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

24 sample cards from the Business Law and Practice (FLK1) deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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).

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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).

18. 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.

19. 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.

20. 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.

21. 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.

22. 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).

23. 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.

24. 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).

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Business Law and Practice (FLK1) flashcards FAQ