1
Q
What is the difference between an incorporated and unincorporated business?
A
Incorporated = separate legal entity Unincorporated = no separate legal entity
2
Q
Is a sole trader a separate legal personality?
A
NO, the sole trader owns the assets personally
3
Q
What liability does a sole trader have?
A
Unlimited liability
4
Q
Who receives the profits for a sole trader?
A
Only the sole trader
5
Q
Who makes the decisions (sole trader)?
A
Only the sole trader
6
Q
What are the administrative burdens (sole trader)?
A
Very little
Tax and employment regimeds
7
Q
What is the flexibility of the structure (sole trader)?
A
There is no set structure so very flexible
8
Q
What transparency is needed (sole trader)?
A
Do not have to publish accounts or file documentation with Companies House
9
Q
What is a Partnership?
A
This is when two or more people run and own a business together
10
Q
What are the two rules of a Partnership?
A
- Partnership is when two or more people
2. Carry a business with a common view for profit
11
Q
Is a Partnership a separate legal entity?
A
NO, partners own the assets
12
Q
What is the liability for a Partnership?
A
Joint and severally liable
All can be sued for all liabilities
13
Q
How are profits shared in a Partnership?
A
Equally, unless agreed otherwise
14
Q
How are decisions made in a Partnership?
A
Equal votes in decision making, unless agreed otherwise
15
Q
What is the administrative burden (Partnership)?
A
Very little
Need to comply with tax or employment regimes
16
Q
What is the flexibility of structure (Partnership)?
A
The Partnership Act imposes a structure only if there is no agreement to the contrary
17
Q
What is the transparency needed (Partnership)?
A
Do not have to punish accounts or file documentation with Companies House
18
Q
Is an LLP a separate legal entity?
A
YES
LLP owns the assets
19
Q
What is the liability of partners in an LLP?
A
Limited liability
20
Q
How are profits shared in an LLP?
A
Shared equally, unless otherwise agreed
21
Q
How are decisions made in an LLP?
A
Equal votes in decisions
22
Q
What is the administrative burden for an LLP?
A
Greater than a Partnership as there are registration and on-going filing requirements
23
Q
What structure must there be for an LLP?
A
The Partnership Act imposes a set structure only if there is no agreement to the contrary
24
Q
What transparency is needed for administrative tasks?
A
Accounts and details of members need to be filed and go on a public register at Companies House
25
Is a company a separate legal entity?
YES
Company owns the assets in its own rights
26
What is the liability for members?
Shareholders - protected by limited liability
Directors by company being separate legal entity
27
How are the profits shared in a company?
Shareholders paid dividends
Directors paid a wage
28
Who is involved in decision making?
Day to day decisions = directors
| Major decisions = shareholders
29
What is the administrative burden for a company?
Highly regulated
Leading to registration and on-going filing requirements
30
What is the structure of a company?
Reasonably rigid, regulated by statute
31
What transparency must there be for a company?
High levels of transparency
| Must file details of directors, shareholders and major decisions
32
What are the advantages of a company?
1. Separate legal entity so limited liability
| 2. Therefore can take more risks
33
What was established in Solomon v Solomon?
A company is a separate legal person from those who owns the shares and run the company
34
What was established in Prest v Petrodel?
The corporate veil can be pierced when a person under an existing legal obligation or liability is subject to an existing legal restriction, which he deliberately evades
35
What must a public company have?
1. Constitution which states it is a public company
2. Plc in the name
3. £50,000 in share capital
36
Why would you operate as a public company?
- They are more prestigious
- They can raise money by offering shares to the public
- They can be part of the stock market
37
What are the two things needed for a Partnership?
s1 PA 1890
1. Two ore more persons
2. Carrying on a business in common with a view for profit
38
What are certain rules which help to determine the existence of a Partnership?
- Sharing gross profit
- Decision making
- Names of title deeds of the property
39
What is the Partnership Act 1890?
This provides a default contract which governs the relationship between partners
40
Can the PA 1890 be override?
s1 and s2 CANNOT
| Anything else
41
What are the advantages of a partnership?
1. Companies are heavily regulated by the CA 2006, whereas Partnerships are not
2. Partners DO have unlimited liability
3. Lack of formalities means more time on trading
4. Tax advantages
42
What are stipulations of the name of a GP?
Any name as long as
- Does not include LLP/PLC
- Be offensive
- Same as an existing trademark
- Sensitive word
43
What place and nature of business for a GP?
Anywhere, set out place of business and area of geographical operation
44
When will commencement begin?
When the definition is satisfied from s1
45
What would a fixed term be?
Clear date when the Partnership will end
However, if continue as if nothing has changed, will assume they will be on the same terms
46
What does the PA 1890 say about working hours?
Not required to take part in the management of the business
47
What should be included in a partnership agreement about work input?
- Working hours
- Full time/part time
- Whether they can work separate jobs
48
What does the PA 1890 say about roles?
Undefined
49
What would you include in a Partnership Agreement on roles?
Will set out each partner's role
50
What does the PA 1890 say about decision making?
All decision making should be made by a majority except
1. Changing the nature of the business
2. Introducing a new partner
3. Changing the terms of the partnership agreement
All of these must be UNANIMOUS
51
What could be set out in the partnership agreement regarding decision making?
If any further decisions need to be unanimous
52
What should partnership agreement say about financial contributions?
The initial contribution and whether any contributions are obliged in the future
53
What is set out in PA1890 regarding profit and losses?
ALL SHARED EQUALLY
54
What should be said in partnership agreement regarding profits and losses?
Profits - different if more capital contribution or more hours worked
Losses
- Salaries still awarded?
- Will be shared equally?
55
What is said in PA1890 about salaries?
Partners are not employees so do not receive salaries
| Anything they take out is known as a drawing
56
What is said in PA1890 about ownership of assets?
Undefined
57
What should the Partnership Agreement say about ownership of assets?
Set out how they are owned
If partner were to leave who would keep the asset
58
What is said in PA1890 about expulsion?
No majority of partners may expel another
| Must be ALL including the one being removed
59
What should be included in a partnership agreement?
A clause where if a partner has acted in a certain way, they will be expelled
60
What is included in the PA1890 about dissolution?
There is no requirement for notice to be given regarding dissolution
Therefore a partner can end the partnership with immediate effect by merely saying to the other partners that they wish the partnership to end
This is impractical
61
How can the partnership agreement prevent this?
Notice period for ending the partnership
Not in first year of trading, allowing themselves to become established
62
When may a partnership dissolve?
- A partner retires
- On expiry of a fixed term
- By the death or bankruptcy of partners
- If the partners give notice of dissolution to a partner
63
What is the effect of dissolution?
The partnership ends, all assets are sold and the outgoing partner must receive their share
64
What could a partnership agreement state about dissolution?
Partial dissolution - when partner leaves, the remaining partners continue partnership
65
What happens to outgoing partners shares?
Entitled to either interest at a rate of 5% per annum or share of profits
66
How are the proceeds of the sale distributed?
1. Creditors
2. Partners who have lent money
3. Partners share of the partnership capital
4. Surplus shared between the partners
67
What can be put in place in a partnership agreement regarding restraint of trade?
Seeks to restrict outgoing partners in their business dealings after they leave
This can protect
- Business contracts
- Confidential information
68
What makes a reasonable restriction on trade?
- Protecting interest
- Duration
- Geographical area
- Scope
69
What can be included regarding dispute resolution?
Must first go to arbitration rather than courts
| Quicker and cheaper
70
What is actual authority?
Any firm is bound by any contract or deed entered in to by partners in the firms name, provided that the actions were authorised
71
What is express actual authority?
The partners may have expressly given one of the partners permission to enter in to a transaction
72
What is implied actual authority ?
Partners have impliedly accepted that one or more partners have authority to represent the firm in a particular type of transaction
73
What is apparent authority?
Firm may be liable for actions that are not authorised but may have appeared to an outside as authorised
74
What types of transactions would come under apparent authority?
1. Related to business carried on by the firm
2. Partner would usually act for this
3. Other party did not know there was no authority
4. Deals with a person they think is a partner
75
How can a partner escape liability?
1. Insurance
2. Novation agreement
3. After leaving the partnership
76
What is a novation agreement?
A retiring partner can enter in to an agreement with a creditor/new partner to release them from existing liability
77
Why would a new partner agree to a novation agreement?
It would come as part of a generous joining package
78
How does a partner escape liability for debts after they have left the partnership?
s36
79
What is s36?
Anyone who has dealt with the firm before must be given ACTUAL NOTICE of the partner in question leaving
Anyone who has not dealt with the firm before must be notified of the partners retirement through
- Notice in London Gazette
80
What is holding out?
This is where a creditor of a partnership has relied on a representation of a particular partner when entering in to a contract
In this case they will be liable, even if the person had never been a partner
81
Who can be sued in a partnership?
1. Partner with whom they made the contract
2. Anyone who is a partner
3. The firm
82
What if the partner cannot pay?
- Obtaining a charge over the partner's property or properties
- Order of sale of these properties
- May seize these assets
83
What are the advantages to the LLP?
- Limited liability
- Able to grant fixed and floating charges
- Leeway with regard to management structure
- Appoint an administrator
84
What are the disadvantages to the LLP?
- Administrative and accounting requirements: must file accounts with the Registrar of Companies and must file other information
- Public inspection of these documents
85
What is needed in a name of an LLP?
```
Must end in LLP
Must not
- Be offensive
- Same as existing trade mark
- Contain a sensitive word
```
86
How do you incorporate an LLP?
LL IN01 at the Companies House, along with the applicable fee
87
How many members must an LLP have?
Must have two members on incorporation
88
What must the members do?
- Sign and file accounts with registrar
- Appoint auditors
- File the annual confirmation statement
- Send notices to the Registrar of Companies
- Winding up the LLP
89
What are the duties and responsibilities of members (LLP 2001)?
- Duty to act in good faith
- Fiduciary duty
- Duty to account for any money received on its behalf
- Duty to members to render true accounts
90
What is the authority of members of an LLP?
They are all agents - actual authority
91
How are profits and losses shared?
- Profits shared equally
| - Losses limited liability
92
What about management of an LLP?
Every member may take part but don't have to
93
What about decision making?
```
Same as GP
All majority apart from
- Nature of business
- New partner
- Terms of the partnership
ALL UNANIMOUS
```
94
Leaving the LLP?
Same as GP
95
How do you incorporate a company?
- Form IN01 to Companies House
- Memorandum of association
- Company's articles of association
96
How do you make the application?
Online or by post
97
What must be at the end of a company name?
Limited or Ltd
98
What are restrictions on similarity of existing names?
Cannot be same as current company name
| This includes identical things such as £ = pound
99
What are restrictions on prohibited names?
Criminal, offensive
Must not be sensitive words (eg British, University, dental)
Must not be more than 160 characters
100
What is a trading name?
This is a name that is different from their registered name?
101
What is passing off?
Where a company uses an association with an existing company to benefit from its good reputation
102
What are stipulations on the registered office?
- Need office and address
- Public
- Where records must be kept
103
How many directors needed per company?
1
104
Do director's residential and service addresses need to be public?
Residential NO
| Service YES
105
Can a director prevent their addresses being public?
YES to court
| There must be a risk of intimidation or violence
106
What is a company secretary?
Don't have to
But will do all filing work etc
Addresses must be public
107
What details need to be available for the first shareholders?
They are called subscribers
They must have their name, addresses and details of their shareholding's
108
What is a statement of capital?
The number of each shares and their nominal value
109
What information must there be regarding the shares?
- What share of dividends they will receive
- Whether they can exchange their shares for money
- Whether they can vote on certain company matters
- How many votes their shares entitle them to
110
What is someone with significant control?
1. Holds more than 25% of shares
2. Holds more than 25% voting rights
3. Holds the right to appoint or remove a majority of the boards directors
111
What are the categories for a person of significant control?
1. Holds more than 25% but no more than 50%
2. More than 50% less than 75%
3. More than 75%
112
What is a company's constitution?
- Memorandum of association
- Articles of association
- Certificate of incorporation
- Current statement of capital
- Shareholder's agreements
113
How are members and company bound to each other?
1. Members to company
2. Company to members
3. Members to other members
114
Explain how members are bound to company?
As company is bound by members, they can enforce their rights
Wood v Odessa Waterworks: directors refused to pay dividends. Wood achieved injunction
115
Explain how company is bound to its members?
As the members are bound to the company, the company can enforce its rights against the members.
Hickman v Kent: where a member has breached the statutory contract, the company itself must bring an action
116
Explain how members are bound to each other?
Members between them can bring action against another to enforce their personal rights [Rayfield v Hands]
117
What are the set articles?
Articles of Association
118
What were the set articles pre-2008?
Table A articles
119
What is needed to amend the articles?
Majority of 75%
Special resolution
120
How does a private company convert to a public company?
- Must pass special resolution approving re-registration of company as a public company
121
What is a shelf company?
This is a company ready to go at very short notice
They will already be set up with two directors and two shareholders, each of whom owns one ordinary share
122
What are key differences between private and public company not yet discussed?
- Company secretary NEEDED in public
- Must hold AGM public
- Cannot use written resolution procedure in public
123
How can a new shareholder be assigned?
1. Obtain shares from existing shareholder
2. Receiving some of the shares of an existing shareholder as a gift
3. Receiving shares by way of transmission
4. Company allotting new shares
124
What about registration of members?
- Must keep a register of members
- Central register at Companies House or not
- Must be done within 2 months
125
What is the PSC register?
Persons of Significant Control
126
What is important about it?
Anyone over 25% voting rights or shares
| Even if no one, this can still be important information
127
What are the two types of share?
Ordinary
Preference
128
What are ordinary shares?
They give the right to attend and vote and general meetings
| They can receive dividends if they are delcared
129
What are preference shares?
Received enhanced rights, usually for people more concerned about financial returns
130
What is a cumulative preference shareholder?
The preference shareholders have to be paid any missed dividends from previous financial years, as well as current financial year's dividend
131
What is a non-cumulative preference shareholder?
If a dividend is not paid in a particular year, the shareholder loses the right to that year's dividend
132
What is unfair prejudice?
Any shareholder can apply to the court for an order or remedy when. they feel they have been unfairly prejudiced
133
How does the court assess unfair prejudice petitions?
It must cause harm to one or more shareholders and it must also be unfair
Objective test
134
What are remedies for unfair prejudice petition?
- Other shareholders must buy the shares of the unfairly prejudiced shareholder
- An order of the company to buy back the shares
135
What is a derivative claim?
This is a claim instigated by a shareholder for a wrong done to company which has arisen from an act or an omission of a director
136
How do shares usually change hands?
Allotting
- Company decides to create new shares
Buy back
- Company buys back some of its owns shares
Transfer
- Shareholder gives to another shareholder
137
Can a company prevent a transfer of shares?
YES within a company's articles, there can be provisions to prevent the transfer of shares to someone
138
How are shares transferred?
Sign and complete a stock transfer form
| Send share certificate and stock transfer to company
139
What should the company do once the shares are transferred?
- Send the new shareholder a share certificate in their name within two months
- Enter their name on the register of members
140
How do directors make decisions?
At board meetings through board resolutions
141
Does every single decision by a director have to be made at a board meeting?
NO
| Can delegate their powers as they see fit
142
Who can call a board meeting?
Any director (MA9)
143
What notice needs to be given
1. Reasonable notice
2. To all directors
3. Include time, date and place
144
What is reasonable notice?
Re Homer
- Few minutes if all work in same building
- If multi-national then longer
- Can be over skype or zoom
145
What is the quorom of the meeting?
1. At least two directors present
| MA 11
146
When may a director not count in the quorom?
When decision of the board is
- Concerned with actual or proposed transaction or arrangement with the company
- In which the director is involved
MA 14
147
What must the company do in regards to interests?
Where a director has a personal interest in a proposed transaction or arrangement with the company, they must declare the nature and extent of the interest
148
What are the exceptions to the rule of interest?
1. If it cannot be reasonably regarded as likely to give rise to a conflict of interest
2. If the other directors are already aware of it
3. If it concerns terms of service contract that have been or are considered by a meeting of directors
149
What happens once a resolution has been agreed?
- Approve transaction
- Enter in to proposed transaction
- Authorise the execution of any documents
150
How does voting work?
- Simple majority (more than 50%)
- Each director has one vote
- Chairperson will have deciding vote if the vote is tied
- Directors with interest cannot vote
151
What administration needs to be done?
Minutes
Forms to Companies House
152
What is an executive director?
- Appointed by the board of directors
- Employment contracts
- Sets out director's job title, duties and responsibilities
153
What is a non-executive director?
They are appointed by the board and will be registered as directors at Companies House
HOWEVER
They DO NOT have service agreements
They do not receive a salary but a director's fee
They are to prevent poor decision making by the board
154
What is a chairperson?
A chairperson may be appointed by board resolution
They will run meetings and they have a vote
If the vote is a tie the chairperson will either vote to pass it or decline to vote and it will fail
155
What is a de facto director?
They will be carrying out the job of a director even though they are not officially appointed
156
What is a shadow director?
a PERSON WHo acts as a director but has not been formally appointed
Eg major shareholder
Shadow directors more likely to be in the background and not carrying out the normal functions of a director
157
What is a sole director?
Must have two at a directors meeting, however if only one then can make all the decisions
158
What is an alternative director?
Can appoint to attend the meeting and vote as they would want to vote
159
How are directors appointed?
Appointed by the board or by ordinary resolution
160
What is usual for appointing a director?
By board resolution much quicker, but if already having a general meeting, then may add it on the end
161
What are restrictions on being a director?
If a person is disqualified cannot take office
1. A bankruptcy order has been made against them
2. Physically or mentally incapable
3. Disqualified
162
What needs to be filed if a new board director is appointed?
Must notify Companies House within 14 days
Fill out form AP01 (individual)
Fill out form AP02 (corporate)
163
What authority do directors have to act on company's behalf?
Actual - consent from other directors
IMplied
- Board has not said they can act in certain way but has and not be stopped
Apparent
- Acts without prior consent but still binds company
164
What comes within a service contract?
Board of directors decides under MA3 and their power to decide specific remuneration
165
What are guaranteed term contracts?
Any contract that binds a company over two years must be approved by shareholders
166
What must a director do if they want to resign?
They must complete form TM01 or TM02 within 14 days of resignation
167
How can a director be removed?
The shareholders can remove a director by ordinary resolution passed at a general meeting.
Special notice is required for a resolution to removed a director
168
What is meant by special notice?
Ordinary resolution is not effective unless notice of intention has been given 28 days before the general meeting at which the resolution has been proposed
169
What is a Bushell v Faith clause?
Can be inserted that if a director is also a shareholder they can have ten times more votes that usual to vote on themselves
170
What are the two types of shareholder resolutions?
Ordinary
| Special
171
What is needed for an ordinary resolution?
50%+
172
What is needed for a special resolution?
75%
173
What are the two methods of passing shareholders' resolution?
General meeting or by written resolution
174
How is a general meeting called?
Directors, in a board meeting, pass a board resolution to call for a general meeting or written resolution
175
What is an AGM?
Public companies must hold this once a year
176
What must be done to give notice?
1. Must give notice to every shareholder and directors and auditor
2. Must be given in hard copy, electric form or by means of a website
177
What must be included in the notice?
1. The time, date and place of the meeting
2. The general nature of the business to be dealt with
3. Exact wording of a special resolution
4. Each shareholder's right to appoint a proxy
178
How much notice should be given?
14 clear days
179
What is meant by clear days?
The day it is sent out and the day of the meeting DO NOT COUNT
180
What is also added if emailed or posted?
additional 48 hours
181
What is needed for shorter notice?
90% of shareholders need to agree for this to be passed
182
What is the quorom for a general meeting?
Two
if the company only has one shareholder then one
183
Does a shareholder have to declare interest?
NO
| Can still vote
184
What are the two exceptions to this rule?
1. Resolution to buy back some or all of a shareholder's shares
2. An ordinary resolution to ratify a breach of duty of a director, where the director is also a shareholder
185
How is voting conducted at a general meeting?
Show of hands
| Each shareholder has one vote
186
Can a shareholder vote if interests?
YES
Two exceptions
In these cases can still vote but will be discounted if deciding vote
187
What is a poll vote?
This is when shareholders vote on the basis of one vote PER SHARE rather than PER PERSON
188
How can a poll vote be demanded?
- Chair of the meeting
- Directors
- Two or more people who have a right to vote
- A person representing 1/10 or more of the votes
189
What administrative tasks need to be completed?
Internal
- Minutes
External
- Companies House
190
Who can use a written resolution?
Private companies, not public
191
What is a written resolution?
The board sends out by post or email the ordinary and special resolutions that the board is proposing
Shareholders then send back depending on whether they would like to vote in favour or not
192
What is different about a written resolution?
Every eligible member is sent the vote
Therefore the percentages will be different
193
What is a lapse date?
28 days from circulation of resolution
The method of circulation is irrelevant to the lapse date
194
What is the default method of voting for written resolution?
Written resolutions have each shareholder with one vote to each share that they own
195
What are the Articles of Association?
The company's constitution is a statutory contract between
- Each shareholder and the company
- Between each shareholder and every other shareholder
196
What is a shareholder agreement?
This is an agreement between particular shareholders
197
What an advantage of a shareholder agreement?
- Privacy and protection of minority shareholders
198
What are voting rights?
1. Right to send a proxy to a general meeting on their behalf
2. Right to a poll vote
3. Right to receive notice of general meetings
4. Right to requisition a general meeting
5. Right to apply to the court to call a general meeting
199
Who is a corporate shareholder?
As companies cannot act without an individual on their behalf, corporate shareholders may authorise a person to act as its representative
200
What is make a company a subsidiary of another company?
This is if
1. The company holds the majority of voting rights
2. The company is a member of it and has the right to appoint or remove a majority of its board directors
3. The other company is a member of it and controls alone, pursuant to an agreement with other members, a majority in it
201
What is a joint shareholder?
Shares can be held by two or more individuals jointly
| - Register of members needs to record both names but only one address
202
What are the three decisions affecting a company's constitution?
1. Changing articles
2. Changing company name
3. Registering as a public company
203
What are decisions that affect directors?
1. Substantial property transactions
2. Loans to directors
3. Dismissing a director
4. Director's long term contracts
204
What is a substantial property transaction?
Where a director (or a member of his close family) is buying or selling major non-cash asset from or to the company
205
What is the definition of a person connected with a director?
This is family
- Spouse
- Child or stepchild
- Parents
- Any person living in an enduring relationship
- Any children who live in an enduring relationship
OR a company in which the director owns at least 20% of shares or voting rights
206
What is the definition of substantial?
over £100,00
OR
Over £5000 and more than 10% of the company's net asset value
207
What is a non-cash asset?
Anything other than cash
208
What is the effect of a breach?
The transaction is voidable
May have to account for profit
209
Who would have to account for the profit?
1. Any director of the company
2. Any person with whom the company entered in to the arrangement who is connected with a director
3. Any other director who authorised the agreement
210
What is a loan to a director?
Where a company is making a loan to a director of the company or its holding company
211
What is the definition of a loan to a director (three things)?
1. Make a loan to a director
2. Give a guarantee to a loan which a director has entered in to with a third party
3. Provide security for a loan which a director has entered into with a third party
212
What is the process to authorise this?
General meeting setting out the terms of the loan 15 days prior
Written resolution. a copy of the memorandum sent out with written resolution
213
What are 4 exceptions to this rule?
1. Expenditure on company business (loans up to £50,000)
2. Expenditure on defending civil or criminal proceedings
3. Expenditure on defending regulatory proceedings by regulatory authorotity
4. Minor business transactions under £10,000
214
What is the effect of the breach?
Transaction is voidable
215
What is payments for loss of office?
When the directorship ends, the director will often receive payment
216
What about payments to connected persons?
STILL BANNED
217
What is the process to authorise a payment for loss of office?
General meeting: a memorandum containing the particulars for the payment made 15 days prior
Written resolution: memorandum sent out to all eligible shareholders
218
What are the three exceptions?
1. Small payments up to £200
2. Damages for breach of an existing obligation
3. Damages to settle or compromise claims linked with the termination of office/employment
219
What is the effect of a breach?
The recipient holds the payment on trust for the company which made it and any director who authorised the payment must indemnify the company for the loss
220
What is a long term service contract?
A provision in a service contract which guarantees a director a term longer than two years
221
What does the long term service contract regard?
Only the length, not salary working hours etc
222
What is the process for a long term service contract?
General meeting: a memorandum containing the particulars for the payment made 15 days prior
Written resolution: memorandum sent out to all eligible shareholders
223
What also must be kept for long term service contracts?
Must be available for inspection by the shareholders at the company's registered office during their term and until a year after they leave
224
What is the effect of breach?
There is an implied term that a contract not approved by shareholders's is voidable
Only the length - not anything else
225
What other liabilities could they face? (7)
1. Failure to maintain company records
2. FAilure to file certain documents
3. Liability for financial records
4. Liability for health and safety legislation
5. Bribery
6. Making political donations without shareholder approval
7. Civil and criminal liability under environmental legislation
226
What is a dividend?
A share or distribution of profits paid to shareholders
| Percentage profit
227
What are the two types of dividend?
Interim
| Final
228
How does a dividend go about being paid?
1. Director's recommend a final dividend
2. This is proposed at the general meeting
3. Shareholder's agree or disagree
4. If approved the dividend will be paid
229
How long can a director be disqualified for?
2-15 years
230
What could you be disqualified for?
- Conviction of an indictable offence
- Persistent breaches of companies legislation
- Fraud
ETC
231
What could count against a director?
1. Using money meant for paying VAT as the company's working capital
2. Paying excessive director's renumeration
3. Recklessly trading when insolvent
232
What could help a director?
1. Employing qualified financial staff
2. Taking professional advice
3. A person financial investment in the company
233
What is the effect of disqualification?
A director is subject to a disqualification order and cannot be a director of any company
234
When could leave be given to a director?
- Honest
- Business is profitable
- Other directors can watch over
235
What is s171?
A duty to act within powers
236
What is meant by a duty to act within powers?
1. Act in accordance with the company's constitution
| 2. Only exercise powers for the purposes for which they are conferred
237
What is usual about director's rights in a company's constitution?
Usually exclusive managerial power
There may be some restrictions eg size of contracts can enter in to etc
238
What happened in Howard Smith v Ampol Petroleum?
Ampol Petroleum controlled 55% of shares in company and wished to take it over. Howard Smith made rival bid.
This was rejected by Ampol, but Howard Smith issued 10m more shares, diluting Ampol's control to under 50%
239
What was the 4 part test established in Howard Smith v Ampol?
1. Determine what power is being exercised
2. Determine proper purpose for which that power was delegated to directors
3. Determine the substantial purpose for which the power was exercised
4. Whether the purpose was breached
240
What is a remedy for breach?
The director will be required to account for any gains made and to indemnify the company for any losses resulting from the relevant act
241
What is s171 CA 2006?
Duty to promote the success of the company
242
What does promoting the success of the company mean?
A director must act in a way that he considers, in good faith, would be most likely to promote the success of the company for the benefit of members as a whole
243
How will the courts test whether director has breached this duty?
SUBJECTIVE TEST
- As long as the directors honestly believe that they are taking their decisions for the right reasons then the court will not intervene
- It is not relevant that it was a bad decision
Therefore very difficult to prove
244
What is success of the company?
This could be financial or non-financial
| Will usually mean the long-term success
245
What is meant by the benefit of members as a whole?
The duty does not focus on the company's success as an end itself, it must promote the success of the company for its members
246
What must a director consider?
- Likely consequences of any decision, long term
- The interests of the employees
- Relationships with suppliers customers etc
- The environment
- The company's reputation
- The need to act fairly between members
247
What are the remedies for breach?
- Any act is voidable at the company's instance
| - Where the act also causes loss to the company, any directors in breach may be required to compensate for such loss
248
What happened in Regentcrest v Cohen?
Regentcrest waived a provision for directors to repay money if they worked for free for three years.
Weeks later the company went in to liquidation
NO BREACH as directors believed would not be able to reimburse and better for company
249
What is s173 CA 2006?
Duty to exercise independent judgement
250
What are exceptions to the duty to exercise independent judgement?
1. The director simply relies on the advice of another person
2. The director fetters their discretion and binds themselves to act in a certain way, if they bona fide believed in such action to be in the interests of the company
3. Acts in a way in line with the company's constitution
4. The director does not have to be independent themselves
251
What are remedies for breach?
- Any agreement is voidable
| - Any director in breach will be required to account for any gains made and to indemnify the company for loss
252
What is s174?
Duty to exercise reasonable care, skill and diligence
253
What is meant by reasonable care, skill and diligence?
1. The general knowledge, skill expected of a person that is a director
2. The general knowledge of that particular director
254
What other duty is there about maintenance?
There is a duty to acquire and maintain knowledge
255
What about delegation and reliance on others?
The ability to delegate and rely on others cannot be absolute
256
What are exceptions to delegation?
1. Must exercise reasonable care and skill when choosing who to rely on
2. Must SUPERVISE the discharge of delegated functions
257
What happened in Dorchester Finance v Stebbing?
Stebbing used black cheques signed by other directors to steal £40,000 of company funds
- Breach by all directors as they did not check in on Stebbing
258
What is s175 CA 2006?
Duty to avoid conflict of interests
259
What is meant by duty to avoid conflict of interests?
Directors must not have direct or indirect conflict of interests with the company
They must not exploit any property, information or opportunity
It is immaterial if the company could take advantage or not
260
What are exceptions to this rule?
1. The duty does not apply to a conflict of interest arising in relation to a transaction with the company
2. There is no breach if cannot be regarded as likely to give rise to a conflict of interest
3. If the matter has been authorised by the director (board resolution)
261
What about multiple directorships?
This is allowed as long as companies are not in direct competition with one another
262
What about former directors?
Directors are free to resign and set up another company
263
What happened in IDC v Cooley?
Cooley was a director of a building consultancy that had been confirmed not to win a contract with British Gas. Cooley resigned and accepted work himself
- Breach as had used information
264
What is s176 CA 2006?
A director must not accept from a third party a benefit conferred by his reason of being a director
265
What are exceptions to this?
1. Benefits received from the company itself
266
How can s176 be authorised?
Must be authorised by members, not directors
267
What are the remedies?
Company can rescind and benefits recovered
268
What is s.177?
Duty to declare interest in PROPOSED transactions or arrangements
269
How must the director go about declaring interest?
1. The declaration must be made BEFORE the company enters in to the transaction or arrangement
2. Must declare nature and extent
3. Must be made at meeting of directors, GM or general notice
4. If inaccurate, must rectify this inaccuracy
5. Director need not to obtain their approval
270
What are exceptions to this rule?
1. Director is not aware of this interest
2. Interest cannot be regarded as likely to give rise to conflict
3. Other directors are already aware
4. It concerns the terms of the director's service contract
271
What are the remedies of this?
Transaction is voidable at the company's instance
This has been criticised as the director is able to keep the profits
272
What is s.182?
Imposes a duty in relation to existing transactions
273
How must director go about declaring this interest?
- Meeting of directors or by notice in writing, or general meeting
274
What are exceptions?
SAME as s.177
1. Director is not aware of this interest
2. Interest cannot be regarded as likely to give rise to conflict
3. Other directors are already aware
4. It concerns the terms of the director's service contract
275
What if the director has already declared under s.177?
No need for subsequent
276
What are the remedies for s.182?
Criminal liability
277
How do you know if a business is profitable?
Look at the profit and loss account
278
How do you know if a business is liquid?
Total current assets minus total current liabilities
279
How do you know if a business is insolvent?
Total current assets minus total current liabilities + any loans
280
What is debt finance?
- When companies borrow money they will owe money back
| - To finance their company
281
Is shareholder approval needed for debt finance?
NO (MA3)
282
What is a term loan?
Taken out for a specified period
| - Will pay interest on it
283
What is an overdraft?
Withdraw an agreed amount
Interests are very high
Bank can call back an overdraft at anytime
284
What is a revolving credit facilitiy?
Not tied to companies bank account
Companies can drawn down amounts as and when needed
285
What is trade credit?
Customers have put down deposit before anything is delivered
Retailers can purchase the goods
This creates a gap between purchases
286
What is debt securities?
Company promises to repay loan while paying interest in the mean time
The most common is bonds
287
What is a debenture?
A loan agreement in writing between a borrower and a lender
288
What is a charge?
This is a security over an asset which is usually given for a loan
289
What is a mortgage?
This gives a lender security over a piece of land in return for a loan
290
Does the mortgagee own the land?
Has the legal title
But does not involve the transfer of possession
291
Are legal mortgages a good form of security?
YES the best
292
What is a fixed charge?
Charges placed on specific assets that provide security for a loan
293
How is a fixed charge created?
By deed or other charge document
294
Does lender have possession?
NO
| - Can prevent it being sold or mortgaged
295
What is a floating charge?
This is placed on assets that the company needs to deal with all the time
Cash or stock
296
What is crystallisation?
This is a process in which the company's power to deal with charged assets ceases and passes to the charge holder
297
When would crystallisation occur?
- The company goes in to liquidation
| - The company ceases to trade
298
What are automatic crystallisations?
1. Judgement against the company
2. Any steps towards administration
3. Service of notice on the company
4. The freedom of the parties to stipulate crystallisation
299
Can a lender have both fixed and floating charges?
YES and they usually want this as gives them most flexibility
300
What is perfecting the charge?
Registrating company charges
301
What is voluntary registration?
Voluntary registration system
302
What charges should be registered?
ALL charges
303
Are there time limits for registration?
within 21 days of creation
304
What is the effect of registration?
The effect of registration is that it gives constructive notice to other creditors.
305
What happens if you fail to register?
- The charge will be void against a liquidator, administrator or other creditors
- unsecured loan
306
Could the 21 day limit be extended?
Yes if accidental failure to deliver documents
307
What is the priority of charges?
1. A fixed charge beats a floating charge
2. Fixed charges take priority over each other in order of creation
3. Floating charges take priority over each other in order of creation
308
How are unsecured creditors prioritised?
Pari passu (equally)
309
What is subordination?
Creditors entering into an agreement between themselves to alter the order of priority of their charges
310
What is a negative pledge?
This will prevent any charge from being created after this one without permission (eg to go ahead on the pecking order)
311
What is the main act for insolvency?
The Insolvency Act 1986
312
What is the cash flow test?
A company is insolvent in the short term if it is unable to pay its debts as they fall due
313
What is the balance sheet test?
A company is insolvent in the long term if it has insufficient assets to cover its liabilities
314
What are the two other tests?
1. Creditor serves statutory demand for outstanding sum of £750 or more and company does not pay in 21 days
2. A creditor has obtained judgement against the company and has tried to enforce that judgement but debt has not been paid
315
What is voluntary liquidation?
Where the company is wound by the choice of the directors
316
What is required for voluntary insolvency?
Proof of insolvency
317
What happens in voluntary insolvency?
Liquidator is appointed to collect the assets of the company and turn them in to cash
Board of directors removed from office
318
What is compulsory liquidation?
Where the company is wound up by an order of the court
If unable to pay debts
319
What is receivership?
This is available to secured creditors who will take possession of the charged asset and sell it to pay back loan
320
What is administration?
- Administrator is appointed to control company assets
- However does not own them and will put forward proposals to achieve company resurrection
- Directors powers cease, but they are not removed from office
321
What does an administrator do?
- Removing and appointing directors
- Paying creditors
- Call meeting with shareholders
- Dealing with property
- Commencing fraud proceedings
322
What is a CVA?
This is an agreement between company and unsecured creditors to get the company out of trouble
323
What percentage of creditors must agree?
75% or more in value
324
What is a stand-alone moratorium?
Allows a 20 day moratorium giving the company a payment holidat
325
What are the creditor's rights post insolvency?
Any creditor can petition to put a company in liquidation, provided that they can prove they are insolvent
326
What is a problem with this?
Most creditors will not have access to an up to date copy of the balance sheet - so cannot prove
327
What else can they do to enforce liquidation?
- Issued statutory demand and unpaid in 21 days
| - Obtained judgement against the company and the judgement remains unsatisfied
328
Who is paid out in which order post liquidation?
1. Fixed charge holders
2. Cost of liquidation (eg liquidator's fees)
3. Preferential creditors (HMRC, employees)
4. Floating charge holders
5. Unsecured creditors
6. Shareholders
329
What is a key stipulation of s172?
Promote success of company for benefits of its MEMBERS.
| However, there are certain circumstances where should act in interest of creditors
330
When does this duty arise?
LLC v SEQUANA: when directors known or should know that the company is or likely to become insolvent
331
What actions could a director take to show considerations of interests of creditors?
- Take advice
- Fully and carefully minute reasoning behind decisions
- Cease trading immediately and take expert advice
332
What actions could a director take to show that they didn't take considerations of creditors?
- Selling assets well below what they are worth
| - Paying off debts to one creditor over another
333
What is fraudulent trading?
The business of the company must have been carried on with intent to defraud creditors or for some other fraudulent purpose.
334
Who can bring an action?
Only a liquidator or an administrator
335
What is meant by fraud?
Intent - real dishonesty
336
What is a defence?
Need to show that the honestly believed that things would get better
Belief DOES NOT need to be unreasonable
337
What can be awarded?
If proved, the court can make an order requiring anyone involved to make a contribution
338
Is it a civil or criminal offence?
BOTH
339
Why was wrongful trading introduced?
As fraudulent trading so hard to prove
340
What is wrongful trading?
Where a director or directors fail to act reasonably and responsibly in the period leading up to insolvency
341
Who can bring an action?
Administrator or liquidator
342
Who can be guilty of wrongful trading?
Only a director
343
What is meant by carrying on trading?
Directors actions must have made things worse
344
What is the time limit on checking for wrongful trading?
There is no time limit so can go far back
| Liquidator must establish when director realised liquidation was inevitable
345
What is meant by trading?
No definition
| Could be anything - contracts, selling company assets, remuneration pay
346
What are the defences for a director?
They took EVERY STEP with a view of minimising the potential loss to the company's creditors
347
What is the every step test?
1. Whether a director knew or ought to have known that insolvent liquidation could not be avoided
2. That he took every step to minimise loss
348
What is a remedy?
A director can be required to make a personal contribution to the company's assets
Disqualification of the director
349
What is the Company Director's Disqualification Act?
This allows the court to disqualify a director for 15 years
350
When may a director be disqualified?
If their conduct makes them 'unfit' to be a director
351
What are the different bands of offences?
2-5 years not very serious
6-10 years serious
10+ years for particularly serious
352
What makes a void floating charge?
At the relevant time before the onset of the company's insolvency, a charge was granted without the company receiving fresh consideration in exchange for granting security
353
What does relevant time mean?
If the charge was created in favour of a person who is connected with the company during 2 years before
OR
Charge created for any other person 12 months before
354
What is a person connected with the company?
- Director or shadow director
- someone who is a close relative of director or shadow director
- An associate of the company
355
What is a preference transaction?
Can challenge if transaction puts person in better position even with the onset of liquidation
356
What is the time limit for a preference transaction?
- If connected to the company - 2 years
| - If not - 6 months
357
What are transactions undervalue?
This is where a company sells off assets etc for way under price
358
What is a defence for this?
There is a defence if the transaction was entered into in good faith, for the purpose of carrying on the business, and where, when the transaction was entered into, there were reasonable grounds for believing that it would benefit the company
359
What is an extortionate creditor transaction?
Grossly exorbitant payments, three years before liquidation
360
What is a transaction defrauding creditors?
A transaction which at an undervalue which puts assets beyond the reaches of creditors
361
What is ring-fencing?
This sets aside a portion of the available money for floating charges for the benefit of unsecured creditors
362
What are the numbers for ring-fencing?
50% of the first £10,000
20% of the remaining money up to £800,000
Law 2
flashcards
Decks in class (4)
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