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Setting  up  a  Company  (tabbed  in  red)  
 
Different  business  media    

Sole  Trader    
• Unlimited  liability    
• No  incorporation  costs  
• No  separate  legal  identity    
• Tax  
• No  structure,  just  usual  commercial  laws    
• Methods  of  financing  –  loans,  savings,  selling  assets  –  Cannot  create  floating  
charges  
 
Company    
• Companies  Act  2006    
• Separate  legal  identity    
• Limited  to  amount  unpaid  on  their  shares  (shareholders)  
• Only  need  one  person  to  set  one  up    
• High  level  of  disclosure    
o Information  on  directors  
o Accounts  
o Registered  office  
o Certain  resolutions  
• Start  up  costs  -­‐  Incorporation  costs  +  legal  fees  
-­‐ Registration  costs    
-­‐ Printing  of  company  stationary    
• Ongoing  expenses  -­‐  Subject  to  high  disclosure  requirements  (have  to  file  
account  annually)  +  administrative  costs    
• Management  structure  –  Articles  of  Association  and  Memorandum    
• Methods  of  finance  –  Debt  finance,  equity  finance,  can  create  floating  charges    
 
 
Partnerships  
• Partnership  Act  1890    
• No  separate  legal  identity    
• Contractual  Agreement  (doesn’t  require  intention)  (recommended  to  be  done  
by  lawyers  –  therefore  legal  fees)    
• Minimum  of  2  people    
• A  company  can  be  a  partnership    
• Cheap  to  set  up  –  No  incorporation  costs  needed  
• Unlimited  personal  liability  (partners  assets  will  be  included)    
• Joint  and  several  liability  (jointly  and  separately  liable)    
• Low  levels  of  disclosure  –  Do  not  have  to  publish  accounts,  nothing  has  to  be  
made  public    
• Ongoing  expenses  would  be  individual  tax  (unlike  companies  who  would  
have  bigger  administrative  expenses)  
• Management  structure  –Partnership  Deed  –  certainty  à  without  this,  the  PA  
1980  sets  out  default  position    

•

Methods  of  financing  –  Retained  profits,  sale  of  assets,  Mortgages,  Bank  Loans  
(less  chance  of  getting  it  as  they  will  be  responsible  for  repayment  –  will  look  
at  what  they  can  hold  a  security  over?  Guarantors?)cannot  create  FCs    

 
LLPS    
• Limited  Liability  Partnerships  Act  2000  
• Management  structure  –  Agreement,  the  LLPA  2000  will  be  default  if  no  
agreement  –  flexibility  –  little  formality  with  management  procedures    
• Liability:  Limited  to  the  amount  they  have  agreed  to  pay  under  the  agreement    
• Separate  legal  entity    
• Minimum  of  2  people    
• Has  to  be  incorporated  –  Cost  and  legal  fees    
• Register  at  Companies  House    
• Administrative  costs  –Regular  Accounts  (legal/accountant  fees)  
• Methods  of  finance  –  Debt  finance,  Personal  funds/  Retained  profits,  can  create  
floating  charges,  personal  guarantees  to  remove  the  safety  of  limited  liability,  
cannot  issue  shares  
• Other  costs  –  stationary/  letterheads  and  cheques  must  have  LLP  name    
• Similar  disclosure  requirements  as  companies:  
o Registered  office    
o Members  details    
o Accounts    
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Procedure  Plan  (Basic  Skeleton)  

Board  Meeting    

 
Who  calls  à  Any  director  (MA  9(1))  
 
Notice  à  Reasonable  (what  is  usual  for  the  Company)  (Browne  v  Trinidad)  
 
Quorum  à  Minimum  2  directors  (MA  11(2))    
 
Voting  à  Board  Resolution  on  the  matters  on  Agenda  
• Simple  Majority  (MA  7(1))  
 
Agenda:    
• Propose  board  resolutions  to:  
o (Any  decisions  the  directors  need  to  make)  
o Approve  the  form  of  notice  for  GM  
o Call  a  GM  to  pass  an  ordinary/special  res  on  …    
o Direct  the  company  secretary  to  give  notice  of  the  GM  in  
accordance  with  s
...
307(1))  
Unless  on  short  notice  under  s
...
318(2))  (unless  sole  member)  (s
...
282(1)  on  show  of  hands  unless  poll  is  
requested  under  s
...
281(3)  –  Where  a  resolution  is  not  specified,  it  is  an  ordinary  res  
 
Special  Resolution  
 
75%  or  more  s
...
Copy  of  Special  Resolutions  à  to  Registrar  within  15  days  (s
...
File  Special  Resolution/Ordinary  Resolution  
3
...
248(1)  and  
s
...
(any  other  Company  House  filings)  
5
...
288:  
•
•
•
•
•
•
•

Agenda  would  be:  propose  written  res,  approve  form  and  instruct  sec  to  send  
out  WR  (to  all  eligible  members  and  auditors)  
Cannot  use  it  to  remove  a  director  or  auditor    
Removes  the  need  for  a  GM  –  Just  one  Board  Meeting  (split-­‐reconvened)  
The  requisite  percentage  takes  into  account  all  those  entitled  to  vote,  not  just  
the  ones  who  vote  on  the  resolution    
Requirements:  s
...
297  –  Period  for  agreeing  WR  if  unspecified  –  28  days    
Attach  any  contract/memorandum  needed    

 
Short  notice  –  Just  reconvene  BM1/  Means  a  GM  can  be  called  earlier  than  14  days  
 
Exam  points:  
When  doing  the  PP:  
Insert  the  names  of  the  individuals,  apply  to  the  scenario  
If  converting  a  shelf  company,  think  about  the  new  directors/members/secretary  
who  will  be  implementing  the  resolutions    
Full  explanation  as  to  why  SH  resolutions  are  required  
Consider  likelihood  of  any  resolutions  being  passed  
Check  articles  to  see  if  they  amend  PP  
Advise  on  timing  issues    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Incorporation    

 
s
...
16  –  Company  becomes  a  separate  legal  entity  upon  incorporation  
 
s
...
51  –  If  a  contract  is  made  between  a  person  acting  for  company  but  was  made  
BEFORE  the  company  had  been  formed,  he  is  personally  liable  for  that  contract    
 
 
Shelf  company  to  tailored  company  
 
Change  of  Name    
s
...
53-­‐59,  s
...
82)  
s
...
276,  Update  secretary  register  
s
...
167  within  14  days,  Update  Register  of  
Directors  under  s
...
87(1)  –  Directors  give  notice  to  registrar  –  BR  to  instruct  secretary  to  do  so  -­‐  BM  
 
PMM  
AD01,  Notify  registrar  with  14  days  s
...
392(1)  –  Directors  give  notice  to  registrar  –  BR  to  instruct  secretary  to  do  so  -­‐  BM  
 
PMM  
AA01,  Notify  registrar,  Minutes    
 
Appoint  Auditors    
s
...
248  –  Board  meeting  Minutes  MUST  be  recorded    
 
s
...
357  –  One  member  à  MUST  provide  company  with  details  of  the  GM  
 
 
 
 
 
 
 
 

Company  Constitution    

 
Legality  test  –  Need  to  ensure  that  Articles  within  the  Articles  of  Association  are  
compatible  with  the  law  and  therefore  legally  acceptable    
 
 
See  if  the  CA  2006  makes  provisions  flexible  by  reference  to  Articles,  if  it  is  silent  on  
the  issue,  outright  prohibition,  complete  freedom  
 
Terminology  
Notwithstanding  –  despite/nevertheless  
 
For  example:  
An  Article:  
• Stating  that  written  resolutions  cannot  be  used,  is  made  void  by  s
...
168(1)    
(In  this  situation,  if  you  were  advising  the  client,  you  could  suggest  a  
Shareholder  Agreement:  the  members  could  agree  amongst  themselves  to  
require  unanimity)    
• In  some  situations  it  depends  on  the  circumstances;  If  an  Article  states  that  5  
members  are  needed  for  the  quorum  –  in  a  company  with  more  than  one  
member,  the  Article  will  prevail  (s
...
 However  if  it  was  a  single  member  
company  s
...
 (which  needs  a  special  resolution)  
• Where  directors  place  limits  on  their  powers  (usually  passes  legality  test)  they  
will  use  Board  Resolutions  to  implement  the  new  Articles  
 
 
 
 
 
 
 
 

Equity  Finance    
 
Allotment  

Is  there  a  cap?  
 
Do  directors  need  authority  to  allot?  
 
Must  pre-­‐emption  rights  be  disapplied  on  allotment?  
(Check  if  the  shares  being  allotted  are  equity  securities)  
 
Must  new  class  rights  be  created  for  the  shares?  
 
Directors  must  pass  a  board  resolution  to  allot  shares  
 

Cap?  

 
If  Company  incorporated  under  1985  Act  –  Will  have  a  cap  
Can  be  removed  by  –  Ordinary  Resolution    
 
If  Company  incorporated  under  2006  Act  –  Wont  have  a  cap    
If  a  Cap  is  placed,  can  be  removed  by  –  Special  Resolution  (s
...
549  Power  to  allot  shares  can  be  done  if:  
• S
...
551  Grant  directors  to  have  Authority    
o Can  grant  directors  authority  to  allot  by  either  amending  the  articles  or  
ordinary  resolution  (easier  if  it  is  a  one  off  (only  requires  majority))  
• Exceptions  to  authority  s
...
561  –  Shareholders  right  of  pre-­‐emption  
(“equity  securities”  have  to  be  offered  first  to  each  shareholder)  
 
“Equity  Securities”  –  Shares  with  rights  to  receive  dividends  and  on  winding  up,  
capital  payments  and  these  rights  are  both  capped,  these  are  NOT  equity  securities
...
560(1))  (Any  variable  right  to  
dividend  or  capital  will  be  an  equity  security)  
 
If  it  is  an  equity  security,  pre-­‐emption  rights  apply  and  they  are  either  excluded  or  
need  to  be  disapplied  –  
 
Exclusions    
• S
...
567  –  Excluded  in  company  articles      
Disapplication  (check  previous  resolutions  (if  in  date)  and  articles)  
RARE    
Private  company  with  only  one  class  of  share  s
...
570  
o May  disapply  where  the  directors  are  generally  authorised  for  the  
purpose  of  s
...
551  authority    

•

By  special  resolution  s
...
21)  
 

Board  Resolution  to  Allot  

Directors  must  pass  BR  to  allot  shares  
 

Post  Meeting  Matters  

 
If  removing  the  cap  on  the  number  of  shares  that  can  be  issued  
• File  new  articles  (s
...
30(1))  If  2006  Company  
• File  OR  if  1985  Company  
 
If  granting  directors  authority  to  allot:    
• If  given  under  s
...
29(1)(a),  s
...
26(1))  within  15  days  and  file  SR  amending  articles  
within  15  days  (s
...
555(2)  within  one  month    
• File  a  statement  of  capital  under  s
...
112/113  within  2  months  (s
...
769  CA)  

  
Types  of  shares  
Ordinary  –  One  vote/share,  right  to  a  dividend  if  one  declared  
 
Preference  share  –  Rank  higher  priority  in  being  paid  dividend,  return  of  capital  on  
winding  up  
 
Participating  preference  shares  –  Surplus  profits  (after  receiving  their  dividend)  and  
surplus  assets  of  a  company  on  a  winding  up    
 
Deferred  shares  –  No  voting  rights,  no  ordinary  dividend    
 
Redeemable  shares  –  Company  can  buy  them  back  
 

Transfer  of  Shares    

 
s
...
771  –  Company  must  give  reasons  if  they  refuse  to  register  a  transfer    
 
Pre-­‐emption  rights:  Will  be  set  out  in  Articles    
 
Method  of  transfer:  
• Instrument  –  Stock  Transfer  Form    
 
• Stamp  Duty    
 
• Legal  and  equitable  ownership    
o Legal  title  passes  on  registration,  and  beneficial  title  passes  on  the  
execution  of  the  stock  transfer  form    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Debt  Finance  

 
Comparison  between  debt  and  equity  finance    
 
Factor  

Equity    

Debt    

Effect  on  balance  
sheet  and  future  
ability  to  raise  
money    

Total  Equity  in  BS  will  increase  
 
Gearing  will  decrease  –  
therefore  more  attractive  to  
lenders    
 
Earnings  per  share  will  
decrease,  less  attractive  to  
equity  investors  in  the  future    

Non-­‐current  liabilities  will  
increase    
 
Gearing  increases
...
 They  can  postpone  
dividends  if  insufficient  
distributable  profits    
 
Therefore  dividends  wont  be  
paid  if  the  company  wasn’t  
successful  that  year    
 
Dividends  aren’t  tax  deductible  
Restrictions  on  
May  need  shareholder  
Company  affecting  
resolutions  to  allot  new  shares    
ability  to  raise  funds    
Private  companies  are  
prohibited  from  offering  shares  
to  public    
Degree  of  Regulation   Share  issue  –  requires  board  
and  procedure  
and  shareholder  resolutions    
 
Opposing  shareholders  could  
vote  against  it  
Effect  on  balance  of  
power  within  
company    

Dilution  of  voting  power    

Degree  of  scrutiny  of  
Company  affairs    

Day  to  day  management  run  by  
directors
...
g
...
 Bank  has  no  direct  
say  in  any  decision  making  

Bank  security  may  mean  a  
Company  cannot  freely  dispose  
of  certain  assets    
 
Undertakings  and  events  of  
default  may  mean  a  Company  
may  be  closely  monitored  

Shareholders  can  bring  
derivative  action  

Future  profitability    

Company’s  any  obliged  to  pay  
dividends  out  of  profits
...
g
...
g
...
 Will  set  out  what  assets  are  given  by  way  
of  security  (and  sets  out  the  type  of  security)
...
g
...
859A/P  
 
(Post  Meeting  Matters)  
• S
...
859D  –  Particulars  must  be  delivered  to  registrar  
• Failure  to  do  so  means  the  charge  is  void  under  s
...
g
...
g
...
   
 
Guarantees  (not  securities)  
• Additional  protection  for  lenders    
• Usually  parent  companies  can  be  requested  to  give  guarantees  
 

Caution  to  be  taken  by  security  providers  
•

Always  check  other  loan  agreements  for  restrictions  before  allowing  a  charge  
(because  the  giving  of  another  charge  when  there  is  a  restriction  COULD  
trigger  acceleration  and  mean  the  loan  becomes  immediately  payable)  

•

Consider  relevant  clauses  in  the  loan  agreement    
o Representation    
o Events  of  default  –  E
...
 insolvency,  representations  being  untrue,  non-­‐
payment  
o Covenants/Undertakings  e
...
 not  to  dispose  of  without  consent,  
undertaking  to  insure,  comply  with  laws  regarding  tax,  making  of  
further  loans    
o Conditions  precedent  –  May  be  necessary  for  the  company  to  provide  
business  plans  for  example  if  they  are  new  to  set  up,  business  accounts,  
transaction  agreements  to  be  provided,  any  evidence  of  default  of  
payment    

 

o The  lender  may  wish  for  events  of  default  apply  to  the  companies  
subsidiaries  (if  lending  to  a  parent  company)  to  truly  protect  their  loan
...
171  
Duty  to  promote  the  success  of  the  company  s
...
173    
Duty  to  exercise  reasonable  care,  skill  and  diligence  s
...
175    
Duty  not  to  accept  benefits  from  third  parties  s
...
177  
o Declare  nature  and  extend    
o Direct  or  indirect  (e
...
 any  family  member  (doesn’t  have  to  be  
connected  person)  
o Must  be  disclosed  before  transaction  (do  it  in  BM  1)  
o Doesn’t  have  to  disclose  interest  if  subsection  (5)  and  (6)  satisfied    

•

Civil  consequences  (same  as  common  law/equitable  principles)  of  breach  of  
duties  s
...
174)    
o Injunction  
o Transaction  may  be  set  aside  
o Damages  (to  the  company  for  any  loss  suffered)  
o Director  may  have  to  indemnify  company  for  costs/expenses  incurred  
o Director  may  be  ordered  to  pay  restitution  and  account  to  the  company  
for  any  profits  made    
S
...
182  
o Under  s
...
21  CA)  

Transactions    
 
Substantial  Property  Transactions  s
...
Is  it  a  director  of  the  company  (or  holding  company),  or  connected  
person,  acquiring  something  from  the  company  OR  
Is  the  company  acquiring  something  from  such  a  director  or  
connected  person?  
 
2
...
1163)  
 
3
...
191)  
a
...
If  value  is  more  than  £100,000  is  IS    
c
...
Is  shareholder  approval  needed?  (ordinary  resolution)  
 
5
...
Sanctions  for  failure  to  get  approval  (s
...
252  à  s
...
254  
• Family  member  (s
...
254)  
o Director  holds  at  lease  20%  share  capital  or  has  at  least  20%  voting  
rights    
 
Substantial  –  s
...
190(4)(b)  exception)  
IF  the  director/connected  person  is  a  director  of  a  company’s  holding  company,  
it  will  need  an  ORDINARY  resolution  from  the  members  of  that  holding  
company  –  s
...
192,  s
...
194)  
+  s
...
195    
• Transaction  is  voidable  unless:  
o Restitution  is  no  longer  possible  
o Company  has  been  indemnified  by  another  person  for  the  loss  suffered    
o Bona  fide  rights  have  been  acquired  by  a  third  party  
 
• Persons  liable  to  account  to  the  company  and  indemnify  for  any  loss  or  
damage  
o Director  or  connected  person    
§ Who  entered  into  transaction  
§ Authorised  it    
 
The  transaction  can  be  subsequently  affirmed  by  shareholders  s
...
177)  
• For  any  other  directors  indirectly  interested  to  disclose  their  interest  
(doesn’t  have  to  necessarily  be  a  “connected  person”  
Agenda:    
• To  propose  Board  Resolutions  to:  
o Call  a  GM  to  approve  the  entry  into  the  property  transaction  
(s
...
Is  it  a  directors  service  contract  (employment)  
2
...
188(3)  if:  
• A  period  during  which  the  contract  is  to  continue  other  than  at  the  
instance  of  the  company  (contractual  term  of  more  than  two  
years/director  controls  how  long  contract  continues)  AND  
• During  the  his  time,  the  company  cannot  terminate  the  contract,  or  
can  only  terminate  in  specific  circumstances    
OR    
• The  period  of  notice  to  be  given  by  the  company  is  more  than  two  
years    
• The  aggregate  periods  exceeds  two  years    
3
...
Are  there  exceptions?  
5
...
189  
 
 
Shareholder  approval:  
Ordinary  resolution  from  the  company  (unless  exception  under  s
...
188(5)  –  The  proposed  contract  must  be  available  for  inspection  for  not  less  than  15  
days  or  if  written  resolution  (a  copy  attached)  
 
Exceptions:  
s
...
189  -­‐  The  provision  is  void  
Contract  is  deemed  to  contain  a  term  entitling  the  company  to  terminate  it  at  any  time  
by  the  giving  of  reasonable  notice      
 
 
 
 
 
 
 
 
 
 
 
 
 

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Procedure  Plan  (insert  into  skeleton)  
 
Board  Meeting    
• Director  to  disclose  interest  in  the  new  service  contract  (s
...
188(2)(a))  
o Make  memorandum  setting  out  the  proposed  contract,  available  to  
members  15  days  ending  with  the  GM  
 
General  Meeting  
Notice:  
• No  point  to  do  short  notice  –  the  contract  must  be  made  available  for  
inspection  at  least  15  days  ending  with  the  date  of  the  meeting  (s
...
228(2)(a))  
 
 

Loans  to  Directors    
 

Exam  Procedure  
1
...
What  type  of  transaction  is  it?  
3
...
Is  shareholder  approval  needed?  
5
...
Exceptions  to  the  need  for  approval?  
7
...
197    
An  ordinary  resolution  is  needed  for  the  company  to  give  a  loan,  guarantee,  or  
provide  security  in  relation  to  a  loan,  to  a  director  of  that  company  or  its  holding  
company  
 

Public  companies/private  companies  associated  with  public  companies:  

s
...
198    
PC/PCAPC  -­‐Quasi  loans  to  director  of  Company/holding  Company  (or  
security/guarantee  in  relation  to  that  quasi  loan)  –  needs  shareholder  approval  
 
s
...
256  
If  one  is  a  subsidiary  of  the  other  or  both  are  subsidiaries  of  the  same  body  corporate    
 

Shareholder  Approval  

Ordinary  resolution  
The  interested  director  won’t  count  in  quorum/vote  in  the  2nd  Board  Meeting  
 

Memorandum  formalities?  

A  memorandum  setting  out  the  details  of  the  transaction  must  be  made  available  for  
inspection  15  days
...
197,  198,  s
...
201  (Place  in  BM)  
 

Exceptions    
Expenditure  on  company  business  –  s
...
205    
•

Approval  not  needed  if  a  company  provides  funds  to  a  director  to  defend  
proceedings  in  relation  to  the  company    

 

Minor  and  business  transactions  –  s
...
209  
•
 

•

Approval  not  needed  if  it  is  in  their  ordinary  course  of  business  to  make  loans  
or  quasi  loans    
And  made  on  normal  business  terms    

Sanctions  
s
...
168  
Shareholders  can  pass  an  ordinary  resolution  to  remove  a  director    
Special  notice  is  required,  of  their  intention  to  move  the  resolution  to  remove  
direction  
 
Method  of  termination  –  Ordinary  Resolution  
 
Special  notice  (s
...
312(2)  in  the  same  
way  they  give  notice  of  a  GM  –  14  clear  days  –  of  the  removal  resolution  
(under  s
...
360  
• If  not  practical  (e
...
 if  notice  of  the  GM  has  already  been  sent  out)  the  notice  
can  be  put  in  an  advertisement  at  least  14  days  before  the  GM  (s
...
303  
 
Shareholders  forcing  Directors  to  call  a  GM  –s
...
304  
• Directors  must  call  a  GM    
o Within  21  days  from  when  they  become  subject  to  the  request  
o GM  is  to  be  held  not  more  than  28  days  after  the  date  of  notice  
convening  the  GM  
 
If  directors  fail  to  call  one,  the  shareholders  can  call  a  GM  themselves  s
...
303  request  OR  any  of  them  who  
represent  more  than  half  of  the  voting  rights  can  call  it    
• The  GM  must  be  held  within  3  months  of  the  date  that  the  directors  received  
the  s
...
312  (special)  notice  AND  s
...
305  
 
Timeline  for  extending  out  the  process  to  negotiate  with  shareholders    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

  
 
Director  has  the  right  to  protest  against  removal  s
...
168(5)  –  A  removal  does  not  deprive  a  person  from  any  right  to  
compensation  or  damages  payable  by  reason  of  termination  e
...
 if  his  employment  
contract  is  breached  by  the  removal,  he  may  be  entitled  to  compensation  
 

Check  documents!  

Check  Articles  for:  
Bushell  v  Faith  clause  
Will  give  a  director,  who  is  also  a  shareholder,  weighted  voting  rights  at  which  a  s
...
 E
...
 11  shareholders  
and  one  abstains
...
 It  may  be  the  case  that  they  lose  
on  a  show  of  hands  but  due  to  the  amount  of  shares  they  own  they  could  win  on  a  poll  
 
Remember  to  adjust  shareholding  if  shareholders  abstain
...
g
...
260  
 
Allows  a  shareholder  to  bring  a  claim  on  behalf  of  the  company  arising  from  an  actual  
or  proposed  act  or  omission  involving  the  negligence,  default,  breach  of  duty  or  
breach  of  trust  by  a  director  of  the  company  (wrong  done  TO  the  company)  
• Includes  breach  of  directors  duties    
 

Two  stage  process  for  bringing  a  claim:  
1
...
If  established,  the  Court  can  issue  directions  for  further  evidence  before  
substantive  action  can  be  taken    
 
Foss  v  Harbottle  –  The  Company  is  the  proper  claimant    
 

Payment  for  loss  of  office  

If  the  company  wishes  to  pay  a  director  compensation  for  loss  of  office,  such  a  
payment  must  be  approved  by  the  shareholders  by  way  of  ordinary  resolution  (s
...
 
 

Ratification  

Unless  the  company’s  articles  require  a  higher  majority,  an  ordinary  resolution  can  be  
passed  to  ratify  a  director’s  conduct  (s
...
 However,  any  votes  of  the  director  
concerned  and  any  person  connected  to  him  cannot  be  taken  into  consideration
...
g
...
g
...
g
...
g
...
g  in  respect  of  future  pension  rights/  personal  
injury    
o Perhaps  include  a  draft  reference    
o Include  any  ex-­‐gratia  payments  (tax  free)  (over  £200  would  require  
ordinary  resolution  s
...
g
...
   
o If  other  shareholders  breach  this,  the  Director  will  be  able  to  sue  them  

Unfair  prejudice  

s
...
994  
 
O’Neil  v  Westbourne  Galleries  Limited  
A  breach  of  articles  of  association  will  usually  permit  a  claim  of  unfair  prejudice  (As  it  
is  an  agreement  of  how  the  affairs  of  a  company  should  be  conducted)  
 
 
Also  matters  such  as:  
§ Excessive  remuneration    
§ Bad  faith    
§ Negligent  management  of  a  company  
 
Court  has  discretion  to  make  any  order  it  sees  fit  s
...
684(2)  
 
 
 
 

 
 

 

 
 
 

Article  must  not  restrict  or  prohibit  use  of  
capital  s
...
710(1))  
Written  statement  of  solvency  by  directors  
AND  auditors  report  must  be  finalised  on  or  
within  7  days  prior  to  GM  (s
...
720(1)  and  (2)  (same  day  
as  publish  notice  (s
...
716(2)  
At  the  GM  –  the  shareholder  whose  shares  
are  being  redeemed  can  vote  BUT  the  
resolution  will  be  ineffective  if  his  votes  (that  
are  the  ones  proposing  to  be  redeemed)  
carried  the  vote  s
...
719(1))  
§ Give  notice  to  creditors  or  publish  in  
newspaper  (s
...
721  
SR  must  be  filed  within  15  days  of  being  
passed  s
...
723(1)  

Notice  must  be  given  to  CH  within  one  month  of  redemption  with  statement  of  capital  
(s
...
684(4)  

§

Shares  to  be  redeemed  must  be  fully  paid  up  s
...
688  

§

Check  the  accounts  used  to  determine  the  distributable  profits  were  not  
prepared  to  a  date  more  than  3  months  before  the  date  of  the  directors  
statement  given  under  s
...
687(1)  

§

The  Gazette  notice  required  under  s
...
721  for  
an  order  preventing  the  payment    

§

Under  s
...
692  
issue  
Check  articles  –  They  must  not  restrict  or  prohibit  own  share  purchase  s
...
690(2)  
Shares  being  purchased  by  the  company  must  be  fully  paid  
Check  articles:  articles  must  
authorise  use  of  s
...
709-­‐723  

 

 

Company  MUST  use  available  
DPs  before  capital  

Only  private  companies  
s
...
692(1)  

 

 
 

 
 

Written  statement  of  
solvency  by  directors  (s
...
714(6))  
Copy  of  DS  and  AR  must  be  
made  available  to  members  
at  GM  (or  in  WR,  sent  out  
with  resolution)  (s
...
720(1)  and  (2))  

 

Check  articles:  Do  they  
restrict  or  prohibit  use  of  
capital  (s
...
696(2)  or  
send  with  any  WR  
 
OR  to  approve  contract  
 
AND  SR  to  approve  
OR  to  approve  contract  (s
...
716(1)  SR  must  be  done  
within  7  from  making  the  
DS  
Notify  creditors  within  a  
 
 

 

 

 

 

 

 

week  of  SR  (Gazette,  national  
newspaper/all  creditors)  and  
file  DS  and  AR  at  CH  (s
...
721(1)  and  (2))  
SR  must  be  filed  within  15  
days  of  being  passed  (s
...
723(1)  

Returns  must  be  sent  to  CH  with  statement  of  capital  within  28  days  of  purchase  and  
notice  of  cancellation  of  shares    (s
...
708(1)  and  (2))  
Amend  Register  of  Members  
Cancel/reissue  share  certificates  s
...
702(2)  and  (3))  
 
 
Check  firstly  if  it  is  a  De  Minimis  Capital  Purchase    
If  not  then  go  to  DP  (the  accounts  to  determine  this  must  not  be  older  than  3  months)  
If  insufficient  –  Take  out  of  capital    
 
Make  a  valid  off-­‐market  purchase  of  shares    
 
Written  statement  of  insolvency  –    
§ Must  state  that  the  company  is  solvent  and  will  continue  to  be  solvent  for  12  
months    
 
Auditors  report  –    
§ Must  enquire  into  the  affairs  and  not  aware  of  anything  unreasonable  in  the  
written  statement  
Procedure  Plan  (insert  in  skeleton)  
Board  Meeting:  
§ Any  interested  parties  to  disclose  interest    
§ Board  resolution  to:  
o Propose  ordinary  resolution  to  agree  terms  of  contract  
o Instruct  CS  to  make  contract  available  for  inspection  
 
General  Meeting:  (to  be  held  15  days  later)  
§ Ordinary  resolution  to  approve  terms  of  contract  (give  it  the  green  light)  
§ Special  Resolution  (if  funding  out  of  capital)  
Voting:  
§ Shareholder  can  vote  but  shares  to  be  bought  cannot  carry  the  vote  
 
(holding  it  on  short  notice  would  only  save  one  day,  as  15  days  are  needed  for  
inspection)    
Board  Meeting:  
§ Board  Resolutions  to:  
o Enter  into  purchase  contract  (Interested  parties  can  not  vote)  
o Authorise  signatory  for  the  contract    
 
PMM  
§ File  return,  notice  of  cancellation  and  statement  of  capital  (s
...
708(1)  s
...
702(3)  
§ Notify  creditors  (and  their  right  to  object)  within  a  week  of  SR    
§ Payment  out  of  capital  must  be  made  between  5-­‐7  weeks  after  SR    
 

  
 Think  about  the  effects  of  certain  purchases  –  e
...
 reduced  or  increased  control    
 
Effect  on  Balance  Sheet  when  purchasing  shares  out  of  distributable  profits    
 

 
 
(also  if  amount  of  consideration  exceeds  the  amount  paid  on  allotment  –  that  extra  
will  be  treated  as  dividend  (distribution)  and  treated  as  an  income  receipt  for  the  
seller  (shareholder)  
 
 

Dividends    

 
Before  company  can  legally  pay  a  dividend  it  must  check  it  has  sufficient  distributable  
profits  –  s
...
 
§ An  interim  dividend  will  only  become  a  DEBT  payable  once  they  are  actually  
paid    
 
Consequence  of  Breach  
s
...
 BUT  those  who  do  not  
take  up  scrip  issue  may  have  their  shareholding  diluted    
 
 

Financial  Assistance  

General  Prohibition    
s
...
 CGT  if  
individual  
seller(s)  
 

 

Tax  liabilities  stay  
with  target  

Seller    

Buyer  

Cherry  pick  assets  
–  leave  liabilities  
and  unwanted  
assets  behind
...
 However  
needs  more  
negotiation  and  
more  time  as  to  the  
individual  assets  
need  to  be  
transferred  
separately  
 

Consideration  to  
the  seller  company  
(selling  the  assets)  
Therefore,  for  
shareholders  to  
benefit  the  money  
would  have  to  be  
passed  by  
dividend/winding  
up  
Corporation  tax  on    
chargeable  gains  or  
on  income  profits  
for  stock/post  
2002    
Tax  liabilities  stay    
with  the  seller  

  

 

 

including  other  
liabilities  
Stamp  duty  on  
share  transfer  
(could  be  lower  
than  SDLT  on  asset  
sale)  
Continuity  of  
contracts  –  target  
remains  
contracting  party    
 
Change  of  control  
clauses  in  material  
contracts?  (are  
consents  
required?)  
Employees  stay  
with  the  target  
company
...
 The  
buyer  company  
becomes  the  new  
employer    

 

Due  Diligence    

Purpose:  To  fact  find  to  provide  the  buyer  with  as  much  information  so  they  can  make  
an  informed  decision
...
 Further  questions  will  probably  
need  answering    
 

Heads  of  Terms  

Generally  not  legally  binding  
Contains  what  the  parties  want  out  of  the  transaction  
Only  some  parts  may  be  legally  binding;    
§ For  example  protection  to  the  buyer  from  the  seller  entering  into  third  party  
negotiations  during  the  time  the  buyer  is  conducting  due  diligence    
§ Confidentiality  
 
 
 
 
 
 

Share  Purchase  Agreement    

Buyer:  
§ Warranties  –  Binding  statement  of  fact  made  by  a  seller  about  Target  
Company
...
g
...
g
...
 
May  have  a  time  limit  and  upper  limit  on  any  claim  for  damages  and  procedure  
that  must  be  followed  when  bringing  a  claim    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

  

Financial  Assistance  when  acquiring  shares    
 

1
...
Who  is  the  target?  Private  Company/Public  Company  
b
...
678/s
...
Is  it  financial  assistance  under  s
...
Loan    
ii
...
Is  assistance  being  given?  
i
...
For  the  purpose  of  the  acquisition/discharging  liability  
(it  is  for  this  purpose  if  the  buyer  wouldn’t  have  been  
able  to  acquire  without  the  assistance,  or  would  the  bank  
have  given  the  loan  without  the  security  for  example)  
iii
...
If  it  is,  are  there  are  exceptions?  
3
...
678  
A  person  is  acquiring  shares  in  a  public  company  
And  that  company  or  any  subsidiary  of  that  company  
Gives  financial  assistance    
 
S
...
681  
Will  be  exempt  from  prohibitions:  
Dividend  payments  
Share  Buy-­‐backs    
Etc
...
682  
Transactions  that  will  be  exempt  from  prohibitions:  
Money  lending  in  the  ordinary  course  of  business  

Assistance  in  respect  of  employee  share  schemes    
 
ON  THE  CONDITIONS  THAT:  
It  is  a  private  company  giving  the  assistance  OR    
The  company  is  public  and  the  net  assets  are  not  reduced  or  to  the  extent  that  they  
are  reduced,  the  assistance  is  provided  out  of  distributable  profits  s
...
680  
§ Breach  of  s
...
679  is  an  offence    
§ Penalties  for  the  company  (fine)  AND  officers  of  the  company  (fine  and  
imprisonment)  
§ For  the  company,  the  transaction  could  be  void
...
 Therefore  their  co-­‐operation  will  
be  needed  in  order  to  succeed
...
122(1)(f))  
 
• S
...
 If  the  debt  exceeds  £750,  is  due  and  
payable,  then  the  company  has  21  days  to  settle  the  debt
...
 Liquidators’  costs  of  preserving  and  realising  assets  subject  to  a  fixed  charge  
 
2
...
 Other  insolvency  costs  and  expenses    
(Liquidators  general  costs  and  expenses)  
 
4
...
 Ring-­‐Fenced  Fund    
(Set  aside  for  the  company’s  unsecured  creditors)  
 
6
...
 Unsecured  creditors    
Ring  Fenced  Fund  is  applied  here  +  amount  left  over  (if  there  is  any)  
Ordinary  trade  creditors,  crown  debts  (VAT,  PAYE),  employees’  outstanding  
remuneration  (the  amount  not  preferential)  
(rank  equally)  
To  work  out  how  many  pence  to  a  pound  is  owed  to  the  creditors  
 
For  example  if  there  is  a  balance  of  29,400  and  a  ring  fenced  fund  of  65,600
...
28p/£  
 
8
...
 Shareholders    
Based  on  their  rights  attached  to  their  shares  
e
...
 Preferential  shareholders  will  rank  above  Ordinary  Shareholders    
 
 

Investigating  Directors  and  Challenging  Past  Transactions    

 
FRAUDULENT  TRADING  –  s
...
10  CCSA  1986    
 
• Criminal  sanctions  under  s
...
   
 
WRONGFUL  TRADING  –  s
...
214(3)  –  They  took  every  step  with  a  view  to  minimising  the  
potential  loss  to  the  company’s  creditors    
 
o Evidence  of:  
§ Voicing  concerns  at  board  meetings  

•

Seeking  independent  financial  advice  
Not  incurring  further  credit  
Consulting  an  insolvency  practitioner  for  advice  
Ensuring  adequate,  up  to  date,  financial  information  is  available    
 
Test  –  s
...
1157  CA    

§
§
§
§

 
 

 
MISFEASANCE  
 
• Any  breach  of  duty  by  the  directors    
 
• Liquidator  will  bring  the  action,  upon  winding  up  
 
• Court  can  order  that  person  to  compensate  the  company  as  a  result  of  the  
misfeasance    
 
• Can  be  brought  against  a  person  who  is/has  been  an  OFFICER  of  the  company  
(managers
...
177  
§ S
...
171  –  Not  acting  within  powers  
§ S
...
 239  –  Preferences    
§ S
...
239    
 
• Relief  under  s
...
 Also  may  consider  disqualification  order  against  a  director  for  unfitness  
under  s
...
238  

 

•

Liquidator/Administrator  can  challenge  the  transaction    

•

Transaction  at  an  undervalue  (s
...
240(1)(a)  –  in  the  two  years  
preceding  the  onset  of  insolvency(commencement  of  insolvency  
procedure))  
o The  company  was  insolvent  at  the  time  of  the  transaction  OR  became  so  
as  a  result  of  it  s
...
240(2)  

•

 

Defence  –  s
...
241  
Court  can  make  any  order  to  restore  the  position  of  the  company  had  it  not  
entered  into  the  transaction  
 

 

 

 

  

But  the  order  should  not  prejudice  a  subsequent  purchaser  from  the  party  
which  transacted  at  undervalue  with  the  company,  provided  they  were  acting  
in  good  faith  and  for  value  (s
...
241(2A)  –  Rebuttable  presumption  that  they  were  not  acting  in  good  faith  
where  the  subsequent  purchaser  either    
o Had  notice  of  the  surrounding  circumstances  (the  transaction  at  an  
undervalue  or  preference)  and  of  the  relevant  proceedings  OR    
o Was  connected  with  or  an  associate  of  either  the  company  or  the  party  
which  transacted  at  an  undervalue  with  the  company    

PREFERENCE  BY  A  COMPANY  s
...
239(4)  Preference  is:  
Company  gives  a  preference  to  a  person  if    
• That  person  is  a  creditor  of  the  company  AND    
• The  company  does  anything  or  suffers  anything  to  be  done  which  has  the  
effect  of  putting  that  person  in  a  BETTER  position  in  the  event  the  company  go  
into  liquidation,  than  he  would  otherwise  have  been  in    
 
(e
...
 paying  off  the  debts  of  an  unsecured  creditor  before  a  secured  creditor)  
 
Preference  is  avoidable  if:  
 
1
...
239(2))  –  in  the  6  months  preceding  
the  onset  of  insolvency    
 
Relevant  time  extended  to    2  years  for  preferences  to  connected  persons  and  
associates    
 
2
...
 It  is  proved  the  company  was  ‘influenced…  by  a  desire’  to  prefer  the  creditor  
(s
...
g
...
239(3)  –  Restore  position  had  the  transaction  not  been  made  at  an  
undervalue  
 
AVOIDANCE  OF  CERTAIN  FLOATING  CHARGES  s
...
 This  is  12  
months  preceding  the  onset  of  insolvency    
o This  time  is  extended  where  a  floating  charge  is  given  to  a  connected  
person  s
...
235(2)):  
• Where  new  money  is  brought  into  the  company  as  a  result  of  giving  the  
floating  charge  (e
...
 in  respect  of  a  new  loan)  
• Invalid  if  –  An  existing  unsecured  creditor  is  granted  a  floating  charge  by  a  
company  in  financial  difficulties  and  the  charge  relates  to  existing  monies  
owed  to  that  creditor  –  BUT  if  they  provided  further  credit  to  the  company,  
the  charge  could  be  valid    
• Claytons  case  –  Payments  into  a  bank  account  discharge  the  earliest  advances  
made  by  the  bank  first  
• Yeovil  case  –  In  regards  to  an  overdraft  and  a  floating  charge  being  given  in  
respect  of  a  previous  overdraft  that  was  unsecured
...
 The  old  money  that  was  unsecured  was  essentially  gone,  but  the  
fact  there  was  new  money  constantly,  meant  the  floating  charge  was  over  that    
 
Remember    
s
...
423    
 
Administrator,  liquidator,  victim  of  the  transaction,  Supervisor  of  a  voluntary  
arrangement  can  bring  claim    
 
• Relates  to  when  a  transaction  is  made  at  an  undervalue    
• Where  there  is  an  INTENTION  to  put  the  assets  beyond  the  reach  of  the  
creditors/otherwise  prejudice  their  interest  (includes  future  creditors  who  
were  unknown  a  the  time)  
 
Easier  to  bring  a  claim  under  s
...
Identify  most  likely  potential  claim  against  the  director  
2
...
What  needs  to  be  shown  for  the  claim  to  succeed?  
4
...
Possible  sanctions  
6
...
Any  other  consequences    
 
 
2  minutes  per  mark  –  Paper  1    
15  minutes  reading  time    
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Tax  and  Business  Accounts    

 
Income  Tax  –  Individuals    
 
TOTAL  INCOME  (gross  income)  
 
Less  Charges  on  Income  and  Pension  Contributions    
(Pension,  interest  paid  on  qualifying  loans  (e
...
 partnership))  
=  NET  INCOME    
 
Less  Personal  Allowance    
(10,600  –  But  reduce  by  2  for  every  1  over  100,000)  
=TAXABLE  INCOME    
 
Split  non-­‐savings,  savings,  dividends  and  then  apply  relevant  rates  
Taxable  income  –  Gross  savings  income  –  Gross  dividend  income  =  Non  Savings  
 
Add  together    
=TOTAL  TAX  LIABILITY    
 
Less  tax  already  deducted  at  source  
=TOTAL  DUE  TO  HMRC    
 
 
Capital  Gains  Tax  –  Individuals    
 
Sale  proceeds/market  value  
Less  disposal  expenditure  
=NET  SALE  PROCEEDS  
 
Less  initial  expenditure  
(Cost  of  Asset/Legal  costs)  
Less  subsequent  expenditure  
(Enhancement/defending  title)  
=  TOTAL  CHARGEABLE  GAIN    
 
Less  carried-­‐forward  or  carried-­‐across  losses  
Less  annual  exemption  (11,100)  
=TAXABLE  CHARGEABLE  GAIN    
 
Rates:  
10%  if  Entrepreneurs  Relief  applies  
(Applies  on  a  disposal  of  shares  if:  
It  is  the  disposal  of  shares  in  a  trading  company    
1  year  before  disposal  was  officer/employee  AND    
Owned  at  least  5%  of  ordinary  share  capital  (with  at  least  5%  of  the  voting  rights)  
Provided  not  used  £10  million  lifetime  allowance)  
 

18%  if  Step  3  Taxable  Income  plus  gains  (or  any  part  of  gains)  is  within  the  basic  rate  
income  tax  threshold    
 
28%  if  Step  3  Taxable  Income  plus  gains  exceeds  the  basic  rate  income  tax  threshold  
 
 
 
CORPORATION  TAX  
 
Chargeable  gains    
Income  Profits  
Sale  Proceeds    
 
 
   
Income  Receipts    
Less  Allowable  Expenditure    
Less  Deductible  Expenditure    
Less  Indexation    
Less  Capital  Allowances  
Less  Capital/Trading  Losses  
Less  Trading  Losses  
=Chargeable  Gain    
=Income  Profits    
 
 
 
 
 
 
Total  Taxable  Profit  
 
TTP  
 
20%  
 
 
Income  Profits    
Income  Receipts    
Rental  income  
Trading  income    
Interest    
Dividend  income    
 
LESS    
 
Deductible  Expenditure    
Expenditure  must  be:  
Wholly  and  exclusively  incurred  for  the  purposes  of  trade  NOT  prohibited  by  statute  
Of  an  income  nature  –  Rent,  Wages,  Repairs,  Interest  Paid    
 
Capital  Allowances    
Qualifying  expenditure:    
Plant  and  Machinery  –  Companies  can  deduct  18%  on  reducing  balance    
Annual  Investment  Allowance  =  can  deduct  100%  of  expenditure  on  plant  &  
machinery  up  to  £500,000  
 
Each  year  the  company  claims  capital  allowance,  it  will  claim  18%  of  the  Written  
Down  Value  of  the  P&M  
 
Therefore,  can  deduct  £500,000  from  income  profits  PLUS  18%  on  the  remaining    

E
...
 X  Ltd  spent  £600,000  on  plant  and  machinery  and  claims  full  capital  allowances  
as  an  income  deduction  for  that  year  
 
Year    
Allowance  Claimed    
 
Written  Down  Value  
1  
 
£518,000  (500,000  +18,000)  
82,000  
2  
 
£14,760  
 
 
 
67,240  
 
=  INCOME  PROFITS    
 
 
Capital  Gains  
Sale  Proceeds  
 
Less    
 
Allowable  Expenditure    
(Disposal  Expenditure,  Initial  Expenditure,  Subsequent  Expenditure)  
 
Indexation  
 
Capital/Trading  Loses  
 
=CHARGEABLE  GAINS    
 
 
Relief  
Replacement  of  Business  Assets  Relief    
• A  company  disposes  of  an  asset  and  buys  a  replacement  for  that  asset    
 
• The  chargeable  gain  from  a  disposal  is  carried  forward  into  the  cost  of  buying  
a  Qualifying  replacement  asset  (land/buildings,  goodwill,  plant  and  machinery,  
ships/hovercraft/aircraft)  
 
• Replacement  asset  MUST  be  purchased  within  12  months  before  or  three  
years  after  the  sale  of  the  old  asset    
 
 
Deadline  for  paying  Corporation  Tax  –  Within  9  months  and  1  day  of  the  end  of  the  
accounting  period    
 
LOSSES  
NATURE  OF  LOSS    
ABSORBED  BY    
PERIOD    
Trading  Loss  
Income  Profits  
(1) Current  year    
Capital  Gains  
(2) Carry  back  one  year    
(3) Carry  forward  one  
year  
Capital  Loss    
Capital  Gains  
(1) Current  year  
(2) Carry  forward    

  
How  to  answer  question  
 
Make  a  grid  of  what  trading/capital  losses  and  gains  in  the  accounting  period  years    
Determine  whether  it  can  be  taken  forward/backwards    
 

Business  Accounts    

 
Effect  on  Balance  sheet  of  certain  transactions  
 
Issue  of  Shares    
Cash  (assets)  increases  
Share  capital  increases  
 
Take  out  a  loan  
-­‐  Cash  (assets)  increases  
-­‐  Liabilities  increase  
 
Enter  into  SPT    
Assets  decrease/increase  (depends  on  if  sale/purchase)  
Cash  (assets)  increase/decrease  
 
Effect  of  a  Buyback/Redemption  
-­‐  Share  capital  decreases    
-­‐  Capital  redemption  reserve  increases  
-­‐Distributable  profits  decrease  
-­‐  (Top  Half)  Cash  decreases  
 
Dividends  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

  
 
End  of  Year  Adjustments      
 
Depreciation    
 
Straight  line  method    
Buys  a  shelf  costing  6,000  which  is  expect  to  last  5  years
...
   
Depreciation  charge  =  6000/5  =  1,200    
This  will  accumulate  over  the  years    
Year  one  –  £1,200,  Year  2  –  £2,400,  Year  3  -­‐  £3,600  
 
Reducing  balance  method    
The  depreciation  charge  is  a  percentage  of  the  reducing  balance  (net  book  value  of  
the  asset)  



---