**BUSINESS LAW**

Businesses are central to economic wealth in the UK, and a solid understanding of business law is essential for solicitors across all practice areas — from corporate and commercial to family and criminal law. For example, knowledge of business structures and accounts is necessary when advising on divorce cases involving hidden assets or defending clients against fraud allegations.

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| | Part 1 Types of Business |

• Incorporated businesses (e.g. limited companies) — exist as a separate legal entity from their owners and managers. A key feature is that owners are generally not liable for the debts of the business.
• Unincorporated businesses (e.g. sole traders and partnerships) — run by individuals who have not created a separate legal entity, resulting in full personal liability for business debts.

The sole trader is the most common business medium in the UK. It involves a self-employed person owning the business outright, keeping all profits after expenses, and bearing all losses personally.

Unlimited Liability

There is no legal distinction between business and personal assets. If the business fails, personal assets — including bank accounts and property — can be used to pay creditors, potentially leading to personal bankruptcy.

A partnership is formed when two or more people "carry on a business in common with a view of profit" (Partnership Act 1890, s 1).

• Nature: Not a separate legal entity. Assets are owned by the partners and they remain personally and jointly liable for all partnership debts.
• Default Rules: The PA 1890 provides default terms that apply unless the partners enter into a written partnership agreement to disapply them.

Governed by the Limited Partnerships Act 1907. Must have at least one general partner (unlimited liability) and one limited partner (liability capped at their initial investment).

Restriction on Limited Partners

To maintain limited liability, the limited partner must not manage the business or take binding decisions on its behalf. Currently popular for specialised financial businesses such as venture capital funds.

Companies are formed by registering documents with the Registrar of Companies under the Companies Act 2006 (CA 2006). Unlike sole traders or partnerships, they cannot start trading until formal incorporation steps are completed.

**1.6.1 Private Companies Limited by Shares**

The most popular business medium, offering separate legal personality and limited liability.

• Limited Liability: Owners (shareholders) are generally not liable for company debts beyond the amount paid for their shares.

Case: Salomon v A Salomon and Co Ltd \[1897\] AC 22

Established that a legally incorporated company is an independent legal person, entirely separate from its members. The "corporate veil" can only be pierced in extremely rare cases where a person deliberately evades a legal obligation by interposing a company.

Case: Prest v Petrodel Resources Limited \[2013\] UKSC 34

Confirmed the very limited circumstances in which the corporate veil may be lifted — only where a person is under an existing legal obligation or liability and deliberately interposes a company to evade it.

• Decision-making: Responsibility is divided between directors (who manage day-to-day operations via board meetings) and shareholders (who provide finance and make major decisions via general meetings).

**1.6.2 Public Companies Limited by Shares (PLCs)**

A plc must comply with specific CA 2006 requirements: its name must end in "public limited company" or "plc"; its constitution must state its public status; and it must have a minimum allotted share capital of £50,000.

• More prestigious and can raise capital by offering shares to the public
• May apply to be traded on stock markets such as the London Stock Exchange or AIM
• More heavily regulated than private companies to protect public investors
• Can register as a plc upon original incorporation or re-register from a private company later

Formed under the Limited Liability Partnerships Act 2000 (LLPA 2000). An LLP is a "hybrid" between a company and a partnership — it has separate legal personality and limited liability like a company, but is taxed and run with the flexibility of a partnership.

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| Type | Key Feature |

| Companies Limited by Guarantee | Non-profits; members guarantee debts up to a small amount (usually £1) |

| Unlimited Companies | Rare — no liability protection for members |

| Community Interest Companies (CICs) | Businesses using profits for public good |

| Joint Ventures | Joint commercial enterprises between two or more parties; can take various legal forms |

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| Factor | Key Consideration |

| 1.9.1 Liability | Companies and LLPs offer limited liability; sole traders and partners risk personal assets |

| 1.9.2 Tax | Most advantageous form depends on specific financial circumstances of the owners |

| 1.9.3 Formalities | Unincorporated businesses have almost no formalities; companies must file minutes, registers, and accounts |

| 1.9.4 Publicity | Companies and LLPs must make financial and director information public; sole traders remain private |

| 1.9.5 Cost | Incorporated businesses are more expensive to form and run due to administrative burdens |

| 1.9.6 Status | Companies are often seen as more prestigious, particularly for international trade |

| 1.9.7 Finance | Companies and LLPs can grant floating charges over all assets, making them more attractive to lenders |

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| | Part 2 The Limited Company |

To incorporate, an applicant must submit Form IN01, a Memorandum of Association, and Articles of Association to Companies House with a fee. Applications can be made by individuals, solicitors, accountants, or company formation agents. Once satisfied, the Registrar issues a Certificate of Incorporation — conclusive evidence of registration.

**1.12.1 Company Name**

• Ending: Must end in "Limited" or "Ltd" ("plc" for public companies)
• Similarity: Cannot be the same as an existing company
• Prohibitions: Cannot be offensive or suggest unauthorised government connections
• Trading Names: Companies can trade under a "business name" different from their registered name
• Infringement: Trade mark searches should be performed to avoid "passing off" actions
• 1.12.2 Registered Office: Must be in the same part of the UK where the company is registered; used for official correspondence
• 1.12.3 First Directors: At least one natural person aged 16 or over
• 1.12.4 Addresses: Directors must provide a service address (public) and a residential address (private)
• 1.12.5 Company Secretary: Optional for private companies; mandatory for PLCs
• 1.12.6 First Shareholders (subscribers): No maximum number
• 1.12.7 Statement of Capital: Details the number and types of shares and the rights attached to them

The constitution consists primarily of the Articles of Association (the company rulebook) and the Memorandum of Association (the initial intent to form a company).

• Model Articles: A standard set of articles provided by regulations that apply by default if a company does not provide its own customised articles.
• Table A: The precursor to Model Articles for companies formed under the Companies Act 1985.
• Amending Articles: Shareholders can amend articles via a special resolution (75% majority).

Companies must identify and register anyone holding more than 25% of shares or voting rights, or having the right to appoint or remove a majority of directors. This information must be filed at Companies House to ensure transparency for third parties.

• Trading Certificate (SH50): A PLC must satisfy share capital requirements and obtain a trading certificate before it can trade or borrow.
• Re-registration: A private company can re-register as a PLC by passing a special resolution, altering its name and articles, and providing a balance sheet and auditors' statement proving it meets capital requirements.

Newly incorporated companies typically hold a first board meeting to address:

• Chairperson — deciding if the board will have a chair with a casting vote
• Bank Account — authorising individuals to manage company funds
• Company Seal — adopting an optional seal for official documents
• Accounting Date — aligning annual accounts with the tax or calendar year
• Auditor — appointing an auditor unless the company qualifies as "small" and is exempt
• Tax Registrations — registering for corporation tax, PAYE/NIC, and VAT
• Agreements — establishing insurance and potential shareholders' agreements

Because a company is an artificial legal person, it cannot make its own decisions — humans must act on its behalf. Directors are responsible for day-to-day management, while shareholders are involved in a limited number of major decisions (e.g. changing the company name or Articles).

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| Provision | Rule |

| MA 5 — Delegation | Directors can delegate responsibilities to specific directors or employees |

| MA 8 — Unanimous decisions | Directors can pass resolutions in writing without a formal meeting if all eligible directors agree |

| MA 9 — Notice | Notice of a board meeting must be given to all directors; must be "reasonable" and include time, date, and place |

| MA 11 — Quorum | Default quorum is two directors |

| MA 13 — Casting vote | The chairperson has a casting vote to break ties |

| MA 14 — Interested directors | An interested director generally cannot vote or count in the quorum for that decision |

| s 177 CA 2006 — Declaration | Directors must declare any personal interest in a proposed transaction to the board |

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| Type | Majority Required / Rules |

| Ordinary Resolution | More than 50% of votes cast |

| Special Resolution | 75% or more of votes cast; must be filed at Companies House |

| Notice period (standard) | 14 clear days (excluding day of service and day of meeting) |

| Short notice | Majority holding at least 90% of voting shares (95% for PLCs) must consent |

| Quorum | Default: 2 shareholders |

| Poll vote | One vote per share — overrides show of hands; can be demanded by chair, directors, or shareholders with 10%+ of voting rights |

| Written resolutions (private companies only) | Passed when required majority of ALL eligible members agree; lapses after 28 days by default |

• Shareholders holding 5%+ of voting rights can requisition a written resolution or call a general meeting
• Special resolutions and certain ordinary resolutions must be filed at Companies House
• Companies must maintain statutory books (registers of members, directors etc.) and keep minutes for 10 years
• Directors must file annual confirmation statement (CS01) to keep public records accurate

• Becoming a shareholder: As a subscriber at incorporation; via allotment of new shares by the company; or via transfer or transmission of existing shares.
• Records: Register of members must be maintained; share certificates must be issued within 2 months of any change.
• PSC Register: Companies must keep a register of People with Significant Control (those with >25% shares or voting rights).

• Ordinary Shares: Most common; typically carry voting rights and dividend rights based on profitability.
• Preference Shares: Enhanced financial rights (e.g. fixed dividend), often in exchange for foregoing voting rights.

**2.9.3 Protection of Minority Shareholders**

• Unfair Prejudice Petition (s 994 CA 2006): Any shareholder can petition the court if the company's affairs are conducted in a way that causes them unfair harm.
• Derivative Claims (s 260 CA 2006): Shareholders can instigate a claim on the company's behalf against a director for negligence or breach of duty.

Directors are responsible for the day-to-day management of a company, including entering into contracts and making business decisions.

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| Type | Key Point |

| Minimum number | Private: 1 director; Public: 2 directors; At least 1 must be a natural person aged 16+ |

| Corporate directors | Currently permitted but SBEEA 2015 will require all directors to be natural persons (not yet in force) |

| Executive Directors | Board member + employment contract (service agreement); fills a specific role (e.g. Finance Director) |

| Non-Executive Directors (NEDs) | Board member providing objective oversight; no employment contract; receive fees for meetings |

| De facto directors | Act as directors without valid appointment |

| Shadow directors | Persons whose instructions the board is "accustomed to act" upon (s 251(1) CA 2006) |

| Sole directors | Can make decisions alone under MA 7(2) in a private company |

• Actual Authority: Arises when the board gives express or implied consent for a director to act on the company's behalf.
• Apparent Authority: Arises when the company represents to a third party that a director has authority, even if they do not. The company is then estopped from denying that authority. If a director lacks both types, they may be personally liable for the contract.

Any service contract with a guaranteed term of more than two years requires approval by shareholders via an ordinary resolution (s 188 CA 2006). If approval is not obtained, the long-term guarantee is void — though the rest of the contract remains enforceable.

• Removal (s 168 CA 2006): Shareholders can remove a director by ordinary resolution at a general meeting. Requires "special notice" of at least 28 days. The director has the right to make written representations and speak at the meeting (s 169).

Bushell v Faith Clauses

Articles may include "Bushell v Faith" clauses, which provide weighted voting rights to a director/shareholder if a resolution to remove them is proposed — making removal practically very difficult.

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| Duty | Summary |

| s 171 — Act within powers | Follow the constitution; use powers only for authorised purposes |

| s 172 — Promote company success | Act in good faith to promote success for the benefit of members as a whole (subjective test); consider long-term, employees, environment |

| s 173 — Independent judgement | Do not let discretion be dictated by others |

| s 174 — Care, skill, diligence | Dual test: (a) objective standard (role) + (b) subjective standard (specific director's knowledge and experience) |

| s 175 — Avoid conflicts | Must not exploit company property, information, or opportunities for personal gain |

| s 176 — Third-party benefits | Must not accept bribes or excessive benefits given because of their directorship position |

| s 177 — Declare interests | Must disclose any personal interest in a proposed contract before the company enters it |

Important

Directors owe these duties to the company itself — NOT to shareholders or creditors (except where the company approaches insolvency, when duties to creditors increase in importance).

• Civil consequences of breach (ss 171–177): Account of profits, damages, rescission of contracts, or injunctions.
• Ratification: Shareholders can ratify a breach by ordinary resolution — but the breaching director's own votes (if also a shareholder) do not count.
• s 182 — Interest in existing transactions: If a director becomes interested in a transaction AFTER it was made, they must declare it as soon as practicable. Failure is a criminal offence.

• Wrongful trading (s 214 IA 1986): Director knew (or should have known) there was no prospect of avoiding insolvency and failed to take every step to minimise creditor losses. Court can order personal contribution to company assets.
• Fraudulent trading (s 213 IA 1986): Carrying on business with the specific intent to defraud creditors.
• Misfeasance (s 212 IA 1986): Summary remedy for any breach of fiduciary duty discovered during liquidation.

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| Control | Key Rule |

| s 190 — Substantial Property Transactions | Assets over £100,000 (or over 10% of net assets and over £5,000) between company and director require ordinary resolution |

| s 197 — Loans to directors | Loans or guarantees for directors generally require shareholder approval by ordinary resolution |

| s 217 — Payment for loss of office | Payments over £200 (not a legal entitlement) require shareholder approval |

| CDDA 1986 — Disqualification | Directors can be disqualified for 2–15 years for indictable offences, persistent filing breaches, or "unfitness" in insolvency |

Companies obtain finance through equity finance (investors paying for shares) or debt finance (borrowing money). This chapter addresses equity finance — how shares are allotted, how ownership is transferred, and how a company can buy back its own shares.

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| Method | Effect |

| Allotment | Company creates NEW shares → increases total number of shares in the company |

| Transfer | Shareholder sells/gives EXISTING shares → total number stays the same; only the owner changes |

| Buyback | Company reabsorbs and CANCELS own shares → reduces total number; increases remaining shareholders' percentage |

**4.3.1 Constitutional Restrictions on Allotment**

Check Articles of Association for any ceiling on shares. For companies formed before October 2009, Authorised Share Capital (ASC) may need to be removed by ordinary resolution before new shares can be allotted.

**4.3.2 Directors' Authority to Allot**

• Post-2006 Private Companies with one class of share: Automatic authority under s 550 CA 2006.
• PLCs and Private Companies with multiple classes: Require authority from shareholders via ordinary resolution or provision in Articles under s 551 CA 2006 (can last up to 5 years).

**4.3.3 Pre-Emption Rights (s 561 CA 2006)**

Existing shareholders have a "right of first refusal" to buy new equity securities in proportion to their current holding — to prevent their voting power being diluted.

• Exceptions: Bonus shares; shares issued for non-cash consideration (e.g. property); employee share schemes
• Disapplication: Shareholders can waive these rights via special resolution or specific Articles provisions

• Payment (MA 21): Shares must be fully paid at the time of allotment. If shares are sold for more than their nominal value, the excess goes to a share premium account (subject to capital maintenance rules).
• Administration after allotment: File Form SH01 at Companies House within 1 month; update register of members within 2 months; issue share certificates within 2 months.

• Process: Transferor signs a stock transfer form and gives it to the transferee along with the share certificate. If sale exceeds £1,000, stamp duty (0.5%) must be paid.
• Board discretion: Under MA 26, the board can refuse to register a transfer. The transferee does not become a legal shareholder until their name is entered in the register of members.
• Transmission: Automatic process on death (to personal representatives) or bankruptcy (to trustee in bankruptcy). Representatives entitled to dividends but must elect to be registered as members.

Capital Maintenance Principle

A company's share capital must be preserved for the protection of creditors. Companies generally cannot return capital to shareholders or pay dividends out of capital — they must use distributable profits.

**4.6.1 – 4.6.2 Off-Market Purchase (Most Common)**

• Articles must not forbid buybacks
• Shares must be fully paid and paid for at time of purchase
• Ordinary resolution required to approve the buyback contract
• The selling shareholder cannot vote on the resolution
• Directors must ensure company has sufficient cash and fulfil s 172 duties

**4.6.3 – 4.6.4 Buyback Out of Capital (Private Companies Only)**

• Directors must sign a statement of solvency
• Auditors' report must confirm the directors' opinion is reasonable
• Special resolution required from shareholders
• Notice published in the London Gazette and a national newspaper (creditor objection period)
• Payment out of capital must occur 5 to 7 weeks after the special resolution is passed

Dividends are the distribution of a company's distributable profits to shareholders. Directors decide whether to recommend a dividend and the amount; shareholders must then approve (declare) it via an ordinary resolution.

Debt finance occurs when a business obtains funding by borrowing money. While sole traders and partnerships can also take loans, this chapter emphasises procedures and regulations specific to companies and LLPs.

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| | Part 1 Types of Debt Finance |

Companies must check Articles of Association and Memorandum (if formed before October 2009) for restrictions on borrowing. If restrictions exist, remove via special resolution. Directors typically have authority to borrow under Model Article 3.

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| Type | Key Feature |

| Secured Loan | Business gives lender rights over property → lower interest rates than unsecured |

| Overdraft Facility | "Uncommitted facility" repayable on demand; flexible but expensive due to high interest rates |

| Term Loan | Fixed amount for a specified period; used to purchase capital assets; bilateral (one lender) or syndicated (multiple lenders) |

| Revolving Credit Facility | Flexible maximum limit; can borrow, repay, re-borrow throughout the term; useful for uneven income streams |

• 5.7.1 Payment — amount, currency, and availability period
• 5.7.2 Repayment — bullet payments (total at end), amortisation (equal instalments), or balloon repayments (larger final instalment)
• 5.7.3 Interest — fixed or floating (variable based on base rate formula)
• 5.7.4 Express covenants — contractual promises to do or not do things (e.g. provide financial info, not dispose of assets, limit dividends)
• 5.7.6 Events of default — specific breaches (missed payments, insolvency) allowing lender to terminate the agreement

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| Factor | Debt vs Equity |

| Risk | Loans less risky for investors — interest is a contractual liability paid before dividends |

| Control | Shareholders have voting rights; lenders generally do not (unless the contract is breached) |

| Tax | Interest payments are tax-deductible trading expenses; dividends are NOT |

| Gearing | High debt-to-equity ratio increases insolvency risk |

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| | Part 2 Security |

Sole traders and general partnerships can only grant fixed charges. Only companies and LLPs can grant floating charges.

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| Type | Key Feature |

| Mortgage | Highest form of security; transfers legal ownership to lender (except for land) |

| Fixed Charge | Specific, identified assets (e.g. machinery); borrower cannot sell without lender's consent |

| Floating Charge | Hovers over a changing class of assets (e.g. stock); business can deal freely until "crystallisation" on default/insolvency |

| Book debts | Can be fixed or floating depending on level of control lender exerts over proceeds |

| Personal guarantee | Individual guarantees company's debt personally |

| Pledge | Physical delivery of asset to lender as security |

| Lien | Lender retains possession of goods |

| Retention of title | Seller retains ownership until payment received |

Priority of Charges

Fixed charges always take priority over floating charges (even if the floating charge was created first). Between identical types of registered charges, priority is determined by date of CREATION, not date of registration.

• Process: Charges must be registered at Companies House using Form MR01 (and certified copy of the charge) within 21 days of creation.
• Failure to register: The charge becomes void against a liquidator, administrator, or other creditors, and the debt becomes immediately repayable.
• Negative pledge: A clause in a floating charge prohibiting later charges with priority. If a subsequent lender has actual knowledge of this clause, they lose priority.

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| | Part 1 General Partnerships |

Under s 1 of the Partnership Act 1890 (PA 1890), a partnership exists when two or more persons are "carrying on a business in common with a view of profit." Partners can be individuals or companies. No separate legal personality.

Why Operate as a Partnership?

No formalities required — the relationship exists as soon as the legal definition is met. No administrative or filing requirements. However, partners have unlimited personal liability for all business debts.

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| Provision | Default Rule / Key Point |

| 6.6.1 Name | Must not include "Limited", "LLP", or "plc"; must not be offensive or suggest government connection |

| 6.6.4/5 Work input | Default: partners may manage but are not required to work |

| 6.6.6 Decision-making | Most decisions by majority; changing nature of business, introducing new partners, or changing agreement require unanimous consent |

| 6.6.7/8 Financial input | Default: equal share of all capital, profits, and losses |

| 6.6.9 Drawings | Partners are owners not employees; income is "drawings" from profit |

| 6.6.11 Expulsion | Default: partners cannot be expelled unless express power is in written agreement |

| 6.6.12 Dissolution | Default: immediate dissolution on notice, death, or bankruptcy; agreement should provide "partial dissolution" clause |

| 6.6.15 Distribution on dissolution | 1\. Third-party creditors → 2. Partner loans → 3. Partner capital → 4. Surplus |

• Actual authority: Firm bound by contracts entered into by partners with express or implied authority.
• Apparent authority: Firm liable if a partner's transaction relates to the usual business of the firm and the third party did not know the partner lacked authority.
• Joint and several liability: Partners are personally liable for all partnership debts incurred while they were partners.
• Leaving the firm: An outgoing partner remains liable for old debts unless there is a novation agreement with the creditor. Must give actual notice to existing contacts and publish in the London Gazette.
• Holding out: A person held liable if they represent themselves as a partner to a creditor who relies on that representation.

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| | Part 2 Limited Liability Partnerships (LLPs) |

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| Feature | Detail |

| Incorporation | File form LL IN01 at Companies House; at least 2 members; name must end in "LLP" or "limited liability partnership" |

| Designated members | At least 2; responsible for filing accounts, confirmation statements; owe duty of reasonable care and skill |

| Liability | Members have limited liability; but may be liable for wrongful/fraudulent trading if insolvent |

| Property | The LLP itself (not individual members) owns its property |

| Floating charges | Can grant floating charges — an advantage over general partnerships for securing finance |

| Membership changes | New members join per LLP agreement; Companies House notified within 14 days |

| Default terms | LLP Regulations 2001 apply if no agreement: equal profit share, right to manage, no right to expel members |

| Advantages | Limited liability, floating charges, flexible management structure |

| Disadvantages | Public disclosure of financial accounts; administrative burdens similar to a company |

The Formula

Trading Profit = Chargeable Receipts LESS Deductible Expenditure LESS Capital Allowances

• Chargeable receipts: Income-natured receipts derived from the trade (money received for goods or services). Capital receipts are excluded.
• Deductible expenditure: Must be (i) income in nature; (ii) incurred "wholly and exclusively" for purposes of trade; (iii) not prohibited by statute. Entertainment costs and some car leasing costs are specifically barred.
• "Wholly and exclusively" test: If an expense has a dual purpose (business and personal), it is generally not deductible. However, HMRC allows apportionment where there is an identifiable business proportion (e.g. home office heating costs).

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| Allowance | Rate / Limit |

| Writing Down Allowance (WDA) | 18% per year on pooled plant and machinery value |

| Annual Investment Allowance (AIA) | 100% deduction for qualifying P&M in the year of purchase; limit: £1,000,000 |

| Plant and machinery | Apparatus for business use (equipment, tools, computers, furniture); excludes stock in trade |

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| Type of Relief | How it Works |

| 7.12.1 Start-up loss relief | Losses in first 4 tax years can be carried back 3 years against total income |

| 7.12.2 Carry-across / 1-year carry-back | Set against total income of same tax year or preceding year |

| 7.12.3 Set-off against capital gains | Unabsorbed losses from carry-across can be set against chargeable capital gains |

| 7.12.4 Carry-forward relief | Set against subsequent profits from same trade indefinitely until exhausted |

| 7.12.5 Terminal carry-back (12 months) | Losses in final 12 months can be carried back against trading profits of final year + 3 prior years |

| 7.12.6 Carry-forward on incorporation | If business transferred to company for 80%+ shares, losses set against future salary/dividends from that company |

| 7.12.7 Cap on reliefs | Capped at greater of £50,000 or 25% of total income (for non-trade income only) |

VAT is charged at 20% on the supply of most goods and services. Businesses charge "output tax" to customers and deduct "input tax" paid on their own purchases, paying the difference to HMRC.

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| Concept | Detail |

| Mandatory registration threshold | £85,000 in taxable supplies over 12 months |

| Zero-rated supplies | No VAT charged (e.g. food, books); seller CAN reclaim input tax |

| Exempt supplies | No VAT charged (e.g. residential land, health services); seller CANNOT reclaim input tax |

| Returns / payment | Due 1 month after end of each quarter |

| Tax invoices | Must show VAT number and rate; allows other taxable persons to reclaim input tax |

| Penalties | HMRC can impose criminal and civil penalties for non-compliance or late payments |

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| | Part 1 Corporate Insolvency |

A company is legally insolvent if it:

• Fails to pay a statutory demand for a debt over £750 within 21 days
• Has an unsatisfied court judgment against it
• Cannot pay debts as they fall due (cash flow test)
• Has liabilities exceeding its assets (balance sheet test)

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| Route | Key Feature |

| Compulsory liquidation (8.6) | Initiated by third party (usually creditor) presenting a winding-up petition to court |

| Creditors' Voluntary Liquidation (CVL) (8.7) | Started by the company when directors/shareholders agree it is insolvent; most common form |

| Members' Voluntary Liquidation (MVL) (8.8) | For SOLVENT companies wishing to close in an orderly fashion |

| Administration (8.20) | Administrator appointed to rescue company as going concern or achieve better result for creditors than liquidation |

| Company Voluntary Arrangement (CVA) (8.31) | Binding contract where creditors accept partial/delayed payment; requires 75% in value of creditors to approve |

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| Challenge | Time Limit / Rule |

| s 245 — Void floating charges | Floating charges for past debts void if granted within 2 years (connected persons) or 12 months (others) before insolvency |

| s 239 — Preferences | Paying one creditor ahead of others with "desire to prefer" within specific periods before insolvency |

| s 238 — Transactions at undervalue | Gifts or sales significantly below market value within 2 years before insolvency |

| s 214 — Extortionate credit | Grossly exorbitant credit agreements within 3 years before insolvency |

| s 423 — Defrauding creditors | Transactions hiding assets from creditors — NO time limit |

Order of Payment

1\. Fixed charge holders (from their specific security)

2\. Liquidation expenses

3\. Preferential debts (employee wages up to £800, holiday pay; HMRC as secondary preferential creditor for VAT and PAYE since December 2020)

4\. Floating charge holders (subject to ring-fencing for unsecured creditors)

5\. Unsecured creditors (pari passu — share pro-rata)

• Administration objectives: (1) Rescue company as going concern; (2) achieve better result for creditors than liquidation; (3) realise assets for secured or preferential creditors.
• Court route: Court must be satisfied company likely unable to pay its debts and that administration is likely to succeed.
• Out-of-court route (company/directors): File statutory declaration that company is unable to pay its debts.
• QFCH appointment: A Qualifying Floating Charge Holder (e.g. bank) can appoint an administrator once their security is enforceable.
• Statutory moratorium: Protects the company from legal action while the administrator proposes a plan to creditors.
• Duration: Automatically ends after 1 year unless extended.
• Pre-pack administration: Sale of business agreed before company enters administration; completes immediately upon administrator's appointment.

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| | Part 2 Personal Insolvency |

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| Concept | Detail |

| Definition | Cannot pay debts currently due or no reasonable prospect of paying future debts |

| Proving insolvency | Unpaid statutory demand for £5,000+ or unsatisfied court judgment |

| Bankruptcy (8.38) | Debtor's assets vest in trustee in bankruptcy; usually discharged after 1 year |

| Bankruptcy petition (8.39) | Creditor petition for debts over £5,000 OR debtor's online application to an adjudicator |

| Bankrupt's property (8.41) | Most assets vest in trustee; bankrupt can keep tools of trade and basic items; excess income via IPA |

| Bankrupt's home (8.42) | Interest passes to trustee; trustee has 3 years to deal with it |

| Discharge (8.51) | Automatic after 1 year; releases from most debts |

| Restrictions on bankrupts (8.52) | Cannot be a director; cannot obtain >£500 credit without disclosure; BROs up to 15 years for culpable debtors |

| Transactions at undervalue (8.45) | 5-year look-back period before bankruptcy petition |

| Preferences (8.46) | 6 months (or 2 years for relatives/associates) before petition |

| Defrauding creditors (8.47) | No time limit |

| Alternatives (8.53) | IVA (Individual Voluntary Arrangement); Debt Relief Order (DRO); informal negotiation |

Income tax is the UK government's largest revenue source, governed primarily by the Income Tax Act 2007, ITTOIA 2005, and ITEPA 2003. The tax year runs from 6 April to 5 April the following year.

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| Step | Action |

| Step 1 | Calculate total income (trading, property, savings, employment income; exempt items include ISA interest, personal injury damages) |

| Step 2 | Deduct allowable reliefs (e.g. qualifying loan interest) to find NET income |

| Step 3 | Deduct personal allowances to find TAXABLE income |

| Step 4 | Apply tax rates to each category (slice) |

| Step 5 | Add totals to find overall liability |

| | |

| --- | --- |

| Allowance | Amount |

| Standard Personal Allowance | £12,500 |

| Income limit (taper) | Reduced by £1 for every £2 of net income above £100,000; disappears at £125,000 |

| Marriage Allowance | £1,250 transfer between spouses |

| Blind Person's Allowance | £2,500 |

| Property / Trading Allowance | £1,000 each |

| Personal Savings Allowance (PSA) | £1,000 (basic rate taxpayer); £500 (higher rate) |

| Dividend Allowance | £2,000 for all taxpayers |

| | | | |

| --- | --- | --- | --- |

| Income Type | Basic Rate | Higher Rate | Additional Rate |

| NSNDI (non-savings non-dividend) | 20% | 40% | 45% |

| Savings income | 20% (0% starting rate if NSNDI is low) | 40% | 45% |

| Dividend income | 7.5% | 32.5% | 38.1% |

Order of Taxation

Income is taxed in "slices": NSNDI is the bottom slice, savings income is the middle, and dividends are the top slice.

• Sole traders: Taxed on profits of the accounting period ending in the tax year. First year: taxed from commencement to following 5 April. Second year: full 12-month period, often creating "overlap profit" taxed twice but reclaimable. Final year: taxed from end of last period to cessation, minus overlap profit.
• Partnerships: Profits calculated for the firm then shared between partners. Each partner is personally responsible for tax on their share.

• PAYE: Tax deducted at source by employers for employment income.
• Self-assessment: Used for untaxed income (rent, trading profits). Paper returns by 31 October; online returns and final payment by 31 January.
• Payments on account: Due 31 January and 31 July for those with significant untaxed income.

General Anti-Avoidance Rule (GAAR)

HMRC uses GAAR to target "abusive" tax arrangements — those that involve contrived steps to exploit loopholes and "cannot reasonably be regarded as a reasonable course of action." Enablers of such schemes can face penalties.

CGT is charged on chargeable gains made by individuals, personal representatives, partners, and trustees on disposal of chargeable assets. Governed by the Taxation of Chargeable Gains Act 1992 (TCGA 1992). Companies do not pay CGT — they pay corporation tax instead.

| | |

| --- | --- |

| Category | Rate |

| Standard assets | 10% (basic rate) / 20% (higher rate) |

| Residential property (not main home) | 18% (basic rate) / 28% (higher rate) |

| Business asset disposal relief | 10% flat rate; lifetime cap of £1 million |

| Trustees and PRs | 20% standard / 28% residential property |

Death is NOT a Disposal

Death is not a chargeable disposal. Personal representatives acquire assets at "probate value" (market value at death), wiping out any gains accrued during the deceased's lifetime.

The Formula

Gain = Proceeds of Disposal MINUS Cost of Asset

Allowable deductions: Purchase price / market value / probate value + incidental acquisition costs (legal fees, stamp duty, valuation fees) + enhancement expenditure still reflected at disposal + incidental disposal costs (legal fees, estate agent commission)

| | |

| --- | --- |

| Relief | Key Rule |

| 10.9.1 Rollover relief | Postpones CGT on qualifying business assets if proceeds reinvested within 1 year before or 3 years after disposal |

| 10.9.2 Rollover on incorporation | Gain rolled into acquisition cost of shares when business transferred to a company wholly or mainly for shares |

| 10.9.3 Hold-over relief | Defer tax on gifts of qualifying business assets; donee takes over donor's original cost; tax paid on donee's disposal |

| 10.9.4 Business asset disposal relief | 10% rate; requires disposal of whole business or shares in personal trading company where disponer is officer/employee; £1m lifetime cap |

| 10.9.5 Wasting assets | Tangible moveable property with predicted life <50 years generally exempt |

| 10.9.5 Chattels exemption | Moveable property sold for £6,000 or less is exempt |

| 10.9.6 Principal private residence | Gains on individual's only or main residence fully exempt |

| 10.9.7 Personal injury damages | Entirely exempt |

• Annual exemption (2020/21): £12,300. Deducted from aggregated net gains. Apply to highest-rate gains first (residential property).
• Current year losses: Must be used against current gains (even if this wastes the annual exemption). Unused losses carried forward indefinitely.
• Spouses/civil partners: Transfers made on a "no gain/no loss" basis, allowing assets to be moved to the person who can make best use of their annual exemption or lower rate.
• CGT payment deadline: 31 January following end of tax year. Residential property: provisional payment within 30 days of completing the sale.

Companies pay corporation tax (not income tax or CGT) on their total profits. The financial year runs 1 April to 31 March. Standard rate for Financial Year 2020: 19%.

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| --- | --- |

| Step | Action |

| Step 1 | Calculate income profits (trading profit: chargeable receipts – deductible expenses – capital allowances; plus property income and interest) |

| Step 2 | Calculate chargeable gains (proceeds – costs – indexation allowance frozen Dec 2017) |

| Step 3 | Add income profits + gains = total profits; deduct reliefs (trading losses, charitable donations) |

| Step 4 | Apply 19% rate to taxable profit figure |

| | |

| --- | --- |

| Type | How it Works |

| 11.4.1 Carry-across / carry-back | Set against total profits of same accounting period or previous 12 months |

| 11.4.2 Terminal carry-back | Company stops trading: carry back to prior 3 years of total profits |

| 11.4.3 Carry-forward | Unused losses carried forward indefinitely against total profits (for losses post-1 April 2017) |

**11.6.1 Close Companies**

A close company is controlled by 5 or fewer "participators" (shareholders) or any number of director-participators. If a close company lends money to a participator, it must pay a 32.5% "deposit" to HMRC, refunded only when the loan is repaid or written off.

**11.6.2 Groups of Companies (75% Groups)**

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| --- | --- |

| Group Provision | Effect |

| Group Relief | Transfer trading losses between group companies to reduce recipient's taxable profit |

| Chargeable Gains | Transfer assets between group companies on "no gain/no loss" basis |

| Rollover Relief | Gains on disposal outside group rolled over into assets purchased by a different group company |

| VAT | Group companies can register under a single VAT number |

| Stamp Duty | Generally exempt on inter-group asset transfers |

| | |

| --- | --- |

| Obligation | Deadline |

| Notify HMRC of first accounting period | Within 3 months of start of first period |

| Standard companies | 9 months and 1 day after end of accounting period |

| Large companies (>£1.5m profits) | 4 quarterly instalments starting during the accounting period |

| Very large companies (>£20m profits) | All 4 instalments during the accounting period |

• Business owners — for assessment and planning
• Banks — when considering lending decisions
• Solicitors — during the purchase or sale of a business
• HMRC — for assessing tax liability
• Companies House — companies required to file accounts annually

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| --- | --- |

| Category | Definition |

| Income | Earnings from trade or services |

| Expenses | Short-term costs required for operation (e.g. utility bills) |

| Assets | Items owned providing long-term benefit (premises, machinery, cash, debtors) |

| Liabilities | Amounts owed (bank loans, creditors) |

Double Entry Bookkeeping

Every transaction has two aspects recorded in Debit (DR) and Credit (CR) columns. Periodically, these balances are totalled to create a trial balance — where total DR must equal total CR.

• Profit and Loss Account: Formula: Income – Expenses = Profit. Only includes income and expense items.
• Trading Account: For businesses buying and selling goods: calculates gross profit (Sales – Cost of Sales) before other P&L expenses.
• Balance Sheet: "Snapshot" of value on a specific date. Formula: Assets – Liabilities = Net Worth.
• Fixed assets: Long-term items (premises, machinery).
• Current assets: Short-term items (stock, cash, debtors).
• Current liabilities: Due within 12 months.
• Long-term liabilities: Due after 12 months.

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| --- | --- |

| Adjustment | Treatment |

| Outstanding expenses (Accruals) | Unpaid bills: shown as expense AND liability |

| Prepayments | Payments made in advance: shown as asset |

| Work in progress | Work done but not yet billed: shown as asset |

| Closing stock | Stock remaining at year-end: current asset |

| Bad and doubtful debts | Unlikely to be paid: written off as expense or provisioned |

| Depreciation | Decrease in asset value over time: recorded as expense |

| Revaluation | Increase in property value: recorded as capital reserve |

• Appropriation account: Shows exactly how net profit is divided among partners (after deducting partner "salaries" and interest on capital, which are mechanisms for allocating profit, not actual employment income).
• Capital account: Records each partner's original and additional capital contributions.
• Current account: Records each partner's share of profits less drawings.
• Changes in partners: If membership changes mid-year, profit is apportioned into two periods with separate appropriation accounts.

• Share capital account: Replaces individual partner capital accounts; shares recorded at nominal (par) value; excess recorded in share premium account.
• Directors' salaries: A company expense shown in the P&L (unlike partners' "salaries" which are appropriations of profit).
• Corporation tax: Shown as a liability in company accounts (unlike unincorporated businesses).
• Retained profit: Profit not distributed as dividends or paid as tax held in the profit and loss reserve.

| | |

| --- | --- |

| Reserve Type | Can it be Distributed? |

| Revenue reserves (e.g. P&L reserve) | YES — available for distribution |

| Capital reserves (e.g. share premium) | NO — cannot be distributed to shareholders |

| | | |

| --- | --- | --- |

| Terminology | UK GAAP (FRS 102) | International (IFRS) |

| Sales | Turnover | Revenue |

| Debtors | Debtors | Receivables |

| Creditors | Creditors | Payables |

• Annual report requirements (large/public companies): Profit and Loss account + Balance Sheet + Strategic Report + Directors' Report + Auditors' Report + Notes to the accounts.

END OF DOCUMENT — BUSINESS LAW AND PRACTICE

All 12 Chapters | Fully Enhanced and Cross-Referenced