LW: Capital and financing

Answer: A. A preference share typically carries the right to a fixed dividend paid in priority to ordinary dividends, and usually priority on a return of capital, but normally limited or no voting rights. Option B is wrong — preference shares usually have restricted voting rights. Option C is wrong — they generally rank ahead of, not behind, ordinary shares on a winding up. Option D is wrong — they receive their fixed dividend when profits allow.

Answer: D. A share represents a member's proportionate interest in the company, defined as a sum of money for liability and dividend purposes, and carrying rights (such as voting and dividends) and obligations set by the articles. Option A describes a loan or debenture, not a share. Option C is wrong — dividends are not guaranteed. Option B is wrong — shareholders own shares, not the company's underlying assets, which belong to the company.

Answer: B. Allotment is the process of creating and issuing new shares, under which a person acquires the unconditional right to be entered in the register of members in respect of those shares. Option A describes a reduction/cancellation, the opposite of allotment. Option C concerns dividends, not share issue. Option D describes a transfer of existing shares between holders, which is different from an allotment of new shares.

Answer: C. Class rights are the rights attached to a particular class of shares — for example, special dividend, voting or capital entitlements — and they can generally be varied only by following the statutory or constitutional variation procedure, protecting that class. Option A concerns creditors, not share classes. Option B concerns directors' remuneration. Option D concerns inspection rights, none of which are class rights.

Answer: D. The maintenance of capital doctrine protects creditors: a company's share capital is regarded as a fund available to meet debts, so it generally may not be returned to members except by recognised procedures (such as a lawful reduction of capital). Option A is wrong — the doctrine restricts, not maximises, distributions. Option C invents a cash-holding rule. Option B is wrong — it does not concern market share prices.

Answer: B. A dividend may lawfully be paid only out of profits available for distribution — broadly, accumulated realised profits less accumulated realised losses. Option A is wrong — paying a dividend out of share capital breaches the maintenance-of-capital rules. Option C is wrong — borrowing does not create distributable profits. Option D is wrong — the availability of cash is not the legal test; distributable profits must exist.

Answer: C. A private company may reduce its capital by special resolution supported by a solvency statement made by the directors, providing a creditor-protective alternative to the court-approved route. Option A is wrong — a mere board decision is insufficient. Option B is wrong — the criminal courts are not involved. Option D is wrong — reduction is permitted where the proper procedure (and creditor protection) is followed.

Answer: A. A debenture is a document that acknowledges or creates a debt owed by the company; the debenture holder is a creditor, typically entitled to interest and repayment, and often secured by a charge. Option B describes a share certificate — shareholders are members, not creditors. Option C confuses debentures with dividends. Option D is wrong — a debenture concerns borrowing, not the conveyance of land.

Answer: D. A floating charge is taken over a fluctuating class of assets (such as stock or receivables), present and future, leaving the company free to deal with them in the ordinary course of business until the charge crystallises into a fixed charge on a specified event. Option A describes a fixed charge. Option C is wrong — charges must generally be registered. Option B is wrong — fixed charges generally rank ahead of floating charges over the same assets.

Answer: B. A registrable charge that is not delivered for registration within the statutory period (generally 21 days) is void against a liquidator, administrator and the company's creditors, although the underlying debt remains due and immediately repayable. Option A is the opposite of the effect. Option C is wrong — registration is not optional for registrable charges. Option D is wrong — the loan itself is not cancelled, only the security is lost against those parties.

Answer: C. Where shares are issued at a premium (above nominal value), the excess must be credited to a share premium account, which is a capital reserve whose use is restricted by statute (for example, it cannot generally be used to pay ordinary dividends). Option A is wrong — premium is not a distributable trading profit. Option B is wrong — it is not paid to directors. Option D is wrong — the premium must be properly recorded.

Answer: D. The general rule is that a limited company may not acquire its own shares, reflecting capital maintenance; statute provides exceptions, such as a properly conducted purchase of own shares following the prescribed procedure. Option A is wrong — acquisition is restricted, not free. Option C invents a mandatory annual buy-back. Option B is wrong — private companies can also buy back shares, indeed with additional flexibility to do so out of capital.

Answer: D. Private company articles commonly restrict share transfers — for instance, by giving the directors a discretion to refuse to register a transfer, or by pre-emption rights for existing members. Option A is wrong — shares can be transferred, subject to such restrictions. Option C is wrong — Companies House does not pre-approve individual transfers. Option B is wrong — legal title passes only when the transferee is registered in the register of members.

Answer: B. The restriction on a public company giving financial assistance for the acquisition of its own shares supports capital maintenance, protecting the company's capital base and, in turn, its creditors and remaining shareholders from the risks of such schemes. Option A is wrong — it is not a price-support measure. Options C and D are unrelated to the purpose of the rule, which is creditor and capital protection.

Answer: A. A debenture holder is a creditor of the company, entitled to interest and repayment and ranking ahead of members on a winding up, whereas a shareholder is a member with an ownership interest who shares in profits via dividends. Option B reverses the two. Option C is wrong — debenture holders do not have membership voting rights. Option D is wrong — secured creditors generally rank ahead of shareholders on a winding up.

Answer: D. A distribution made otherwise than out of distributable profits is unlawful; a member who knew or had reasonable grounds to believe it was unlawful may be required to repay it to the company. Option A is wrong where the member had the relevant knowledge. Option C invents a non-existent rule converting it to a loan. Option B wrongly excludes the recipient shareholder; directors who authorised it may also be liable.

Answer: C. A floating charge crystallises — becoming a fixed charge over the assets then in the relevant class — on events such as the company going into liquidation, ceasing to carry on business, the appointment of a receiver, or any crystallising event specified in the charge. Options A, B and D are ordinary-course dealings the company remains free to undertake precisely because the charge is still floating, not crystallised.

Answer: B. Statutory pre-emption rights generally require new equity shares allotted for cash to be offered first to existing ordinary shareholders, pro rata to their holdings, so their proportionate stake is not diluted; these rights can be disapplied by the appropriate resolution. Option A is wrong — creditors have no pre-emption right. Option C ignores existing members' priority. Option D is wrong — directors cannot bypass pre-emption rights to allot to themselves.