CILEX Professional Qualification (CPQ) Foundation Stage: Business Law and Practice Syllabus

Define share capital and distinguish 'allotted' from 'paid-up' capital.

Share capital is the capital a company raises by issuing shares. Allotted (issued) capital is the nominal value of shares actually issued; paid-up capital is the amount of that nominal value the shareholders have actually paid to the company.

Distinguish ordinary shares from preference shares.

Ordinary shares carry voting rights and a residual entitlement to dividends/capital. Preference shares typically carry a fixed (often cumulative) preferential dividend and priority on a return of capital, but usually no or limited voting rights.

What is the difference between equity finance and debt finance for a company?

Equity finance raises money by issuing shares (owners/members, dividends, no repayment obligation). Debt finance raises money by borrowing (loans, debentures) which must be repaid with interest and is often secured by a charge.

Distinguish a fixed charge from a floating charge as forms of security.

A fixed charge attaches to specific identified assets the company cannot freely deal with. A floating charge hovers over a fluctuating class of assets (e.g. stock) the company can use in the ordinary course until it 'crystallises' and attaches to the assets then held.

What is the statutory rule on maintenance of capital and one of its key consequences?

A company must not return capital to shareholders except by lawful procedures, to protect creditors. Consequently dividends may only be paid out of distributable profits, and a company generally cannot purchase its own shares except by permitted procedures.

List the seven general statutory directors' duties under sections 171-177 of the Companies Act 2006.

s.171 act within powers; s.172 promote the success of the company; s.173 exercise independent judgment; s.174 exercise reasonable care, skill and diligence; s.175 avoid conflicts of interest; s.176 not accept benefits from third parties; s.177 declare interest in a proposed transaction.

What does the duty to promote the success of the company under section 172 CA 2006 require directors to consider?

To act in good faith to promote the success of the company for the benefit of members as a whole, having regard to factors including the long term, employees' interests, supplier/customer relationships, the community/environment, the company's reputation, and fairness between members.

What standard of care applies to a director under section 174 CA 2006, and is it objective or subjective?

A dual standard: the care, skill and diligence of a reasonably diligent person with (a) the general knowledge, skill and experience reasonably expected of someone in that role (objective), and (b) the actual knowledge, skill and experience that the particular director has (subjective).

Under section 175 CA 2006, how can a director's conflict of interest be authorised?

The conflict may be authorised by the independent (non-conflicted) directors of the board, provided the company's constitution does not invalidate such authorisation (for private companies authorisation is allowed unless excluded; for public companies it must be expressly permitted).

What is the consequence of a director breaching their fiduciary duties?

Remedies are the same as for breach of the corresponding common law/equitable duty: e.g. account of profits, equitable compensation, rescission of contracts, restoration of property, and an injunction. Breach can be ratified by ordinary resolution of the members (s.239).

Compare an ordinary resolution and a special resolution under the Companies Act 2006.

An ordinary resolution requires a simple majority (over 50%) of votes cast. A special resolution requires at least 75% of votes cast and is needed for major matters such as altering the articles, changing the company name, or reducing capital.

What is the written resolution procedure and which companies may use it?

Under ss.288-300 CA 2006 a private company may pass members' resolutions in writing without a meeting. The required majority is calculated on total voting rights of eligible members (over 50% for ordinary, 75% for special). It cannot be used to remove a director or auditor before term.

What notice is generally required to call a general meeting, and how may short notice be given?

A general meeting must be called on at least 14 clear days' notice. Short notice is permitted if agreed by a majority in number of members holding at least 90% (95% for public/traded companies) of the nominal value of voting shares.

How may a member requisition a general meeting under section 303 CA 2006?

Members holding at least 5% of the paid-up voting capital may require the directors to call a general meeting. The directors must call it within 21 days, to be held within 28 days of the notice; if they fail, the requisitionists may call it themselves.

What is the procedure to remove a director under section 168 of the Companies Act 2006?

A director may be removed by ordinary resolution at a meeting, with special notice (28 days) given to the company. The director is entitled to written representations and to be heard at the meeting. The Bushell v Faith clause may, however, weight votes to entrench a director.

What is a quorum for a general meeting, and what is the default position?

A quorum is the minimum number of members who must be present for valid business. The default is two qualifying persons present (one for a single-member company), unless the articles provide otherwise.

Distinguish voting on a show of hands from a poll vote.

On a show of hands each member present has one vote regardless of shareholding. On a poll, votes are counted according to the number of shares held (one vote per share), giving weight to larger shareholdings. A poll can be demanded under the articles/s.321.

What does section 994 of the Companies Act 2006 provide regarding unfair prejudice?

A member may petition the court for relief where the company's affairs are being, have been, or will be conducted in a manner that is unfairly prejudicial to the interests of members generally or some part of the members, including the petitioner.

What must a petitioner show for an 'unfair prejudice' claim under section 994, and what is the most common remedy?

Conduct that is both unfair and prejudicial to the member's interests, judged objectively (often by reference to the articles or legitimate expectations in a quasi-partnership). The most common remedy is an order that the majority buy out the petitioner's shares at a fair value (s.996).

What is a derivative claim under sections 260-264 of the Companies Act 2006?

A claim brought by a member on behalf of the company in respect of a wrong (e.g. breach of duty by a director) done to the company. The member must obtain the court's permission to continue it, applying the statutory criteria including the s.172 success factor.

What is the rule in Foss v Harbottle, and why does it matter for minority shareholders?

Where a wrong is done to the company, the proper claimant is the company itself, and the court will not interfere with internal matters that could be ratified by the majority. This limits minority members' ability to sue, making the derivative claim and s.994 important exceptions.

What is the concept of a 'quasi-partnership' company in minority protection?

A company (usually small/private) formed on the basis of mutual trust and confidence, an understanding that members participate in management, and restrictions on share transfer. Courts may impose equitable considerations giving rise to legitimate expectations enforceable under s.994.

Distinguish compulsory liquidation from creditors' voluntary liquidation.

Compulsory liquidation is ordered by the court, typically on a creditor's petition for the company's inability to pay debts (s.122 IA 1986). Creditors' voluntary liquidation (CVL) is begun by the members by resolution when the company is insolvent, with creditors controlling the process.

When is a company deemed unable to pay its debts under section 123 of the Insolvency Act 1986?

Where it fails to satisfy a statutory demand for a sum exceeding £750 within 21 days, where execution of a judgment is returned unsatisfied, where it cannot pay debts as they fall due (cash-flow test), or where its liabilities exceed its assets (balance-sheet test).

State the statutory order of priority for distributing assets in a company liquidation.

1) Liquidator's costs/expenses; 2) preferential creditors (e.g. employee claims, certain HMRC debts); 3) the prescribed part for unsecured creditors out of floating-charge assets; 4) floating-charge holders; 5) unsecured creditors; 6) interest; 7) any surplus to shareholders. Fixed-charge holders are paid first from their secured asset.

What is administration and what is its primary statutory objective?

A rescue procedure under the Insolvency Act 1986 in which an administrator manages the company under a statutory moratorium. The primary objective is to rescue the company as a going concern; if not, to achieve a better result for creditors than liquidation; failing that, to realise property for secured/preferential creditors.

Distinguish fraudulent trading from wrongful trading under the Insolvency Act 1986.

Fraudulent trading (s.213) requires actual intent to defraud creditors and a dishonest carrying on of business. Wrongful trading (s.214) needs no dishonesty: a director is liable if they continued trading when they knew or ought to have known there was no reasonable prospect of avoiding insolvent liquidation and failed to minimise creditor losses.

What are the main routes by which an individual may enter personal insolvency?

Bankruptcy (by debtor's online application or a creditor's petition), an Individual Voluntary Arrangement (IVA), and a Debt Relief Order (DRO) for low-asset, low-debt individuals.

What is an Individual Voluntary Arrangement (IVA) and how does it compare with bankruptcy?

An IVA is a formal, binding agreement between a debtor and creditors to repay debts (often partly) over time, supervised by an insolvency practitioner. It avoids the stigma and asset loss of bankruptcy, requires creditor approval of 75% by value, but binds all unsecured creditors once approved.

What are the key effects and typical duration of a bankruptcy order on an individual?

The bankrupt's estate vests in the trustee for distribution to creditors, the bankrupt faces restrictions (e.g. on credit and acting as a company director), and is normally automatically discharged after one year, though a bankruptcy restrictions order can extend restrictions.

Identify the main UK business taxes affecting companies and unincorporated businesses, naming the chargeable items.

Companies pay corporation tax on income and chargeable gains. Sole traders/partners pay income tax on trading profits and capital gains tax on disposals. Both may charge VAT on taxable supplies, and employers/employees pay National Insurance contributions.

How is a company's corporation tax liability fundamentally calculated, and how does dividend extraction differ from salary?

Corporation tax is charged on the company's taxable total profits (income profits plus chargeable gains, after deductible expenses) at the prevailing rate. Salary is a tax-deductible expense for the company but bears income tax and NICs; dividends are paid from post-tax profits (not deductible) but are taxed on the shareholder at dividend rates with no NICs.