Solicitors Qualifying Examination (SQE) Business Law and Practice (FLK1) Syllabus

How are directors of a company appointed, and what are the minimum requirements?

Directors are appointed as set out in the articles — typically by ordinary resolution of the members or by a decision of the existing board (model article 17). A private company must have at least one director, and a public company at least two; at least one director must be a natural person aged 16 or over. Appointments must be notified to Companies House within 14 days.

Distinguish a de jure director, a de facto director and a shadow director.

A de jure director is validly appointed and registered. A de facto director acts as a director and is held out as one without valid appointment. A shadow director is a person in accordance with whose directions or instructions the directors are accustomed to act (excluding professional advisers giving advice). All three can owe directors' duties and incur liabilities.

List the seven general (codified) directors' duties under ss171–177 Companies Act 2006.

s171 — duty to act within powers; s172 — duty to promote the success of the company for the benefit of members as a whole; s173 — duty to exercise independent judgment; s174 — duty to exercise reasonable care, skill and diligence; s175 — duty to avoid conflicts of interest; s176 — duty not to accept benefits from third parties; s177 — duty to declare an interest in a proposed transaction or arrangement.

What factors must a director have regard to under s172 CA 2006 (duty to promote success of the company)?

A director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of members as a whole, having regard to: long-term consequences; employees' interests; relationships with suppliers/customers; community and environmental impact; the company's reputation for high standards; and the need to act fairly between members.

What is the s174 CA 2006 standard of care, skill and diligence, and is it objective or subjective?

A director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with: (a) the general knowledge, skill and experience reasonably expected of a person carrying out that director's functions (objective minimum standard), AND (b) the general knowledge, skill and experience the director actually has (subjective element, raising the bar for the better-qualified). The higher of the two applies.

How can a director authorise a conflict of interest or avoid breaching s175/s177 CA 2006?

A conflict under s175 can be authorised by the independent (non-conflicted) directors where the articles permit (default for private companies under CA 2006). Under s177 a director must declare the nature and extent of any interest in a proposed transaction to the board before it is entered into; the company can also ratify a breach by ordinary resolution of disinterested members (s239).

What are the consequences/remedies for breach of a director's general duties?

The duties are owed to the company, so the company (or members via a derivative claim) enforces them. Remedies mirror equitable/common law principles: account of profits, restoration of company property, rescission of contracts, equitable compensation, injunction, and for s174 damages for negligence. A breach (other than s174) may be ratified by ordinary resolution of disinterested members.

How is a director removed from office under s168 Companies Act 2006?

By ordinary resolution of the members at a general meeting (notwithstanding anything in the articles or any agreement). Special notice of 28 days must be given to the company, and the director has the right to make written representations and to be heard at the meeting. Note Bushell v Faith weighted voting clauses in the articles may defeat removal.

What approvals are required for a substantial property transaction between a company and a director under s190 CA 2006?

A transaction where a director (or connected person) acquires from or sells to the company a non-cash asset of 'substantial value' requires approval by ordinary resolution of the members. 'Substantial' means worth more than £100,000, or more than £5,000 and exceeding 10% of the company's net asset value. Without approval the transaction is voidable and the director must account for any gain/indemnify loss.

What is required to approve a director's long-term service contract and a loan to a director under the CA 2006?

A director's service contract guaranteeing employment for more than 2 years (s188) requires approval by ordinary resolution of the members. A loan to a director (s197) generally requires approval by ordinary resolution, supported by a memorandum setting out its terms; certain exceptions apply (e.g. expenditure on company business up to £50,000, minor loans up to £10,000).

What is the distinction between a member (shareholder) and a director, and how do their respective powers differ?

Directors manage the company's business day-to-day, exercising the powers conferred by the articles (model article 3). Members own the company through their shares and exercise residual control through voting on resolutions at general meetings — e.g. amending the articles, removing directors, and approving major transactions. Members do not generally manage the business.

What rights typically attach to an ordinary share?

Three core rights: (1) the right to vote (usually one vote per share) at general meetings; (2) the right to a dividend if declared; and (3) the right to a share of surplus capital on a winding up. Ordinary shares carry the residual economic risk and reward and rank after preference shares for dividends/capital.

What are preference shares and how do they differ from ordinary shares?

Preference shares carry a preferential right to a fixed dividend (a stated percentage) paid before ordinary dividends, and usually priority for return of capital on winding up. They are presumed cumulative (unpaid dividends carry forward) unless stated otherwise, and typically carry no voting rights except in limited circumstances. They do not usually share in surplus profits/assets (non-participating).

What is a 'class right' and how is it varied under s630 CA 2006?

A class right is a right attached to a particular class of shares (e.g. preference dividend, special voting). It may be varied only in accordance with provisions in the articles, or (absent such provision) with the written consent of holders of at least 75% in nominal value of the class, or a special resolution passed at a separate class meeting. Dissenting holders of 15% may apply to court to cancel the variation.

What minority shareholder protections are available under the Companies Act 2006?

(1) Unfair prejudice petition (s994) — conduct of the company's affairs unfairly prejudicial to some members' interests; (2) derivative claim (ss260–264) — a claim brought by a member on the company's behalf for a wrong (e.g. director's breach of duty) done to the company; and (3) just and equitable winding up (s122(1)(g) Insolvency Act 1986).

What must a petitioner establish for an unfair prejudice claim under s994 CA 2006, and what remedy is most common?

That the company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of members generally or of some part of them (including the petitioner). 'Unfair' is judged against the terms on which they agreed the company's affairs would be conducted. The most common remedy is an order that the other members or the company buy the petitioner's shares at a fair value (s996).

What is a derivative claim and what is the procedure under ss260–264 CA 2006?

A claim brought by a member in the company's name for a cause of action vested in the company arising from an actual/proposed act or omission involving negligence, default, breach of duty or breach of trust by a director. The member must apply to the court for permission to continue; the court applies a two-stage test, refusing permission if a person acting under s172 would not continue it, or if the act was authorised/ratified.

Distinguish an ordinary resolution from a special resolution under the Companies Act 2006.

An ordinary resolution requires a simple majority (more than 50%) of votes cast. A special resolution requires at least 75% of votes cast. Special resolutions are needed for fundamental matters (amending articles, changing the name, reducing capital, disapplying pre-emption rights, winding up); ordinary resolutions are the default for everything else unless the Act/articles require more.

What notice periods apply to general meetings and to written resolutions of a private company?

A general meeting requires at least 14 clear days' notice (a plc AGM requires 21 days). Short notice is permitted if agreed by a majority in number of members holding at least 90% (private company) or 95% (public/AGM) of the voting shares. A written resolution of a private company has no meeting/notice — it is passed when the required majority of eligible members have signified agreement, within a 28-day lapse period.

What is the procedure for passing a written resolution in a private company, and what cannot be done by written resolution?

The directors (or members holding ≥5%) circulate the proposed resolution; members signify agreement in writing. It is passed when the required majority of total voting rights of eligible members agree (>50% ordinary, ≥75% special) within 28 days. Written resolutions cannot be used to remove a director under s168 or an auditor before term-end — those require a meeting.

What quorum is required for a board meeting and a general meeting under the model articles?

For a board meeting, the model articles set the quorum at 2 directors (unless otherwise fixed); a director cannot count in the quorum or vote on a matter in which they are interested (subject to exceptions). For a general meeting, the statutory quorum is 2 qualifying persons (members/proxies), except a single-member company where one person is a quorum (s318 CA 2006).

What is an ordinary resolution requiring 'special notice', and give an example?

Some ordinary resolutions require 28 days' special notice to the company before the meeting, which the company then notifies to members. Examples: a resolution to remove a director under s168, and a resolution to remove an auditor or appoint a replacement. This gives the affected person time to make representations.

What is a confirmation statement and what key filings must a company make at Companies House annually/periodically?

A confirmation statement (form CS01, replacing the annual return) must be filed at least once every 12 months confirming the company's registered details (officers, registered office, SAIL, shareholders, PSCs, SIC codes). Companies must also file annual accounts, notify changes of directors/secretary (14 days), allotments and resolutions (15 days), and maintain a PSC register (persons with significant control).

What is a 'person with significant control' (PSC) and the relevant thresholds?

A PSC is an individual who: holds more than 25% of shares; holds more than 25% of voting rights; can appoint or remove a majority of the board; exercises (or has the right to exercise) significant influence or control over the company; or has such control over a trust/firm that meets one of these conditions. Companies must keep a PSC register and report it to Companies House.

What is the difference between equity finance and debt finance?

Equity finance raises capital by issuing shares — investors become members, sharing in profits (dividends) and capital growth, with no obligation to repay and no fixed return; it dilutes ownership/control. Debt finance is borrowing (loans, overdrafts, debentures, bonds) — the lender is a creditor entitled to repayment of principal plus interest, ranks ahead of shareholders, but gains no ownership rights.

Define a company's authorised, allotted, issued, called-up and paid-up share capital.

Allotted/issued capital is the nominal value of shares the company has agreed to issue. Called-up capital is the amount the company has demanded shareholders pay so far. Paid-up capital is the amount actually paid. (Under the CA 2006 the concept of 'authorised' share capital was abolished, though companies may still cap allotment in their articles.) Nominal (par) value is the fixed minimum legal value of a share.

What are statutory pre-emption rights on the allotment of shares, and how are they disapplied?

Under s561 CA 2006, before allotting new equity (ordinary) shares for cash, a company must first offer them to existing shareholders pro rata to their existing holdings. This protects against dilution. Pre-emption rights can be excluded or disapplied by the articles, or by special resolution (s569–571). A private company with one class of shares can permanently exclude them in its articles.

State the rule on the share premium account and explain a share premium.

A share premium is the excess of the issue price of a share over its nominal value. Under s610 CA 2006 the aggregate premium must be credited to a share premium account, which is treated like capital — it can generally only be used for limited purposes (e.g. writing off certain expenses/commission of the issue) and is subject to the capital maintenance rules, not freely distributable. Example: a £1 share issued at £3 generates £2 premium.

What is the capital maintenance doctrine and the rules on a company buying back or reducing its own shares?

Capital maintenance requires that a company's capital is preserved as a creditor buffer — a company generally cannot return capital to members except through lawful procedures. A limited company may reduce capital by special resolution supported by a solvency statement (private companies) or court order (s641–644). A share buyback (ss690–708) must follow the statutory procedure, funded from distributable profits, fresh issue proceeds, or (private cos) capital with a solvency statement.

Distinguish a fixed charge from a floating charge as forms of security for debt finance.

A fixed charge attaches to specific identified assets (e.g. land, machinery); the company cannot dispose of them without the lender's consent, and the charge ranks highly on insolvency. A floating charge 'floats' over a class of changing assets (e.g. stock, book debts), allowing the company to deal with them in the ordinary course until 'crystallisation' (e.g. default/insolvency), when it fixes onto the then-existing assets.

What is the order of priority of charges and the importance of registration at Companies House?

Charges must be registered at Companies House within 21 days of creation (s859A CA 2006); an unregistered charge is void against a liquidator, administrator and other creditors, though the debt remains payable. Generally a fixed charge ranks ahead of a floating charge over the same asset (even if created later), and charges of the same type rank by date of creation, subject to registration and negative pledge clauses.

What is the statutory order of priority for distribution of assets in a corporate liquidation?

(1) Fixed charge holders (from charged assets); (2) liquidation expenses; (3) preferential creditors (e.g. employee wages up to limits, then secondary preferential — certain HMRC debts); (4) prescribed part set aside for unsecured creditors; (5) floating charge holders; (6) unsecured/ordinary creditors; (7) interest on debts; and finally (8) shareholders. Each tier is paid in full before the next.

Distinguish compulsory liquidation, creditors' voluntary liquidation (CVL) and members' voluntary liquidation (MVL).

Compulsory liquidation is by court order (often on a creditor's petition for inability to pay debts). A CVL is initiated by the company's members (special resolution) where the company is insolvent — controlled mainly by creditors. An MVL is for a solvent company being wound up, requiring a directors' statutory declaration of solvency (debts payable in full within 12 months); members appoint the liquidator.

How does a company prove it is unable to pay its debts under s123 Insolvency Act 1986?

A company is deemed unable to pay its debts if: it fails to satisfy a statutory demand for a debt exceeding £750 within 21 days; execution on a judgment is returned unsatisfied; the court is satisfied it cannot pay debts as they fall due (cash-flow test); or its liabilities exceed its assets (balance-sheet test).

What is administration and what is its statutory purpose hierarchy?

Administration places a company under the control of an administrator (an insolvency practitioner) with the benefit of a statutory moratorium protecting it from creditor action. The purpose (Sch B1 IA 1986) is, in order: (1) rescuing the company as a going concern; or if not reasonably practicable (2) achieving a better result for creditors than winding up; or (3) realising property to pay secured/preferential creditors. It can be entered via court or out-of-court route.

What is a Company Voluntary Arrangement (CVA)?

A CVA is a binding compromise or arrangement between a company and its creditors (e.g. to pay debts in part or over time), supervised by an insolvency practitioner. It is approved if 75% or more (by value) of voting unsecured creditors agree (and not opposed by more than 50% of unconnected creditors). It binds all unsecured creditors entitled to vote, but cannot affect secured/preferential creditors without their consent.

What is wrongful trading under s214 Insolvency Act 1986 and its consequences?

Wrongful trading occurs where, before insolvent liquidation/administration, a director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation and failed to take every step to minimise loss to creditors. The court may order the director to contribute to the company's assets. The 'ought to have known' standard is judged by the s174 objective/subjective test.

What is fraudulent trading under s213 IA 1986 and how does it differ from wrongful trading?

Fraudulent trading is carrying on business with intent to defraud creditors or for any fraudulent purpose. It requires actual dishonesty (a high bar), can apply to anyone knowingly party to it, and may attract criminal as well as civil liability. Wrongful trading (s214) requires no dishonesty — only negligence/failure to act — applies only to directors, and is civil only.

What are voidable transactions a liquidator/administrator can challenge — transactions at an undervalue and preferences?

A transaction at an undervalue (s238) — a gift or transaction for significantly less than the company received — can be set aside if made within 2 years before insolvency and the company was/became insolvent. A preference (s239) — putting a creditor in a better position on insolvency — can be set aside if within 6 months (2 years for a connected person) before insolvency and influenced by a desire to prefer.

What insolvency options are available to an individual (personal insolvency)?

(1) Bankruptcy — by debtor's application or creditor's petition (debt over £5,000), assets vest in a trustee for distribution, typically discharged after 12 months; (2) Individual Voluntary Arrangement (IVA) — a binding compromise with creditors supervised by an IP, approved by 75% by value of voting creditors; and (3) a Debt Relief Order (DRO) for low-debt, low-asset debtors.

What happens to a partnership and its partners on insolvency?

A general partnership has no separate personality, so partners are jointly liable and can be made personally bankrupt for partnership debts. The firm may be wound up as an unregistered company under the Insolvent Partnerships Order 1994, often alongside bankruptcy of individual partners. Partnership assets pay partnership creditors first; each partner's personal assets pay their personal creditors first (the dual-fund/joint-and-separate estates rule).

What is the basic structure for calculating a company's corporation tax liability?

Corporation tax is charged on a company's Taxable Total Profits (TTP) for an accounting period: TTP = income profits (trading profits, property income, non-trading loan relationship income) + chargeable gains − qualifying charitable donations. Tax = $\text{TTP} \times \text{corporation tax rate}$. From April 2023 the main rate is 25% (profits over £250,000), the small profits rate is 19% (profits up to £50,000), with marginal relief between.

How is marginal relief applied to corporation tax for profits between £50,000 and £250,000?

Companies with augmented profits between the lower limit (£50,000) and upper limit (£250,000) pay the 25% main rate reduced by marginal relief. The relief is calculated as: $$\text{MR} = F \times (U - A) \times \frac{N}{A}$$ where $F$ is the standard fraction ($\frac{3}{200}$), $U$ is the upper limit, $A$ is augmented profits, and $N$ is taxable total profits. The limits are divided by the number of associated companies.

How are dividends received by a shareholder taxed, and what is the dividend allowance?

Dividends are taxed as the top slice of an individual's income. A tax-free dividend allowance applies (£500 from 2024/25). Dividends above the allowance are taxed at: 8.75% (basic rate band), 33.75% (higher rate), and 39.35% (additional rate). Companies pay dividends out of post-corporation-tax distributable profits; there is no further corporation tax deduction for the company.

How are chargeable gains and capital allowances relevant to companies?

Chargeable gains on disposals of capital assets are computed (proceeds − allowable costs − indexation up to Dec 2017 for companies) and added to TTP, taxed at the corporation tax rate (companies do not get the CGT annual exempt amount or separate CGT rates). Capital allowances give tax relief for capital expenditure on plant and machinery (e.g. the Annual Investment Allowance and full expensing) as a deduction in computing trading profits.

How is a partnership taxed, including the principle of tax transparency?

A partnership is tax transparent — it is not itself taxed. The firm computes its profits, which are then allocated to partners in their profit-sharing ratio. Each partner is taxed individually on their share: income tax on income profits and CGT on their share of chargeable gains. The firm files a partnership return, but each partner accounts for their own tax (and Class 4 NICs on trading profits).

How is a sole trader taxed on business profits, and what are the income tax bands (2024/25)?

A sole trader pays income tax on trading profits (after the personal allowance, £12,570). For 2024/25: basic rate 20% on taxable income up to £37,700; higher rate 40% from £37,701 to £125,140; additional rate 45% above £125,140. The personal allowance tapers away by £1 for every £2 of income over £100,000. They also pay Class 2 (largely abolished/voluntary) and Class 4 NICs.

Compare the tax treatment of withdrawing money as a sole trader/partner versus a director-shareholder of a company.

A sole trader/partner is taxed on the whole business profit (income tax + Class 4 NICs) regardless of drawings — drawings are not a deductible expense. A director-shareholder can extract value as salary (deductible for the company, but income tax + employer/employee NICs) and/or dividends (paid from post-corporation-tax profit, no NICs, taxed at lower dividend rates), giving planning flexibility but two layers of potential tax (corporation tax then dividend tax).