible, owned that will enable the business to make profit (e.g. building or trade mark)
Your client is considering their trial balance.
They ask you to explain what a current asset consists of.
This includes cash or items owned that can quickly be turned into cash within one year. They continually flow through the business such as stock and petty cash.
Your client is considering their trial balance.
They ask you to explain what a current liabilities consists of.
Those due to be paid within a year. For example, bank overdraft
Your client is considering their trial balance.
They ask you to explain what a non-current liabilities consists of.
Those due after one year. For example, a term loan.
Your client is using their trial balancetois construct the end of year financial statements in the form of the (a) profit and loss account; and (b) balance sheet.
They ask you to explain the purpose of a profit and loss account
The profit and loss account records ‘Income — Expenses incurred during the accounting period = Profit or Loss’
Your client is using their trial balancetois construct the end of year financial statements in the form of the (a) profit and loss account; and (b) balance sheet.
They ask you to explain the purpose of a balance sheet
The balance sheet records the position of the business in respect of assets, liability and capital. It is a snapshot on a given date as opposed to the whole accounting period.
Your client is considering year end adjustments to the trial balance in order to construct the financial statements.
They are considering a fixed asset with a useful life of five years after which it is estimated it will depreciate in value.
What adjustment is required?
To ensure the company is prepared for this, an annual depreciation charge accounts for the decline in value of the asset and spreads the cost of the asset over its useful life.
The charge appears as an expense in the profit and loss account and added to the accumulated provision for depreciation liability account.
It is calculated in one of two ways:
- Straight Line Method of Calculation: This spreads depreciation evenly over the life of the asset and gives rise to the same charge for depreciation each year. Used when asset is used consistently and generates consistent income over its lifespan
- Reducing Balance Method of Calculation: The depreciation charge each year is expressed as a percentage of the reducing balance with more depreciation charged in earlier years than in later years, since the value reduces each year.
Your client is considering year end adjustments to the trial balance in order to construct the financial statements.
An expense has been incurred and should be charged against profit in the current year.
What adjustment is required?
Accural Adjustment
For example, the business has not received an invoice for an item worth £5,000 and by the time accounts are drawn up, the expense wasn’t listed in the trial balance. The adjustment should record £5,000 in the accrual current liability account.
Your client is considering year end adjustments to the trial balance in order to construct the financial statements.
An expense is paid in the current year but all or part of the cost should be charged as an expense for next year.
What adjustment is required?
Prepayment Adjustment
Example: If accounting period ends 31 December, and rent has been paid from October to next October, only 3 months need to be included. The correct rent (3 months) should be shown in the expense account, whilst the pre-payment shown in a pre-payment current asset account.
Your client is considering year end adjustments to the trial balance in order to construct the financial statements.
The client knows with certainty it is never going to receive payment from a company that owes them money.
What adjustment is required?
Bad Debt Adjustment
The bad debt must be written off and removed from the receivables entry as it will not be paid and shown in the Profit and Loss account as an expense.
Example: X ltd has a balance of receivables of £7,000. It discovers one of its customers who owes £360 is bankrupt. The receivables asset account must be deducted to £6,640.
Your client is considering year end adjustments to the trial balance in order to construct the financial statements.
The market is doing poorly and future losses are estimated due to failure of a creditor to pay their debts.
What adjustment is required?
A doubtful debt occurs when a business is providing for the possibility that a debt may not be paid. Unlike bad debts, it’s not written off completely.
However the accounts should reflect that the business may not receive all the money owed on the balance sheet as a liability.
Your client has created a security.
Explain the defaul registration requirments.
Most securities created by a company need to be registered with Companies House within 21 days (priority period) beginning with the day after the charge is created along with Form MR01, a certified copy of the charge and fee.
Failure to register within 21 days means (a) charge is void against a liquidator, administrator and creditor; and (b) the debt becomes immediately payable.
Your client is thinking of purchasing a company, but is concerned about the debt-equity ratio.
They ask you how you can figure out the ratio
Gearing: The higher the ratio of debt to equity, the more highly a company is geared.
The formula for gearing as as follows:
Long Term Debt (e.g. £5,000)
————————————— x 100 = 50 %
Total Equity (e.g. £10,000)
Your client is concerned that they may be deemed unable to pay debts, allowing a winding up order.
Explain the four tests.
- Cash Flow Test: The company is unable to pay debts as they fall due
- Balance Sheet Test: The company has greater liabilities than its assets
- The company does not comply with a statutory demand for a debt over £750; or
- The company has failed to pay a creditor to satisfy enforcement of a judgment debt
Your client is facing corporate insolvency.
They want to avoid cost and are willing to negotiate.
What advice could you give?
An informal arrangement with creditors may be negotiated.
There are two key methods used during an informal arrangement:
- Standstill Agreement > Creditor agrees not to enforce their rights for a specified period.
- Obtain a pre-insolvency moratorium during which creditors are unable to take action to exercise their usual rights and remedies. The moratorium lasts for 20 business days. It can be extended by directors for a further 20 business days.
Your client is facing corporate insolvency.
They want to enter into a formal compromise. The directors wish to remains in control and for the company to continue to trade.
What advice could you give?
This is a Company Voluntary Agreement (CVA) where the creditors agree to part payment of the debts owed, and/or a new extended timetable for repayment.
- Directors draft CVA proposal,
- Appoint a nominee who reports to court
- Nominee must allow 14 days for the creditors to vote on the proposal
- Meeting of shareholders must take place within 5 days of creditors decision. At least 75% in value of debts owed, of those voting on the proposal must vote in favour.
It is binding on all unsecured creditors even those who did not vote or voted against it. Secured & Preferential Creditors are only bound if they unanimously consent to the CVA
Your client is facing corporate insolvency.
Creditors are not willing to enter into a CVA, but a compromise is still desirable.
What advice could you give?
Enter into a restructuring plan.
- Creditors and members must be divided into classes
- Must be approved by at least 75% in value of those voting in each class
- One rank of creditor can force the plan on another class of creditor who voted against it in a ‘cross class cram down’ if sanctioned by the court.
If sanctioned, all creditors and shareholders including dissenting, secured and preferential are bound.
Your client is facing corporate insolvency.
Formal agreements and resturcturing has failed.
What advice could you give?
Administrators should be appointed to rescue the company as a going concern.
If it isn’t reasonably achievable, to achieve a better result for the company creditors.
Note…
* Directors remain in office but are unable to exercise management powers.
* The administrator take control of the company.
* Administrators have 8 weeks to produce a report setting out proposals
(a) If rejected, the company is usually placed into liquidation
(b) If accepted, administrator proceeds with proposals. 12 month limit for completion.
Your client is facing corporate insolvency.
Formal agreements and resturcturing has failed. Administrators have been unable to rescue the copany.
What advice could you give?
Liquidation
(a) Compulsory: Applicant presents winding up petition to the court (just and equitable winding up);
(b) Creditor Voluntary Winding Up: Where the company resolves that it is advisable to wind up the company due to its inability to carry on business due to insolvency:
- Shareholders pass a special resolution to place into CVL
- Shareholders pass an ordinary resolution to appoint a liquidator
- Dissolution occurs 3 months after filing final accounts and return to Companies House.
Your client is facing liquidation.
It asks you to briefly explain the statutory order of priorities.
Aa liquidator will be required to distribute the assets of the company to its creditors in a specified order of priority.
- Fixed Charge Assets
- Other liquidator costs
- Tier 1 preferential creditors (Employees: £800)
- Tier 2 preferential creditors (Crown Debts, PAYE, NI deductions, VAT for HMRC.
- Create a Prescribed Part Fund
- Floating Charge Creditors
- Unsecured Creditors
- Interest on Unsecured Debts
- Shareholders
Your client, an individual, is facing personal insolvency.
What should you suggest?
Enter into an IVA (Individual Voluntary Arrangement) which a debtor makes a proposal for a compromise of their liabilities with creditors
An IVA can last any length of time. Often 3 - 5 Years.
Setting Up an IVA:
* Debtor drafts a proposal
* Nominee submits a report to the court
* Debtor can apply for moratorium
* The proposal must be approved by creditors holding at least 75% of value of the total debt owed
* If approved, the IVA binds the debtor and all unsecured creditors.
* It cannot bind secured or preferential creditors without their consent.
Your client, a creditor, is owed £10,000 from an individual
What should you suggest?
The creditors may bring a bankruptcy petition if….
- The debt is one the debtor appears unable to pay
- The debt owed is for an unsecured liquidated sum exceeding £5,000; and
- The debtor is domiciled or present in England and Wales
Your client, a company director, is concerned they may be liable in fraudulent trading.
They ask you to explain the requirments.
(a) A company continues to trade, incurring further debts when the company is in financial difficultly.
(b) The individual was knowingly party to carrying on company business with intent to defraud creditors/for fraudulent purposes
(c) To succeed, actual dishonesty must be proven > (i) the directors subjective knowledge; and (ii) that the directors conduct was dishonest applying the objective standards
Your client, a company director, is concerned they may be liable in wrongful trading.
They ask you to explain the requirments.
Director must satisfy two limits:
Limb 1: The company must have gone into an insolvent liquidation or administration and before commencement the director knew or ought to have concluded that there was no reasonable prospect the company would avoid insolvent liquidation/administration
Limb 2: The directordid not take every step with a view to minimising the potential loss to the creditors.
The court apply the ‘reasonably diligent person test’ - the objective reasonable director coupled with the actual knowledge and skill of that director (higher subjective standard).
Your client is concerned that a trasnaction made with a company may be set aside.
The company entered into a transaction where there was a significant inequality in the value of the consideration received compared to the value of the asset.
Explain the grounds.
Transactions at an Undervalue
The court can set aside a TUV if….
- Entered into for a value significantly less
- Took place within 2 years ending of onset
- The company was insolvent or became so as a result of it (presumed)
Defences: The company entered into the transaction in good faith for the purpose of carrying on business
Sanction: Order to restore the position. Should not prejudice subsequent 3rd Party.
Your client is concerned that a trasnaction made with a company may be set aside.
The company entered into a transaction with the intention to put assets beyond reach of creditors
Explain the grounds.
Transaction Defrauding Creditors
The court can set aside if….
- There is a transaction at an undervalue;
- The intention was to put assets beyond reach of creditors
- Claim can be brought at any time
Your client is concerned that a trasnaction made with a company may be set aside.
The company gave a preference to a creditor to put them in a better position in the event of insolvent liquidation
Explain the grounds.
Preference
The court can set aside if….
- A company gives a preference to a creditor to put them in a better position in the event of insolvent liquidation; and
- Company was influenced by a desire to prefer; and
- It occured in the following timframe before the onest of insolvency (6 months for unconencted persons; 2 years for connected persons).
- It was insolvent or became insolvent as a result of the transaction.
Presumption: If given to a connected person (e.g. director) there is a rebuttable presumption the company was influenced by a desire to prefer
Defences: Absence of a desire to prefer
Sanction: Order to restore the position.
Your client is concerned that a trasnaction made with a company may be set aside.
The company created a floating charge created to secure an existing debt for no new consideration
Explain the grounds.
Preference
- A creditor obtaining a floating charge to secure an existing debt for no consideration
- It was created within 12 months ending with the onset of insolvency, extended to 2 years for preferences to connected persons;
- Company was insolvent at time of creation or became insolvent as a consequence of the creation of the floating charge
Defences: New money (fresh consideration) was provided in return for the floating charge
Sanction: Security is Void
Debt Remains.
You are writing a letter to a client setting out ideal business models
What are the pros of operating as a sole trader?
- Simplicity: Easiest and cheapest to set up. Minimal legal formalities.
- Control: Full control over all business decisions. financial details are not publicly accessible
- Privacy: Fewer public records compared to limited companies.
- Taxation: Profits taxed as personal income, which can be simpler for small businesses. Note however, they must register and file Self Assessments.
You are writing a letter to a client setting out ideal business models
What are the CONS of operating as a sole trader?
- Unlimited Liability: Personally liable for all business debts. Personal assets are at risk.
- No separate legal personality: any death, bankruptcy, departure, etc. of an owner will terminate the business.
- Limited Access to Capital: Difficult to raise significant funds or secure loans.
- Perceived Credibility: May be seen as less credible than limited companies.
You are writing a letter to a client setting out ideal business models
What are the pros of operating as a traditional partnership?
- Shared Responsibility: Shared workload and decision-making.
- Increased Capital: Easier to raise capital compared to a sole trader with debt finance and individuals buying into the partnership.
- Shared Expertise: Partners bring diverse skills and knowledge.
- Tax Transparency: Profits and losses are passed through to the individual partners avoiding “double taxation.” Each partner can utilize their individual tax allowances and reliefs, potentially reducing their overall tax liability.
You are writing a letter to a client setting out ideal business models
What are the cons of operating as a traditional partnership?
- Unlimited Liability (in a general partnership): Partners are jointly and severally liable for business debts.
- No separate legal personality: any death, bankruptcy, departure, etc. of an owner will terminate the business.
- Potential for Disputes: Disagreements between partners can lead to legal issues.
- Partnership Agreements: Essential to have a comprehensive partnership agreement to avoid disputes.
You are writing a letter to a client setting out ideal business models
What are the pros of operating as a limited liability partnership?
- Limited Liability: Partners’ personal assets are protected from business debts, apart from the initial capital contribution and whatever is agreed in the partnership agreement (if anything)
- Separate legal personality: Would not come to an end if a partner dies, becomes bankrupt or departs.
- Flexibility: Combines the flexibility of a partnership with the limited liability of a company.
- Tax Efficiency: Taxed similarly to a traditional partnership - no double taxation
You are writing a letter to a client setting out ideal business models
What are the cons of operating as a limited liability partnership?
- Increased Administrative Burden: More complex than a traditional partnership, with filing requirements. Partnership agreements are still very important.
- Public Disclosure: Some financial information is required to be made public.
- Limited Growth: since it is closely akin to a traditional partnership, it better suits smaller businesses that do not require larger-scale methods of growth. For example, an LLP could not issue shares to raise money from investors.
You are writing a letter to a client setting out ideal business models
What are the pros of operating as a limited liability company?
- Limited Liability: Shareholders’ personal assets are protected except for the unpaid nominal value of the shares.
- **Separate legal personality: **any death, bankruptcy, departure, etc. of a shareholder will not terminate the business, and it can continue seamlessly.
- Increased Credibility: Often perceived as more professional and credible.
- Easier to Raise Capital: Easier to attract investors and secure loans by way of equity finance
- Tax Efficiency: Potential tax advantages through corporation tax and dividends. However, note the double taxation con.
You are writing a letter to a client setting out ideal business models
What are the cons of operating as a limited liability company?
- Increased Administrative Burden: More complex to set up and maintain, with filing requirements (Companies House).
- Public Disclosure: Financial information and director details are publicly available.
- Increased costs: More expensive to setup and run than a sole trader.
- Double- taxation: The company would have to pay tax on the profits that it makes. Then if you pay yourself a salary from the company and/or dividends , these would be taxed again. I
You are writing a report on whether a petition for winding up can be brought against a company with a debt of £700 + VAT.
Explain the grounds.
A company is deemed to be unable to pay debts if they owe a sum in excess of £750, and the creditor has served a written demand,
The sum can include VAT.
£700 + VAT = £750 = Falls within the definition and the court has jurisdiction.
Your client is facing a winding up petition.
Explain the four tests for when the court has jusrisdiction under IA s.86.
- Cash Flow Test: The company is unable to pay debts as they fall due
- Balance Sheet Test: The company has greater liabilities than its assets
- The company does not comply with a statutory demand for a debt over £750; or
- The company has failed to pay a creditor to satisfy enforcement of a judgment debt
Your client wishes to arrange a
pre-insolvency moratorium.
What is the initial procedure?
- File statement insolvency statement
- File rescue statement from Monitor
=
20 Business Days Moratorium
Your client wishes to arrange a
pre-insolvency moratorium.
What is the subsequent procedure after the intiail 20 day moratorium has been granted?
- Director can extend for 20 Business Days
- Further extensions can be agreed with majority of creditors up to max of 1 year.
- Any extensions beyond 1 year will need court approval.
Your client wishes to arrange a
pre-insolvency moratorium.
What is the effect of such a moratorium?
During the period:
* Creditors Unable to enforce security
* Stay of proceedings
* No new proceedings
* No winding up procedures
Your client wishes to arrange a
Company Voluntary Agreement (CVA).
What is the initial procedure?
Draft CVA Proposal
Appoint Nominee
Nominee has 28 Days to Report to Court
Your client wishes to arrange a
Company Voluntary Agreement (CVA).
What is the subsequent procedure once the nominee has reported to court?
(a) Allow 14 days for Creditors to vote on the CVA. 75% in Value of Debts Owed vote in favour.
(b) Within 5 days of Creditor Vote, Shareholders vote. Ordinary Resolution needed.
Your client wishes to arrange a
Company Voluntary Agreement (CVA).
What is the effect once the shareholders and creditors have voted in favour?
- Binds all Unsecured Creditors (including those who object)
- Secured & Preferential Creditors bound if they consent
- Directors remain in control
- Trading Continues.
Your client wishes to arrange a
Restructuing Plan.
What is the initial procedure?
Creditors, Shareholders, Directors, Liquidators or Administrators may initiate the process.
Creditors and members must be **divided into classes **
Your client wishes to arrange a
Restructuing Plan.
What is the subsequent procedure once creditors and shareholders are divided into classes?
Plan must be approved by at least 75% in value of those voting in each class (creditors/shareholders)
One rank of creditor can force the plan on another class of creditor who voted against it in a ‘cross class cram down’ if sanctioned by the court on the basis that
(a) Dissenting class would not be worse off; or
(b) The plan is approved by at least one class who have genuine economic interest in the event of cram down not approved
Your client wishes to arrange a
Restructuing Plan.
What is the effect if sanctioned by the court?
All creditors and shareholders including dissenting, secured and preferential are bound by an approved plan.
Your client is facing
administration.
What is the procedure if the application uses the court route?
Shareholders, Directors, Creditors, CVA Supervisor or Liquidator may apply to court.
Notice must be served on a QFCH.
Your client is facing
administration.
What is the procedure if the application uses the out of court route?
Shareholders, Directors, or QFC Holder can appoint an administrator….
QFC: Enforce security and file notice of appointment.
or
Directors file a notice of intention to appoint at court and serve on QFC. Wait 5 days (period for QFC to choose their own administrator) and then, within 10 business days of the NoI, file a notice of appointment at court.
Your client is facing
administration.
What is the effect ?
Interim Moratorium freezing creditor action until the administration order is made, or the court dismisses application.
Directors remain but do not exercise management powers.
Administrators have 8 weeks to produce a report with proposals. If rejected the company is placed into liquidation. If creditors accept the plan, there is a 12 month limit for completion
Your client is facing
compulsory liquidation.
Who can apply for a winding up petition by virtue of Insolvency Act ?
Creditor, company, directors, administrators, CVA Supervisor can presents winding up petition to the court.
If just and equitable (and staisfying one of the criteria) official receiver becomes the liquidator and notifies Companies house of known creditors.
Your client is solvent but wishes to wind the company up.
What type of liquidation is this?
Members Voluntary Winding Up:
Company resolves by special resolution to wind the company up. Must be Solvent.
Your client is insolvent and unable to carry on business.The company decide to wind up the company.
What type of liquidation is this? What is the procedure?
Creditor Voluntary Winding Up:
- Special Resolution to place into CVL
- Ordinary Resolution to appoint liquidator
- 14 days to ask creditors to approve liquidator or choose their own.
- Dissolution within 3 months after filing final accounts.
You are advising a company on the effect of liquidation.
What is the statutory order of priority?
- Fixed Charge Assets
- Liquidator Costs & Expenses
- Preferential Creditors 1: Employees up to £800 each.
- Preferential Creditors 2: HMRC, Crown Debts (to £800 each)
- Prescribed Part Fund: 50% of first 10k. 20% up to 800k
- Floating Charge Holders
- Unsecured Creditors (Using Prescribed Part Fund)
- Interest on Unsecured Debts
- Shareholder Surplus
Your client is facing liquidation and wishes to understand what a prescribed part fund is. How does it work?
Money is reserved for unsecured creditors (ring fenced) calculated by reference to the prescribed part of the companies net property.
- 50% of first £10k
- 20% between £10k - £800k
When paying unsecured creditors, the ‘prescribed part’ fund can be used.
You are explaining a prescribed part fund to your client facing liquidation.
What are the relevant percentages of the net property after paying fixed and preferential creditors?
- 50% of first £10k
- 20% between £10k - £800k
You are advising your client on the effecrt of a transaction at an undervalue.
What are the time periods preceding the bankruptcy insolvency that the transaction could be deemed voidable for:
- Personal Bankruptcy; and
- Companies
- Personal Bankruptcy: 5 Years
- Companies: 2 Years
No extensions for associated or connected persons
You are advising your client on the effecrt of a transaction defruading creditors.
What are the time periods preceding the bankruptcy insolvency that the transaction could be deemed voidable for:
- Personal Bankruptcy; and
- Companies
Any Time for Both
You are advising your client on the effect of a preference.
What are the time periods preceding the bankruptcy insolvency that the transaction could be deemed voidable for:
- Personal Bankruptcy; and
- Companies
Same for personal and corporate:
6 Months if Unconnected;
or
2 Years for Connected Persons
You are advising your client on the effect of a preference.
Is there a presumption for:
- Personal Bankruptcy; and
- Companies
Same for both:
If given to a conencted person/associate there is a rebuttable presumption the company was influenced by a desire to prefer
The board of directors seek your advise in relation to director duties.
A director has authorised a loan outside of her powers.
What breaches of directors duties may have been committed?
Breach of the duty to act within the company’s constitution.
This is also likely to be a breach of the duty to exercise reasonable care, skill and diligence.
The board of directors seek your advise in relation to director duties.
A director has authorised a loan outside of her powers.
Aside from advise on the potential breaches, what else should you explain?
Breaches of duty (not wilfully fraudulent) may be ratified by an ordinary resolution of the shareholders.
Consider the shareholder support and whether ratification is likely either on a vote by show of hands or poll.
The board of directors seek your advise in relation to director duties.
A director has authorised a loan outside of her powers and commited a breach of duty.
What remedies may be available if proceeings are brought?
Possible remedies here include…
- Setting aside the transaction
- Damages
- Grounds to terminate ’s service contract
- Disqualification: Directors Disqualification Act 1986.
You are approached by the board of directors who are faced with an unfair prejudice claim by a shareholder director.
Explain in simple terms an unfair prejudice petition.
Any shareholder may bring a claim for unfair prejudice on the grounds that a company has been run in such a way that they have suffered unfair prejudice.
In a small private company, a director may have a legitimate
expectation of remaining involved in the management of the company (e.g. if the businesscommenced as a partnership and all individuals have been involved effectively as “equal partners” throughout the life of the business. )
So the director may be able to argue that there has been removal from office as director in breach of this legitimate expectation, which effectively has prejudiced him in his capacity as a shareholder.
You are approached by the board of directors who are faced with an unfair prejudice claim by a shareholder director.
Advise the board on the likely remedy if the claim succeeds.
The court has discretion as to the remedy that may be ordered for successful claims for unfair prejudice,
but the most usual remedy is an order that the other shareholders or the company
purchase the petitioner’s shares at market value.
Note, it is unlikely that a court would award substantial compensation in additon to a share purchase.
You are advising a business in financial difficulty.
Explain the function of a informal creditor arrangement and the advantages.
Direct negotiations with creditors for flexible repayment terms or debt reduction.
- Flexibility in repayment schedules.
- Retains management control.
- Maintain positive relations with creditors.
You are advising a business in financial difficulty.
Explain the function of a informal creditor arrangement and the disadvantages.
Direct negotiations with creditors for flexible repayment terms or debt reduction.
- Not legally binding—creditors may retract concessions.
- Limited debt reduction, depending on creditor cooperation.
You are advising a business in financial difficulty.
Explain the function of a creditor voluntary arrangement (CVA) and the advantages.
Legally binding debt restructuring with approval from 75% of creditors.
- Provides debt repayment certainty.
- Binds all unsecured creditors
- Allows continuity of business
- Managed by an insolvency practitioner
You are advising a business in financial difficulty.
Explain the function of a creditor voluntary arrangement (CVA) and the disadvantages.
Legally binding debt restructuring with approval from 75% of creditors.
- High approval threshold
- Creditors may prefer liquidation
- Doesn’t bind all secured or preferential holders
- Costs for insolvency practitioner.
- Non-compliance risks triggering compulsory liquidation.
You are advising a business in financial difficulty.
Explain the function of a administration and the advantages.
Formal procedure to rescue/rehabilitate potentially viable companies.
- Provides a moratorium on creditor actions.
- Allows for potential recovery and asset management prioritising secured creditors
You are advising a business in financial difficulty.
Explain the function of a administration and the disadvantages.
Formal procedure to rescue/rehabilitate potentially viable companies.
- Management control shifts to the administrator.
- Significant costs, potentially impacting creditor returns.
- Uncertain outcome; may still lead to liquidation.
You are advising a shareholder on their interest in a transaction.
Can an interested shareholder form part of the quorum and vote?
Yes
Interested shareholders can vote and form part of the quorum unless articles restrict (which is not the case with model articles).
Note, this differs to s.177 for directors where interested directors cannot vote on the board decision or count toward the quorum
Shareholders have served a s.303 request on the board.
Advise the board how long they have to call a GM.
21 Days to call GM
Board lose control day 23 from s.303 Request
Shareholders have served a s.303 request on the board.
The board have now lost control.
How long do the shareholders have to serve the 14 day clear notice of the GM?
Within 3 months of the DDS of the s.303 request
Your client asks you to explain the timeframes for a Company Voluntary Agreement (CVAs)
- Nominee Report to Court: 28 Days
- Within 14 Days, Creditors must Vote
- Within 5 days of creditor vote, shareholders vote
Your client asks you to explain the timeframes for a pre-insolvency morotorium?
- 20 Business Days morotorium
- Director Extends for further 20 days - 40 Days
- Creditors agree extension up to 1 year
- 1 Year + requires court approval
Your client asks you to explain the timeframes for entering into an adminsitration.
- Directors file Notice of Intention (NOI)
- Wait 5 days for QFC
- Within 10 days of NOI file notice of appointment
- Administrators have 8 weeks to produce report
- If creditors accept, 12 months to complete plan.
Your client asks you to explain the timeframes for entering a Creditor Voluntary Liquidation
- Shareholders pass SR to place into CVL
- Shareholders place OR to appoint liquidator
- 14 days for creditors to approve liquidator or choose their own
- Dissolution within 3 months of filing final accounts
Your client wishes to take control of goods.
What value of tools of the trade means they are prohibited from taking those tools?
Up to an aggregate value of £1,350
