Business Law and Practice for FLK1: Formation, Duties, Insolvency

Business Law and Practice is the subject that quietly decides a lot of FLK1 results. It sits at the top of the FLK1 syllabus, it carries a heavy share of the questions, and it punishes anyone who learned company law as a set of headings rather than as a set of triggers. You can recite the Companies Act 2006 sections all day. The exam doesn't ask you to recite. It hands you a board minute, a shareholder who's been kept in the dark, a director who's signed something he shouldn't have, and asks you for the single best answer.

So let's work through the three areas that generate the most marks and the most mistakes: getting a company off the ground, what its directors are actually on the hook for, and the moment when "the business is struggling" becomes "the directors have a legal problem". Treat this as a revision sharpener, not a substitute for the full syllabus — but if these three click, a big chunk of FLK1 Business Law gets a lot more answerable.

Company formation: the mechanics examiners actually test

Most candidates over-study the romantic bit (choosing a name, the certificate of incorporation) and under-study the boring bit that earns marks: who decides what, and which document governs it. The SQE loves a question where the answer turns on the difference between the model articles and a bespoke provision.

Start with the spine. A private company limited by shares is incorporated by filing the right documents at Companies House, and on registration it becomes a separate legal person — distinct from its members and its directors. That separateness is the whole game. It is why a sole shareholder-director is not personally liable for the company's trading debts, and why the classic principle from Salomon v Salomon still does the heavy lifting in a fact pattern about who pays when the company can't.

Articles, model articles and the bits people forget

If a company adopts no bespoke articles, the model articles apply by default. The constitution is the articles; the old memorandum is now a short historical document, not a source of objects. Plenty of FLK1 questions hinge on a company having amended its model articles — and an amendment to the articles requires a special resolution (75%). Get that threshold wrong and the whole answer collapses.

Things worth nailing cold before exam day:

• Shareholders' agreement vs articles. A shareholders' agreement is a private contract between the parties to it; the articles bind the company and all members as a statutory contract. An obligation that lives only in a shareholders' agreement does not automatically bind a new shareholder who never signed it.
• Ordinary vs special resolution. Ordinary is a simple majority (over 50%); special is 75% or more. The default written resolution route exists for private companies, but the percentage is the same whether the vote is at a meeting or in writing.
• Notice and quorum. A general meeting normally needs 14 clear days' notice; the quorum under the model articles is two qualifying persons (or one, in a single-member company). Examiners build whole questions on a meeting that was inquorate or short-noticed.
• Persons with significant control (PSC). A company must keep a PSC register and report this information. Expect a question testing whether someone holding, say, more than 25% of the shares triggers a PSC entry.

A quick worked example

Imagine a private company with model articles, four equal shareholders each holding 25%, all of whom are also directors. Two of them want to change the articles to introduce pre-emption rights on share transfers. The other two object. Can they do it? No — amending the articles needs a special resolution, which requires 75% of the votes. Two out of four equal shareholders is 50%. The amendment fails. The trap the question will set is offering you an answer that says "yes, because they have a board majority" — but the board doesn't get to change the constitution. The members do, by special resolution. Spot which decision belongs to which organ and you've spotted the whole point.

Directors' duties: where Business Law earns its difficulty

This is the richest seam in the topic and the one where careful candidates pull ahead. The general duties of directors are codified in the Companies Act 2006, and the SQE expects you to apply them to a director who has done something self-interested, careless or unauthorised. Knowing the duties is the easy 40%. Knowing the consequence and the cure is the hard 60%.

The codified duties you must hold in working memory:

1. To act within powers — exercise powers for their proper purpose and in accordance with the constitution.
2. To promote the success of the company for the benefit of members as a whole, having regard to the longer-term factors (employees, suppliers, environment, reputation, fairness between members). This is the "enlightened shareholder value" duty.
3. To exercise independent judgement.
4. To exercise reasonable care, skill and diligence — judged on a dual objective/subjective standard: what would reasonably be expected of someone carrying out that director's functions, and the actual knowledge and experience this particular director has.
5. To avoid conflicts of interest.
6. Not to accept benefits from third parties.
7. To declare any interest in a proposed transaction or arrangement with the company.

The exam rarely asks "name the duty". It asks "the director did X — now what?" The marks are in the consequence, the ratification, and the disclosure, not in the label.

The standard of care is not the same for everyone

That dual test under duty four catches people out. A director who happens to be a qualified accountant is held to a higher subjective standard on financial matters than a director with no such background — because the test imports their actual knowledge and experience on top of the objective minimum. So in a fact pattern where the finance director signs off plainly dodgy accounts, the "but I'm not really a numbers person" defence does not help if the duties point the other way.

Conflicts, disclosure and the things that need shareholder sign-off

Several transactions need more than a director's good intentions. These are exam favourites because they have clean, testable thresholds:

• Substantial property transactions. Where a director (or connected person) buys from or sells to the company a non-cash asset of substantial value, the arrangement generally requires approval by ordinary resolution of the members. "Substantial" has statutory thresholds — know that there is a threshold and that member approval is the cure.
• Loans to directors. A company generally needs members' approval to make a loan to a director, subject to exceptions (such as small-value loans or expenditure on company business up to a cap).
• Long-term service contracts. A director's service contract with a guaranteed term beyond two years needs members' approval by ordinary resolution.
• Declaring an interest. A director with an interest in a proposed transaction must declare it before the company enters into it, and under the model articles an interested director usually cannot count in the quorum or vote on it.

Here's the move that lifts your score: when a director has breached a duty, ask whether the breach can be ratified by ordinary resolution of the members — and whether the votes of the director (and any connected members) must be excluded from that ratification. The available remedies — account of profits, equitable compensation, rescission of a contract, restoration of property — are then tested by giving you a self-dealing director and four plausible outcomes. Only one fits the facts.

Removing a director — the classic trap

A company may remove a director by ordinary resolution under the Companies Act, but special notice is required and the director has the right to make representations. The trap is the interaction with a weighted-voting (Bushell v Faith style) provision in the articles or a shareholders' agreement, which can frustrate a removal that looks straightforward on the bare percentages. If the question hands you an article that gives a director extra votes on a resolution to remove him, read it twice.

Insolvency triggers: when "struggling" becomes a legal duty to act

This is where Business Law and Practice overlaps with the most commercially important judgement a director ever makes — and where FLK1 likes to set a fact pattern that quietly shifts from solvent to insolvent halfway through.

The two tests for insolvency you must be able to apply

A company is unable to pay its debts under the Insolvency Act 1986 on either of two limbs:

• The cash-flow test — the company cannot pay its debts as they fall due.
• The balance-sheet test — the company's liabilities (including contingent and prospective liabilities) exceed its assets.

A company can be cash-flow insolvent while looking healthy on paper, and balance-sheet insolvent while still paying today's bills. Examiners exploit exactly that gap. A statutory demand that goes unpaid is also a route to demonstrating inability to pay.

The duty shift that catches directors out

While a company is solvent, directors owe their duties to the company for the benefit of the members. Once the company is insolvent or bordering on it, the interests of creditors move to the front — directors must have regard to creditor interests, a principle the Supreme Court examined closely in recent years. Practically, that means a director who keeps trading and racking up new liabilities once insolvency is inevitable is exposed.

The two personal-liability concepts the SQE tests most:

• Wrongful trading. Where a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation and did not take every step to minimise loss to creditors, a liquidator can seek a contribution from that director. The defence is taking every step to minimise creditor loss — not just "we hoped it would turn around".
• Fraudulent trading. Carrying on business with intent to defraud creditors — a higher bar, requiring actual dishonesty, with both civil and criminal consequences.

Add the transaction-based clawbacks a liquidator or administrator can pursue: transactions at an undervalue and preferences entered into within the relevant statutory period before the onset of insolvency, and the granting of a floating charge for past value. The detail of the relevant time periods and the connected-person presumptions is exactly the sort of figure you should verify against your study materials rather than half-remember.

A mini case study to pull it together

A director realises in March that the company cannot meet its quarterly supplier payments and the bank has frozen the overdraft. Rather than seek advice, she continues to place new orders on credit through April and May, and in April she repays a £30,000 loan the company owed to her brother. The company enters insolvent liquidation in June.

Two flags should go up immediately. The continued ordering after the point where insolvent liquidation looked unavoidable raises wrongful trading — did she take every step to minimise creditor loss, or did she gamble? And the repayment to her brother, a connected person, shortly before liquidation looks like a preference: putting one creditor in a better position than they'd have been in on liquidation, with the connected relationship affecting the presumptions. A well-built FLK1 question will offer you "no liability because the company was a separate legal person" as a tempting wrong answer. Separate legal personality protects directors from ordinary trading debts — it does not protect them from their own breach of the insolvency provisions.

How to revise this without drowning

Business Law and Practice rewards a particular study rhythm. The rules are interlocking, so isolated flashcards only get you so far. What works is volume practice on applied questions, because the difficulty in FLK1 is almost never "do you know the rule" — it's "can you spot which of four near-identical rules the facts are pointing at, in 100 seconds, on question 140 of a long sitting".

A few habits that move the needle:

1. Drill by decision-maker. For every scenario, ask: is this a board decision or a members' decision, and what majority does it need? Half of the company-law traps live in that single question.
2. Practise the "now what" reflex. Don't stop at identifying the breach. Force yourself to state the consequence and the cure — ratification, member approval, the available remedy.
3. Time everything. FLK1 and FLK2 are long. Each paper is 180 single-best-answer questions split across two sessions of 2h 33m, so you are training stamina as much as knowledge. Sit full-length, timed sets, not just casual review.
4. Keep a wrong-answer log specifically for resolution thresholds and insolvency time periods. Those are the facts your memory will quietly corrupt under pressure.

This is where a serious question bank earns its keep. Working through applied Business Law questions in the Ant Law SQE Question Bank, tagged by FLK subject and sub-topic, lets you hammer directors' duties one evening and substantial property transactions the next, then revisit whatever you got wrong. The smart practice engine resurfacing your low-accuracy topics matters more here than in almost any other FLK1 subject, because company law forgetting is sneaky — you think you know removal-of-a-director until a weighted-voting clause appears.

None of this exists in a vacuum, of course. Passing SQE1 is one piece of qualifying as a solicitor in England and Wales: you'll also need a qualifying degree or equivalent, two years of Qualifying Work Experience, and to satisfy the SRA's character and suitability requirements before admission. Build the Business Law foundation now, though, and you remove one of the biggest sources of FLK1 anxiety. For anything time-sensitive — sitting dates, fees, booking windows and the current published pass-rate data — always check the authoritative position at sqe.sra.org.uk; treat any figure you "remember" as out of date until you've confirmed it.

Ready to test whether these rules actually stick under exam conditions? Pull up a timed Business Law set on the Ant Law SQE Question Bank at antlaw.ai — start with a 20-question block on directors' duties and insolvency, mark every "now what" you couldn't answer instantly, and let your wrong-answer book tell you what to revise next. That's the loop that turns shaky recognition into reliable FLK1 marks.