Business Law and Practice

Part One: Business Law and Practice

Chapter 1 - Starting a New Business: Types of Business

Medium
● Incorporated and Unincorporated Businesses
● Unincorporated Businesses - does not have its own legal identity/ separate
personality and no distinction between the business and its owners (sole traders and
partnerships)
○ Sole Trader - self-employed and owns and runs their own unincorporated
business - while they may have employees they are the sole owner of the
business
■ Term sole practitioner is sometimes used for sole traders who have a
profession rather than a trade
■ No legal separation between the business and the sole traders personal
affairs/ assets - risks unlimited liability - their personal assets will be at
risk and they can be made bankrupt if the business is unsuccessful
■ No specific formalities or legal processes required to set up - need to
register with HMRC (and in some cases register for VAT) but additional
costs of forming a company are avoided and no ongoing formality, filing
and disclosure requirements
■ Pay income tax on their trading profits and capital gains tax on their
capital gains
○ Partnerships - unincorporated business that exists when two or more people
carry on a business in common with a view of profit - partnerships under the PA
must be distinguished from limited liability partnerships
■ As with sole traders while the partners may have employees they are
the owners of the business and may be involved in any trade business
or profession
■ No specific formalities are required to set up the business as it can arise
through oral agreement or conduct - if the parties are actually carrying
on business together with a view of profit then a partnership exists - but
usually desirable to have some form of formal partnership agreement
setting out the terms of the partnership - otherwise many provisions of
the PA will apply without an express or implied agreement to the
contrary
■ No separation between the business and thus they are personally liable
■ S5 PA - no separation between ownership and control - every partner
may act for the purposes of the partnership business and the acts of any
one partner may bind the partnership - management can be more
straightforward
■ Need to register with HMRC and maybe VAT but the additional costs of
forming a company are avoided - no onerous ongoing formality -
decision making filing and disclosure requirements
 ■ Individual partners pay income tax on their share of the trading profits
and capital gains tax on their share of the capital gains
● Incorporated Businesses - own legal identity/ separate personality - there is a legal
distinction between the business and its owners and managers
○ Companies - incorporated business with separate legal personality and where
the owners usually have limited liability - may be limited by shares or
guarantees and can be public or private
■ If it just says a name in a question e.g. “car company” it is assumed not
to be limited liability and the shareholders will be liable unless the
question says “car company ltd/ limited)
■ Creation of a company must be filed at companies house to be born - it
is not possible for a company to exist without the involvement of
companies house.
■ Companies can be involved in any trade business or profession
■ Separate legal personality - enshrined in Salomon v A Salomon [1897] -
the cases where the court will disregard this are very rare - company is
separate from its members/shareholders and directors- can own
property, enter into contracts and be party to legal proceedings a exist
indefinitely
● Promoter (individual who undertakes to form a company) will will
personally liable for any contract entered into prior to
incorporation
○ Subscribers are those who put their names to a
memorandum of association and comply with things such
as the filing of an application to register a company -
these become the first members of the company
○ PLC must have at least one issued share with no max
(unless articles say otherwise)
● Not the agent of its shareholders and acts in its own right not just
on behalf of its owners
● Separation of membership and management is a key advantage
of incorporation but can be unnecessarily cumbersome for
smaller businesses
● Sale or transfer of a company is more straightforward as can be
done through the transfer of shares rather than the assets
themselves
■ Limited Liability - members have a limit on their liability to contribute to
companies debts - limited by shares (any amount unpaid on shares) or
guarantees (limited to any amount they promise to pay in the event the
company is wound up)
● If it is an unlimited company then there is absolutely no cap on
the amount the company may call on them to pay
● If the unpaid shares are held by another company then that
company will be liable - if the company has no assets on its own
then a liquidator could call the owners of the holding company to
pay
○ If held by individuals - then creditor cant call on them
directly - the company/ insolvency practitioner can
■ Members of a company cannot be held liable to contribute any further
sum in respect of the debts liabilities or obligations of the company other
than in exceptional circumstances:
● Legislative offences: fraudulent/ wrongful trading or transactions
to defraud creditors (ie gifts with no consideration or significant
undervalue)
● Piercing the veil - Either to prevent evasion or concealment of
facts to bypass or frustrate an existing legal obligation or liability
● Imposition of tortious liability - Ie parent company that has
assumed a DOC for the safety of employees of a subsidiary -
can be held liable for damages. Or negligent misstatements by
directors, employees and members if it is made to a C who
transacted with company if reasonable reliance and personal
responsibility created a special relationship between hem
● Non of this means that you should not be permitted to ring-fence
on its own - ie isolating and protecting certain assets as is
common in parent - subsidiary relationships - must be something
greater such as fraud or improper purposes
○ If the aim of the ring fencing was legitimate (e.g. for tax
purposes) then wont be able to enforce a claim
■ Advantages of incorporation
● Companies can grant floating and fixed charges - more flexible
form of security
● Al
■ Disadvantages of incorporation
● Pretty onerous ongoing formality, decision making, filing and
disclosure requirements that can add to administrative burden
and legal expenses over time
■ Public and private companies
Private Limited Company Public Limited Company

S4(1) CA 2006 Certificate of incorporate

states that it is a public
limited company

May be limited by shares or May be limited by shares

guarantee

Shares cannot be offered to General public can be invited

general public (s755 CA) to subscribe for shares

No minimum capital Minimum capital

requirements requirements £50k
Shares must be at least
25% paid up (does not
actually have to be listed to
be public and can become
delisted but remain public)

Subject to more onerous

 rules on things like disclosure
Company can apply for
shares to be listed for trading
on recognised investment
exchange
Listed companies have
further disclosure rules
● Limited Liability Partnerships (LLPs)
○ Formed by sending form LLIN01 to companies house - cross between a
company and a partnership - will not be formed until CH issues certificate of
inspection
○ Available for persons “carrying on a commercial business with view to profit”
(S2(1)(a) LLPA) and every member is deemed to be an agent of the LLP (s6
LLPA)
■ This is even if the view to profit is incidental and not the primary
motivation - may arise later if that view comes up after the fact -
provided that it is a commercial enterprise and not just charitable
■ If it is charitable making a profit then it wont be a partnership as it is not
a commercial business
○ However has a separate personality and members have limited liability/ are not
directly responsible for its debts S1(4) and (5) LLPA
○ Anything invested in the property by the partners (whether cash or not) will
become part of the partnerships assets
○ Provide provisions that apply between the partners in default of express or
implied agreement to the contrary - more flexibility with regard to management
than companies which have a stricter separation of powers
○ Like companies can grant fixed and floating charges over their assets and are
subject to stringent administrative and reporting requirements
○ Might not be as well recognised internationally as limited companies
○ LLP itself does not pay tax, instead members pay income tax on their share of
the trading profits and capital gains tax on their share of the capital gains
○ If anyone the LLP deals with in the course of business makes a written request
for the address of its registered office, place of inspection or type of records
kept there the LLP must provide the information within 5 working days
■ Must also have a register of the names and addresses of its members
and identify any member controlling >25% of its assets or voting rights /
who has significant control (ie can appoint or remove the majority of
those involved in management)
● Register of members
● Register of members residential addresses
● PSC register
● And to the extent that it has any - a register of debenture holders

Chapter 2 - Partnerships
● Formation of Partnerships and the PA
○ What is a partnership and how is it formed?
 ■ One way in which a business may be run - an unincorporated business
and not a separate legal entity
■ Agreement to operate in partnership can be oral or in writing or may
even be implied by conduct - not legally required to have a partnership
agreement but it is advantageous
● Partnership agreement - formal document setting out the terms
of a partnership, usually deals with the relationship between the
partners and their relationships with third parties - often varies or
amends default provisions under the PA 1890
○ Who can be a partner - generally any capable person - maximum number of
persons who could be a partner used to be 20 but professions like solicitors and
accountants were exempt - since 2002 there is no limit regardless
■ Any person can become a member of an LLP in accordance with an
agreement of existing members (majority)
■ Must have at least 2 designated members (if non are designated or only
one is then every member is deemed to be a designated member)
○ The Partnership Name
■ If it includes the name of any member on letters it must include all
members names (unless >20 provided it keeps a list at the principal
place of business)
■ Law relating to business names is contained in Part 41 of the CA 2006 -
no restrictions if name consists only of the surnames of all partners
without forenames or initials - in any other case the CA will apply and
certain words or expressions forming part of the business name will
require prior approval - including those in the Company, LLP and
Business Names Regulations 2014
■ Partnership that uses a business name must also comply with the
prescribed disclosure requirements under the CA - details about the
partners must appear at the main place of business and on partnership
stationary (need to include names of partners on stationary unless >21
partners)
■ Need details of the partnership at all of its addresses
● Partnership Agreements and the PA
○ Purpose of a Written Partnership Agreement - not a strict requirement but has
benefits like: providing evidence of partners relations and partnerships terms,
overrides some of the provisions of the PA which will automatically apply except
to the extent that there is contrary agreement - many default provisions have
undesirable consequences for modern partnerships
■ If an LLP and no LLP agreement the relationship between the LLP and
its members will be governed by the limited liability partnership
regulations 2001
○ Usual Clauses in a partnership agreement:
■ The parties - will be the partners, no new partner may be admitted
without the consent of all of the partners although sensible for smaller
partnerships this may be unworkable for larger ones - larger ones will
usually have a formal partnership agreement that does not require
unanimity
■ Commencement date - existence of a partnership is a question of fact -
partnership will exist from the date the S1 PA criteria are satisfied - thus
an agreement subsequent to that date will only govern rights and
responsibilities from that date
■ Nature and place of business - unanimity is required by the partners to
change the nature of the business (s24(8) PA)
■ Partnership name - need unanimity to change unless otherwise
provided for
■ Duration - partnership may run for a specific venture or a fixed term,
fixed term partnership that continues after expiry will be presumed to
continue on terms consistent with a partnership at will (no end date)
(s27(1)(PA) otherwise it will be dissolved (s32 PA). For partnerships at
will the following applies:
● Any partner may determine the partnership (bring it to an end) at
any time by giving notice to other partners - no requirement for
written notice - but it is how they are commonly determined
● Partnership shall be dissolved from the date specified in the
notice or date notice is given
● Remaining partners may seek to continue in what would be a
new business - usual to provide in the agreement that the
partnership will continue (technically as a new partnership)
despite the retirement death expulsion or bankruptcy of a partner
■ Capital - important to specify what each partner is contributing to the
business and how capital profits/ losses will be shared between the
partners - absent express or implied agreement to the contrary the PA
provided that profits and losses will be shared equally (S24(1) - may be
implied that unequal contributions of capital permit unequal withdrawals
but should be clear in agreement. Agreement may also provide for
interest to be paid on partners capital contributions
■ Income - agreement should specify how the income profits/ losses of
business will be shared between the partners - absent express or
implied agreement to the contrary income profits and losses will
be shared equally and this may not be suitable to clients specific
circumstances - agreement should also deal with the payment of
salaries from profits before the final profit shares are divided - PA does
not provide for salaries to be paid to partners and this could be
particularly important where not all partners work full time for the
business. Drawings - amount that partners withdraw on account of
profits - a well drafted agreement should deal with how and when
drawings are made and provide for repayment with interest if too much
is taken
■ Partnership Property - should be specified so that they are clearly
distinguishable from the assets belonging to individual partners - some
things may be owned by a partner but can be used for the purposes of
the business
● If a partner spends their own money in the ordinary conduct of
the firms business (ie dont have company card so spend own
 and reimburse) they will be entitled to be refunded provided they
are acting in good faith - can be excluded by agreement though
■ Management - all partners are entitled to take part in the management
of the business (s24(5) PA) - may not always be what occurs as some
just invest in the business. All matters connected with the partnership
business may be decided by a majority of the partners (s24(8) PA) -
except for changing the nature of the business where unanimity is
required - thought should be given to whether unanimity should be
required for other decisions and whether a majority decision should
always be applicable - some issues may just be for senior partners to
decide on. Absences should be catered for
● Different if the share in the partnership is assigned - ie lender
takes share - cannot intermeddle at all or even require
production of accounts - is only entitled to receive profits from
the share and share of assets if dissolved
■ Retirement - retirement simply means leaving the partnership - PA does
not provide for the possibility of a partner leaving a partnership without it
being dissolved - significant shortcoming of the PA so usually
agreement has a mechanism for a partner to leave following appropriate
notice and get what is owed to them without dissolving the firm
● Absent any other agreement the outgoing partner or his estate is
entitled to such share of the profits made since dissolution as
attributable to his share in assets that he has a proprietary
interest in
■ Death and bankruptcy - unless otherwise agreed by partners the
partnership will be dissolved by death or bankruptcy of any partner - can
have serious consequences for continuing partners - provision should
be made in agreement for continuation of firm by surviving partners and
payment of the gone partners share
● Dead partners share of partnership assets will not go to her
estate - instead will be sold first as part of dissolution process
■ Expulsion - under PA no majority may expel any partner S25 PA - thus
an express power to expel a problem partner should be included
specifying grounds for expulsion and providing for patent of their shares
and provision that the partnership should continue rather than dissolving
as regards the remaining partners - with the other partners buying the
expelled partners share
● Can also be dissolved by the court if partnership itself is illegal or
automatically if the law changes making the business illegal, or a
partner applies under S.35 because a partner is permanently
incapable of performing his part, is guilty of a prejudicial offence,
breaches of the partnership agreement, is unable to profit, or it is
just and equitable
■ Payment for outgoing partners share - specific provision should be
made for the following:
● Remaining partners to purchase the share
● Valuation of outgoing partners share
● Payment of the outgoing partner share
 ● Dissolution if the option to purchase is not exercised - dissolution
takes place in accordance with provisions of the partnership
agreement or S44 of the PA - proceeds of sale are used to pay
third party and partner creditors and partners capital entitlements
○ Any balance is then divided between partners in
accordance with their profit sharing ratios
● May be a financial advantage in selling the business as a going
concern rather than dissolving
■ Restrictive covenants - consideration should be given as to whether
there should be a restriction on ex-partners competing, approaching
employees or former clients etc - nothing is provided for in PA so
provision must be made
■ Administrative Provisions - agreement will need sufficient administrative
provisions to make it workable - definitions and interpretation, service of
notices, costs and arbitration in the event of disputes
● Partners Duties to Each Other
○ Partners owe each other a duty of good faith and the PA provides for three
fiduciary duties
■ Duty to provide true accounts and full information on partnership matters
(s28 PA)
■ Duty to account for profits derived from the position as partner (s 29 PA)
● Or from the use of any partnership property
■ Duty to account for profits from a competing business (S 30 PA)
● Other partners can also obtain injunctive relief to restrain the
continuing competing trade
○ Many agreements have further provisions such as not to start or join any other
business while partner
○ Further provisions of the PA relate to the relationship between partners - in
usual way it can be varied by contrary agreement - include right to inspect
partnership books and payment of 5% interest on loans made by partners to the
firm (but no interest if it is just a capital investment)
■ These will be paid back after the creditors if the partnership is dissolved
○ Firm should indemnify partners where own funds were used in ordinary and
proper conduct of the business
● Liabilities to Third Parties
○ Is the partnership liable? - starting point is S5 of the PA based on the law of
agency - provides that each partner is an agent of their fellow partners and as
such a partner acting within the scope of their actual or apparent/ ostensible
authority will bind the partnership as a whole
○ Actual authority - partner is actually authorised to bind the partnership in the
circumstances whether under partnership agreement or through authority
through things like course of conduct
○ Apparent/ ostensible authority - would appear to the third party that the
transaction is authorised by the partnership in the circumstances
■ Is the transaction related to the partnership business?
■ Would a partner usually be expected to have authority to enter into the
transaction?
■ Does the third party know that the partner has no actual authority?
 ● This is different in companies - if a director enters a contract
which would normally need a resolution under the articles and
the third party is aware of this restriction - they are entitled to rely
on the belief that directors have full bower to bind the company
■ Does the third party know that the partner concerned is not in fact a
partner of the firm or do they have suspicions that this is the case?
○ (a) If a partner entered into a transaction with actual or apparent authority then
partnership will be bound by that act
○ (b) If not actual or apparent authority then partnership will not be bound – only
partner concerned (for example if the partnership told a company that 3
partners needed to approve contracts but entered into one with only 2 partners
- while normally this would be apparent authority as the company was informed
then the partnership would not be bound only the partners who entered
contract)
■ Example could be where acting outside of the usual way of business - if
a partner in a law firm gave financial advice - would not be course of
business and while personally liable the firm would not be
○ (c) If a partner entered with only apparent authority he will be liable to fellow
partners for breach of warranty of authority - partnership will still be bound and
third party contract not affected - individual partner will still be liable personally
to account to fellow partners for any loss to the partnership
○ Which Partners are Liable?
■ Once established whether the partnership as a whole is bound by a
transaction with a third party it must be established precisely which
partners are liable - partners are jointly and severally liable for debts and
obligations of the partnership without limit (S9 PA) - where unable to pay
its debts out of partnership assets a creditor can obtain payment from
private assets of the partners
■ In the case of fraud, wrongful acts and omissions by one partner, the
partnership will be liable if it can be established that it was in the course
of business (partner will also be liable - could sue any partner or
partnership)
■ Changes of partners - important to distinguish between existing debts
(those incurred prior to the change) and future debts (those incurred
after the change)
● Partner is liable for the debts incurred whilst they are a partner
(s9)
● New partner is not liable for debts incurred by the partnership
before they became a partner (s17(1)(PA)
● Retiring partner is not released from debts incurred by the
partnership whilst they were a partner (s17(2)) - retiring partner
may seek to protect themselves from liability for existing debts
through a deed of release, a novation agreement or an indemnity
●
Type of document Description Effect

Deed of release Release of Release of

 outgoing partner outgoing partner
from any
outstanding debt/
liability

Novation Tripartite Newly constituted

agreement from agreement partnership stands
willing creditors between (1) the in shows of old
creditor (2) the one as regards the
(this may also be partnership as debt/ liability
used in the sale of before retirement
a sole trader) (3) partnership as
following
retirement -
consideration or a
deed will be
required in order
to be valid/ binding

Indemnity from Bipartite Not binding on

continuing agreement (1) third parties and
partners outgoing partner outgoing partner
and (2) continuing will still be liable
partners but able to seek
indemnity from
continuing
partners
● Retired partner may be liable for debts incurred after their
retirement if they fail to comply with sections 36 and 14
● S36 - retiring partner must give notice to third parties of their
leaving the partnership
○ Actual notice - to existing/ former clients - inform directly
via letter etc
○ Constructive Notice - potential future clients - place
advertisement in London Gazette
● S14 - must avoid being held out as a partner - doing something
or allowing something to be done that suggests one is a partner,
that is relied upon by someone, who gives credit to the firm as a
result

Chapter 3 - Limited Companies: Part 1

● Company formation and Constitution
○ Incorporating a company
■ Two ways to provide a business client with a company:
● Incorporating a new company
● Acquiring a company that has already been incorporated but has
not traded (off the shelf company)
■ Incorporation procedure, forms and documents - need to send the
following to companies house:
 ● Application to register a company (form IN01) can be done
online
● Memorandum of association (can be completed as part of INo1)
● Articles of association
● Requisite fee
■ Form IN01 - Part 1: Company Details
● Subject to very limited exceptions the name of a company must
end with limited, Ltd, public limited company or Plc (or welsh
equivalent)
○ Company name cannot be chosen which: is the same of
an existing company, in the opinion of the SoS is
offensive or refers to an activity prohibited by law, unless
previously approved includes words suggesting a
connection with the Government, local authority or any
other sensitive words defined in Company, Limited
Liability Partnerships and Business Names Regulations
2014
○ If name is same as or similar to existing business and the
business is likely to be affected by the similarity the
company may be subject to a passing off action in tort
○ Company can change its name by special resolution -
form NM01 must be filed at Companies House with a
copy of the special resolution and required fee
■ Also must send copy of the special resolution and
a notice to the registrar
■ May need secretary of state approval if including
govt words like “national”
■ Name change will take effect from the date on
which the new certificate of incorporation is
issued
● Must include company type - public or private, limited by shares
or guarantee
● Principle business activity - CH has list of code numbers to
select from to define this
● Situation of registered office and registered office address -
official correspondence address of a company - can be changed
later by board resolution (s87 CA) and form AD01 filed with the
registrar
● Articles of Association - particularly important constitutional
document for a company - contract between (1) a shareholder
and the company and (2) a shareholder and other shareholders
○ There are a standard model articles for different types of
company - not compulsory and companies can make
amendments or use a bespoke set of articles
○ Unless adopting in entirety the articles must accompany
the application
○ Special resolution is required to change the articles
(S21(1)(CA) - copy of the special resolution and
 amended articles must be filed at companies house
within 15 days
■ Form IN01 Part 2: Proposed Officers
● Company secretary - person responsible for keeping records
and filing documents at Companies House - not a requirement
but if there is one then their name and address for service must
be given - no particular qualifications are required to act as a
company secretary of a private limited company - if private can
also be a director at the same time
○ Not automatically entitled to enter into commercial
contracts but do have ostensible authority for those to do
with administration
○ For public must have either been a secretary of another
public company for 3/5 of the last years, chartered
barrister or solicitor, or has held another position that
makes it seem to the directors that they would be
capable of discharging the functions of a secretary
○ Must notify the registrar of any changes and keep a
register of secretaries available for inspection - failure is
a criminal offence
● Directors - name, month and year of birth, nationality and
business occupation must be set out - address for service and
usual residential address given (can apply for exemption if would
be a danger) - residential address will be hidden and service
address will be public
○ Private companies must have at least one director and
public 2
○ Directors must be at least 16 years of age and at least
one be a natural person (check that the law hasn't
changed)
■ Form IN01 Part 3: Statement of capital and initial shareholdings
● Number of shares of each type and their nominal value
● Rights attaching to different types/ classes of share
● Initial shareholdings
● Minimum of one shareholder is required
■ Form IN01 Part 4 - statement of guarantee (only if company limited by
guarantee)
■ Form IN01 Part 5: Details of people with significant control
● Hold more than 25% of shares (25.1% or above basically)
● Have more than 25% of voting rights
● Have right to appoint or remove majority of the board
● Or significant control in another capacity - ie shareholder director
with influence (not just because both)
■ Form IN01 Part 6: Election to keep information on the public register -
rather than maintaining the statutory books the subscribers can agree to
keep the information that would be contained within them solely on the
central registers held by companies house. Statutory books include:
● Register of secretaries
 ● Register of directors
● Register of directors and their residential addresses
● Register of members (do not need to keep if private)
● PSC register
■ Form IN01 Part 7: Consent to act
● In all cases the subscribers must make a statement that the
proposed officers and company secretary have consented to act
in the relevant roles
■ Form IN01 Part 8: statement about individual PSC Particulars:
● Subscribers must make a statement that the PSCs know their
details have been provided as part of the application
■ Form IN01 Part 9: Statement of Compliance - confirms requirements of
the CA as to registration have been compiled with
● Memorandum of association - statement of intention of the
subscribers to form a company and become shareholders taking
at least one share each - the prescribed form of memorandum is
set out in the Companies Regulations 2008. Under old CA 1985
the memorandum of association was an important ongoing
constitutional document setting out the objects of the company,
following the CA the objects are moved to the articles and may
be changed by special resolution (objects is the purpose for
which a company is formed)
● Certificate of Incorporation - documents are examined by
Companies House and provided that they are in order a CoI is
issued including the company name, number and date of
incorporation - the number remains consistent always
● Post incorporation steps
○ Order company seal (optional)
○ Publishing companies name (outside place of business
and in correspondence)
○ Including the correct particulars on business stationary -
include company’s name register office and number
○ Registering for VAT with HMRC
○ Dealing with all matters relating to the companies
employees: contracts of employment, PAYE etc
○ Arranging insurances
○ Opening company bank account
○ Obtaining all requisite licences/consents
○ Maintaining the statutory books (if kept)
○ Keeping other documents at the registered office -
include copies of charges, directors employment
contracts etc
● First Board meeting
● Company Meetings and Resolutions
○ Board meetings - meetings of the directors who pass board resolutions to make
decisions
■ If there is a chairman and the board members reach no majority (split
vote) then the chairperson has casting vote
 ■ (remember the same does not apply to resolutions of members - they do
not have anyone with casting vote if incorporated after 2009 - instead
will have deadlock)
○ General meetings - meetings of the members/ shareholders who pass ordinary
resolutions and special resolutions to make decisions
○ Directors make most day to day decisions but some key decisions must be
approved/ authorised by the members first - can be because of the provisions
of the CA or articles if this is the case the the directors normally call a BM to
pass BR or call a GM
■ Do not need to keep records of the resolutions passed at general
meetings
○ Exercise of Directors Powers Board Meetings
■ Powers of directors are laid down in companies articles and MA3
■ Generally directors make decisions at BMs by majority vote (MA7) or
unanimous (MA8)
■ It is common to give the directors the right to delegate any of their
powers (MA5)

Calling and notice Any director may call a BM at any time or require the company
secretary to do so (MA9)

Reasonable notice must be given (MA9(1))

All directors must be given notice (MA9(3))

Permitted forms of communication include telephone, video,

text, IM (MA10(1))

Directors can waive the right to notice (MA9(4))

An Agenda is not a legal requirement

If failure to give notice then new meeting can be demanded

Must keep a written record for 10 years of every majority or

unanimous decision

Quorum - minimum number Two (MA11(2))

of people required to be
present for valid decisions If no quorum the only thing it an do is appoint further directors or
to be mad call a GM

Voting Show of hands or oral assent (MA7(1)) - each member has one
vote - not based on percentage of shares

Chairperson's casting vote in the event of deadlock (MA13)

MA14 and s117 and 182

Resolutions and majority BRs - simple majority required (deadlock if equity of votes and
MA13 does not apply)
 ■ Conflicts of interest
● MA14 prevents a director from voting and counting towards the
quorum on any Board meeting decision in which they have a
personal interest - ie buying or selling property from or to the
company - conflicts with the fiduciary duties owed to the
company - can still count as a shareholder
● MA14(3)(a) allows a company to suspend or relax the general
application of MA14 or
● S177 and 182 CA require a director to declare the nature and
extent of a personal interest in a proposed or existing transaction
or arrangement subject to limited exceptions (declaration of a
conflict of interest is separate from voting and counting towards
quorum) - will be voted on by members of the board but can
also write to all directors
○ Will not need to declare it if it is already been mentioned
that they have an interest and the members are aware or
the interest
○ Do not need to declare if it is unlikely to lead to a conflict
of interest
○ Do not need to declare if it is a service contract
■ Minutes of BMs - must be kept for at least 10 years in the minutes book
(don't need to keep those of general meetings though)
■ Unanimous decisions - MA8 provides that a procedure for unanimous
decision making may be used instead of holding a BM - enables the
directors to make decisions in writing or more informally
○ Exercise of Shareholders Powers: GMs
■ Powers of members are laid down in the CA and articles - generally
exercise their powers by passing resolutions in GMs (2 types):
● AGM - annual general meeting - if formed on or after 1 october
2007 is not required - if before and articles have not been
amended then this will be required. 21 clear days notice
(unanimity if earlier)
○ Quorum for private - 2 (1 if only one member)
○ Public companies still need to have them
○ Single member companies dont need them but should
write down their resolutions
● EGM/ GM - any other general meeting 0 can be called at
discretion of directors whenever, by members of >5% share
capital/ voting rights (paid up), if members request then directors
must call within 21 days (doesnt mean working days) and 28
days of the call. Must have 14 clear days notice (shorter if
>90/95% (private/public) of voting rights request
○ Need 28 days notice if a special thing like removing
directors or auditors
■ Two types of resolution:
● Ordinary Resolution - requires simple majority of shareholders
attending and voting at a GM
 ● Special resolution - requires 75% majority or more of
shareholders attending and voting at a GM (shareholders NOT
shares) all special resolutions must be filed at CH within 15 days
of being passed
■ Can also pass resolutions without a meeting or without a written
resolution if all members agree to it (Duomatic principle) - even if
outside of articles of association
● It is also possible to entrench something - ie if say it cant be
changed - will be able to change but will need unanimity - SR
wont be enough
○ If have a provision for entrenchment anywhere in the
articles - will need to submit a statement of compliance to
CH whenever articles are changed (alongside amended
articles and resolution) even if the articles being changed
are not entrenched provisions
■ Cant use a written resolution if removing a director or auditor from office
- must have a GM
■ Key provisions of GMs
■
Calling and notice Usually the directors call a GM (s
302)

Written or electronic notice may

be given

Shareholders power to
requisition a GM
14 clear days notice required -in
effect 16 as do not include date
of service and date of meeting)

Extra 2 days notice if by email or

post

Short notice may be agreed by

(1) a majority of members (2)
holding at least 90% of voting
shares

Contents of notice - date, time,

place, nature of business, full
text of SR proposed and
sufficient detail,

reasonably prominent proxy

notice - a notice informing the
shareholder of their right to send
someone to attend and vote in
their stead

Quorum 2 (unless one member company)

 Meeting must remain quorate
throughout

Voting - Show of hands unless poll vote

demanded

Poll may be demanded by (1)

chairperson, (2) 2+ voting
members, (3 any members
holding at least 10% of voting
share (cant be restricted in
articles)

One vote per share on a poll

vote

Resolutions and majorities OR - >50%

SR - >75%
■Shareholders power to requisition a GM - Although it is usually the
director who calls GMs the members of a company may also indirectly
call for them - directors must call a GM when members holding at least
5% of the paid up share capital with voting rights requisition them to do
so - directors then have 21 days from date of requisition to call a GM
which must be held within 28 days - if meeting is not called the
shareholders may call the meeting themselves and recover the costs
from the company
■ Written resolutions - alternative to GM - pass resolutions in writing with
shareholders having one vote per share (if 5% request or directors)
■ Formalities -
● minutes kept for 10 years,
● signed copy of every SR and some ORs (such as issue of
shares) must be filed at companies house within 15 days
● Where resolution alters companies articles a copy of the
amended document must be filed
● Any appropriate forms must be filed
● Where appropriate the company's statutory books must be
updated
○ Summary of Key Decisions
○
Substantial Legal Procedural Filing/ admin
requirements Requirements and requirements
directors declaration of
personal interests

Change of company name (takes effect from when new certificate is issued)

Check whether PR - BM > GM > BM Filing- copy SR, NM01

company name DOI: not usually form, fee
requires approval applicable If unique articles - give
 notice to registrar and a
statement that the
name change was in
line with the companies
articles
Admin - update
company stationary.
BM and GM minutes

Change of trading name

MA3 (BR) PR - BM Admin - update

DOI: not usually company stationary
applicable BM minutes

Change of registered office

MA3 (BR) PR - BM Filing - form AD01

DOI: not usually Admin - update
applicable company stationary
BM minutes

Change articles (but takes effect from date of SR - unless it is changing the
specified purpose of the business if the company decided to select one)

SR PR - BM > GM > BM Filing - SR amended

DOI: not usually articles
applicable Admin - BM and GM
minutes
Send the amended
articles, the resolution
to adopt the amended
articles and a notice to
remove (CC02) or add
(CC01) any restriction
(ie provisions for
entrenchment such as
SRs which are above
the normal 75%) on the
articles (if necessary)

Appointment of chairperson

MA3 PM - BM Admin - update

MA12 DOI - S177 and MA14 company stationery
BM minutes

Change of accounting reference date

MA3 PR: BM Filing - AA01

DOI - usually not Admin - BM minutes
applicable
● Accounts
○ Directors must file account with companies house every financial year
■ Failure to do so could lead to criminal penalties
 ○ Small companies are exempt from the requirement for accounts to be audited -
two or more of the following
■ Turnover of not more than £10.2m
■ Balance sheet of no more than £5.1m
■ Not more than 50 employees
○ Directors must also prepare a financial report for each financial year (small
companies exempt)
○ Medium companies also have more relaxed accounting requirements - if
■ Max 250 employees
■ Up to £36m turnover
■ Balance sheet of up to £18m
○ Accounts for private companies must be filed with companies house and
circulated to its members within 9 months of deadline for submission
■ Public company is 6 months
■ However if they have filed the accounts with CH must at the same time
send to shareholders (cant send to CH and then later send to them)
● Confirmation statement
○ Must be filed each year, within 14 days of the anniversary of the company’s
incorporation
○ Confirms that all information required to be delivered to companies house had
been duly filed and provides details of any changes to shareholdings (important
where the changes were not really notifiable (ie no one new of significant
control)
■ Company and its officers may be criminally liable if not filed within 14
days
○ First confirmation statement must be filed within 12 months of initial
incorporation - then all others every 12 months after date of incorporation
● Other stuff
○ Large companies are required to include an analysis of non-financial
performance indicators in its strategic report
○ If quoted it must also report on greenhouse gas emissions in the directors
report
○ If less than £6.5m turnover balance sheet below £3.26m max 50 employees is
not required to do so
○ Medium companies - turnover over £25.9m balance sheet £12.9m and max 250
employees only need to do so if quoted

Chapter 4 - Limited Companies: Part 2

● Directors
○ Any person occupying the position of director by whatever name called
■ Shadow director - although not properly appointed as a director does
exercise a major influence on the directors
■ De facto director - who has no been properly appointed under CA but
performs the role of a director
■ De jure - a properly appointed director
○ Appointment of Directors
 ■ Requirement for directors
● Private must have 1 and public must have 2
● Company can be a director but must be one natural person
● Human directors must be at least 16 and not disqualified from
being a director
■ First directors - automatically appointed on incorporation if named in
Part 2 of IN01
■ Subsequent directors - articles may specify the permitted minimum and
maximum number of directors
● Articles will provide for the appointment of subsequent directors -
● important to understand that directorship is an office - non
executive position but can also be executive
○ Non executive - do not work for the company in a paid
position - will be entitled to fees for duties
○ Executive director - paid position and will have an
employment or service contract - often have a particular
role and job title linked to their duties or specialism
■ Appointment of a non-executive director
● Dealt with under MA17 and can be done via OR of shareholders
or BR of directors
■ Appointment of executive director
● Dealt with under MA19 and may be done by BR
● Following appointment the company must:
○ Update register of directors and register of addresses
○ File form AP01 (individual directors) or AP02 (corporate
directors) as appropriate with Companies House within
14 days
● Directors Duties
○ Directors owe fiduciary duties to their company (act in best interest of the
company and not make a secret profit) - shareholders may act in their own
interests
○ The company can make a claim directly or by way of derivative claims against
the directors - remedies include damages, restoration and account of profits.
Members can also ratify breaches (provided they don't involve illegality such as
fraud)
■ Any provision seeking to exempt / indemnify a director for negligence,
default, breach of duty or fraud will be void
○ To act within the company’s constitution and to exercise their powers for proper
purposes (s171)
■ Directors must adhere to the provisions of the company’s articles and
exercise their powers in the best interests of the company - their own
personal interests for example when issuing shares or entering into
contracts should not sway them
○ To promote the success of the company (s172)
■ Director must act in a way they consider in good faith would be the most
likely to promote the success of the company for the benefit of the
members as a whole (just the company in question and not any parent
 companies or those in the group etc) - test is subjective and in acting
directors must have regard to 6 non-exhaustive factors:
● The likely long term consequences
● Employees interests
● The need to foster good business relationships
● Impact on the community and the environment
● The desirability of maintaining a reputation for high standards of
business conduct
● The need to act fairly between members
■ The subjective nature of the test and the lack of weight given to the
respective factors is a key criticism of this provision as it can make it
very difficult to establish a breach - directors only need to “have regard”
to the factors and the need to promote the success of the company will
usually take precedence
○ To exercise independent judgement (s173)
■ Director must not do anything to fetter (compromise or undermine) their
right to exercise independent judgement unless it is done in good faith
and in the best interests of the company - they may take legal or
financial advice without being in breach of this section
■ Ie being swayed by minority shareholder may indicate not
○ To exercise reasonable care, skill and diligence (s174)
■ Standard of care is of a reasonably diligent person - minimum objective
standard (standard knowledge, skill and experience that may
reasonably be expected of a director) which may be raised based on the
actual knowledge skill and experience that the director has - e.g. if are a
financial director rather than a generic director it will be imputed that
they have more knowledge
○ To avoid conflicts of interest (s175)
■ Taking advantage of property information or opportunities that belong to
the company whether or not the company was in a position to exploit
these - the directors of a private company may authorise a breach of
this duty by BR - although the interested directors vote will not count
○ Not to accept benefits from third parties (s176)
■ Will be no breach of this duty if the acceptance of the benefit cannot
reasonably be regarded as likely to give rise to a conflict (minimal or
relates to normal corporate hospitality). However receipt of a gift may
constitute bribery under the Bribery Act 2010
○ To declare interest in a proposed transaction with the company (s177)
○ Remedies and ratification
■ As directors owe their duties to the company it is the company that is
the proper claimant in any action for their breach - shareholders may
consider taking derivative action if the directors fail to act
■ Remedies can include an account for profits, damages or an injunction
■ Shareholders may ratify a breach of a duty by OR - the votes of any
interested director who is also a shareholder and those persons that
they are connected with will not count
● Unless by OR the shareholders vote to allow their vote to be
counted
 ■ Cannot have a provision that purports to exempt a director from or
indemnify them in relation to any liability arising from negligence,
default, breach of duty etc - will be void
● Personal Liability of Directors
○ A director will be personally liable to third parties dealing with the company
while the director has given a personal guarantee or is guilty of wrongful
trading, fraudulent trading or misfeasance.
■ It is unlikely that a director will be personally liable for fraudulent or
negligent misstatements to a third party if he did not make an
assumption of responsibility or had no personal nor special relationship
with a third party
○ Personal Guarantee - lenders often insist on personal guarantees from director-
shareholders - makes them personally liable for the liabilities of the company
taking away the real benefit of limited liability
○ Wrongful trading - director of an insolvent company may be liable to contribute
to the assets of a company where the company continued to trade and they
knew or ought to have concluded that there was no reasonable prospect of the
company avoiding insolvency
■ Combined objective and subjective test - will be a defence if the director
took every step to minimise potential loss to creditors as ought to have
been taken
■ Will be as the court sees fit - all directors will be able to potentially
contribute not just who seems to be most in the wrong
○ Fraudulent Trading (s 213 IA) - director of an insolvent company may be liable
to contribute to the assets of a company where the company carried on
business with intent to defraud creditors or for any fraudulent purposes -
criminal offence
○ Misfeasance (s212 IA) - breach of directors duties discovered on winding up -
personal liability may be imposed in these circumstances
■ An example could be if within 12 months of commencing winding up the
company made a payment out of capital in respect of the redemption or
purchase of any of its own shares
○ Criminal liability of companies for offences requiring mens rea by way of the
identification principle - acts and state of mind of the company - directors and
potentially other senior manager/ officers
● Powers of Directors
○ The powers of the directors are set out in the companies articles - their wide
powers of management (MA3) are subject to any instruction given to the board
by special resolution of the members (MA4)
○ Directors powers are exercised either by making decisions at board meetings or
by unanimous agreement (MA8), MA5 also contains wide powers of delegation
○ Articles may make provision for appointing an alternate director during absence
● Disclosure of Information Under CA 2006
○ Companies must maintain a register of directors (s162) and a register of
directors residential addresses (s165) unless they have applied for exemption
○ If a directors particulars change they must be reported to companies house
using CH01 (individual) CH02 (corporate)
 ○ Registered name must be displayed at registered office, on business letters,
publications, invoices, correspondence etc certain communications etc
○ Must have country of registration and its company number and address on
things like order forms and business letters
○ Directors names do not need to be in business letters but if they are all must be
included (s82 CA)
○ Copies of directors service contracts or a memorandum of their terms must be
kept by the company for up to one year after expiry/ determination (s228 CA)
members have a right to inspect these (s299 CA)
● Restrictions on Directors
○ Restrictions on directors: directors service contracts (S188 CA)
■ Shareholders approval by OR is required for service contracts of a
guaranteed fixed term of more than 2 years as such contracts could
lead to significant liability for the company if wrongfully terminated
■ If guaranteed term is not duly approved by OR the service contract will
be terminable on reasonable notice
■ Although the director will not need to declare their interest in the
proposed service contract due to the exception in S117(6)(c) CA they
will be unable to vote where it is approved
■ Memorandum of the proposed terms must be made available for
inspection 15 days prior to meeting and during meeting s188(5) CA
○ Restrictions on directors: substantial property transactions (s190 196 CA)
■ Directors under their general management powers may approve most
property transactions involving the company but substation ones require
shareholder approval by OR
■ Substantial property transaction - acquisition/ disposal of a non-cash
asset where:
● The parties involved are the company and a director or a person
connected to a director and
● The asset is substantial, ie value is not £5k or less and either
more than £100k or more than 10% of the company's net asset
value
■ Person connected to a director (S252- 257 CA) - spouse, civil partner,
romantic partner, children, stepchildren, parents, children of romantic
partners (siblings, grandparents, grandchildren, uncles, aunts, nephews
are fine).
● Body corporate - director and persons connected with the
director who own at least 20% of the company voting shares
● Transaction with body corporate (company which has that many
shares) is voidable - unless did not have notice (bona fide for
value), or is affirmed
■ If CA 190 is breached then a transaction is voidable (s195)
○ Restriction on directors - Credit transactions
■ If under £15k for a credit transaction/ £10k if a loan or in the ordinary
course of the company's business a credit transaction or provision of a
security for a credit transaction - will not need approval
○ Restrictions on directors: loans to directors (or directors of the holding/ parent
company) (s197 CA)
 ■ With limited exceptions loans made to a director or holding directors of
more than £10k in total require the approval of the members by OR
● Less than this just needs a BR
● Unless it is for the purposes of the company, defending legal
proceedings or in connection with regulatory action it will need
OR
■ Transaction will be voidable if not approved unless ratified by OR of the
shareholders within a reasonable time
■ Memorandum of the proposed terms must be available for inspection for
15 days prior to the meeting and at the meeting itself (s 197(3))
■ Does not apply if the company is a money lending business
○ Restrictions on directors: Payments for Loss of Office (s215-222 CA)
■ Certain payments to directors for loss of office require approval of the
members by OR if they exceed £200 - does not include those due under
existing contracts or pursuant to a legal obligation
○ Restrictions in constitution/ articles
■ Ie if director is not allowed to contract the company to a loan or for
transactions over a certain amount - validity cannot be challenged on
the grounds of lack of capacity and company will be bound
■ Unless the other party acts in bad faith (just knowing that the other party
is contracting beyond their powers is not enough to constitute bad faith)
■ To change the articles requires a special resolution - must register any
change with copy of resolution and new articles to registrar within 15
days (change takes effect immediately from resolution though unless it
is a change of objects in which case it is when registered)
● Removal of Directors
○ Director holds office until death, voluntary retirement, removal of disqualification
○ Voluntary retirement/ resignation - director may resign by serving notification of
resignation on the company - executive director will have to adhere to the terms
of any service contract
○ Removal - Bankruptcy order, entering into composition with creditors, physician
or mental incapacity - directors office ceases in these circumstances (MA18(b-
d))
○ Removal under S168 CA - shareholders removal via OR
■ Special notice (at least 28 days) of the proposed resolution must be
given to the company of the proposed resolution s168(2) and 312(1) CA
■ Director has the right to be informed and make representations (S169) -
written resolution procedure cannot be used here
■ Company must serve notice of the GM (s312(4)) - members may need
to requisition a GM if board is uncooperative
■ Removal of a director is without prejudice to any right to compensation
which the director may have - therefore it is important to check the
directors service contract
■ Important to check for any Bushell v Faith clause - clause giving
shareholder-directors weighted voting rights for every one that they
would normally have on a resolution to remove them as director
■ Any shareholder agreement should also be consulted as may contain an
agreement as to how voting powers are to be exercised
 ■ Following resignation/ removal the company must:
● Update register of directors and address
● File form TM01 (individual directors) or TM02 (corporate
directors) with CH within 14 days
○ Disqualification by court under Company Directors Disqualification Act 1986
(CDDA)
■ Directors may be disqualified by the court from acting as director for 2-
15 years in England and Wales
■ Grounds:
● Conviction of an indictable offence in connection with promotion
formation management or liquidation of a company
● Persistent breaches of companies legislation (ie failing to file
company's confirmation statement or accounts)
● Fraud in winding up
● Summary conviction for failure to comply with companies
legislation
● Wrongful or fraudulent trading
● Being unfit director of insolvent company
● Can include relevant foreign offences
■ It is a criminal offence to breach a disqualification order and the director
will be personally liable
● The Company Secretary
○ The person responsible for: keeping company records, filing documents at
Companies House, general administration of the company
○ Not required for private company but is required for public (has some
qualification requirements if public)
○ If chooses not to appoint a secretary its first secretary named in part 2 of form
IN01 is automatically appointed on incorporation - company must confirm on
form IN01 on behalf of the secretary that he consents to act as such
○ It is possible for another company to act as secretary
○ Directors can remove and appoint new secretary by BR under MA3
○ Administrative formalities on a change of secretary are:
■ Update register; and
■ File form AP03 (individual appointment) or AP04 (corporate
appointment) or TM02 (termination) within 14 days
● Company Members
○ Becoming a company member
■ Every private company must have at least 1 member - no legal
maximum
■ First members of company are subscribers who signed companies
memorandum prior to incorporation and agreed to become members of
the company S112 CA
■ Subsequent members of the company are those who acquire shares
and are registered as such
■ Registration of membership - every company must keep a register of its
members S113 CA unless an election is made to keep the records
centrally S128B CA - Shareholders may inspect and receive a copy
within 5 days (unless it is for an improper purpose) - others can request
 to do so and may need to pay a fee and specify why (company must
comply within 5 days or if not for a proper purpose then apply to the
court to refuse the request) - journalism is a proper purpose
■ Classes of share - different classes of share may be used with different
rights attached
■ Shareholders agreements - may be entered into between shareholders
to govern their relationship (protect minority shareholders, how voting
rights will be exercised etc)
■ Liability of members - absent personal guarantees the company is liable
for its own debts - the liability of a member to contribute to the debts of
the company is limited to their investment in that company
○ Members Powers
■ Powers of the members are laid down by statute and in the companies
articles - they exercise it by passing resolutions in GMs or by written
resolutions
■ Powers and rights given to members depend in many cases on the
holding of a particular proportion of the company's voting shares
although members have some powers irrespective of their shareholding
■ Examples of members powers:
● Receive a share certificate
● Receive notice of GMs, vote at GMs or appoint a proxy
● Receive a copy of the company's annual accounts (must be sent
to all whom the company has the address of whether they
request or not (will have a copy of address if significant control
25.01+%))
● Inspect minutes of the GMs, company books and directors
service contracts
● Receive dividends where payable and declared
○ Ordinary shares
○ Preference shares - right to payment of any dividend
declared in priority to other shares
○ Redeemable shares - can be bought back by the
company after a certain period
○ Cumulative preference shares - carry a right that if the
company cannot pay the dividend in one year then it can
carry it forward to successive years
● Request the court hold a GM
● Bring winding up proceedings
● Claim minority shareholder protection
■ Minority and Majority Shareholders
● Majority shareholders thus have the right to remove a director
under s168 CA
●
Percentage Power

100% Control the company

75% Pass SR
 50% Block ordinary resolution

>50% (50.1% +) Pass ordinary resolution

>25% (25.1%+) Block SR

Majority in number holding at Consent to short notice of

least 90% of voting shares GM

Any 2 voting members or any Demand a poll vote

member(s) holding 10%+
voting shares

>10% Refuse consent to short

notice of GM

5%+ with voting rights Circulate written resolutions

Circulate a written statement
as to proposed resolutions

5% Requisition a GM
○ Minority Shareholder Protection
■ Petition for unfairly prejudicial conduct (s994 CA) - member can petition
the court for an order that the company’s affairs have been or are
proposed to be conducted in a way that is both prejudicial and unfair to
them, in this case the shareholder is the proper claimant - can cover a
whole range of conduct - e.g. refusing to pay dividends when can cover
a whole range of conduct - e.g. refusing to pay dividends when properly
payable exclusion from management or excessive pay being awarded to
directors e.g. promising that will be able to appoint a director if purchase
shares but then company refusing to- most popular order of the court is
that the shareholder is bought out
● Cant bring on behalf of another shareholder if themselves have
not been unfairly prejudiced
■ Derivative action (S260 - 264 - no longer a common law remedy) - claim
by shareholder that act or omission of a director in breach of their
directors duties - negligence, default or breach of duty or trust
● Shareholders cannot bring a claim against directors if directors
breach has caused a loss in the form of a decrease in share
value if the company can bring the claim itself - unless suing in
another capacity such as a creditor
■ Winding up on the just and equitable ground (s122(g) IA) - most drastic
remedy and enables a member to apply to wind up the company on the
basis that it is just and equitable to do so - e.g. due to total breakdown
of communication or total deadlock/ inability to make decisions/ cant
fulfil its intended purpose/ member has been excluded from
management despite genuine expectation of being entitled to participate

Chapter 5 - Financing a Business, Financial Records and

Accounting Requirements
● Equity Finance
○ Also called share finance is the issue of new shares in exchange for
consideration (ie where something of value is given in exchange for a promise
received by a company - generates money/ assets for a company)
○ Share issue
■ Process whereby new shares are allotted (technically different to
issuing) in exchange for consideration received by the company and
the member is entered into on the register of members in respect of
those shares
● Must file resolution with CH within 15 days and a return of
allotment and statement of capital within a month
■ Directors authority -
● In private companies with model articles and one class of shares
the directors are free to issue further shares of the same class
by board resolution
○ Shares can have different nominal value, denominated in
any currency and can be different depending on class
and can be transferred in accordance with companies
articles - if have different types of share then the director
requires authorisation in articles or ordinary resolution
● Otherwise proposed issue of shares by director requires
advanced authority of members by OR - for companies after
2009 need to check articles for restrictions (can amend by SR) if
before then in memorandum of association (OR to change)
● Authority to issue must state - maximum number of shares the
directors are allowed to issue and the date when the authority
will expire
● If OR is passed it must be filed at Companies House within 15
days
■ Pre-emption Rights
● If it is proposed to issue shares wholly for cash then pre-emption
rights may apply - generally on issue of new shares (provided it
is ordinary shares and for cash consideration) they must first be
offered to existing members on the same or more favourable
terms in proportion to their existing shares - have right for 14
days
● Statutory rights may be:
○ Varied or removed in articles
○ Disapplied by SR of members
○ Formerly waived in relation to specific issue if all
members intend to decline offer
● Articles can also extend pre-emption to shares for both cash and
non-cash consideration
○ Standard articles means that this only applies to ordinary
shares - other shares or shares not issues for cash
consideration or under an employees share scheme dont
have pre-emption rights
■ Payment for shares and administration/ filling
 ● Shares may be issued fully or partly paid - for private companies
with MAs MA21 states that they must be fully paid
● Shares are quite commonly issued at a premium - for price
exceeding their base/nominal/ par value
● Shares may not be offered at a discount
● Form SH01 must be sent to Companies House within 1 month of
share issue
● Copies of any OR or SR must be sent to CH within 15 days and
any relevant PSC forms filed within 14 days
● Register of members if kept must be updated and share
certificates issued within 2 months - PSC register should also be
updated
○ Includes name and address, date they were registered,
date they ceased to be a member, statement of shares
held, amount paid
■ If it keeps its records with CH instead of their own
books then all members details will be publicly
avaliable
○ If over 50 members then must keep an index of names
○ Technically will not become a member until the buyer of
shares is added to the register of members
○ Share transfer
■ Share transfer - involves dealing with existing shares - no new money or
assets are generated for the company - but potential for individuals
control of company to change
■ Share transmission - transfer of shares by operation of law- e.g. to PRs
on death or trustee in bankruptcy - these people will receive dividends
but do not become shareholders. They may apply to be registered as a
member or sell in their capacity
■ Transfer process:
● 1) - transferor completes and signed stock transfer form and
sends it with share certificate to transferee
● 2) transferee pays stamp duty on STF (0.5% rounded up to
nearest £5 - only payable if the consideration given is >£1000) -
will be on each individual class of share- cant group multiple
classes for a total sum - not if gifts - even if exempt from the duty
will still need to send to HMRC for stamping
○ If the consideration is shares for shares for bona fide
commercial reasons (and is only shares) ie company A
and B issuing shares to each other and the number and
class of shares mirrors each other then HMRC may grant
stamp duty relief
○ Exempt from stamp duty if it is appropriated by PRs or in
satisfaction of a general legacy of money
● 3) transferee sends stamped STF and share certificates to
company
● 4) directors pass BR to approve/ reject transfer (absolute
discretion)
 ● 5) Transfer must be registered and new share certificate sent to
the new member within 2 months of application unless directors
have right to refuse register of transfer
● 6) company will update details of shareholders annually on
confirmation statement
■ Until entered onto register of members the transferor holds on trust - so
if directors do not register then will never be the legal owner but
transferor must vote according to their wishes and hold dividends on
trust
■ If company becomes multi member or goes from multi member to just
one then must update the members register with a note stating the
company has multiple members
■ If the amount of members increased above 50 - company must then
keep an index of its members unless the register will be sufficient - do
so within 14 days
○ Dividends
■ A payment the company makes to its members providing them with a
return on their financial investment in the company
■ May only be made out of profits available for the purpose - the company
must calculate its accumulated realised profits to date and deduct its
accumulated realised losses to date -
■ Any profits or losses will be carried forward - may be able to pay
dividend even if it makes a loss that year (accumulated profits exceed
accumulated losses) - includes interim dividend payments (no special
authorisations for interim dividends- dont even need OR just board
approval)
● Can even make one before first year accounts - provided use
initial accounts that give a reasonable judgement as to amount
of profit loss assets etc (if it is not first year then just look at last
years accounts and if it can be reasonably determined that
accumulated profits exceed accumulated losses)
■ Articles will further regulate how they are to be paid
● 1) check profits are available
● 2) check special articles
● 3) directors decide whether dividend ought to be declared and
make recommendation to members in GM
○ Directors can rescind this any time before the
shareholders resolution
● 4) members vote (OR) to pay themselves the amount
recommended by directors or less (cant vote for more) - this is
the date that the debt is created
■ If does not declare a dividend when properly payable then this may be
grounds for unfairly prejudicial conduct
■ Will need to be approved by resolution - but remember the Duomatic
principle - often fine for smaller companies if everyone is there and
agrees
■ If a distribution is unlawful:
 ● Any member who knew or ought to have known it was unlawful
will be liable to repay the corresponding sum to the company
● Board of directors who recommended the distribution may be in
breach of duty
● Directors will be jointly and severally liable but not the members
so long as they did not know
■ Final dividend - will be based on the companies last audited annual
accounts
○ Buyback of shares
■ Where company buys back its own shares and they are cancelled
■ This is a method of capital maintenance - capital provided by
shareholders must be maintained and not be returned to them as
creditors rely on it
■ If it was made and within a year the person whose shares were bought
and the directors will be liable jointly and severally (except for directors
who can show that they had reasonable grounds for their opinion)
■ Redeemable shares (ie shares which in the terms of the share will be
redeemed by the company at a specific time) - not subject to these
requirements
■ Buyback is heavily regulated
■ Buyback from profits - a buyback that is only permitted where
distributable profits are available
● 1) check shares are fully paid
● 2) check articles don't prohibit buyback
● 3) directors should consider duties under s172 and 174
● 4) check profits are available
● 5) OR required to approve contract (holders of shares being
bought cant vote)
● 6) - copy buyback contract or summary of it must be sent with
written resolution or made available for inspection for 15 days
before and at GM. Payment must be made at time of buyback
● 7) - file forms SH03 and SH06 within 28 days, cancel shares,
update register of members, file relevant PSC forms and update
PSC register. Make contract/ summary available for 10 years at
registered office
○ Cash asset value and profit and loss should be
reduced by purchase price while share capital should
be reduced by nominal value and capital redemption
reserve created in the same sum
■ Buyback from capital - can only use if profits are not available (even
more tightly regulated)
● 1) check shares are fully paid
● 2) check articles don't prohibit buyback
● 3) directors should consider duties under s172 and 174
● 4) check profits are available
● 5) no earlier than 14 days before meeting directors must make
an SOS with auditors report that the company will remain solvent
for a year after transaction - may face personal liability and
 criminal sanctions if they do this negligently - auditors report
must confirm SOS is not unreasonable
● 6) OR required to approve contract and SR required to approve
buyback from capital (holders of shares being bought cant vote)
● 7) - copy buyback contract or summary of it must be sent with
written resolution or made available for inspection for 15 days
before and at GM.
● 8) copy SOS and auditors report must be available for inspection
before and at meeting otherwise resolution will be ineffective
● 9) Notice must be published in London Gazette and national
newspaper or actual notice to each creditor within 7 days of SR -
details of where SOS and auditors report will be available and
that creditors have 5 weeks to apply for order preventing
buyback
● 10) copy SOS and auditors report must be available for 5 weeks
from SR
● 11) payment must be made within 2 weeks after this 5 week
period. File form SH03, SH06 (notice of purchase) within 28
days, file SR at CH within 15 days, cancel shares, update
register of members, fil relevant PS forms and update PSC
register. Contact/ summary available for inspection for 10 years
at registered office once completed
● Debt finance
○ Also called loan finance - involves borrowing money in order to finance a
business - may be secured or unsecured
○ Power to borrow/ give security
■ Need to check if business has power to borrow and give security
■ Partnership - involves checking any partnership agreement
■ Company - will have power unless articles say otherwise
■ Borrowing options available to a business include loans (secured and
unsecured) overdrafts and revolving credit facilities (hybrid between
loan and overdraft - business can borrow up to a certain amount and
may repay and re-borrow when needed)
○ Types of security
■ Lender will usually require a security for a loan - a mortgage or charge
(fixed and/or floating) - will normally carry out due diligence in any
secured lending
● Things like mortgages will be marked as a capital liability in the
books (if a mortgage the market value of the property will be
inserted as a fixed asset and mortgage as a capital liability)
■ Security - in the event of default the charge holder will have priority over
unsecured creditors - and may sell charged assets
■ Due diligence - process of investigation by lender to ensure its interests
are protected - security will be validly granted and enforceable and that
title to the assets over which the charge will be made will be sound -
may involve company, land registry, bankruptcy and winding up
searches etc
 ■ Mortgage - highest form of security - involves transfer of legal title to
mortgagee with re-conveyance/ transfer back to mortgagor when debt is
satisfied (ie paid off in full) - gives lender an immediate right to
possession - in case of land a mortgage is usually created by a fixed
charge - particulars of mortgage and certified copy of mortgage must be
filed at CH within 21 days of creation
■ Charge - provides lender with an interest in the property, but unlike a
mortgage in traditional sense it does not transfer legal title
■ Fixed charge - charge taken over a particular asset or assets - consent
of lender is required to deal with them
■ Floating charge - taken over a particular class of assets and can only be
granted by company/ LLP - can deal with assets without consent of the
lender until crystallisation - until then it floats over assets
■ Invoice factoring or discounting - assign current and future debts to a
factor in return for cash - the factor is responsible for collecting the debts
and accepts the credit risk - ideal for immediate capital on a short term
basis especially when a high volume business with few assets
■ Crystallisation - fixes onto the assets in the particular class at that time
(becomes a fixed charge)
■ Debenture - is a document which includes security in the form of a
floating charge or sometimes both fixed and floating charges - can only
be granted by company or LLP
■ Could also have specific indemnities under a facility agreement -
limitation period of 6 years from indemnified loss is established (12 if
made by deed)
○ Priority of security
■ General rules as to priority of security:
● As between validly created charges of the same type - the first in
time (date of creation) will have priority
● As between a validly created fixed charge or mortgage and a
floating charge, the fixed charge or mortgage will take priority
(even if granted later) unless:
○ The document creating the floating charge contains a
negative pledge clause (a clause in a debenture which
prohibits the creation of later fixed charges without
permission); and
○ The latter fixed charge has notice of this prohibition at the
time when it takes it charge
■ If not registered - wont matter if they have notice -
still have priority
■ Registration of Charges
● Generally all charges created by a company may be registered
at companies house - not compulsory but the potential
consequences for a secured creditor are such that it is routine
● Registration process - submit the following to CH within 21 days
of the creation of the charge (can also be registered by the
chargeholder)
○ Form MR01
 ○ Certified copy of the charge document
○ Relevant fee
○ Company will receive a certificate of registration and
must also update its register of charges (if held)
○ Charges over rent deposits are not registerable
● Failure to register
○ A charge that is not registered in time is void against a
liquidator administrator or any creditor of the company,
debt will be payable immediately but will be unsecured
○ Clearly a potential for negligence on the part of solicitors
who fail to register a charge
○ Although there is provision for the court to extend the
deadline this is not guaranteed and priority will only be
enjoyed from the date of registration
○ If not done in time then is void but can apply to the court
for an order - will only be given in exceptional
circumstances such as failure to register is due to
negligence
■ In the case of a mortgage will probably need to
inform indemnity insurers
○ Copy of charge and MR01 should be made available for
inspection and when a charge is redeemed, form MR04
should be completed and sent to CH
● Remedies of Debenture Holders - if company or LLP defaults on
repayment of the loan the holder may:
○ Sue as a creditor;
○ Petition for winding up of the company
○ Utilise any powers in the debenture document
○ Fixed charge holder will usually exercise their power to
sell the charged assets
○ There is no obligation on companies to keep a register of
debenture holders
● Business Accounts
○ Business accounts are summaries of financial information
○ Preparation of accounts - based on the double entry system. They begin with
trial balance which involves obtaining all the credit and debit balances from the
various accounts ledgers - figures are then used to prepare the final accounts
of profit and loss account and balance sheet
■ Profit and loss account - shows whether the business has made a profit
or loss in the relevant period - income, less expenses = net profit
■ Income - usually recurring and includes sales, profit costs, interest
received and rent received
■ Expenses - usually incurred and exhausted over a short period of time -
necessary to keep the business running - include stock purchased for
trading businesses, wages, utilities, rent, interest paid, insurance,
repairs, petrol and hire charges
■ Balance sheet - has two parts
 ● First - shows value of a business at a particular point in time -
assets, less liabilities (WHAT ELSE)
● For unincorporated business - second part of the balance sheet
shows what is owed to the owner - where the money the
business has has come from - capital plus net profit less
drawings
■ Assets include permanent fixed assets and more fluid current assets
(Debtors and cash)
■ Liabilities - sums owed by the business - those repayable within a year
are current liabilities and beyond a year are long term liabilities
■ Capital - sum invested in the business by the owners
■ Drawings - money withdrawn by owners of unincorporated business
○ Adjustments
■ Business accounts are usually based on accruals method of accounting
- items within the accounts should properly relate to the relevant period -
may be necessary to make adjustments to accounts after the trial
balance has been prepared to ensure they are an accurate reflection of
the position
■ Prepayments - payments made by business in advance of service or
something that wont be used until next financial year - deducted as an
expense in profit and loss account and included as a current asset in the
balance sheet
■ Accruals - payments the business will make in arrears - for services
used in the financial year but not yet paid for - included as an expense
in the profit and loss account and as a current liability in the balance
sheet
■ Closing stock / work in progress - relates to stock and work in progress
depending if trading or service business that has not yet been used/
billed in current financial year - included as an income in the profit loss
account and current asset in balance sheet
■ Opening stock/ work in progress- closing stock/WIP from previous year -
deducted from income in profit loss account and no entry in balance
sheet
■ Depreciation - hidden expense - current years depreciation is included
as an expense in the profit loss account, accumulated depreciation is
deducted from value of the asset in balance sheet to give it - net book
value
■ Bad debts - a debt that the business resolves will never be paid so
written off - included as an expense in profit and loss/ bad debts and
deducted from debtors figure in balance sheet
● Abatements put as DR profit costs (and HMRC ledger if
applicable) and CR entries in business section of client ledger
account
● Bad debts as DR bad debts
● When a bad debt is less than 6 months old VAT relief cannot be
claimed - will not be able to do HMRC entries immediately
● Abatements can reduce the HMRC entries immediately by
amount of abatement vat
 ■ Doubtful debts - a debt unlikely to be paid - included as an expense in
profit and loss and deducted from debtors figure as a separate entity
○ Partnership accounts
■ Must appoint an auditor each financial year unless it is a small llp
(turnover less than £10.2m, balance sheet less than £5.1m or less than
50 employees) - any person who was a member of the LLP will be guilty
of an offence if an audit report is not prepared in time
■ Profit and loss account and top part of the balance sheet are the same
as for sole trader - but an appropriation account is added to the bottom
of the profit and loss account and second part of the balance sheet is
adjusted to reflect aht there is more than one owner
■ Appropriation Account - extension of the profit and loss account which
shows the division of profits between the partners - profit is divided into
salaries which are paid first then interest on capital, anything left
(residual profit) is shared according to the agreed profit-sharing ratio
■ Capital account - amount of capital invested in the business by the
partner - this is usually kept separate from the current account so that
the partners investment can always be seen
■ Current account - partners share of the business - opening balance
(what remains undrawn) plus net profit share (appropriation account)
less drawings
○ Company Accounts
■ Differ from those of unincorporated businesses due to separate legal
personality and regulation concerning share- main difference is need for
share capital account and share premium account
■ Accounts must give a true and fair view of the assets liabilities financial
position and profit or loss of the company or its group
■ P/E ratio - company’s share price divided by the EPS ratio (earnings per
share: net profit / number of outstanding shares)
● EPS ratio is just earnings per share
■ Share capital account - shows the funds contributed by shareholders in
exchange for shares at their nominal/ par value
■ Share premium account - shows funds contributed by shareholders in
exchange for shares over their nominal/ par value (ie where premium
has been paid)
■ Directors salaries will be shown as an expense of the business
■ Appropriation of profit is calculated as follows:
● Corporation tax (shown before and after)
● Dividends
● Retained profit
■ Company balance sheet - second part is usually headed capital for
capital reserves and reserves for revenue reserves and shows what is
owed to shareholders
■ Capital reserves - (capital and share premium) - not normally
distributable while company is solvent due to capital maintenance
■ Revenue reserves - distributable and things like profit and loss reserve -
shows profit after tax and dividends
 ■ Regulation of accounts - directors must file annual accounts and group
companies must produce consolidated accounts. Accounts must comply
with FRS102 - best practice guide produced by accounting profession
and International Financial Reporting Standards of International
Accounting Standards Board

Chapter 6 - Termination and Insolvency

● Individual Insolvency and Bankruptcy
○ Insolvency
■ Insolvent - if a) a debt is payable immediately or a certain time in the
future and b) the debtor appears either unable to pay it or to have no
reasonable prospect of being able to pay it
■ Inability to pay:
● 1) a statutory demand has been served for a liquidated and
unsecured sum of at least £5k or more, payable immediately and
after three weeks it remains unsatisfied - there is no application
to set it aside
○ Statutory demands can only be made if a debt has fallen
payable - if it has not then should invite the lender to
withdraw it
○ If statutory demand has been validly made the individual
has 18 days from service to apply for it to be set aside
● 2) a statutory demand has been served for a liquidated and
unsecured future liability of at least £5k and three weeks have
passed without reasonable prospect of payment being shown or
an application to set it aside
● 3) attempt has been made to enforce a judgement debt of at
least £5k but remains unsatisfied
■ Statutory demand - formal written demand for payment
■ Liquidated and unsecured sum - an exact sum rather than one that
needs to be calculated or assessed
■ Judgement debt - a debt that is deemed due following a judgement of
the court
○ The Bankruptcy Process
■ Bankruptcy judicial process whereby most of the bankrupt's assets
pass to a trustee in bankruptcy and the bankrupt becomes subject to
restrictions - most bankrupts are discharged and free of restrictions after
one year
■ Trustee in bankruptcy - takes control of most of the bankrupt's property -
under a duty to maximise the funds that will be available to the creditors
■ Creditors petition or debtors application
● Bankruptcy process usually starts with a creditors petition
although the debtor may seek to make a debtors application
● Creditors petition - a creditor owed a liquidated and secured sum
of £5k or more may present a bankruptcy petition if a debtor is
unable to pay their debts - creditor will need to prove this by
 having followed one of the three methods to show inability to pay
debts
○ If creditor has a secured sum owed to them then they
must relinquish their security to pursue the bankruptcy
process - will usually rely on their security as it will give
them priority
○ Joint petitions are possible if a creditor is owed less than
£5k - court fee and a deposit to cover the costs of the
trustee in bankruptcy must be paid and the petition must
usually be filed at the debtors local county court then
served on the debtor
● Debtors application - if a debtor is unable to pay their debts an
online application for bankruptcy may be made and will be
decided upon my an adjudicator
○ Application fee and a deposit to cover the costs of the
adjudicator/ official receiver must be paid, a bankruptcy
order must usually be made within 28 days
○ Individual will usually make a debtors application as a
self help measure to avoid pressure from creditors where
a creditors petition is inevitable
■ Bankruptcy Order
● When the bankruptcy order has been made the official receiver
of the court takes control over their assets - bankrupt must
produce a statement of affairs setting out their financial position
in order to assist the trustee
● Trustee has wide powers to convert assets into cash and
investigate and unwind certain transactions to maximise the
available funds
■ Bankrupt’s Property
● Title to the bankrupt's property vests in the trustee with the
exception of tools of the trade and everyday items like clothing
and furniture (unless of very high value in which case trustee can
insist that they are sold)
● If bankrupt’s salary is more than is needed for reasonable needs
an income payment agreement may be agreed - must make
contributions up to 3 years
■ Bankrupts home
● Interest in his home will pass to trustee - where bankrupt has
sole legal and beneficial interest in the home and no one else
has an interest or right of occupation a court order will not be
required to sell it
● Court will consider circumstances set out in S3335 in deciding
whether to sell it - interests of creditors, spouses, children - but
after one year the interests of creditors are paramount unless
exceptional circumstances
● Three years after the bankruptcy order, ownership reverts to the
bankrupt unless alternative arrangements have been made e.g.
property has been sold
○ Investigating past transactions
■ Trustee can investigate past transactions (to claw back money):
■ Disclaiming onerous property
● Any property which is essentially a liability/ drain on resources
rather than an asset
● Disclaimer means that liabilities will cease- however anyone who
sufferers as a result such as a landlord may claim as an
unsecured creditor for what is owed to them, can also push
trustee into making a decision to disclaim so that the landlord
may re-let the property - procedure is to ask the trustee to
disclaim within 28 days after which it will no longer be possible
for the trustee to do so
■ Transactions at an undervalue
● Gift or sale of a property where the consideration is lower than
the value (or enters into a transaction in consideration of
marriage)
● Trustee can set aside undervalue transactions going back up to
5 years from date of presentation of the petition - if was in the
first two years then there are no pre-conditions but if more than
two years prior it must be proved that the bankrupt was either
insolvent or became insolvent because of the transaction
● If the undervalue is in favour of an associate there is a rebuttable
presumption that the bankrupt was insolvent at the time of the
transaction
● Associate - relatives (board), spouse or their relatives and
spouses of relatives, business partners and employees, a
company controlled by a person either alone or together with
their associates
■ Preferences
● Preferences are arrangements that place a creditor or guarantor
in a better position than they would otherwise have been in the
event of bankruptcy -e.g. Security
● A desire to prefer the particular creditor must be shown and this
is presumed if preference is in favour of an associate
● Trustee can investigate and set aside preferences going back 6
months for any preference or up to 2 years from the relevant
date (date of presentation of the petition) must be shown that the
bankrupt was insolvent at the time or became insolvent because
of entering into the transaction
■ Transactions defrauding creditors
● Undervalue transactions where there is an intention to put assets
beyond the reach of someone or prejudice their interests in
relation to a potential claim
● There is no time limit in these circumstances so the section is
often used where the relevant time for undervalue transactions
has expired - it is harder to prove than a simple undervalue due
to the intention required
 ● Court can order anyone who is knowingly party to the fraud to
contribute to the companies assets in liquidation
■ Extortionate credit transactions
● Credit transactions entered into within 3 years of the relevant
date that involves grossly exorbitant payments or grossly
contravenes ordinary principles of fair dealing
● Seldom used and little case law
○ Order of distribution
■ IA sets out a clear order of distribution of the bankrupt's assets:
● Secured creditors first - if sum of charged assets exceeds the
debt then they must pay any surplus to the trustee
● Costs of bankruptcy
● Sums paid to masters by apprentices
● Preferential debts (based on relevant date)
○ Primary preferential debts - wages for work carried out in
the 4 months preceding bankruptcy up to a max of £800,
accrued holiday pay
■ Anything over £800 will be claimable but as an
unsecured debt
○ Secondary preferential debts - sums owed to HMRC for
PAYE and VAT
● Unsecured creditors
● Postponed creditors (spouse/ civil partner, where a company has
been carrying out unauthorised activity)
■ If insufficient funds to settle preferential debts or unsecured creditors
they will receive a proportionate sum of what is left
○ Restrictions on bankrupts
■ Must disclose their bankruptcy if obtaining credit of more than £500
■ Cannot act as a director
■ Must disclose their bankruptcy if trading under a different name
■ Cannot be a partner
■ Cannot be involved in company management, promotion or formation
without leave of the court
■ Require leave of the SRA to practise as a solicitor
○ Discharge
■ Most bankrupts are automatically discharged after one year, however
bankruptcy restriction orders or bankruptcy restriction undertakings may
continue to apply, liability to repay student loans will continue
■ BROs and BRUs - provide additional restrictions for particularly culpable
bankrupts for 2-15 years - aim to protect the public from the financially
reckless - BRUs are entered into by agreement while BROs are issued
by the court
● Personal Insolvency: Alternatives to Bankruptcy
○ Individual Voluntary Agreement - binding agreement to settle between debtor
and unsecured creditors
○ Debtor appoints a nominee - an insolvency practitioner to become
supervisor of the IVA - debtor then produces a statement of affairs (their
 financial circumstances) and applies to the court to obtain a moratorium
(a stay on further proceedings/ enforcement of usually 14 days)
○ In order for the IVA to be approved 75%+ of the creditors in value must
agree to the proposals of which 50%+ are not associates of the debtor -
if approved then it is binding on every ordinary unsecured creditor, if the
debtor defaults, petition may be made for their bankruptcy - it is
preferable to an informal agreement with a creditor which could be
viewed as a voidable preference
○ Debt relief order (DRO) - online application for the write off of debts and is only
available where assets and liabilities are low:
■ Unsecured liabilities cannot exceed £30k
■ Gross assets cannot exceed £2k
■ Cannot have a car worth £2k or more unless adapted due to disability
■ Cannot have a disposable income of more than £75 per month
■ Cannot have had a DRO in the preceding 6 years
■ Cannot be subject to other insolvency proceedings
○ Debt respite scheme (DRS)
■ Provides breathing space for up to 60 days or 30 days plus any
treatment period (for mental health crisis) - provides time during which
no further action can be taken
● Corporate Insolvency - when a company has an inability to pay its debts
○ There are 4 ways to show inability of a company to pay its debts:
■ 1) Statutory demand has been served for a liquidated sum of £750+ and
has been unsatisfied after 21 days
● Appropriate response is to apply without notice for an injunction
to restrain the presentation of a winding up petition
● Ie if have a charge over property - will not be able to pursue
bankruptcy - instead must pursue sale of this - or remove the
charge and then pursue
■ 2) Attempt has been made to enforce a judgement debt against the
company but remains unsatisfied
■ 3) the company is unable to pay its debts as they fall due
● Current ratio - measures by reference to whether the current
assets of the company are greater than its current liabilities
● Balance sheet insolvent - but will include the freehold property
as a fixed tangible asset - realisable value can be higher than its
assets alone due to cus
● Acid Test Ratio - ignoring stock, is the value of the company
greater than its current liabilities
● Return on Capital Employed - net profit / capital
■ 4) the companies liabilities are more than their assets
○ Liquidation - Winding up (most drastic insolvency procedure for companies) -
involves the company ceasing to trade and a liquidator taking control to review
past transactions, sell its assets and distribute the proceeds to creditors before
being dissolved (not looking to save just to liquidate)
■ Compulsory liquidation - commenced by a creditor presenting a winding
up petition (can also be done by the court on just and equitable
grounds)
 ● Creditor will usually prove inability to pay by showing a statutory
demand has been unsatisfied for 21 days
● If debt is disputed the petition will be unable to proceed or
adjourned if the company says that it will be able to pay the sum
due within a reasonable period
● When a winding up order is made by the court the official
receiver (an officer of the court) becomes the liquidator
■ Creditors Voluntary Liquidation - corporate equivalent of a debtors
application for bankruptcy - usually as a response to creditor pressure or
concern of the directors as to personal liability - special resolution is
required
■ Members voluntary liquidation - commenced only by solvent companies
- often used for corporate restructuring or closing down a company that
is no longer needed - special resolution is required
● Resolution must be advertised and a meeting of creditors held
within 14 days - notice must be given to them and advertised in
London Gazette and two other newspapers
● Must send a resolution for winding up to the court, a declaration
of solvency and a notice of appointment of a liquidator
● If company articles say it will be dissolved after x amount of
years then it will only need an ordinary resolution to dissolve
after that time (can still dissolve before but will need special
resolution)
■ Effects of liquidation
● Liquidator takes over company and directors powers cease - has
wide powers to manage and wind up the company - includes the
ability to investigate and unwind past transactions where
permitted. After submission of final accounts the liquidator may
apply to be released and company will be dissolved 3 months
later
■ Voluntary Strike off and Dissolution - Company can apply to be
voluntarily struck off the register if:
● Has not traded in last 3 months
● Not changed its name in last 3 months
● Not currently subject to legal proceedings (or proposed)
● Not made a disposal for value of property or rights in last 3
months
● Not engaged in any other activity except one necessary or
expedient for making a striking off application, settling company
affairs or meeting statutory requirement
● Not subject to insolvency
● Application must be signed by all directors if 1-2, or if over two
(3+) then a majority
■ Compulsory striking off by registrar - if thinks there is reasonable cause
to believe the company is not carrying out business or in operation
● Sends first communication querying with company - if no reply in
14 days then a follow up
 ● If no response in 14 days then sends notice to company and
publishes in Gazette that the company will be struck off in 2
months unless contrary is shown - application by member or
director or order of court
● Director or member can also apply for it to be restored if not
been struck off for 6 years unless
○ In order to bring proceedings for PI or insurance
damages
○ If registrar refuses - have 28 days to apply to court
○ Investigating Past transactions
■ Similarly to bankruptcy, liquidator may investigate and unwind certain
transactions - may also seek to impose personal liability on directors for
misfeasance, wrongful trading or fraudulent trading
■ Floating charges
● Will automatically be void if granted at the relevant time before
insolvency - presentation of the winding up petition without the
company receiving fresh consideration
○ If have fresh consideration - ie more money in return for a
floating charge then will be valid - however any money
already lent which is later secured by a floating charge
wont be
● Relevant time is 2 years if in favour of a connected person and
12 months if unconnected person
● Insolvency is a prerequisite if the charge was in favour of an
unconnected person - ie the company was insolvent at the time
or as a result of the transaction
● Connected person includes a director and his associates or an
associate of the company
■ Preferences
● Work in a similar way to individual insolvency - work in a similar
way to individual insolvency
■ Transactions at an undervalue
● Similar to individual insolvency but the time limits do differ
● Possible defence if the transaction was entered into in good faith
for the purpose of carrying on business and there were
reasonable grounds for believing it would benefit the company
■ Extortionate credit transactions
■ Transactions defrauding creditors
○ Order of distribution
■ 1) fixed charge holders (any surplus goes to the liquidator and if there is
a deficit this can be claimed as an unsecured creditor)
■ 2) winding up expenses
■ 3) preferential debts
■ 4) Floating charge holders
■ 5) unsecured creditors (must usually complete a form to prove)
■ If there are insufficient funds to settle preferential debts or unsecured
creditors, those within the category receive a proportionate sum of what
is left
 ■ Ring fencing - 50% of the first 10k and 20% of the balance over 10k is
set aside for unsecured creditors - this is subject to a statutory limit
(£800k)
○ Alternatives to Liquidation
■ Administration - involves an administrator running the company to
rescue it and/or enable it to be sold as a going concern - must act in the
interests of the creditors and their general priority is to achieve a better
result than on winding up
● Creates a moratorium which prevents proceedings against the
company (breathing space) - if fails then will often lead to
liquidation though
● Can be appointed by court - if company is likely unable to pay its
debts and administration is likely to achieve its purpose - must
notify those entitled to appoint an administrative receiver and
qualifying floating charge holders (floating charge which
○ a) states para 14 schedule B1 IA to appoint applies,
○ b) relates to whole or substantially the whole of the
companies property and
○ c) purports to empower the QFC holder to appoint an
administrator or administrative receiver
● Appointer out of court - made by company/ directors - court,
QFC holders and those entitled to appoint administrative
receivers must be notified. Statutory declaration must be filed
that the company is unable to pay its debts and is not in
liquidation
● Out of court appointment - made by QFC holder - must notify
other QFC holders with priority and charge must be enforceable,
Then file notice of appointment at court along with statutory
declaration confirming the lender is a QFC, charge is
enforceable and appointment complies with Sch B1 IA
● Conduct of administration - administrator has a duty to all of the
creditors and the moratorium will continue while they act
○ A majority in value of the creditors present and voting at
meetings convened by the administrator must vote in
favour of the proposals - will not be passed if those
against are more than 50% in value of creditors
unconnected to the company
○ Administration ends aver one year unless extended or
ended earlier by the administrator or creditor
■ Company Voluntary Arrangements - binding agreement between the
company and the creditors - essentially a formal compromise agreement
whereby creditors accept part payment/ a delay in payment - outcome of
creditors can usually be better and is cheaper than administration
● Must be approved by 75%+ in value of the companies
unsecured creditors and 50%+ of the unconnected creditors
● If approved is binding on all unsecured creditors
 ● Company must nominate an insolvency practitioner to implement
and supervise the voluntary arrangement - within 28 days after
the notice a report must be submitted to the court
● Similarly is a Part 26A restructuring plan - proposed by directors
to the court - similarly needs 75% support from creditors
■ Corporate insolvency and governance act 2020
● Relatively new process introduced by CIGA 2020 - permits a
company to enjoy a moratorium of 20 business days to give it
breathing space (can be further extended)
● If granted will appoint a monitor
● Creditors cannot commence insolvency or other legal
proceedings, landlords cannot forfeit leases and company is not
required to make payment on pre-moratorium debts
■ Secured creditors (with security over all or substantially all of the assets
of a company) - may appoint an LPA receiver or an administrative
receiver
● LPA receiver - fixed charge holder may appoint usually to sell
the property - their power to appoint is usually in the charge
document
● Once appointed the floating charge crystallises and the company
can no longer deal with the property
● Administrative receiver - is appointed by a floating charge holder
for charges created before 15 september 2003 - power to
appoint is usually in the charge document and they usually run
the company and sell the charged assets - job is to go in and
find the best way for the creditor who appointed them to recover
their money

Chapter 7 - Trading Profits and VAT

● Calculation of Trading Profits
○ A business will usually prepare accounts for a 12 month period to show whether
a profit or a loss has been made - income can include things like trading profits,
interest received and rent received - principles of calculation are common to
both incorporated and unincorporated businesses:
■ Chargeable receipts; less
■ Deductible expenses; less
■ Capital allowances; equals
■ trading profit or loss
■ Remember that you do not factor in capital gains and losses - they are
taxed separately
○ Chargeable receipts - something of an income rather than a capital nature - that
is in respect of / derived from the trade, the most common examples are
income from the sale of goods or services (profit costs)
○ Deductible Expenses - must:
■ Not be prohibited by statute e.g. business entertainment expenses
 ■ Be of an income nature (not capital nature) e.g. goods purchased to sell
at a profit and expenses like rent and salaries - expenses necessary for
the making of profit - usually has an element of recurrence
■ Wholly incurred and exclusively for the purposes of the trade - e.g.
eating out while away on business would not be included - in some
circumstances expenses can be apportioned e.g. utility bills when
working from home
○ Capital allowances - allow businesses to deduct some of the cost of plant and
machinery from chargeable receipts to reduce tax liability
■ Plant and machinery - include assets used to help carry on business -
machines, office equipment and tools but not items bought and sold as
part of the business
○ (1) Writing down allowance - the first of two types of capital allowance that may
be claimed - allows 18% of the total value of plant and machinery in each
financial year to be deducted from the chargeable receipts - then deduced from
the total value of the plant and machinery to give the written down value
■ Items are usually pooled - WDA per year is calculated on the value of all
the assets pooled together - makes it simpler when assets are disposed
of individually as the proceeds are deducted from the total value of the
pool - if on sale of all of the assets the sale price exceeds the WDV -
balance will be included as a chargeable receipt
○ (2) Annual investment allowance - the second capital allowance that may be
claimed - a business can deduct the entire cost of a newly purchased plant and
machinery in that accounting period from chargeable receipts (subject to a cap
of £1m each year). Group companies have one AIA between them - if the cost
of the new machinery exceeds the AIA the WDA can be claimed on the balance
over the cap (make sure to check AIA as it frequently changes)
● Relief for trading losses
○ If an unincorporated business makes a trading loss during an accounting period
there will be a nil liability to tax - in addition tax relief may be available in
respect of the loss. Reliefs are:
■ Start up loss / early trade losses relief - losses made during the first 4
years of trade may be set off against any other income in the three tax
years before the loss only available to unincorporated businesses
● Can be used against any other income
● Involves claim back of tax paid
● Set against earlier years first
● Time limit - must be claimed on or before the first anniversary of
31 january following the end of the loss making tax year
● Cap applies
■ Carry across/ back one year relief/ trade loss relief against general
income - amount of the loss may be deducted from any other income
taxable in that tax year or the preceding tax year
● Can be used against any other income
● Carry across can be used against chargeable gains in the same
tax year if the loss is not absorbed
● Time limit - on or before the first anniversary of 31 jan following
the end of the loss making tax year
 ● Cap applies
■ Carry forward relief - amount of loss may be deducted from future
income profits of the same trade
● Set against earlier years first
● Can only be used against trading profits from the same trade
● Can be carried forward indefinitely
● Taxpayer is required to notify HMRC no more than years after
the end of the loss making tax year
● No cap applies
■ Terminal loss relief - a loss made during the last year of trade may be
set off against trading profits connected to the same trade in the final
year and in the three tax years prior to the final tax year
● Set against later years first
● Can only be used against income profits from the same trade
● Time limit - claim must be made no more than four years after
the end of the loss-making tax year
● Involves claiming a rebate on tax paid
● No cap applies
■ Carry forward relief on incorporation of business - allows trading losses
to be set off against any income received from the company when an
unincorporated business is transferred to a company wholly or mainly in
return for shares (>80% consideration in shares)
● Can be carried forward indefinitely
● Time limit - claim must be made no more than 4 years after the
end of the loss making tax year
● No cap applies
○ Owner of a business may have a choice of reliefs but the same loss cannot be
claimed for twice - some may be preferable to others based on particular
circumstances. Each individual partner in a partnership will choose their own
reliefs
○ Cap on reliefs - the greater of £50k or 25% of the taxpayer's income from other
sources in the tax year in relation to which the relief is claimed
○ VAT
■ Scope of VAT - is charged when a business supplies goods or services
where it is a taxable supply made by a taxable person in the course or
furtherance of any business carried on by him
■ Taxable supply - supply is taxable unless it is exempt - main exempt
suppliers are education and health services, residential land and
insurance
○ Taxable persons, registration, supply, input and output tax
■ Taxable person is someone who makes taxable supplies - must register
for VAT with HMRC if the value of their taxable supplies exceeded £85k
in the previous year (not accounting period) (or they expect it to go
over that threshold in the next 30 days - but takes affect from date
expected to go over threshold) otherwise registration is voluntary - it is
not possible to register if the business only makes exempt supplies
● If unregistered then do not need to charge VAT but also cannot
recover input tax at all
 ● If registered it is also possible for a trader to backdate their
registration by up to 4 years for goods and 6 months for services
● Just because you are VAT registered doesn't mean it must be
charged on everything you sell - just what is generating a
continuing income from the sales (ie dont need to charge for a
car boot sale)
■ Businesses charge VAT on the value of goods and services provided
(output tax) it can deduct any VAT paid on the goods and services it
uses (input tax) and must account to HMRC for any difference
● It is on the sale price - not necessarily the amount charged to the
buyer if it is haggled or has part exchange etc
● Ie if exchanged goods and services not for money then it will be
the value effectively
● But VAT will not be charged on samples given to customers
■ Can be more than one tax point for the same supply - e.g. if deposit paid
then later rest of purchase price
● General tax point is when goods were collected or sent - but will
be overridden by an invoice or payment received (whichever
comes first) before then or by an invoice if it is sent up to 14
days after
■ If deliver a VAT invoice within 14 days of delivery then that is the
tax point
■ Normal rate of VAT is 20%
● There is a rate of 0% for so called zero rated supplies - non-
catering food, books and water, childrens clothes, public
transport, newspapers etc
● Some may be exempt such as sponsored charitable events,
MOTs and other statutory fees and services. Insurance and
credit
● Reduced rate of 5% such as domestic fuel, sanitary products,
installation of energy saving materials in residential properties
○ Returns/payment VAT invoices and record keeping
■ VAT return must usually be submitted to HMRC and VAT paid within
one month from the end of each quarter - a rebate will be payable if
input tax exceeds output tax and full records must be kept
■ VAT invoices including VAT number, value of supply and rate of tax
must be provided for a taxable supply to a taxable person, these are
important as they are required to deduct input tax
■ Penalties for failing to adhere to the legislation include the following:
● Repayment with interest
● Unlimited fine and imprisonment for up to 7 years for tax evasion
● Fixed financial penalties for failing to keep records
● Default surcharge of 15% of the tax for persistent defaulting in
filing returns
● Investigation will look at record keeping processes alongside any
results obtained and inaccuracies
Chapter 8 - Income Tax
● Chargeable Persons/ Entities
○ Starting point is to be able to identify who are chargeable persons for IT
purposes
■ Individuals (including sole traders)
■ Individual partners
■ Trustees
■ Personal representatives
■ Companies and corporate partners pay corporation tax on their income
profits and capital gains
● Basis of Charge to IT
○ Income includes (usually recurring in nature unlike a capital gain)
■ Salary
■ Dividends
■ Interest received - on savings account for example
■ Trading profit
■ The profit element of rent
○ Key statutes:
■ Income Tax Act 2007
■ Income Tax (Trading and Other Income) Act 2005
■ Income Tax (Earnings and Pensions) Act 2003
○ Income tax year - runs from 6 april to 5 april
● Calculations of IT: Individuals
○ Is a progressive tax so rate increases as income increases
■ 1) Calculate total income
■ 2) Deduct allowable reliefs
● Gift aid - can be allowed on charitable donations if a higher rate
tax payer
○ If looking at corporation tax - can deduct charitable
donations provided that they are not charities associated
with members, subsidiaries, parents etc
■ 3) Deduct personal allowances
■ 4) calculate the tax for each source of income
● a) - first NSNDI
● b) - savings income
● c) dividend income
■ 5) add together the tax for each source of income and deduct an tax
previously paid/ deducted at source to give IT liability
○ Taxable Income - income after deduction of allowable reliefs and personal
allowances - from this rate can automatically tell whether someone is a basic
rate, higher rate or additional rate taxpayer
■ Incapacity benefit for the first 28 weeks does not constitute taxable
income (other benefits might)
○ Basic rate taxpayer - person whose taxable income does not exceed the basic
rate threshold (£37.7k)
○ Higher rate taxpayer - person whose taxable income exceeds the basic rate
threshold but does not exceed the additional rate threshold (£150k)
○ An individuals taxable income is then charged at the appropriate rate(s) - there
are different rates for different categories of income this it is necessary to
separate savings and dividend income from taxable non-savings/non-dividend
income (NSNDI)
■ NSNDI - taxable income after deduction of savings income and dividend
income
○ Total Income
■ Aggregate gross income from each source - is taxable if it comes from a
source specified in the relevant legislation
● Property Income Part 3 ITTOIA
● Profits of a trade or profession Part 2 ITTOIA
● Savings income Part 2 ITTOIA
● Employment and pensions income - ITEPA
■ Certain income is exempt - e.g. child benefit, interest paid on national
savings certificates, interest from ISAs and interest on damages for
personal injuries or death
■ Most types of income are paid gross:
● Interest paid by banks and building societies
● Dividends paid to shareholders
● Property (rental) income
■ Some types of income will be received net by the taxpayer - IT will
already have been deducted at source - main source of income here is
employment income where tax is deducted as part of the PAYE (pay as
you earn) scheme - gross amount (net amount received plus IT already
deducted at source must however be included in the full IT calculation)
■ Employees and directors
● Charge to IT on directors and employees is under ITEPA and
includes the charge on all earnings
● Distinction made between cash and non cash benefit
● Generally all benefits that derive from the office or employment
are liable to tax
● Employees are usually taxed on the cost to the employer of
providing the benefit - e.g. on benefits of rent free
accommodation
● A lump sum payment made to compensate a director/ employee
for early termination of tier contract will be taxable if they are
contractually entitled to it - any payment on retirement/ removal
from office that is not otherwise chargeable to tax may be
taxable although the first £30k of any such sum is usually
exempt
○ Allowable Reliefs
■ Most important AR is interest payable on qualifying loans - a) to buy a
share in a partnership or b) a loan to invest in a close trading company
(ie a company which is exclusively owned by its employees)
● NOT on any other loans though
■ Net income - total income after deduction of ARs but before deduction of
personal allowances
○ Personal Allowances
 ■ Amount an individual can earn each year before paying IT (subject to an
annual income limit - 100k?) cannot be carried forward to a new tax year
■ Reduced by £1 for every £2 earned over £100k
■ Depending on circumstances two other PAs may be applicable
■ Marriage allowance and blind persons allowance - up to £1260 of
individuals unused PA may be transferred to a spouse or civil partner
(must be a BRT) - people who are blind also receive an additional
£2520 PA - so remember - if they have used all of their personal
allowance then they will not be able to use
● Married couples allowance - if old - between 3,530 - 9125 - any
earnings over 30400 - take the amount over half it then deduct it
from 9125 - then 10% of this figure (minimum will be £353)
■ Property and trading allowances - up to 1k of gross property income and
1k of gross trading income will not be subject to IT - for amounts over
the limit the allowance may be deducted from the gross figure as an
alternative to deducting actual expenses
■ If they died at any point during the year they will have the entirety of the
personal allowance
○ Slices of taxable income - separate the different types of income and calculate
the tax for each source int he following order:
■ 1) Tax NSNDI
■ 2) Tax savings income
■ 3) Tax dividend income
■ Savings Income
● Up to £5000 - is deducted by £1 for every £1 over personal
allowance - so nothing if earn over £17,570
○ But also have Personal savings allowance - up to the first
£1k of savings income will be tax free
○ 1k if BRT, 500 if HRT, no allowance if ART
● Avaliabble PSA is added to taxable NSNDI figure and then taxed
at 0%
■ Dividend Income - will add to overall amount of income to know what
rate (but then tax it separately from income)
● Dividend allowance - first 1k of a taxpayer's dividend income
(used to be 2k) will be free from tax - applies to all taxpayers
irrespective of their taxable income
● Available DA is added to taxable NSNDI, available PSA and
remaining interest income then taxed at 0%, the tax free amount
still counts towards the cumulative total in moving from one
threshold to the next. Any dividends over the DA is taxed at the
appropriate rate for dividend income based on the cumulative
income taxed so far
■ Full IT Calculation
● 1) calculate total income (from each source)
● 2) deduct allowable reliefs to give net income
● 3) deduct personal allowances to give taxable income
● 4) calculate the tax - separate taxable NDNDI from interest and
dividend income and calculate tax at the applicable rates
 ● 4a) - tax NSNDI first using the relevant rate(s)
● 4b) tax interest - first add total of any available PSA to taxable
NSNDI and tax at 0%. Tax any interest over and above the PSA
using the relevant rates
● 4c) - Finally, tax dividends- first add total of any available
dividend allowance to the taxable NSNDI, PSA and interest
income and tax at 0%. Then tax any dividend over and above
the dividend allowance using the relevant rate(s)
● 5) - add the figures from 4a-c to give the income tax liability and
deduct tax already paid at source to give the income tax payable
● Calculation of IT: Sole Traders
○ Sole trader will prepare accounts for the business for an accounting period to
show how much profit/loss has been made - accounting period will not always
match the IT year so it is necessary to know the rules for assessment of trading
profits
○ If business has made a profit IT is payable on those income profits - if made a
loss then relief may be available
○ Opening year rule - in the first tax year in which the business trades, IT will be
assessed on the taxable profits made by the business from the date it starts
trading to the following 5 april
○ Current year basis - second tax year in which the business traded IT will usually
be assessed on the taxable profits of the 12 month accounting period that ends
in the second tax year. CYB also applies to the third and subsequent tax years
until final year of business
○ Closing year rule - in the final tax year in which the business trades, IT will be
assessed on the taxable profits made from the end of the last accounting period
to the date the business stops trading, less a deduction of any overlap profit
■ Overlap profit - profits of a business which are assessed for IT more
than once in the opening years of the businesses trade - it is deducted
from the income profits assessable to IT in the businesses final year of
trade
● Calculation of IT: Partners
○ A partnership will be charged IT on the income profits the business makes in
the same way as sole traders
○ The basis of assessing the taxable profit of the business for any given tax year
is the same basis as applies to sole traders
○ The taxable profit is apportioned between the partners as agreed between them
for the relevant accounting period - this could be under the default provisions of
the PA, a formal partnership agreement or some other express or implied
agreement between them
○ Partners are separately taxed on their own share of the partnerships profits and
each partner is liable to pay their own tax - it is not a partnership liability as the
partnership is not a separate legal entity. If the partnership has made a sloss
then each partner may choose what type of relief to claim in respect of their
share of the loss
○ Change of partners
■ Each partner is taxed as if they were a sole trader - for the individual
partner it begins and ends when they become or cease to be a partner
 ■ When a partner joins an existing firm the OYR will apply to that partner
only and existing partners will continue to be assessed on the CYB rule
■ When a partner leaves a continuing irm the CYR rule will apply to that
partner only and the remaining partners continue to be assessed on the
CYB rule
● Collection of IT
○ Some IT is deducted at source like employment income, if a taxpayer receives
any other income then they must complete a tax return under the self
assessment scheme
○ If an individual is liable for self assessment HMRC must be notified within 6
months f the relevant tax year or else they will be fined (31 jan online or 31
october paper)
○ Payment made by 2 payments on account
■ Ie if self assessing can pay in two installments one on 31 jan then the
other before the next 31 jan
○ Those who have already paid more than 80% of their tax bill through deduction
at source or with a small self assessment liability in the previous tax year (less
than 1k do not need to make payments on account)
○ Penalties include interest on late payments and fixed penalties if tax is not paid
or is paid late,there are also penalties for not keeping accurate records.
Appeals are made to the first tier tribunal
● Anti avoidance provisions
○ Tax avoidance - working within the law to minimise tax liability
○ Tax evasion misinterpreting or misapplying the law deliberately to minimise tax
liability - illegal
○ General anti tax avoidance rule - rule applying to certain taxes to combat
abusive tax avoidance arrangements that go beyond lawful tax avoidance -
taxpayer will be notified if an abusive tax avoidance arrangement is uncovered
and a request for tax adjustments will be made - anyone who has enabled the
scheme as part of their business may be fined. Taxpayers have a right of
appeal to a tax tribunal
○ Abusive tax avoidance arrangement - abusive if “cannot reasonably be
regarded as a reasonable course of action… having regard to all the
circumstances)

Chapter 9 - Capital Gains Tax and Inheritance Tax

● Chargeable Persons/ Entities
○ Individuals (including sole traders)
○ Individual partners
○ Trustees
○ Personal representatives
○ Companies pay corporation tax on their income profits and capital gains They
do not pay CGT
● Basis of Charge to CGT
○ CGT is a tax on an increase in an assets value during ownership - it is charged
on a chargeable gain made by a chargeable person, on a disposal of a
chargeable asset
 ○ Chargeable asset - most forms of property with the exception of sterling. Can
include tangible and intangible property. Will not include plant/ machinery and
motor vehicles as they are wasting assets - usually depreciate over time
(anything which is tangible and movable with a life expectancy of less than 50
years) - antiques with a life expectancy below 50 years like watches and clocks
will be a wasting asset. Fine wines generally aren't wasting though. Family
home also wont be generally
■ Shares in an ISA are not subject to CGT either - so they also cannot be
set off against gains if the ISA makes a loss
○ Disposal - construed widely for CGT purposes - includes a sale whether at full
value or undervalue or a gift - death usually gives rise to IHT not a charge to
CG
○ Chargeable Gain - the part of the gain that is liable to tax (after deduction of any
reliefs or exemptions)
○ An individual's main home subject to limitations is usually exempt from CGT -
but will be payable on second homes and investment properties
○ Main statute is the Taxation of Chargeable Gains Act 1992
○ CGT is paid on the genuine increase in an assets value and not because of
capital improvements
● Calculation of a Basic Gain: Individuals and Sole Traders
○ Basic calculation for CGT is:
■ Disposal value (ie not necessarily money); less
■ Acquisition cost + allowable expenditure; equals
● If was a gift - ie acquisition cost was £0 then will be assessed
based on what the market value was at acquisition
■ Basic gain (since 1982 - ignore value and gain before this)
■ Apply reliefs/ exemptions; gives
● Can carry over a loss from the previous year - indefinitely (not
subject to 4 year rule like others)
■ Chargeable gain
○ Disposal value - usually the sale price but can be the market value if: a gift, a
sale at undervalue with a gift element, disposal to a connected person
■ If the disposal is for only part of an asset then GCT will be payable on
that part
○ Connected person: spouses and civil partners, close relatives (not uncles
aunts, nieces and nephews), close relatives of one's spouse or civil partner
○ Allowable expenditure - CGT is charged on a genuine increase in an assets
value, the following may be deducted:
■ Incidental costs of acquisition (solicitors and surveyors fees)
■ Subsequent expenditure - cost of capital improvements that increase
size of property. Does not include cost of repair, redecoration or
replacement
■ Incidental costs of disposal (estate agents and solicitors fees)
○ Basic gain - gain that has been made after the acquisition cost and allowable
expenditure have been deducted from the disposal value but before application
of reliefs and exemptions
○ If the asset is a business which is sold (in its entirety) in exchange for shares
then will likely be able to have incorporation relief - delays chargeable gains
 until sale or disposal - if in part for shares and part for cash - add the two
together, minus the initial value of the asset to give the gain - then work out the
percentage of the consideration that was cash - that is the amount payable
● Calculation of a Basic Gain: Partners
○ Partnerships are transparent for CGT purposes and each partner is treated as
owning a fractional share of the chargeable assets of the firm, on disposal by
the partnership each partner is considered to be making a disposal of their
fractional share in an asset
○ Two steps to calculating the BG of individual partners:
■ 1) Identify the fractional share of capital gain for the partner - shared
equally unless there is an express or implied agreement to the contrary
■ 2) calculate the gain by apportioning the relevant fractional share of the
acquisition cost, disposal proceeds and allowable expenditure to the
partner
○ When paying CGT reliefs and rates apply to the individual partners - when a
partner leaves they are treated as disposing of their proportionate share to the
other partners
○ When a new partner joins each partner is treated as disposing of part of their
existing share to accommodate the new partner
● Calculation of CGT Charge: Rates
○ Charged at 4 main Rates:
■ 10% - Where business asset disposal relief or investors relief applies
■ 10% - where total taxable income and gains do not exceed the IT basic
rate band (always read the q to find out whether it is after deducting
allowances or not)
■ 20% - on the amount over the threshold where total taxable income and
gains exceed the IT basic rate band
■ 18% /28% - where the property is residential property an 8% surcharge
on the normal rate applies
■ 20% - gains realised by trustees and personal representatives (28% if it
is residential property)
○ CGT is a progressive tax - the rate increases as the CG increases - individuals
may make use of the lower rates first
● Principal CGT Reliefs/ Exemptions
○ Business Asset Disposal Relief (BADR) - applies where there is a qualifying
business disposal
■ QBD
● 1) sale or gift of the whole or part of a business carried on as a
sole trader or in partnership provided that the business has been
owned for at least 2 years prior to disposal
● 2) sale or gift of shares or gifts in a company provided that: the
company is a trading company, shareholding represents at least
5% of votes and profits, individual is an employee or officer of
the company, these conditions have been satisfied for at least
the two years prior to disposal
● 3) - sale or gift of assets used by a trading company or
partnership business, but owned individually by the partner or
shareholder. Such disposals qualify if they are associated with
 another qualifying disposal and involve reducing their share in
the company by at least 5% - assets must have been owned for
at least 3 years and used by business for previous 2
○ The period includes when it was owned by a spouse as
well as the original owner
■ Gains qualifying for BADR are usually taxed first - an allowable lifetime
limit of £1m is taxed at 10% - above that will be appropriate rate
■ If applicable the annual exemption can be used against qualifying gains
as tax is being paid
○ Annual Exemption (AE)
■ Amount of capital gain that an individual can make each year without
CGT (6k) (for other trustees (not PRs or disabled people) it is £3k
■ It is not possible to carry forward
■ Can be used first against CGs where the rate of tax would be higher in
order to save tax
■ It is minused from the gain itself - not from the tax payable
○ Hold-over relief (HOR) - postpones the payment of CGT until eventual disposal
by the transferee of the business asset - if disposed of by way of a gift or
undervalue provided that both parties elect for it to apply
■ Business asset - include those used in the transferors trade, shares in a
trading non listed company or shares in a trading company (must be
over 5%) and assets owned by a shareholder and used in his personal
company
■ Can then use AE or BADR when eventually disposed of
○ Roll-over relief on replacement of business asses (ROR) - postpone potential
payment and declaration of CGT until replacement asset is sold (must be a
qualifying business asset) and proceeds of sale are then used to buy another
qualifying business asset
■ Qualifying business asset - most business assets used in trade - land
and buildings, includes assets owned by shareholder by used by
company (>5%)
■ Assets do not need to be replaced with the same type but can be used
for something else
■ Shares do not count
■ Can use AE or BADR on subsequent disposal
■ Must be claimed within 4 years from end of the tax year in which
replacement asset was acquired
○ Deferral relief on reinvestment in EIS shares (DR)
■ Deferral relief to postpone the potential payment of CGT until EIS
shares are sold
■ Deferral relief - available following disposal of any asset by an individual
who then reinvests the proceeds of sale in buying EIS shares within one
year before or within 3 years after the sale of the original asset
■ EIS - enterprise investment scheme - tax relief to individual investors
who buy new shares in a company whose shares are part of the
scheme
■ Can use AE or BADR on subsequent disposal of the asset
○ Investors Relief (IR)
 ■ Similar to BADR - can be used for gains made on the disposal of
qualifying shares in unlisted trading companies
■ Qualifying shares - shares must be fully paid ordinary shares issued to
the investor in return for cash after march 2016 and held for at least 3
years by the investor
■ A special rate of 10% applies to the gain subject to a lifetime cap of
£10m
○ Roll over relief on incorporation of a business (RORIB)
■ Applies in order to postpone the potential payment of CGT when an
unincorporated business is incorporated
■ Business must be an ongoing concern (operating and making a profit)
with all of its assets (ignoring cash) - only applies to the extent that the
business is transferred in consideration of shares
■ Similarly to ROR AE and BADR cannot be used until the subsequent
disposal of the asset
○ Transfer between spouses are deemed to be made with no gain or loss -
liability to tax is deferred until eventual disposal of item
○ Buyback of shares
■ Usually involves the payment if IT by the shareholder as the
consideration is taxed as a dividend but CGT will be payable when:
● a) company is an unlisted trading company;
● b) buyback is to benefit the trade;
● c) the shares have been owned for at least 5 years; and
● d) the shareholding must be reduced by between 25-30% of the
companies shares
● Collection of CGT is part of the self-assessment scheme.
○ Normally payable by 31 Jan
○ But a provisional calculation must be made and tax paid within 30 days of
completion of the sale of a residential property where CGT is payable
● Anti avoidance provisions are the same as the general anti-avoidance rule
● Inheritance Tax and BPR
○ Inheritance tax - death will usually give rise to IHT not CGT - PRs acquire
property at market value on the death of the original owner
○ Business Property Relief (BPR) - provides that on death there is no charge (ie
100%) to IHT in respect to an interest in an unincorporated business and the
value of unlisted company shares relevant to trading activities.
■ Also provides that there is a reduction of 50% of the value transferred
for IHT purposes for:
● Listed company shares where the transferor had voting control
immediately prior to transfer thus if part of a controlling
shareholding is disposed of this may give rise to PBR where the
transferor no longer has control that will not qualify
● Land buildings plant and machinery owned by the transferor
but used either a) in the business in which they were a partner or
b) a company listed or unlisted in which they had voting control.
Control in this context means more than 50% of voting power on
all resolutions and takes into account the shares of spouses/ civil
partners
 ○ For relief to apply the assets must have been owned for at least 2 years or be a
replacement for assets with a combined period of ownership of more than 2
years
○ Except in the case of lifetime transfers any spouse or civil partner is deemed to
have owned the property from the original acquisition date. If they subsequently
transfer relevant property BPR may apply even if they themselves have not
owned the assets for the relevant period
○ If transferor dies within 7 years of a lifetime transfer BPR will be withdrawn
unless the business property or substituted business property is still owned by
the transferee - therefore if the business property is sold and proceeds are used
to pay off debts and make home improvements BPR will be withdrawn
○ BPR will not apply if there is a binding contract for the sale of the relevant
property e.g. an obligation in a partnership agreement to sell a partnership
share on death, rather than an option for the continuing partners to buy. In
these circumstances the interest will be in the proceeds of sale rather than
relevant business property

Chapter 10 - Corporation Tax

● Basis of Charge to CT
○ Companies pay corporation tax on both income profits and capital gains
■ Unincorporated associations will also be required to pay corporation tax
○ Income profits of companies are calculated according to IT principles and CG of
companies are calculated according to CGT principles
○ Assessed in the corporation tax financial year -1 april
● CT Rate
○ Main rate is 25% and is calculated by applying the appropriate rate to the profits
made in each of the companies accounting periods
■ Last year it was 19%
○ Is paid once per year unless over 1.5m in profit - in which case pay quarterly
● Calculation of CT
○ 1) Calculate income profits
■ Income profits are calculated according to usable principles of
chargeable receipts, less deductible expenses and capital allowances
● Purchase of capital assets like plant and machinery are not a
deductible expense that can be set off against the chargeable
trading income of a company - instead can deduct a fixed
percentage of the cost of capital assets from their trading income
(capital allowance)
○ Annual investment allowance
○ Writing down allowance
○ First year allowance
■ Dividends and payment for the buyback of shares are not deductible
expenses for CT purposes - but interest on loans are
■ Beware that if accounts are not in march - ie if tax is 31 march and
accounts end in december 31 - and need to work out the amount owed
so far - work out relative to amount of the year - ie if accounts show 1m -
then 3/12 x 1,000,000 x (CT %) = taxable amount
○ 2) calculate chargeable gains
■ Calculated according to the usual principles of calculating a basic gain
from the disposal of a chargeable asset and applying any available
reliefs
■ Some special rules for goodwill and IP which are treat as income not
capital gain and expenditure is a deductible expense
■ Same GCT rules on undervalue disposals apply - usually the market
value is used as to the rules on connected persons
■ For CT purposes people who control a company either alone or with
other connected persons are treated as connected, companies are
connected if the same person either alone or with other connected
persons controls both
■ Capital losses may be deducted from chargeable gains in the same
accounting period or carried forward to later accounting periods - but
cannot be offset against trading income
■ Indexation allowance - adjustments to account for increases in value
that is simply a result of inflation, incidental costs of acquisition and
subsequent expenditure (capital improvements) but not the disposal
value or incidental costs of disposal (e.g. agents fees)
■ Roll over relief on replacement of qualifying business assets - works in
the same way as the equivalent CGT relief for individuals - will usually
be available if such assets are sold and replaced with other goodwill or
intellectual property
○ 3) Add together income profits and chargeable gains to give total profits
○ 4) Apply reliefs
■ If there is a tax credit - this is deducted from the tax payable at the end
of the calculation - not the profit itself
■ Can use a number of reliefs that the company can choose from but
same loss cannot be claimed for twice:
● Carry-across/ carry-back relief for trading losses
○ Carry across - set trading loss against total profits for
same accounting period
○ Carry back - if full loss is not absorbed then set trading
loss against total profits of the same trade during the
accounting periods in previous 12 months (in the last
year - not accounting year) - cant for those over 12
months before - must carry forward
■ Must have been trading in both the current and
previous financial years
■ Trading losses can only be set off against capital
gains made in the preceding 12 month period but
cannot be set off against capital gains in earlier or
future periods
○ Time limit - within 2 years from end of loss making
accounting period
● Terminal carry-back relief for trading losses
○ For losses in final year of trade - set trading losses
against total profits from the loss-making accounting
 period and the previous three accounting periods before
the start of the final 12 months of trade (later periods first)
○ Time limit for claim - within 2 years from the end of the
loss making accounting period
● Carry-forward relief for trading losses
○ Set trading loss against subsequent total profits in the
next accounting period and subsequent accounting
periods until loss is absorbed
○ Conditions include that the company must continue to
trade and certain trades like farming are excluded
○ Time limit for claim - within 2 years from the end of the
accounting period where losses will be applied
○ Cap £5m plus 50% of remaining total profits over this
amount deduction of the allowance
■ Can be used for any form of loss - so can set of
capital loss against future chargeable gains
○ 5) calculate the tax
● Tax Treatment of Distributions
○ Company may deal with its profits in 5 main ways:
■ Retain them in the business
■ Pay them as dividends to shareholders (not deductible expense)
■ Use them to pay loan/debenture interest (is deductible expense)
■ Pay directors fees (is a deductible expense)
● Unless they are excessive in which case they wont be at all
■ Make loans to directors/ shareholders (not deductible expenses)
○ Withdrawal of profits
○ Close companies - Company controlled by 5 or less participators or any number
of participators who are also directors
■ Participators - essentially shareholders and debenture holders
■ Controlled - these participators control a company if they own or have
the right to acquire a majority of the voting shares or power - rights of
participators associates are also taken into account
■ If a close company makes a loan to a participant or participators
associate the company must pay a levy to HMRC equivalent to 32.5% of
the loan - if returned then the levy will be refunded and no tax
consequences for the recipient. If loan is written off the levy is also
refunded to the company but in the hands of the recipient will be taxed
in the same way as a dividend
■ Two exceptions
● 1) where the company is in the business of money lending and
the loan is made as part of that business - no need to obtain any
permission
● 2) where the loan (together with outstanding loans) does not
exceed £15k, the borrower works full time for the company and
owns less than 5% of the company’s shares
○ Group Companies
■ Have separate legal personality so each is taxed separately
■ Group relief
 ● Group companies - a company that owns 75%+ of the others
ordinary shares or both companies own 75%+ of the ordinary
shares in another company - all of the companies must be
entitled to more than 50% of the profits and assets of each
company within the group
● Group relief for income profits and expenses - allows certain
income losses and expenses (not capital losses) to be
transferred from one group company to another to reduce the
transferees income profits in an accounting year
● Group relief for chargeable gains - allows group companies to
transfer chargeable assets between them without a loss or gain
occurring - roll over relief can also be used to roll over a gain
made from selling property into the acquisition of assets by
another company in the same group (rather than into the
acquisition of assets by the same company)
● Collection and Payment of CT
○ Self assessment tax and HMRC must be notified within 3 months of the start of
the first accounting period
○ Usually payable 9 months and one day from the end of the accounting period
and tax return must be made by 12 months from the end of the accounting
period
○ Larger companies with taxable profits of £1.5m or more may pay CT by four
instalments and these dates are set by HMRC - there are different dates for
companies with annual taxable profits over £20m
○ If not paid or there is an issue with compliance - then penalties may apply which
will be based by reference to the corporation tax liability and will vary based on
culpability