Qualified Lawyers Transfer Scheme (QLTS) Business Law and Practice Syllabus

What does the s.172 CA 2006 duty to promote the success of the company require, and what factors must directors consider?

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

Under s.174 CA 2006, what standard of care, skill and diligence must a director meet?

The standard of a reasonably diligent person with both: (objective) the general knowledge, skill and experience reasonably expected of someone carrying out that director's functions, and (subjective) the actual general knowledge, skill and experience that the particular director has — whichever is higher.

How may a director's conflict of interest under s.175 CA 2006 be authorised?

In a private company, by authorisation of the independent (non-conflicted) directors, provided the constitution does not prohibit it. The conflicted director does not count in the quorum or vote. Otherwise members may authorise it by ordinary resolution.

What is required of a director under s.177 CA 2006 regarding a proposed transaction with the company?

A director must declare the nature and extent of any direct or indirect interest in a proposed transaction or arrangement to the other directors before the company enters into it. No declaration is needed if others are already aware or it cannot reasonably be regarded as giving rise to a conflict.

What remedies are available for breach of a director's general duties?

The duties are enforceable like fiduciary/common law duties: remedies include damages/compensation, restoration of company property, account of profits, rescission of contracts, and injunctions. A transaction tainted by breach may be voidable. Members may bring a derivative claim under ss.260-264.

What is a company's constitution under s.17 CA 2006?

The constitution comprises the company's articles of association and any resolutions and agreements affecting the constitution (e.g. special resolutions, unanimous shareholder agreements). For companies pre-2009 it can also include the old memorandum's substantive provisions.

What are the 'Model Articles' and when do they apply?

Model Articles are the default articles prescribed by regulations under CA 2006. They apply automatically to a company limited by shares to the extent the company does not register its own articles or excludes/modifies them. Different Model Articles exist for private and public companies.

What is the effect of s.33 CA 2006 (the statutory contract)?

The articles bind the company and its members as a contract: they create mutual obligations between the company and each member, and between the members themselves, but only in respect of membership/constitutional rights (not rights in some outside capacity).

What resolution and procedure are required to amend a company's articles?

Articles are amended by special resolution (75% majority). A copy of the amended articles and the special resolution must be filed at Companies House within 15 days. Any amendment must be made bona fide for the benefit of the company as a whole.

What is an 'entrenched provision' in the articles under s.22 CA 2006?

A provision specifying that it may be amended or removed only if conditions more restrictive than a special resolution are met (e.g. unanimity). Entrenchment may be included on formation or by unanimous member agreement, and Companies House must be notified.

Distinguish an ordinary resolution from a special resolution under CA 2006.

An ordinary resolution is passed by a simple majority (over $50\%$) of votes cast. A special resolution requires at least a $75\%$ majority and the notice must state it is proposed as a special resolution. Special resolutions are required for major constitutional changes.

What are the main statutory rights attaching to an ordinary share?

The right to vote at general meetings (typically one vote per share), the right to receive dividends if declared, and the right to a share of surplus capital on a winding up. Ordinary shares carry the residual/equity interest after preference shares.

What is a shareholders' agreement and what advantage does it have over the articles?

A private contract between some or all shareholders governing their relationship (e.g. voting, dividends, transfers, deadlock). Unlike the articles it is confidential (not filed publicly) and can only be varied with the consent of all parties to it, giving minority protection (e.g. unanimity over specified matters).

What notice periods apply to general meetings of a private company under CA 2006?

A general meeting must be called on at least 14 clear days' notice. A meeting can be held on short notice if agreed by a majority in number of members holding at least $90\%$ of the voting shares (which can be raised to $95\%$ by the articles).

What is the quorum for a general meeting of a company with more than one member?

Under the Model Articles the quorum is two qualifying persons (members, proxies or corporate representatives) present. A single-member company has a quorum of one.

How can the members of a private company make decisions without holding a meeting?

By written resolution under ss.288-300 CA 2006. An ordinary written resolution needs a simple majority and a special written resolution needs $75\%$, calculated on the total voting rights of all eligible members. Written resolutions cannot be used to remove a director or auditor.

What is the s.168 CA 2006 procedure for removing a director, and what protects the director?

Members may remove a director by ordinary resolution at a general meeting, with special notice of 28 days given to the company. It cannot be done by written resolution. The director has a right to make written representations and to be heard at the meeting (s.169).

How are the powers divided between the board of directors and the shareholders?

Under Model Article 3, the directors are responsible for the management of the company and may exercise all its powers. Shareholders can direct the board only by special resolution (Model Article 4) or by reserved statutory matters (e.g. amending articles, removing directors).

What is the quorum and decision rule for board meetings under the Model Articles?

The quorum for a directors' meeting is two (unless fixed otherwise; for a sole director, one). Decisions are taken by a majority of votes; the chair has a casting vote in the event of a tie. A director may not count in the quorum or vote on a matter in which they are interested (subject to permitted exceptions).

What is 'maintenance of capital' and why does the doctrine exist?

The principle that a company's share capital is a permanent fund available to creditors and must not be returned to shareholders except by permitted procedures. It protects creditors who deal with a limited liability company on the faith of its stated capital.

Distinguish 'called-up', 'paid-up' and 'nominal' share capital.

Nominal (par) value is the fixed face value of a share. Called-up capital is the amount the company has demanded shareholders pay. Paid-up capital is the amount actually received. Shares may be issued at a premium (above par) but not at a discount (below par).

From what funds may a private company lawfully pay a dividend?

A dividend may only be paid out of distributable profits — accumulated realised profits less accumulated realised losses (s.830 CA 2006). Paying a dividend out of capital is unlawful, and recipients who know it is unlawful must repay it.

How can a private company carry out a buyback of its own shares out of capital?

A private company may purchase its own shares out of capital using the s.709-723 procedure: a directors' solvency statement, a special resolution, an auditor's report, and public notice in the Gazette, subject to creditor objection rights. Generally buybacks are otherwise funded from distributable profits or fresh issue proceeds.

What is the difference between a fixed charge and a floating charge?

A fixed charge attaches to specific identifiable assets (e.g. land, machinery); the borrower cannot dispose of them freely without consent. A floating charge 'floats' over a class of changing assets (e.g. stock, book debts), allowing the company to deal with them until the charge 'crystallises' into a fixed charge on default or insolvency.

Why does registration of a company charge at Companies House matter, and what is the deadline?

A charge created by a company must be registered at Companies House within 21 days of creation. If not registered, the charge is void against a liquidator, administrator and creditors of the company (though the underlying debt remains payable). Registration also fixes priority and gives public notice.

In what general order are creditors paid on a corporate insolvency?

(1) Fixed charge holders from their secured assets; (2) liquidator's/insolvency expenses; (3) preferential creditors (e.g. employee wages within limits, certain HMRC debts); (4) the prescribed part set aside for unsecured creditors; (5) floating charge holders; (6) unsecured creditors; (7) finally, shareholders.

Distinguish compulsory liquidation, creditors' voluntary liquidation and administration.

Compulsory liquidation: winding up by court order, often on a creditor's petition for inability to pay debts. Creditors' voluntary liquidation (CVL): initiated by the company (insolvent) by special resolution with creditor involvement. Administration: a rescue procedure where an administrator runs the company under a statutory moratorium aiming to rescue it as a going concern or achieve a better result for creditors than winding up.

What are wrongful trading and fraudulent trading under the Insolvency Act 1986?

Wrongful trading (s.214): a director may be personally liable to contribute to assets 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. Fraudulent trading (s.213): liability where business was carried on with intent to defraud creditors — requires actual dishonesty.

What are the two main routes into personal bankruptcy, and what is the effect on the debtor's assets?

An individual may be made bankrupt by their own application (online to the Adjudicator) or on a creditor's petition for a debt of at least £5,000 the debtor cannot pay. On bankruptcy, the debtor's estate vests in the trustee in bankruptcy, who realises it to pay creditors; the bankrupt is usually discharged after 12 months.

What is an Individual Voluntary Arrangement (IVA) and how does it differ from bankruptcy?

An IVA is a binding contractual arrangement, supervised by an insolvency practitioner, under which an individual agrees a composition or repayment schedule with creditors to avoid bankruptcy. It requires approval by at least $75\%$ in value of voting creditors, avoids the stigma and asset-vesting of bankruptcy, and can preserve the debtor's business and assets.

How is a sole trader/partner taxed on trading profits, and on what basis?

They pay income tax on their share of trading profits (self-employment income), assessed on the tax-year basis. Profit is computed as taxable income less allowable deductions and capital allowances. They also pay Class 4 (and Class 2/flat) National Insurance contributions on profits.

State the UK income tax rates and the basic personal allowance for an individual (illustrative thresholds).

After the personal allowance (around £12,570), non-savings income is taxed at the basic rate $20\%$, higher rate $40\%$, and additional rate $45\%$. The personal allowance is tapered away by £1 for every £2 of income above £100,000, removing it entirely once income reaches £125,140.

On what profits does a UK company pay corporation tax, and how is the chargeable profit broadly calculated?

A company pays corporation tax on its total taxable profits — trading income, property income, non-trading loan relationship (interest) income, and chargeable gains — for its accounting period. Taxable trading profit is income less deductible expenses (incurred wholly and exclusively for the trade) and capital allowances.

When must corporation tax be paid and a return filed by a typical (non-large) company?

Corporation tax is due 9 months and 1 day after the end of the accounting period, and the company tax return (CT600) must be filed within 12 months of the end of the accounting period. Large companies pay by quarterly instalments.

How is a capital gain on a chargeable asset calculated for an individual?

$\text{Gain} = \text{Disposal proceeds} - \text{allowable costs (acquisition cost} + \text{enhancement and incidental costs)}$. The annual exempt amount is then deducted, and the remaining gain is taxed at the applicable CGT rate.

What is Business Asset Disposal Relief, and what is its effect and lifetime limit?

Business Asset Disposal Relief (formerly Entrepreneurs' Relief) reduces the CGT rate on qualifying business disposals (e.g. of a trading business, or a $5\%$ personal-company shareholding held with employment/office) to $10\%$, subject to a lifetime limit of £1 million of qualifying gains.

What is rollover (replacement of business assets) relief in CGT?

Rollover relief allows a trader to defer the gain on the disposal of a qualifying business asset where the proceeds are reinvested in another qualifying business asset within the period from one year before to three years after disposal. The deferred gain reduces the base cost of the replacement asset.

What is VAT and how does the output/input mechanism work for a registered business?

VAT is an indirect tax on the supply of goods and services. A registered business charges output VAT on its taxable sales and recovers input VAT on its purchases; it pays HMRC the difference: $\text{VAT due} = \text{Output VAT} - \text{Input VAT}$. If input exceeds output, it reclaims the balance.

What is the standard VAT rate, and distinguish zero-rated from exempt supplies?

The standard rate is $20\%$ (with a reduced rate of $5\%$ on some items). Zero-rated supplies are taxable at $0\%$ — the trader charges no VAT but can still recover input VAT. Exempt supplies carry no VAT and the trader cannot recover related input VAT, so the two are treated very differently.

When must a business register for VAT?

Registration is compulsory once taxable turnover exceeds the VAT registration threshold (around £90,000) in any rolling 12-month period, or where it is expected to exceed the threshold in the next 30 days. A business below the threshold may register voluntarily to recover input VAT.