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

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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.

The directors have heard that a company must satisfy both realised profits test and the net assets test before it can pay a dividend to its shareholders – This statement is true to an extent but there are exceptions.

A public company must meet both needs of the realised profits test and the net assets test before it can distribute its profits by dividends to its members. This can be seen in s.263 and s.264.

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A private company like Fashion Designs Ltd only needs to encounter the realised profits test only.

Both tests are just generally put into place to allow the company and its shareholders to see the amount the dividends it has.

(b) If on the basis of interim accounts the directors were to declare a dividend to preference shareholders in accordance with their class rights, but when final accounts for the year were completed the company discovered that it did not have enough profits to pay a dividend the legal position of the directors and the preference shareholders are ...

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