Monday 6 November 2023
Your weekly SQE Prep Quiz has arrived
Dear Subscriber,
Hope you had a great weekend. Please see below for the question, the answer to the previous question and associated resources. This is the web version of this newsletter.
Question:
Ambrac Ltd is a private limited company, which has just two shareholders and two directors. John owns 51% of the shares. Jane owns 49% of the shares. They are both directors. John wishes to make a significant loan to Ambrac Ltd. Which of the following statements is correct?
- John cannot make a loan to Ambrac Ltd because it is a private company and he is a director.
- John can make a loan to Ambrac Ltd because he owns 51% of the shares.
- John can make a loan to Ambrac Ltd but he must get the consent of Jane.
- John can make a loan to Ambrac Ltd but he must get the consent of all the shareholders.
- John can make a loan to Ambrac Ltd but he must first obtain approval from the company’s auditors.
Top Tip: Did you know that the SRA is changing the way pass scores are calculated for the January 2024 SQE1 sitting? There is going to be set pass score at 60% now. For details on how this is calculated and what it means see the video here.
Relevant Reading: Watch the video linked here for a presentation of shareholder rights. For relevant sections in a text see ReviseSQE Business Law and Practice, Chapter 4. You can obtain the text by following this link.
Answer and feedback to last week’s question: The previous question was as follows: Cancun Ltd is a travel services company. The company has operated for a number of years but had a very successful run in the last season and the directors are considering distributing a dividend to its newest shareholders, to reward them for investing in the business. Which of the following statements is correct regarding the process for distributing dividends?
- The directors have complete discretion to decide whether to distribute dividends or not.
- Dividends can only be distributed if the company has profits available for distribution, according to the types of shares available.
- Dividends can be distributed regardless of whether the company has profits available for distribution.
- Dividends can be distributed to some shareholders but not others, at the discretion of the directors.
- Dividends can only be distributed if approved by the company’s auditors.
The correct answer is 2. Dividends can only be distributed if the company has profits available for distribution, according to the types of shares available. Under the Companies Act 2006, dividends can only be paid out of profits available for distribution. This means that a company’s distributable profits must be sufficient to cover any proposed dividend. The company’s accounts must be reviewed to determine whether there are sufficient distributable profits available. The directors must also ensure that they comply with the company’s articles of association in relation to the payment of dividends. Different classes of shares may benefit from differential treatment in the payment of dividends, but payments cannot discriminate between shareholders in the same class at will. If dividends are paid when there are insufficient profits available for distribution, this could result in the company being unable to meet its debts as they fall due, which could lead to insolvency.
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You will hear from me again soon.
All the best
Dr Ioannis Glinavos
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