CPA Intermediate Level

Company Law flashcards

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What did Salomon v A Salomon and Co Ltd decide, and what follows from it?

A duly incorporated company is a legal person separate from its members, even where one member holds almost all the shares and controls it. So the company owns its own property, makes its own contracts and can sue and be sued in its own name. Mr Salomon, as a secured debenture holder, ranked ahead of the company's unsecured creditors, because the debts were the company's, not his.

Who is liable on a contract made on behalf of a company before it is incorporated?

The company is not bound and cannot ratify it, because it did not exist when the contract was made (Kelner v Baxter). Under section 44 the contract takes effect as one made with the person who acted for the company, who is personally liable, subject to any agreement to the contrary. The company takes the benefit only by a new contract after incorporation (novation).

Whom do the articles of association bind, and who can enforce them?

They bind the company and its members as if each had signed them: a contract between the company and each member, and among the members. Only rights held in the capacity of member are enforceable (Hickman v Kent or Romney Marsh Sheep-Breeders' Association). An outsider, or a member suing in another capacity, gains nothing from them (Eley v Positive Government Security Life Assurance Co).

How do ordinary shares differ from preference shares?

Ordinary: full voting rights, a variable dividend after preference dividends, and the surplus on a winding up after creditors and preference holders. Preference: a fixed dividend paid first, cumulative unless the articles say otherwise, usually priority on a return of capital, and usually no vote except on class matters or when the dividend is in arrears.

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

Fixed: attaches at once to a specific, identified asset, which the company cannot dispose of free of the charge without the creditor's consent. Floating: a charge on a class of present and future assets that changes in the ordinary course of business, which the company may deal with until the charge crystallises (Re Yorkshire Woolcombers Association Ltd).

What majority does each type of resolution need, with an example of its use?

Ordinary resolution: a simple majority of the votes cast (section 256), for example declaring a dividend or appointing auditors. Special resolution: at least seventy-five per cent of the votes cast, with notice stating that it is a special resolution (section 257), for example altering the articles or changing the name. Removing a director or auditor is an ordinary resolution needing special notice of twenty-eight days (section 287).

What are the six general duties of directors under sections 142 to 147 of the Companies Act, 2015?

142: to act within powers. 143: to promote the success of the company. 144: to exercise independent judgement. 145: to exercise reasonable care, skill and diligence. 146: to avoid conflicts of interest. 147: not to accept benefits from third parties. They are owed to the company, not to the members individually.

What is a derivative claim under sections 239 to 242, and who receives what it recovers?

A claim a member brings on the company's behalf for negligence, default, breach of duty or breach of trust by a director. The member needs the court's permission to continue it; the court dismisses it if there is no prima facie case and refuses it if the act was authorised or ratified. Any recovery belongs to the company, because the wrong was done to the company.

In what order are a company's assets applied in a liquidation?

1. Fixed charge holders, out of their own assets. 2. The costs and expenses of the liquidation. 3. Preferential debts. 4. Floating charge holders, after a prescribed part is set aside for unsecured creditors. 5. Unsecured creditors, pari passu. 6. Deferred debts. 7. Members, according to their share rights.

How do you work out the maximum lawful dividend of a public company?

1. Available profits: accumulated realised profits less accumulated realised losses. 2. Net asset test: net assets less (called-up share capital + undistributable reserves, such as share premium and a revaluation reserve). The lawful dividend is the lower of the two. A private company applies only the first test.

When will a court pierce the veil of incorporation?