Essential Business Law and Practice for SQE1 Essential Business Law and Practice for SQE1 explains the key principles of business law and practice as required for the Solicitors Qualifying Examination (SQE) Part 1, in a clear, easy-to-follow style. The key principles of law in each topic are introduced together with concise examples of how each principle can be applied, and the book includes a range of supporting features: ● Commercial awareness talking points reinforce the book’s strong focus on commercial awareness throughout. ● Multiple-choice questions: Each section of the book provides multiple-choice questions following the SQE1 question format (with answers to enable you to test your knowledge). Further multiple-choice questions and answers are also provided on the companion website. ● Problem questions: To test understanding and analytical skills applied to practical scenarios. A companion website also provides suggested answers. ● Revision points: Each chapter concludes with a concise list of key revision points. Part of Routledge’s Essential Law for SQE1 series, this concise and accessible text provides a clear understanding of the business law and practice element of SQE1 and enables you to test your assessment skills. Without the assumption of any prior knowledge of Business Law and Practice, it is suitable for non-law graduates. Bill Davies is Dean of the Faculty of Law, Crime and Justice at University of Winchester. He teaches company and commercial law. Rachel Cooper is Course Leader for undergraduate Accounting and Finance courses at the University of Worcester. She teaches management accounting and strategy. Essential Law for SQE1 Essential Law for SQE1 Series editor: Wendy Laws Essential Law for SQE1 is a series of concise textbooks aligned to the latest SQE1 curriculum. Providing candidates with an accessible summary of the core principles in each area of law, the style of each book is precise, with bullet-point lists summarizing key information and revision points concluding each chapter. The books also feature multiple choice questions with answers, example problem questions and a glossary of key cases. For more information about this series, please visit: www .routledge .com/ Essential Tort Law for SQE1 Wendy Laws Essential Dispute Resolution for SQE1 Ben Waters Essential Business Law and Practice for SQE1 Bill Davies Essential Business Law and Practice for SQE1 Bill Davies with contributions from Rachel Cooper Designed cover image: amtitus / Getty Images First published 2023 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2023 Bill Davies The right of Bill Davies to be identified as author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-032-26754-8 (hbk) ISBN: 978-1-032-26753-1 (pbk) ISBN: 978-1-003-28976-0 (ebk) DOI: 10.4324/9781003289760 Typeset in The Sans by Deanta Global Publishing Services, Chennai, India Access the SQE Companion Website here: www. routledge. com/ cw/ sqe Contents Introduction xiii Part 1: Choosing a business form 1 1 Business organisations 3 1.1 Chapter overview 3 1.2 Sole traders 3 1.3 Ordinary partnerships 4 1.4 Limited liability partnerships 4 1.5 Private limited companies 5 1.6 Public limited companies 6 1.7 Commercial awareness talking point 6 Chapter 1 revision points 7 Part 2: Private limited companies 9 2 Formation of the company 11 2.1 Chapter overview 11 2.2 Incorporation 11 2.3 Limited liability and separate legal personality 11 2.4 When separate legal personality does not apply 12 2.5 Unexpected consequences of separate legal personality 13 2.6 Pre-incorporation contracts 13 2.7 Requirements for registration 14 2.8 Initial financing considerations 14 2.9 Commercial awareness talking points 15 Chapter 2 revision points 15 3 The constitution of the company 17 3.1 Chapter overview 17 3.2 The articles of association 17 3.3 Model articles 17 3.4 Model articles with amendments 18 3.5 The articles as a contract 18 3.6 Amending the articles 19 vi Contents 3.7 Shareholders’ agreements 19 3.8 Commercial awareness talking points 19 Chapter 3 revision points 21 4 Roles in the company 23 4.1 Chapter overview 23 4.2 Shareholders/members 23 4.3 Different types of shareholder 23 4.4 Directors 24 4.5 De facto and shadow directors 24 4.6 Company secretaries 25 4.7 Auditors 25 4.8 Other stakeholders in the company 25 4.9 Commercial awareness talking points 25 Chapter 4 revision points 26 5 Financing the company 27 5.1 Chapter overview 27 5.2 Equity and debt finance 27 5.3 The nature of shares 27 5.4 Ordinary shares 27 5.5 Preference shares 28 5.6 Share dividends 28 5.7 Allotting and issuing shares 28 5.8 Allotting shares in private companies with only one class of share 29 5.9 Allotting shares in private companies with more than one class of share 29 5.10 Pre-emption rights 29 5.11 Transferring shares 29 5.12 Share buybacks 29 5.13 Types of debt capital 30 5.14 Fixed and floating charges 30 5.15 Personal guarantees 31 5.16 Commercial awareness talking points 31 Chapter 5 revision points 32 6 Shareholders’ decision-making 33 6.1 Chapter overview 33 6.2 Ordinary resolutions 33 6.3 Special resolutions 34 6.4 General meetings 34 6.5 Written resolutions 35 6.6 Minutes 35 6.7 Commercial awareness talking point 35 Chapter 6 revision points 36 Contents vii 7 Directors’ decision-making 37 7.1 Chapter overview 37 7.2 Board resolutions 37 7.3 Board meetings 37 7.4 Commercial awareness talking point 38 Chapter 7 revision points 38 8 Directors’ duties 39 8.1 Chapter overview 39 8.2 To whom are the duties owed? 39 8.3 Duty to act within powers 39 8.4 Duty to promote the success of the company 40 8.5 Duty to exercise independent judgement 41 8.6 Duty to exercise reasonable care, skill, and diligence 41 8.7 Duty to avoid conflicts 42 8.8 Duty not to accept benefits from third parties 42 8.9 Duty to disclose interests in proposed transactions or arrangements 43 8.10 Duty to disclose interest in existing transaction or arrangement 43 8.11 Ratification of breach of duty 44 8.12 Court relief for breach of duty 44 8.13 Commercial awareness talking points 44 Chapter 8 revision notes 45 9 Transactions with directors requiring shareholder approval 47 9.1 Chapter overview 47 9.2 Substantial property transactions 47 9.3 Long-term service contracts 48 9.4 Loans to directors 49 9.5 Payments for loss of office 49 9.6 Commercial awareness talking point 50 Chapter 9 revision points 50 10 Minority shareholder protection 51 10.1 Chapter overview 51 10.2 Unfair prejudice 51 10.3 Unfair prejudice and quasi partnerships 52 10.4 Examples of unfair prejudicial behaviour 52 10.5 Effect of a reasonable offer to buy out shareholder 52 10.6 Remedies for unfair prejudice 52 10.7 Derivative action 53 10.8 Permission to continue claim 53 10.9 Mandatory factors 53 10.10 Discretionary factors 53 viii Contents 10.11 Just and equitable winding up 54 10.12 Contractual self-help remedies 54 10.13 Commercial awareness talking point 54 Chapter 10 revision points 54 Part 3: Partnerships 57 11 Ordinary partnerships 59 11.1 Chapter overview 59 11.2 Formation of a partnership 59 11.3 Partnership agreements and common terms 60 11.4 Liability of partners in an ordinary partnership 61 11.5 When does a partner cease to be liable for debts of the partnership? 62 11.6 Liability through holding out 62 11.7 Liability in tort 62 11.8 Power to bind the firm 62 11.9 Fiduciary duties owed by partners to each other 63 11.10 Duty of care and skill owed by partners to each other 63 11.11 Commercial awareness talking points 63 Chapter 11 revision points 64 12 Limited liability partnerships 65 12.1 Chapter overview 65 12.2 Formation of an LLP 65 12.3 Content of LL IN01 65 12.4 Role of designated members 66 12.5 Comparison with ordinary partnerships 66 12.6 Similar default provisions 66 12.7 Commercial awareness talking point 67 Chapter 12 revision points 67 Part 4: Business accounts and tax 69 13 Calculating business profits (Rachel Cooper) 71 13.1 Chapter overview 71 13.2 Why is calculating profits important? 71 13.3 Types of profit 72 13.4 Income profits 72 13.5 Capital profits 72 13.6 Calculating income profits 72 13.7 Calculating capital profits 73 13.8 Capital allowances 73 13.9 Capital allowances: A worked example 74 Contents ix 13.10 Accounting periods 76 13.11 Relief for tax losses 76 13.12 Accounting information and systems 77 13.13 Commercial awareness talking point 78 Chapter 13 revision points 79 14 Income tax 81 14.1 Chapter overview 81 14.2 What is income tax charged on? 81 14.3 Who pays income tax? 82 14.4 The tax year 82 14.5 Rates of income tax 82 14.6 Calculating income tax 82 14.7 Tax calculation exercise 84 14.8 Collection and payment 85 14.9 Anti-avoidance measures 86 14.10 The GAAR 86 14.11 The Ramsay principle of statutory interpretation 87 14.12 Commercial awareness point 87 Chapter 14 revision points 87 15 Capital gains tax 89 15.1 Chapter overview 89 15.2 Chargeable persons 89 15.3 Chargeable assets 89 15.4 Disposal of assets 90 15.5 Gifts to spouses or civil partners 90 15.6 How to calculate CGT 90 15.7 Calculate gain on disposal 90 15.8 Subtracting allowable expenditure 91 15.9 Indexation 91 15.10 Apply reliefs 91 15.11 Deduct annual exemption 92 15.12 Apply the relevant rate of tax 92 15.13 Business property relief for inheritance tax 93 Chapter 15 revision points 93 16 Corporation tax and value-added tax 95 16.1 Chapter overview 95 16.2 Who pays corporation tax? 95 16.3 How to calculate corporation tax 95 16.4 Corporation tax rates 95 16.5 Value-added tax 95 16.6 Who is liable to pay VAT? 96 16.7 Rates of VAT 96