1
Q
Sole traders key characteristics:
Costs
Risk
Structure
Formalities
Privacy
Finance
A
Costs - low - no set-up costs
Risk - higher risk as unlimited personal liability e.g. home/car might be used to pay debts
Structure - No formal structure
Formalities - No formalities
Privacy - good privacy as no reporting requirements
Finance - would have to get personal loan
2
Q
Partnership key characteristics:
Costs
Risk
Structure
Formalities
Privacy
Finance
A
Costs - low set-up costs as no formalities to comply with
Risk - unlimited joint (in contract) or joint and several (in tort) liability for the debts and obligations of the partnership incurred while they are partners
Structure - have some flexibility with structure and can adopt a partnership agreement or use the Partnership Act default provisions
Formalities - no formalities
Privacy - good level of privacy as no reporting requirements
Finance - personal loans
3
Q
When does a partnership form?
A
When 2 or more people are working together with a view to making a profit
4
Q
Key characteristics of an LLP:
Costs
Risk
Structure
Formalities
Privacy
Finance
A
Cost: costs involved in setting up
Risk: limited liability so limited to amount put in
Structure: The organisational structure of an LLP is flexible and should be decided between the members in a formal written members’ agreement. In the absence of such an agreement Regulations 7 and 8 of the Limited Liability Partnerships Regulations 2001 will apply.
Formalities: requirement to be registered at CH
Privacy: less privacy as there are reporting regulations e.g. to file annual accounts
Finance: can get loans in the name of the LLP and can create floating charges
5
Q
Who is a “person with significant control” in a company?
A
Someone who owns more than 25% of the shares or voting rights in the company OR
Has the power to appoint or remove a majority of its board of directors OR
otherwise exercises significant influence or control over the company
6
Q
When should a business register for VAT?
What is the threshold?
What is the de-registration threshold?
A
- If at the end of the month its sale o taxable supplies exceeds the threshold
- should register within 30 days of the end of the month
- will commence as VAT reg from 2 month after the end of the month - If anticipate to exceed threshold within 30 days
- should register within the 30 days
- will commence as VAT reg from beginning of 30 days - Can register voluntarily
Registration threshold
- £85,000
De-registration threshold:
- £83,000
7
Q
Examples of reduced rated VAT items:
A
Heating and power, smoking cessation products, elderly and child aids
8
Q
When does a VAT invoice need to be sent?
A
VAT invoice to be sent to customer within 30 days o charging std/reduced rate on supply
9
Q
When does VAT payment need to be made to HMRC?
A
- Every 3 months
- It is due 1 month 7 days after the end of the VAT period
- If business pays more than £2.3 million in VAT/year then make payments on account every month and settle the balance when do the quarterly VAT return
10
Q
3 special VAT schemes:
A
- Retail scheme
- Cash accounting
* businesses earning less than £1,350,000 - output tax is accounted for when the invoice is paid (but input tax can only be recovered when the business pays the supplier) - Annual accounting
* businesses earning less than £1,350,000 can do an annual tax return instead of quarterly
* still make quarterly payments but settle the balance at end of year when do the return
11
Q
What is corporation tax payable on?
A
All income profits and capital gains that are made by a body corporate during an accounting period
12
Q
What is TTP?
A
Total taxable profit
The sum of a company’s income profits and chargeable gains
13
Q
What is the financial year?
A
1 April - 31 March
Same for all companies
14
Q
Basic proforma for TTP:
A
Chargeable gains =
Sale proceeds LESS
(Allowable expenditure)
(Indexation allowance)
(Capital/trading losses)
+
Income profits =
Income receipts LESS
(Deductible expenditure)
(Capital allowances)
(Trading losses)
15
Q
What are Capital ALLOWANCES?
A
Expenditure which relates to a capital asset but is permitted to be deducted from income receipts
Only relate to certain qualifying items of expenditure
Qualifying expenditure = incurred plant and machinery
16
Q
What are the 3 Capital ALLOWANCES? (those that can be deducted from income receipts)
A
- Tax written down value
- Annual investment allowance
- Super deduction [Don’t go into depth on this]
17
Q
How does AIA work with 18% allowance on Capital Allowances?
A
Allowance for the year would be £1,000,000 plus 18% of the remaining value of the P&M asset
18
Q
Tax reliefs and exemptions for capital gains?
A
- Indexation allowance (will be told this)
- Substantial shareholding exemption
- Rollover relief
- Loss relief
19
Q
What is SSE and what are the conditions?
Who can claim it?
A
Substantial shareholding exemption
* companies don’t have to pay corporation tax where they are disposing of share sin a trading company or holding co of a trading company
* must have held 10% of the ordinary share capital
* must have held the shares for 12 consecutive months in last 6 years
Claimed by companies NOT by individuals
20
Q
Who can claim rollover relief?
A
- Company
- Sole trader
- Partnership
- Individual who buys qualifying asset and both asset and replacement used for business purposes
21
Q
General effect of rollover relief - how does it work?
When does the new asset need to be purchased?
A
Sale of asset deducted from cost of replacement asset
Tax postponed until the new asset is sold
Timing:
- New asset purchased within 12 months before or 3 years after the sale of the old asset
22
Q
Assets the qualify for rollover relief:
A
- Land and buildings
- Goodwill
- P&M
- Ships and hovercrafts
- Aircrafts
- Lloyds syndicate capacity
23
Q
When can no rollover claim be made?
A
If, when the cost of the replacement asset is deducted from the sale price of the asset, the resulting figure is more than the gain made
24
Q
Special rule on dividend re corporation tax:
A
There is no corporation tax payable on dividends
[Because dividends are paid out of profits after they have been taxed]
25
What dates is corporation tax assessed to?
Financial Year i.e. 1 April - 31 March
26
How long can capital losses be carried forward for?
What can they be set off against?
How long?
- Indefinitely
- BUT to crystallise the loss a claim must be made to HMRC within 4 years from the end of the AP in which the loss arose
What can they be set off against?
- Capital gains
27
Procedure of payment of corporation tax (2 avenues):
1. Companies with TTP of £1,500,000 or less
- Company estimates its tax liability and pays it within 9 months and 1 day of the end of the AP to which it relates
- Company must file a tax return within 12 months from the end of the AP setting out how it calculated the tax liability
- If HMRC accept the calculation then tax computation regarded as finalised 12 months from filing date
- Interest will accrue on over/under payments
2. Companies with TTP of over £1.5m
- Required to pay tax to HMRC in 4 instalments over the AP
28
Can capital losses be carried back?
No
29
Definition of a close company:
What is a participator?
Company is controlled by:
- 5 participators or fewer
- More than 5 participators but everyone is a director
Participator
- person a share or interest in capital or income of the company e.g. shareholder or sometimes a creditor
30
What are the corporation tax rates?
- 25% if profits of over £250,000
- 19% if profits under £50,000
31
Method for carrying the trading losses:
Start by setting off against profits/gains in the current AP
THEN carry back (unless the was not trading in the business in which loss occurred in the previous year)
THEN carry forward if any left (if carrying on the trading business in which loss occurred)
32
Elements to consider - taxation effect on close companies:
1. IHT
2. Loans to Participators
3. Distributions
4. Transactions in securities
33
How are loans to participators treated for tax purposes in a close company?
What is not counted as a loan?
Treated:
- Company has to pay corporation tax on the amount of the loan at the higher dividend rate for income tax
- Must pay this within 9 months and 1 day from the end of the AP in which loan made
- C may claim a refund if the loan is repaid, waived or written off
What is not counted as a loan
- Loan in respect of goods/services normally provided by the company and loan is for not more than 6 months
- Loan, taken in aggregate w other loans to same participator, does not exceed £15,000 AND B works for C full time AND B has no material interest* in the close company
- Loan is in the ordinary course of business for the company
*Material interest = indirect control of more than 5% of the ordinary share capital or entitlement on winding up to 5% of the assets
34
What financial statements will be prepared in respect of an accounting period?
- Balance sheet
- Profit and loss account
35
What does the profit and loss account record?
Income - Expenses
It is for a period of time
36
What does the balance sheet record?
The Net Asset Value of the company
And the capital invested at the bottom
Capital and NAV will be the same
It is a SNAPSHOT
37
What are the 5 YE adjustments?
1. Accruals
2. Pre payments
3. Bad debts
4. Doubtful debts
5. Depreciation
38
2 methods of calculating depreciation:
1. Straight line method
(same amount deducted every period)
2. Reducing balance
(deducted as a percentage of the net book value (reducing balance) each period)
39
What is an accrual?
Where the benefit has been received but not yet paid for (profit is artificially high)
40
What is a prepayment?
Where have paid for the benefit of something that has not yet been received - profit is artificially low
41
What are bad debts?
Debts C expecting to receive but that the company knows with certainty will not be repaid to it
Relate to the asset account
Will be written off and removed as receivables from the balance sheet
Can be done during the year (don't need to make adjustments) OR will be done at the end of the year in which case will need to adjust
42
What are doubtful debts?
How may they be recorded?
Debts that business is aware MAY not get back
Not written off the balance sheet but noted on so as to correctly reflect the status
Recorded:
1. Specific doubtful debts (where aware of a particular debtor that may not repay)
2. General doubtful debts
(aware of market conditions and make e.g. 5% provision)
Noted as a liability on the balance sheet and is set off against NAV
Only noted on PL account if the provision has been increased or decreased from the previous year
43
What is 'impairment of receivables' on the balance sheet?
Provision for doubtful debts (a liability in the receivables section)
44
Main difference in accounting in Partnerships?
Need to prepare a profit apportionment statement to show how the profit is apportioned between the partners
Each partner has their own account (can make 'drawings' from) split in two:
1. Long-term capital - investment
2. Current account - can draw at discretion
- Both CAPITAL accounts - ALCIE
45
What are dividends distributed out of?
The revenue reserve part of the capital
46
Where are dividends shown in the financial accounts?
On an attachment to the balance sheet called the Statement of changes in equity
47
Do dividends show up on the PL account?
No
48
Does a director of a company with model articles have the power to declare a dividend without the need for SH approval?
Yes
49
Difference between final and interim dividends in terms of the accounts:
Final
- this is a dividend that is proposed by the board but needs to be approved by OR of SH
- once approved it becomes a debt of the company and obliged to pay it to SH
- if paid within the FY then will be in the SoCiE
- if not paid by time accounts drawn up then will be a debt on the balance sheet under current liabilities
Interim
- Ds can declare dividend without SH approval
- Can also rescind at any time so is not a debt
- Only in the accounts if it is actually paid
- Not in PL as it is an allocation of profit not an expense but it will be in SoCiE
50
What is a term loan called that is repayable in installments?
Amortising loan
51
Why can a preference share be similar in nature to debt?
Generally holder has no voting rights and gets back a fixed amount every year (a bit like interest)
CAN also have a maturity date on which company must buy back the shares
52
What is a pledge?
Security provider gives possession of asset to lender until repaid
53
What is a lien?
Security holder retains possession until repaid e.g. mechanic retaining possession of vehicle until repaid
54
Disadvantages to the creditor of a floating charge (as opposed to fixed charge):
1. C can't be sure of value of assets
2. Rank below fixed charge creditor
3. Subject to the 'prescribed part fund'
4. Company free to deal with the assets freely
5. Can be avoided on insolvency under the Insolvency Act
55
What is a guarantee?
Contractual agreement that the guarantor will pay the borrower's debts in full if the borrower fails to do so
56
What needs to be delivered to CH to register a charge?
By when?
What is conclusive evidence of registration?
What needs to be delivered:
- MR01 which sets out:
* company creating charge
* date of creation
* persons entitled to the charge
* description of land, aircraft, IP or ships subject to fixed charge
- Fee
- Certified copy of the charge
When?
- Within 21 days of the date of creation
Conclusive evidence:
- Registrar will issue 'certificate of registration'
57
Consequences of failure to register charge at Companies House:
VOID against liquidators or administrators and any creditor of the company AND
Debt becomes immediately repayable
58
Risks of a highly geared company:
- Credit risk - banks less likely to lend
- Less equity to pay back creditors
- Need a higher profit before interest and tax to meet interest payments
59
Advantages to higher geared company:
- If business has a highly profitable investment opportunity - loan means can invest more in it without using own resources
- MAY be beneficial to SH as does not require dilution of shareholding
60
What is corporate insolvency?
What are the 4 tests?
When a company is unable to pay its debts
Tests:
1. Cash flow
-LIKELY inability to pay debts as they fall due
2. Balance sheet
- LIKELY that liabilities will outweigh assets
3. Failure to comply with statutory demand over £750
4. Failure to satisfy enforcement of a judgment debt
61
Indicators that directors should pick up on that a company is in financial difficulty:
1. Lots of unpaid creditors putting pressure on
2. Overdraft facility fully drawn and bank refusing to lend more
3. Loans and liabilities that exceed assets
62
Options for a company facing financial difficulty:
1. Do nothing - Ds face personal liability under IA and breach of DD under CA
2. Do a deal - whether formal or informal
3. Put company into administration
4. Request appointment of a receiver
5. Put company into liquidation
63
Examples of things Co might need to do to have effective negotiations with creditors when in financial difficulty?
- Grant additional security
- Get rid of some Ds
- Sell part of business
- Reduce workforce
- Issue new shares to creditors
64
Procedure for obtaining a pre-insolvency moratorium including length of moratorium:
Apply to court including a document with statement from a Monitor (licensed insolvency practitioner) that states that it is likely the company will be saved by a moratorium
Length = 20 Business days
- Can be extended for further 20
- Court can approve an extension of up to 1 year
65
When will a pre-insolvency moratorium terminate?
- Liquid
- Admin
-CVA
- Scheme
- Plan
- Expiry
66
What debts must be paid during a moratorium?
- Monitor's fees
- Wages/redundancy payments
- Good/services supplied during a moratorium
- Rent in respect of a period during moratorium
- Loans under a contract involving financial services
- Moratorium debts - those incurred because of obligations created during the moratorium
67
2 types of formal arrangements for companies in financial difficulty:
1. CVA
2. Restructuring plan (Plan)
68
Process for getting a CVA:
1. If co NOT in liquid/admin then Ds appoint a Nominee (licensed insolvency practitioner)
(if co in liquid/admin then L/A will be Nominee and draft proposals)
2. Ds draft proposals and company's state of affairs and submit to Nominee
3. Nominee considers and within 28 days reports to court on whether thinks should be put to creditors/ SH
4. The Nominee must allow at least 14 days for the creditors to vote on the proposal and the SH must vote 5 no more than 5 days after creditor decision
5. Voting majorities required:
- 75% in value of creditors (not including secured creditors)
- majority of unconnected creditors
- simple majority of SH
6. Nominee must report to court that CVA has been approved
7. Nominee becomes the Supervisor and oversees the CVA
69
Effect of a CVA:
- Binds all UNSECURED creditors - does not bind secured creditors unless they consent
- Creditors can oppose the CVA within 28 days of it being approved by CREDITORS on basis of (i) unfair prejudice (ii) abuse of process
- Supervisor role is to agree creditor claims, collect in funds and pay dividends, ensure company complying with CVA
- Good bc management stay in control
- Trade creditors likely to agree as will get more back this way than liquid
- LL will get less rent but retail properties hard to let (if retail case) so may agree
70
Purpose of a restructuring plan
To compromise the shareholders and creditors and to restructure liabilities with the aim of rescuing the company
Can be used when a company is in or likely to be in financial difficulty
71
How does voting work in a restructuring plan?
Creditors divided into classes and 75% of each class must vote in favour of the plan
BUT the court can order a cross class cram down if it thinks it is just and equitable to do so (bind a class that has voted against)
When the court sanctions the plan it is binding on all creditors
72
Advantages of plan:
- Court can prevent SH from voting if have no genuine interest
- CCCD
- Binds secured creditors
- Can be used alongside pre-insolvency moratorium and can also be used by admin/liquid
73
Objectives of an administration:
1. Rescue company
2. Achieve better outcome for creditors than liquidation
74
Appointment of an administrator in the COURT procedure:
1. Court may appoint if company is/is likely to be unable to pay its debts
2. Application can be by Ds, Company, creditors, Supervisor of CVA or liquidator
3. Court must be satisfied that the administration would be reasonably likely to achieve the purpose
4. Interim moratorium granted alongside
5. Often used where creditor bring WU petition and company wants to prevent
75
Procedure for appointment of administrator in the OUT OF COURT procedure:
1. D or QFCH can appoint administrator
2. QFCH = a holder of a QFC of the whole or substantially whole of company property
3. Ds file a notice of appointment at court giving QFCH 5 business days to consent or appoint own
4. Ds filing commences a 10 day moratorium
5. QFCH can consent or appoint own admin by filing a notice of appointment at court which takes immediate effect
6. A as 8 weeks to come up with a plan of proposals to put to the creditors
- Rejected - goes into liquidation
- Accepted - A has options to restructure creditors' rights by scheme of arrangement or CVA and exit admin
7. A has 12 months to complete admin but can be extended
8. There is a full moratorium during administration
76
What is one thing administrators generally do not have the power to do?
Pay dividends although the court can authorise this
77
KEY BENEFIT OF ADMINISTRATION:
Full moratorium
78
What can NOT happen during administrative moratorium:
1. LL can't forfeit lease
2. No legal proceedings can be brought against company
3. Security can't be enforced
4. Admin receiver can't be appointed
5. No WU order can be made
79
What is the procedure to put a company in compulsory liquidation?
Consequences of WU order:
1. A winding up petition is put before the court on the basis of a statutory ground
2. Official Receiver is appointed until someone else is appointed
3. Who can apply?
- Creditor
- Company
- Ds
- Administrative receiver
- Admin
- Sec of State for bus
- Supervisor of a CVA
4. Grounds
- C unable to pay debts
- just and equitable to do so
Consequences:
- some dispositions, changes to members, transfers of shares may be void
- stay on any proceedings against the company
- employees automatically dismissed
- Ds dismissed from office
80
2 types of voluntary winding up:
1. Members voluntary WU (where approved by 75% of the SH)
2. Creditors voluntary WU (where company resolves it is advisable to wind up on basis inability to carry on business)
81
Procedure for member's voluntary winding up:
1. Company must be solvent
2. Ds must swear a statement of solvency that says Co will be able to pay creditors in full with interest within 12 months from date of winding up
- if it is discovered Ds did not have reasonable grounds for making this statement can be liable to fine and/or imprisonment
3. Ds should produce a schedule of assets at the latest possible opportunity before making the statement
4. SH must pass a SR to put co into liquidation
5. SH pass OR to appoint liquidator
6. If liquidator assesses that co will not be able to repay creditors on time then switches the process to CVL
82
CVL procedure:
1. Procedure is started by the SH but creditors ultimately have control
2. SR by SH to put the company into liquidation
3. OR of SH to appoint L
4. Creditors have 14 days to approve L or appoint own (creditors choice takes precedence)
5. Ds to draw up a statement of company affairs to be sent to creditors
83
Statutory order of priority:
1. L's expenses associated with selling asset subject to fixed charge
2. Sale proceeds of asset subj to fixed charge go to security holder
3. L's other expenses
4. Preferential creditors get paid (Tier 1 (employees - £800 per employee) then Tier 2 (HMRC))
5. Prescribed part fund
- 50% of first £10,000
- 20% thereafter up to max of £600,000 (charges created before 6 April 2020) OR £800,000 (charges made from 6 April 2020)
6. Floating charge holders get paid
7. Unsecured creditors
8. Interest to unsecured creditors
9. Shareholders
84
IVA - procedure and what happens:
How long does it last?
1. D sets out a statement of affairs with help of Nominee
2. Nominee reports to court on whether has a prospect of success
3. D can apply for a moratorium of 14 days which can be extended
4. Nominee will call a meeting of the creditors and must get approval of over 75% in value - will then bind all unsecured creditors
5. If D complies with IVA and hasn't repaid all debt by the end then will be written off
6. If D fails to comply with IVA, Nominee can bring bankruptcy proceedings
Length:
Commonly for 3-5 years
85
Bankruptcy procedure:
1. Can be petitioned for by debtor or, more commonly, creditor
2. Creditor can petition on following grounds:
(a) D unable to pay debts
(b) No reasonable prospect D will be able to pay debts
* debt must be a liquidated sum of more than £5000 and D must be domiciled in E&W
3. Debtor can petition on grounds that unable to pay debts
4. Evidence that unable to pay debt:
(a) unpaid judgment debt for 3 weeks or more
(b) unsatisfactory execution of judgment
COURT HAS DISCRETION on whether to grant bankruptcy order
86
What is D prevented from doing on bankruptcy order?
- Acting as a director
- Being involved in the management of a company
- Obtaining credit for more than £500 without disclosing bankruptcy
- Retaining personal possessions except for domestic purposes
87
When does bankruptcy end?
Automatically after a year but the Trustee can apply to have the discharge suspended
88
Bankruptcy order of priority:
1. Payment to secured creditors
2. Trustees expenses
3. Specially preferred creditors (training, apprenticeship fees)
4. Preferential creditors
5. Unsecured creditors
6. Statutory interest
7. Debts to spouse
8. Any surplus is payable to the debtor
89
What happens if borrower fails to comply with bankruptcy order/commits fraud/engages in preference transactions or TUV?
SS or Official Receiver can apply for Bankruptcy Restriction Order
- operated between 2 and 15 years and prevents person obtaining credit for more than £500 without disclosing bankruptcy for duration
- Breach is criminal offence - fine or imprisonment
B can in the alternative offer a bankruptcy restriction to SS which has same effect without criminal consequences - a 'final warning' sort of thing
90
3 types of voidable transactions:
1. Transactions at an undervalue
2. Preferences
3. Transactions defrauding creditors
91
What power does the court have re voidable transactions?
Can restore position as though transaction had not occurred
92
Transaction at an undervalue - what are the timing considerations?
What needs to be proved?
- Can be a TUV within the last 5 years starting on date of petition of bankruptcy
- If between 2-5 years then must prove was insolvent at the time
- Insolvency presumed where TUV was to an associate of B
93
Preferences
What is it?
Timing?
Prove?
Preference is a transaction to a person who is (i) a credit (or surety or guarantor) and (ii) it puts them in a better position than would have been on bankruptcy
Timing
- in the 6 months preceding the petition OR 2 years if to an associated person
Prove
- Insolvent at the time or became insolvent as a result
- Influenced by a desire to prefer
- Desire to prefer presumed where to an associated person
94
Requirements for transaction defrauding creditors?
Show TUV with intent to defraud
No timing elements or need to prove insolvency
95
Fraudulent trading
Process?
Prove?
Remedies?
Process:
- Liquid/admin applies to court
- Bring against ANY PERSON who knowingly carried on business with the intent to defraud creditors for fraudulent purposes
Prove
- Actual dishonesty
Remedies
- D to pay to company whatever the court deems fit
- Compensatory not punitive
- Co holds on trust for all creditors generally NOT the defrauded creditor
- D will generally be subject to disqualification order
- D could face up to 10 years in prison
96
Wrongful trading
Who brings?
Remedies?
Against whom?
Requirements?
Brought by Admin/Liquid
- Civil wrong not criminal
Remedies
- Court orders D to compensate all creditors generally - more money in the pot for distribution
Brought against any person who was a director at the relevant time
Requirements
1. Company has gone into insolvent liquidation
2. at some time before commencement of WU
3. Ds knew or ought to have known
4. There was no real prospect that the company would not go into insolvent liquidation
AND
5. Ds continued trading even thought they knew the above
6. The trading put the company in a worse off position
(Company MUST have been at the point of no return for wrongful trading to apply)
97
Defence to wrongful trading?
Every step defence
98
What is the every step defence and what is the test?
Defence - that after D knew or ought to have known that there was no real prospect that the company would not go into insolvent admin/liquid, they took every step with a view to minimising loss to the creditors
Test:
1. Whether D concluded no reasonable prospect of co not going into admin/liquid
2. Whether D took every step
Look at the reasonably diligent person test - facts D ought to have known/ascertained assessed against what a reasonabnly diligent person would have known having (i) general knowledge, skill and expertise of someone in that position, and (ii) actual knowledge of that specific director
- Court will take the higher of the two
99
Advice to directors of company in financial difficulty to minimise the risk of wrongful trading:
- Hold regular board meetings to review financial position and take minutes
- Raise concerns regularly
- Seek legal/financial advice
- Consider whether it is sensible to incur further liabiliyies
100
When is there a defence against voiding a TUV on WU of a company?
Where
1. Ds acted in good faith on entering into transaction
2. They had reasonably grounds for believing that it would benefit the company
101
Sanctions for a TUV - company:
- Court can make order as it sees fit to restore position
- Order should not prejudice any subsequent purchaser who transacted in good faith for value
- Presumption of bad faith where:
(a) Purchaser knew of the surrounding circumstances OR
(b) was a person associated with D or company
102
What does victim or L/A need to show to prove transaction defrauding creditor - company:
1. TUV
2. Made with the intent to put assets out of reach or otherwise prejudice the interests of creditors (includes future creditors who were unknown at the time)
103
Avoidance of floating charges:
1. Floating charge for no new consideration is automatically avoided but may need L/A to bring the claim
2. Time - 12 months preceding insolvency or 2 years if connected person
3. Show company was insolvent at the time or became insolvent because of transaction
4. Presumption of insolvency if floating charge granted to connected person
5. If avoided, only the floating charge is invalid not the underlying debt
6. Overdrafts - once more money is drawn this is valid as it counts as new consideration and payments back into account pay off initial debt first
104
Liability in a partnership:
Contract- joint
Tort - joint and several - may have to pay more than their share if other partner does not pay enough
Personal liability for partnership debts
105
Is a firm bound by a contract entered into by an agent?
*Where partners content with agent's act
*Where partners not content with agent's act
Where partners are content:
- if have given actual implied or express consent then will be bound
- even if agent did not have authority at the time can be bound if Ds ratify
Where partner is not content:
- Partner can bind firm against other partners wishes if:
* act is for carrying on the business
* in the usual way
* NOT be bound if
(i) 3P knew that partner was not authorised
(ii) 3P thought partner was not a partner
NB: partner may be liable to the other partners for breach of contract
106
How does tax work in a partnership?
Tax transparent - Parnters pay income tax and CGT on their share of the profits
107
Standard terms in PA on income/capital and profits/losses:
Partners are entitled to share equally in the profits and contribute equally to the losses
108
Are partners entitled to a salary in default provisions?
No
(Can take drawings out of the profits though)
109
Standard provisions on decision making in partnership agreement:
All decisions to be taken by a majority except the following which must be unanimous:
1. Changes to the nature of the business
2. Appointment of new partner
3. Varying the powers/duties of partners
110
What happens when a partner leaves the partnership?
Dissolves
111
How can a partnership dissolve?
1. Automatic
- Expiry of fixed term
- End of joint venture
- Death or bankruptcy of any partner
2. If a partnership becomes unlawful
3. On notice from any partner
4. By the court as a last resort
112
How do you set up an LLP?
Form LL IN01 sent to CH with fee stating:
- Name
- Registered address
- Designated members
Certificate of incorporation will be sent which is conclusive evidence that the partnership is registered
113
How many members must an LLP have?
How many designated?
At least 2 - no max
AND at least 2 DESIGNATED members
114
When will a member of an LLP cease to be a member?
1. Death
2. Agreement of other members
3. Notice to the LLP
4. Dissolution
115
How are LLPs treated for tax purposes?
As partnerships i.e. partners pay tax on their own share of the profits
116
Some corporate characteristics and partnership characteristics of LLPs?
Corporate:
- Separate legal personality
- Limited liability
- Can create floating charge over assets
- File accounts at CH
Partnership
- Tax
- No requirement for capital maintenance and no share capital
- No real distinction between members and the board of management
- Subject to the 'clawback' rule (in certain circumstances, money taken out of the partnership by partners in 2 years preceding WU can be lawed back into the pool to be distributed to creditors
117
Purpose of Articles of Association:
- Regulate relationship between SH and Co
- Regulate relationship between SH
118
What is a provision of the CA that overrides anything in the Articles?
- For the right to demand a poll vote at a GM the SH must hold 10% of the voting rights
119
How to incorporate a company from scratch:
Documents to send to CH:
- IN01
- Fee
- Memorandum
- Articles (unless using model articles)
Company will be sent a certificate of incorporation
Becomes a legal entity on the DATE RECEIVE the certificate
120
Post-incorporation steps:
- Set AP - Form AA01
- Register for tax
- Chairperson - decide whether they will have casting vote
- SH agreement
- Auditor
121
Is it possible for a company to ratify an agreement made by an individual in company name before became a legal entity?
No
122
What decisions cannot be passed by written resolution?
1. Removal of a director
2. Removal of an auditor
123
Who can demand a poll vote at a GM?
1. Chairperson
2. Directors
3. SH with 10% of voting rights
4. 2 or more person with the right to vote on the resolution
124
Board meetings:
Who calls?
Notice?
Quorum?
Voting?
1. Any D can call or instruct company secretary to call
2. Notice - reasonable notice
3. Quorum - 2 Ds
4. Voting - show of hands and chair has casting vote
125
General Meetings
Who calls?
Notice?
Quorum?
Voting?
1. Called by Ds or in very limited circumstances SH
2. SH must be given 14 clear days' notice of meeting which excludes the day of notice and day of meeting
* if posted or e-mailed then notice deemed served 48 hrs after sending
* notice to include location, time and date of meeting
* Ds must approve notice and authorise circulation
3. Quorum is 2 SH (unless single SH company)
4. Voting is by show of hands unless poll vote demanded (by Ds, SH holding 10%, 2 or more who can vote or chairperson)
126
Sequence of meetings in company decision making involving SH:
1. BM to discuss matters needed to be voted on at GM and to convene GM and authorise notice
2. GM at which SH vote on resolution
3. BM where Ds discuss outcome of vote and authorise steps to be taken for PMM - e.g. relevant filings at CH
127
How to shorten the notice period for calling a GM:
1. Shortened if agreed to by SH
- Majority in number AND hold at least 90% of the voting rights
2. NB for some resolutions still need to display written memo at reg office for 15 days so would only shorten by a day
- in these circumstances a written resolution would be better
NB: can increase the required majority to 95% of voting rights through the Articles
128
What is the written resolution procedure?
1. BM1 to approve the wording of the resolution and approve circulation
2. If SH are present, BM is adjourned and SH can immediately vote, if not then is circulated
3. Vote passes as soon as the requisite majority have voted in favour
4. If majority not obtained within 28 days the resolution will lapse
5. PMMs
129
Who are Ds accountable to?
The company itself not the SH
130
Minimum number of Ds required in a company:
1. Ltd - 1 D
2. Plc - 2 Ds
131
Who is a director?
Anyone who occupies that position howsoever called
1. De jure director - appointed by law
2. De factor director - assumes the position but not appointed
3. Shadow - exerts influence over the board but not appointed
132
What is a service contract in company re Ds?
1. Something an Exec D will have and sets out (i) duties (ii) remuneration (iii) notice provisions
2. Service contract will need to be at the registered office and available for inspection by SH
3. Long-term service contracts need to be approved by SH
133
Where does directors' power to make decisions come from?
Model article 3 - Board can make any decisions for co except those that require SH approval as set out in the Articles
134
What disclosure requirements relating to directors need to be included on the annual accounts?
- Ds salary, bonus, pension entitlements
- Compensation paid to Ds and past Ds for loss of office
- Paid to person connected with D
- Information on advances/ credits given to D
135
How are directors removed?
1. SH can remove a director by ordinary resolution
2. A removal resolution requires special notice of 28 days
3. It is not possible for board to remove D unless this is provided for in the Articles
4. Ds who are also SH are allowed to vote in their capacity as SH AND may have weighted voting rights (Bushell v Faith clauses)
136
What duties does a director have under the Companies Act 2006?
1. s.171 - Act within powers
2. s.172 - Promote the success of the company
3. s.173 - Exercise independent judgment
4. s.174 - Exercise reasonable care, skill and diligence
5. s.175 - Avoid conflicts of interest
6. s.176 - Not accept benefits from 3P
7. s.177 - duty to declare interest in proposed transaction
137
What is D's duty to promote the success of the company?/
s.172
- act in a way that consider in good faith to be in the bes tinterests of the company
- success = long term increase in value
- enlightened shareholder value
138
What is required under Ds duty to act with reasonable care, skill and diligence?
(i) what would be expected of a person in that position (objective)
(ii) what would be expected of a person with that D's knowledge, skill and expertise (subjective)
139
What does D's duty to disclose interest in proposed transactions encompass?
- Must declare the nature and extent of interest in a proposed transaction
- Must declare before transaction entered into
- Includes transactions indirectly interested in e.g. through spouse
- Can make a general declaration
- Declare at meeting or in writing - posted or email if agreed upon
- Do NOT need to declare if
(i) no prospect of conflict arising OR Ds already knew about it
(ii) D not aware of transaction
(iii) interest is in a service contract that will be discussed at the meeting
- D cannot vote on a transaction in which has an interest in capacity as director unless authorised in the Articles
140
Remedies for breach of director duties:
1. s.174 - care, skill, diligence
- Damages ONLY
2. Other duties
- Injunction
- Set aside transaction
- Restitution and account for profits to company
- Restoration of property
- Damages
141
When can SH ratify a breach of DD?
- Negligence
- Breach of duty
- Breach of trust
- Default
CANNOT ratify in an insolvency situation or for fraud or anything unlawful
142
3 main groups of transactions that require SH approval?
1. D's long term service contract
2. Substantial property transaction
3. Loans, quasi loans and credit transactions
143
Ds long term service contract:
- How do they get approved?
- What is it?
- What if it does not get approved?
- Procedure for voting
Approval by OR of SH
It is a contract the guaranteed term of which exceeds 2 years - i.e. the company does not have the power to bring the contract to an end in that time
If contravened (entered into without SH approval) then void to the extent of the contravention and implied term than co can bring contract to end at any time on reasonable notice
Procedure
- Memorandum setting out the proposed terms of service contract is to be made available at registered office for 15 days ending with meeting (and at the meeting itself)
- Means that the shortened procedure would only save one day
- Can use the written resolution procedure - would need to send terms to each member with resolution
144
What is a substantial property transaction?
Transaction involving a disposal or acquisition of a substantial non-cash asset by a director, or director of holding company (or person connected) from or to the company
Substantial non-cash asset:
1. £5000 or less is NOT substantial
2. Over £100,000 IS substantial
3. Between those values IS substantial if it is more than 10% of the NAV (or called up share capital if a new company)
145
Who is a person connected for purpose of substantial property transactions?
- Members of D's family - parents, children, step-parents (NB: brothers, sisters, grandparents ARE NOT)
- companies in which the D holds 20% or more of the shares
- business partner of D or those connected with business partner
- trustee of trust where D is a B or connected with a B
146
Remedies where SH approval not gained before SPT:
1. Voidable at the instance of the company UNLESS
(i) restitution no longer possible
(ii) SH affirmed
(iii) rights acquired by 3P in good faith would be affected
2. Directors to account for profits to co to indemnify for any losses
3. SH can affirm SPT by OR within a reasonable time
147
Defence to D breach of correct procedure for SPT:
1. If D can show it took all reasonable steps to comply OR
2. D can show they had no knowledge of the circumstances constituting the contravention
148
What are the 4 types of loans we are interested in when looking at loans to directors?
3 types of companies when looking at this?
1. Loans
2. Quasi loans - e.g. where co agrees to pay off a debt owed by D to 3P on understanding D will pay back
3. Credit transactions
4. Guarantees or provision of security for any of the above
Companies
1. Private company
2. Public company
3. Private company associated with public company
149
Can a company legally make loans to directors?
Yes, but may require shareholder OR approval
150
What loans/transactions with Directors require OR SH approval for PRIVATE companies?
1. Loans
2. Guarantees or securities for loans
151
What loans/transactions with Directors require OR SH approval for PUBLIC and PRIV ASSOC WITH PUBLIC companies?
1. Loans
2. Quasi loans
3. Credit transactions
4. Guarantees/security
With D or with connected person
152
Exceptions to the rule need SH approval for loans with directors:
- Expenditure on company business up to £50,000
- Loans for defending proceedings against D
- Loans for defending regulatory proceedings or investigations
- Small transactions - Loans/quasi up to £10k and credit up to £15k
- Money lending in the ordinary course of business
153
Right of SH and their remedy if breached:
SH rights (in capacity as members):
- right to dividend once declared
- right to share in surplus on winding up
- right to vote at meetings
- right to receive notice of AGMs and GMs
Remedies
- damages
NB: court will not imply any terms into contract - Articles deemed to be complete
154
Procedure for SH removal of a Director:
- Directors can be removed by OR of the SH
- Cannot be done by written resolution
- SH have to provide a special notice of intention to Ds AT LEAST 28 clear days before GM
Ds then have 2 options
1. Put removal resolution on GM agenda
- Give SHs normal 14 clear days' notice of GM and attach details of resolution
2. Do not put the removal resolution on agenda
- SH can force Ds to call a GM
- This can be done by SH together holding at least 5% of the voting rights in the company
- Send to Ds a request for a GM and details of nature of request e.g. RR to be on agenda of GM
- Ds have to call meeting within 21 days of receiving request
- Ds then have 28 days from calling to hold the meeting
- if Ds fail to do this then SH can call the meeting either (i) ALL the SH who submitted the request OR (ii) SH representing over 50% of the voting rights in the company
- SH must give at least 14 clear days' notice of the GM AND must hold the GM within 3 months' of Ds receiving the request
155
What are a directors' options when faced with a removal resolution?
1. Defend self
- D will be notified immediately of the removal resolution (RR) by the board
- D can make written representations (of reasonable length) and this can be circulated to SH or read out at the GM
- D also has the right to be heard at GM and can make oral representations too
2. Vote at the meeting
- D can vote on the resolution in capacity as SH
- Check Articles and SH agreement as may contain a Bushell v Faith clause
3. Compensation
- D can get compensation but has to be approved by OR of the SH UNLESS:
(i) less than £200
(ii) payment made in good faith (a) in discharge of legal obligation, (b) damages in respect of legal obligation (c) pension money (d) in satisfaction of a claim relating to termination of employment
- if employment contract breached then may be entitled to damages
If SH OR then details of the payment need to be made available at the registered office at least 15 days before the GM
156
What is the rule in Foss v Harbottle?
When a wrong is done to the company the proper claimant is the company
157
What is a s.260 (CA) claim?
Who can bring?
Allows Sh to bring a claim against Ds who breach duty on behalf of the company
SH but not a former SH
158
Process for a s.260 claim:
This is a derivative claim against Ds by SH acting on behalf of company
Need to seek court permission in a 2 stage test
1. Prima facie case
- Court MUST deny if considers someone acting in accordance with s.72 (promote success) would not bring
- court then MUST have regard to factors in s.163(3) - whether SH acting in good faith, whether breach likely to be ratified
2. Step 2 - court must have regard to particular factors including any evidence it has about members' views who have no personal interest in the matter
- very restrictive approach and many claims are denied
159
Key principles of unfair prejudice and process
Remedies
Section 994(1) provides this process
- SH claiming in their own capacity
Process
- Petitions the court on the grounds:
(a) company affairs have been/are being conducted in a manner which is unfairly prejudicial to shareholders or some part of shareholders OR
(b) company's proposed affairs will unfairly prejudice SH
What does not count as UP
- negligence or ineptness unless it is serious and persistent so that it causes risk to minority shareholding
- breach of articles may be enough
Other considerations
- No need to prove bad faith
- No need for SH to come to court with clean hands
Evidence of unfair prejudice:
- diminished value of shareholding
- no longer being involved in the management
Remedies:
- generally court will order company buy back SH shares
- generally valued as set out in the Articles unless do not provide for this
- court will not value at a discount generally
- company behaviour taken into account eg if rejected a reasonable offer
160
What is just and equitable winding up/process?
SH petition court to wind up company on basis it is just and equitable under s.122(1)(g) IA
Court has discretion over whether to grant
161
What is a share?
Bundle of rights
- right to vote
- right to dividend when called
- right to share in the surplus capital on winding up
162
What is a participating preference share?
Preference share but after received fixed amount joins the OS shareholders in participating in the surplus for dividends and on winding up
163
How can a class of rights be varied?
- In accordance with the Articles or else by WRITTEN consent of 75% of holders of shares in that class OR SR of all shareholders
- SH holding at least 15% of shares in that class may apply to court to have resolution cancelled within 21 days of it being made
- The resolution is on hold until court order made
- Court will not approve if thinks it UP to the SH in the class
164
Which companies are prohibited from giving financial assistance?
If Target is public then prohibition applies to T and any subsidiary
If T is private then applies to any public subsidiary of target only
165
Consequences of carrying out prohibited financial assistance?
- fine for company
- fine or imprisonment for officers of company
- transaction void and winder transaction (e.g. FA for acquisition) may also be void
166
What is the doctrine of maintenance of capital?
Company cannot release money in equity account to return money to SH while business is a going concern
167
What shareholder resolution is needed to authorise buyback of shares?
ORDINARY
168
How to calculate income tax:
1. Gross taxable income
2. Net = gross - reliefs
- Relief 1 = deduction of interest paid on qualifying loans*
- Relief 2 = deduction of payments into pension schemes
3. Taxable = Net - Personal allowance
- PA = £12,570 - reduced by £1 for every £2 over £100,000
4. Split into NSD
5. Apply the Non-savings tax rate
6. Apply the PSA
- £1000 for basic rate
- £500 for additional rate
- £0 for higher rate
7. Apply the savings rate
8. Apply the dividend allowance of £1000
9. Apply the dividend rate
= Total
169
How do disposals between spouses work for CGT purposes?
Exempt from CGT - spouses takes over the base cost of the asset
170
Income tax rates and bands:
Bands:
Basic = 0 - 37,700
Higher = 37,700 - 125,140
Additional = 125,140+
Rates:
NS = 20, 40, 45
S = 20, 40, 45
D = 8.75, 33.75, 39.35
171
What is the annual exemption for CGT for individuals?
£12,300
172
How to calculate CGT payable by an individual?
Chargeable gains = sale proceeds - allowable expenditure (includes acquisition cost, any enhancement costs and any costs associated with sale)
Taxable CG = Chargeable gain - capital losses - annual exemption (£12,300)
Apply tax rate
- Basic = 10% (up to 37,700)
- Higher = 20% (over 37,700)
173
What is the effect of BADR?
Reduces the tax rate from 20% to 10%
174
What disposals can be subject to BADR and what are the requirements?
1. Disposal of a trading company
- must have owned company for 2 yers before disposal
- must be a trading company
2. Disposal of assets in a company that ceased to be a trading company
- must have owned company for 2 years before it ceased to trade
- assets must have been used for business purposes at time ceased to trade
- must sell assets within 3 years of business ceasing to trade
3. Disposal of shares in trading company
- must have held shares for at least 2 years
- must be an officer or employee of the company
- must hold at least 5% of the OS and entitled to 5% of assets/surplus on WU and have held for 2 years
4. Disposal of shares in company that used to trade
- must have held shares for 2 years before company ceased to trade
- must have held 5% interest in OS and surplus on WU
- must dispose of shares within 3 years of company ceasing to trade
LIFETIME ALLOWANCE OF £1 million
175
What is investors' relief?
Investors' relief reduces CGT rate from 20% tp 10%
- must be share sin unlisted company held for at least 3 years
- investor cannot be officer or employee of company
176
IMPORTANT TO REMEMBER RE HOLDOVER AND ROLLOVER RELIEF (Individual CGT):
CANNOT use the annual exemption
177
What is hold-over relief?
Where asset is given away, the new base cost of the asset held by beneficiary is reduced by donee's deemed gain
- postponed until donee disposes
178
Shares have been transferred, new Ds and CS have been appointed and PSC has changed - what registers need updating?
1. Register of members
2. Register of directors and company secretaries
3. Register of PSC
179
SQE
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