ICAEW BL · Chapter 9
Share capital, loan capital and capital maintenance MCQs with Answers
10 multiple-choice questions on Share capital, loan capital and capital maintenance for ICAEW BL Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Fairlight Ltd wants to raise money quickly by issuing £1 ordinary shares at 80p each. Is this permitted?
- A) Yes, provided the members pass an ordinary resolution
- B) Yes, because a private company may issue shares at any price its directors choose
- C) No, because shares may not be allotted at a discount to their nominal value
- D) Yes, provided the shares are fully paid on allotment
Show answer & explanation
Answer: C) No, because shares may not be allotted at a discount to their nominal value
Under s580 Companies Act 2006, a company's shares must not be allotted at a discount to their nominal value. If they are, the allottee must pay the company the amount of the discount plus interest. Shares may be issued at a premium, but not below nominal value, whatever the company type or resolution.
Question 2
Larchmont Ltd plans to issue new ordinary shares to Ingrid in exchange for a piece of land she owns. An existing shareholder claims the shares must first be offered to existing members. Is he right?
- A) No, because statutory pre-emption rights apply only to allotments of equity securities wholly for cash
- B) Yes, because pre-emption rights apply to every allotment of ordinary shares
- C) Yes, unless Ingrid is already a member of the company
- D) No, because pre-emption rights apply only to public companies
Show answer & explanation
Answer: A) No, because statutory pre-emption rights apply only to allotments of equity securities wholly for cash
Under s561 Companies Act 2006, a company allotting equity securities must first offer them to existing ordinary shareholders pro rata. However, s565 disapplies this where the shares are to be paid for wholly or partly otherwise than in cash, as here, where the consideration is land. Pre-emption rights apply to private companies as well as public ones.
Question 3
Corrie Ltd issues 40,000 ordinary shares with a nominal value of 25p each at a price of £1.40 per share, fully paid in cash. What amount must be credited to the share premium account?
- A) £56,000
- B) £10,000
- C) £46,000
- D) £16,000
Show answer & explanation
Answer: C) £46,000
Share premium is the excess of the issue price over nominal value (s610 Companies Act 2006). Premium per share = £1.40 − £0.25 = £1.15. Total = 40,000 × £1.15 = £46,000. Check: share capital £10,000 (40,000 × £0.25) + share premium £46,000 = £56,000 cash received. £56,000 is the total cash raised, £10,000 is the nominal value credited to share capital, and £16,000 wrongly treats the nominal value as £1 (40,000 × £0.40).
Question 4
Penrose Ltd, a private company, has the following figures: accumulated realised profits brought forward £120,000; realised profit for the current year £30,000; accumulated realised losses not previously written off £40,000; and an unrealised revaluation gain on property £50,000. What is the maximum amount it may lawfully distribute as a dividend?
- A) £160,000
- B) £110,000
- C) £150,000
- D) £70,000
Show answer & explanation
Answer: B) £110,000
A private company may distribute only its accumulated realised profits, so far as not previously used, less its accumulated realised losses, so far as not previously written off (s830). Realised profits = £120,000 + £30,000 = £150,000. Less realised losses of £40,000 gives £110,000. Unrealised revaluation gains cannot be distributed, so £160,000 is wrong, and £150,000 ignores the realised losses.
Question 5
Ashcombe plc, a public company, has called-up share capital of £400,000, a share premium account of £100,000 and retained earnings of £220,000. The retained earnings consist of accumulated realised profits of £300,000 less accumulated unrealised losses of £80,000. It has no other reserves, so net assets are £720,000. What is the maximum dividend it may lawfully pay?
- A) £220,000
- B) £300,000
- C) £720,000
- D) £140,000
Show answer & explanation
Answer: A) £220,000
A public company must satisfy both the realised profits test and the net assets test in s831. Under the realised profits test, the limit is £300,000. Under s831, net assets after the distribution must not be less than called-up share capital plus undistributable reserves (£400,000 + £100,000 = £500,000). Unrealised losses exceed unrealised profits, so no further undistributable reserve is added. The maximum is £720,000 − £500,000 = £220,000. In effect, a public company must also cover its net unrealised losses, unlike a private company.
Question 6
Thornbury Ltd grants a fixed charge over its warehouse to a lender. The lender's solicitor forgets to deliver the charge for registration at Companies House, and the error is discovered six weeks after the charge was created. Thornbury Ltd is still trading and solvent. Which statement is correct?
- A) The charge is permanently void and the lender can never obtain registered security over the warehouse
- B) The charge remains fully valid against everyone until Thornbury Ltd goes into liquidation
- C) The registrar may accept the charge for registration late, without any court order, if the lender pays a penalty
- D) The charge is void against a liquidator, an administrator and creditors, the secured money becomes immediately payable, and the lender may apply to the court for an order extending the period for delivery
Show answer & explanation
Answer: D) The charge is void against a liquidator, an administrator and creditors, the secured money becomes immediately payable, and the lender may apply to the court for an order extending the period for delivery
Under s859A Companies Act 2006, a charge must be delivered for registration within 21 days beginning with the day after its creation. If it is not, s859H makes the charge void against a liquidator, an administrator and any creditor of the company, and the money it secures becomes immediately payable; the debt itself is not void. Under s859F the court may extend the period if the failure was accidental, due to inadvertence or some other sufficient cause, or if it is otherwise just and equitable, usually without prejudice to rights acquired before registration. The registrar cannot accept late delivery without a court order.
Question 7
Brackley Ltd's debenture describes a charge over its present and future book debts as a 'fixed charge'. However, Brackley Ltd is free to collect the debts, pay the proceeds into its ordinary bank account and use them in its business without the lender's consent. How will a court classify the charge?
- A) As a fixed charge, because the parties described it as fixed in the debenture
- B) As a floating charge, because the company's freedom to deal with the charged assets and their proceeds in the ordinary course of business is inconsistent with a fixed charge
- C) As void, because a charge cannot be created over future book debts
- D) As a fixed charge, because book debts are specific, identifiable assets
Show answer & explanation
Answer: B) As a floating charge, because the company's freedom to deal with the charged assets and their proceeds in the ordinary course of business is inconsistent with a fixed charge
The label the parties use is not decisive; the court looks at the substance of the rights created. Re Yorkshire Woolcombers Association describes a floating charge as one over a changing class of present and future assets that the company may deal with in the ordinary course of business until the charge crystallises. In Re Spectrum Plus the House of Lords held that a charge over book debts was floating where the company could use the proceeds freely, because the lender lacked the control needed for a fixed charge. Charges over future assets are valid.
Question 8
In January, Pilgrim Ltd grants Bank X a floating charge over all its assets, with no negative pledge clause. In June it grants Bank Y a fixed charge over its factory. Both charges are properly registered. In a later liquidation, which charge has priority over the factory?
- A) Bank X's floating charge, because it was created first
- B) Both rank equally and share the proceeds pro rata
- C) Neither, because a company cannot create a fixed charge over an asset already subject to a floating charge
- D) Bank Y's fixed charge, despite being created later
Show answer & explanation
Answer: D) Bank Y's fixed charge, despite being created later
A floating charge allows the company to deal with its assets in the ordinary course of business, including granting later fixed charges. A later fixed charge therefore generally takes priority over an earlier floating charge. This is different only if the floating charge contains a negative pledge clause and the fixed charge holder has notice of it. There was no such clause here.
Question 9
Which of the following correctly distinguishes a debenture holder from an ordinary shareholder?
- A) A debenture holder is a member of the company and may vote at general meetings
- B) A debenture holder is paid after shareholders in a liquidation
- C) A debenture holder is a creditor of the company and is entitled to interest whether or not profits are made
- D) A debenture holder receives a dividend only if the directors declare one
Show answer & explanation
Answer: C) A debenture holder is a creditor of the company and is entitled to interest whether or not profits are made
A debenture is a written acknowledgement of a debt. The holder is a creditor, not a member, and is entitled to interest as a contractual debt regardless of profits. Debenture holders rank ahead of shareholders in a liquidation. Shareholders are members who vote and receive dividends only when declared out of distributable profits.
Question 10
Ashby plc, a public company, wants to reduce its share capital to eliminate accumulated losses. Under the Companies Act 2006, what must it do?
- A) Pass a special resolution and obtain the court's confirmation of the reduction
- B) Pass a special resolution supported by a solvency statement from all the directors, without applying to the court
- C) Pass an ordinary resolution with the consent of its auditors
- D) Pass a board resolution and file a statement of capital with the registrar
Show answer & explanation
Answer: A) Pass a special resolution and obtain the court's confirmation of the reduction
Under s641 Companies Act 2006, a company limited by shares may reduce its share capital by special resolution confirmed by the court. Only a private company has the alternative of a special resolution supported by a solvency statement made by all the directors, without going to court (s641(1)(a) and s642). Ashby plc is a public company, so it must use the court route, where the court considers the interests of creditors. An ordinary resolution or a board resolution is never sufficient.