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Fashion Designs Ltd - As an avowed expert on company law I am requested to advise the board of directors

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Introduction

Company Law Fashion Designs Ltd Coursework HND Business Studies Kelly Oehme 2204764 The Assessment: Fashion Designs Ltd As an avowed expert on company law I am requested to advise the board of directors on the following matters: (a) Realised Profit Test is related to the maintenance of capital in the distribution of profits and assets. A realised profits test takes place when a company wants to determine its profits which are available for distribution. Profits need to be distributed in a situation of a winding up of a company, for example bankruptcy. The Realised profit test provides that the profits available for distribution will be the company's accumulated realised profits, which is known as revenue and capital. The Net Assets Test is again related to the maintenance of capital in the distribution of profits and assets. A Public company must also use this test. A company has to make good its net unrealised losses before it can declare a dividend to its shareholders. Unrealised losses have to first be made clear before net assets are given. So this test helps to show this and it shows how much assets can be distributed. ...read more.

Middle

The Preference Shareholder: The rights attached to preference shares will normally be defined in the Articles of Association including the right to receive dividends at a fixed rate payable on specific dates. It is important to compare the cost to your company of dividends payable to any preference shareholder with the cost of other sums advanced to the business, e.g. a bank loan. For example, with a fall in interest rates, it may be that the dividend originally agreed on the preference shares becomes unduly high. In that event some reorganisation, possibly involving redemption or repurchase of your preference shares, may be advisable. If there is no profit available, either because none have been earned or because the directors decide to transfer all the profits to reserve, the preference shareholder cannot sue the company for his/her dividend. A dividend is not due unless it is declared. The articles may however provide that available profits must be applied to payment of preference shareholders if their dividends are not paid. If the company/directors fails to pay, i.e. 'passes', its preference dividend, the right to it as a priority claim is usually carried forward. ...read more.

Conclusion

Profits available for payments of dividends - A company may not make a distribution except out of profits available for the purpose: s.263. This rule primarily controls the dividends but distribution is defined to cover any distribution of assets other than: (a) the issue of shares as fully or partly paid bonus shares (b) payments on redemption or purchase of the company's shares (c) a reduction of share capital by extinguishing or reducing liability in respect of unpaid share capital or by repaying paid-up share capital (d) a distribution of assets to members in winding up The profits available for distribution are the accumulated, realised profits, so far as not previously utilized by distribution or capitalisation less accumulated realised losses so far as not previously written off by a reduction or reorganisation of capital made. This rule applies to all companies because the new formula on distribution profits is best illustrated by reference to the loopholes in the previous law which it closes. Both profits and losses must be accumulated i.e. the profit and loss account must be maintained as a continuous record of the company's financial results since incorporation. It is no longer possible to pay a dividend out of current profits without setting off against those profits and losses of previous periods. ...read more.

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