SQE1 Business Law & Practice questions

Business law and practice is assessed in FLK1. It covers how businesses are set up and run: sole traders, partnerships, limited liability partnerships and companies; decision-making by directors and shareholders; business finance; insolvency; and the taxation of businesses and their owners. Much of it comes from statute, so the key primary sources are the Companies Act 2006, the Insolvency Act 1986, the Partnership Act 1890 and the Limited Liability Partnerships Act 2000. Questions often turn on a procedural step, such as which resolution is needed or what notice must be given. Every question below links to the source behind its answer.

Rules to remember

A director can be removed by ordinary resolution at a general meeting on special notice (28 days to the company), and never by written resolution. Question 01

VAT registration is compulsory when 12-month taxable turnover exceeds the threshold; taxable turnover includes zero-rated supplies but excludes exempt and out-of-scope supplies. Question L026

Business property relief requires the transferor to have owned the property throughout the two years before the transfer, including a transfer on death (IHTA 1984 s.106). Question L025

On a gift of qualifying business assets, including unlisted trading company shares, a s.165 claim reduces both the donor's gain and the donee's base cost by the held-over gain. Question L024

Business Asset Disposal Relief on shares requires a personal company (5%+) and that the seller has been an officer or employee throughout the two years before disposal (TCGA 1992 s.169I). Question L023

Dividends are taxed as the top slice of income; the £500 dividend nil rate still uses the band, then dividend ordinary and upper rates apply (ITA 2007 ss.8, 13A). Question L022

A company's trading loss may be set against total profits (including gains) of the loss-making period and then, by claim, the previous 12 months; any balance is carried forward (CTA 2010 ss.37, 45A). Question L021

A trading loss in the first four tax years of a trade can be carried back against net income of the three preceding tax years, earliest first (ITA 2007 ss.72-73). Question L020

Creditors may jointly petition where their unsecured liquidated debts together reach the £5,000 bankruptcy level and inability to pay is shown, e.g. by an unpaid statutory demand (IA 1986 ss.267-268). Question L019

A director is not liable for wrongful trading if, after she knew or ought to have concluded insolvent liquidation was unavoidable, she took every step to minimise creditors' potential loss (IA 1986 s.214(3)). Question L018

A floating charge to an unconnected person within 12 months before insolvency, while the company is unable to pay its debts, is invalid except for new value given at or after its creation (IA 1986 s.245). Question L017

A preference to a connected person within two years before the onset of insolvency, while the company is unable to pay its debts, can be set aside; desire to prefer is presumed (IA 1986 ss.239-240). Question L016

If an LLP carries on business with fewer than two members for over six months, a member who knows this is jointly and severally liable for debts contracted after those six months (LLPA 2000 s.4A). Question L015

Until they have notice, those who dealt with a firm before a change may treat apparent partners as continuing; a Gazette notice binds only those with no prior dealings (PA 1890 s.36). Question L014

A partner acting in the usual way of the firm's business binds the firm unless he lacks authority and the third party knows it or does not believe him a partner (PA 1890 s.5). Question L013

Floating charge realisations go to winding-up expenses, then preferential debts, then the prescribed part is ring-fenced for unsecured creditors, before the floating chargeholder is paid (IA 1986 ss.175, 176A). Question L012

A charge whose particulars are not delivered within 21 days is void against a liquidator, administrator and creditors, but the secured debt remains payable (CA 2006 ss.859A, 859H). Question L011

Distributions may only be made out of distributable profits; a member who knew or had reasonable grounds to believe a distribution was unlawful must repay it (CA 2006 ss.830, 847). Question L010

An off-market buyback contract must be authorised in advance by ordinary resolution; on a written resolution the selling member is not an eligible member (CA 2006 ss.694(2), 695(2)). Question L009

In a single-class private company, directors can allot under s.550 unless the articles prohibit it, but allotting for cash outside s.561 pre-emption requires a special resolution (or articles) under s.569. Question L008

A member may petition under s.994 CA 2006 where the company's affairs are conducted in a manner unfairly prejudicial to members' interests; the court may order a purchase of the petitioner's shares (s.996(2)(e)). Question L007

Members holding 5% of paid-up voting capital can require a general meeting; directors must call it within 21 days, for a date not more than 28 days after the notice (CA 2006 ss.303-304). Question L006

On ratification at a meeting, the necessary majority must be reached disregarding votes in favour by the director and members connected with him, such as a spouse (CA 2006 s.239(4)). Question L005

A guaranteed term of employment longer than two years needs members' approval; without it, the provision is void and the company can terminate on reasonable notice (CA 2006 ss.188-189). Question L004

In a private company, unless the constitution prevents it, independent directors may authorise a director's conflict, provided the quorum is met and the vote carried without the interested director (CA 2006 s.175(5)(a), (6)). Question L003

A written special resolution passes only if members holding at least 75% of the total voting rights of all eligible members agree; non-responses count against it (CA 2006 s.283(2)). Question L002

A contract made for a company not yet formed takes effect, subject to contrary agreement, as one made with the person purporting to act for it, who is personally liable (CA 2006 s.51). Question L001

A director with any direct or indirect interest in a proposed transaction with the company must declare its nature and extent to the other directors before the company enters into it, unless a s.177(6) exception applies. Question 15

A company buying a non-cash asset from, or selling one to, a director needs members' approval (or a conditional contract) if it is worth over £100,000, or over 10% of net assets and over £5,000. Question 29

Absent contrary agreement, ordinary partnership matters are decided by majority, but a change in the nature of the business needs the consent of all existing partners (PA 1890 s.24(8)). Question 43