FLK1 Business Law and Practice: Formation to Insolvency

Business Law and Practice is the subject that quietly decides a lot of FLK1 results. Not because it's conceptually hard — most of it is statute, and the statute is unusually well signposted — but because it's broad, procedural, and unforgiving of half-remembered detail. You either know that a substantial property transaction needs an ordinary resolution, or you don't. There's no partial credit in a single-best-answer paper.

And BLP sits alongside six other subjects in FLK1: Dispute Resolution, Contract, Tort, the Legal System of England and Wales, Constitutional and Administrative Law including EU law, and Legal Services. One hundred and eighty questions, split across two sessions of 2 hours 33 minutes each. You will not get warning of which subject is coming next. A Tort question about pure economic loss can be followed immediately by a question about whether a company can validly pass a written resolution to remove a director. (It can't, by the way. Hold that thought.)

What follows is the three-part spine of BLP that the SRA's functioning legal knowledge specification keeps circling back to: how a business comes into existence, what its directors are obliged to do, and what happens when the money runs out.

Company formation: the boring bit that examiners love

Formation questions look administrative, and that's precisely why they're good MCQ material. There's a right answer buried in the Companies Act 2006 and a set of very plausible wrong ones.

Incorporation mechanics

To incorporate a company limited by shares in England and Wales, an application goes to the Registrar of Companies with the memorandum of association, the statement of capital and initial shareholdings, a statement of proposed officers, a statement of the registered office address, and a statement of compliance. Articles are filed unless the company adopts the model articles wholesale, in which case they apply by default.

Two details candidates habitually get wrong:

• The memorandum is not the constitution. Under the 2006 Act it's a short historical document — the subscribers stating that they wish to form a company and agree to take at least one share each. It cannot be amended. The articles do the constitutional heavy lifting.
• The company exists from the date on the certificate of incorporation, not from the date of application, and not from the first board meeting. Anyone who contracts "on behalf of" the company before that date is personally liable on the contract — a point that recurs in pre-incorporation contract questions.

Then there's the alternative route: buying a shelf company and changing its name, registered office, articles, directors and share structure. Slower to describe, quicker in practice, and a favourite fact pattern because it forces you to identify which of those changes needs a special resolution (name change, new articles) and which is a board matter (registered office, appointing directors).

Articles, entrenchment and the section 21 default

Articles are amended by special resolution — 75% of votes cast. Entrenched provisions require whatever higher threshold the articles specify, and Companies House must be notified that entrenchment exists. A provision can only be entrenched on formation or with the unanimous agreement of the members.

Watch for the trap where a company purports to entrench a provision so that it can never be amended at all. Members acting unanimously can still change it. Nothing in the articles can bind the members absolutely against their own unanimous will.

Choosing the vehicle — and why the tax answer is usually the point

A surprising slice of BLP questions dress themselves up as company law and are actually testing business structures and tax. A client asks whether to trade as a sole trader, a general partnership, an LLP or a private limited company. The doctrinal differences — unlimited personal liability, the automatic partnership arising under the Partnership Act 1890 without any documentation at all, the LLP's separate legal personality, the company's limited liability and public filing burden — are usually the easy half. The discriminating half is the tax treatment: sole traders and partners pay income tax on profits as they arise; a company pays corporation tax and the shareholder is then taxed again on dividends or salary.

If a fact pattern gives you profit figures, the examiner wants arithmetic reasoning, not vibes. Practise those.

Directors' duties: seven statutory duties and three approval gateways

Sections 171 to 177 of the Companies Act 2006 codify the general duties. You need them cold, and you need to be able to spot which one a fact pattern is aiming at, because the remedies differ.

The pair that trips people up is 177 and 182. Section 177 covers a proposed transaction; section 182 covers an existing one and is a criminal offence if breached. Same subject matter, different timing, different consequence. Examiners know this and use it.

The shareholder approval gateways

Beyond the general duties, three transaction types require members' approval by ordinary resolution regardless of what the board thinks:

1. Substantial property transactions (s.190) — where a director (or connected person) buys a non-cash asset from the company, or sells one to it, exceeding £100,000, or exceeding 10% of the company's asset value where that figure is more than £5,000.
2. Loans to directors (s.197) — with carve-outs, including small loans up to £10,000 and expenditure on company business up to £50,000.
3. Long-term service contracts (s.188) — a guaranteed term exceeding two years.

And remember removal: a director is removed by ordinary resolution under section 168, but it requires special notice — 28 clear days to the company — and the written resolution procedure is expressly unavailable. The director also has the right to make representations. Miss any of that and the removal is procedurally defective.

The single most common BLP error I see is candidates treating "the board decided" as the end of the analysis. In a well-drafted question, the board deciding is where the analysis starts — the real issue is whether the members ever got a say.

Worked example

Ravensworth Interiors Ltd has three directors: Priya, Tom and Elena. Priya also owns a freehold warehouse personally. The board resolves that the company will buy the warehouse from Priya for £180,000. Priya mentions her ownership at the meeting, and all three directors vote in favour. The company's articles are the unamended model articles. Total net assets are £2.1 million.

Work through it in order:

• Section 177: Priya declared her interest before the transaction, orally at a board meeting. That's a valid method. Duty satisfied.
• Model article 14: an interested director generally cannot count in the quorum or vote. So Priya's vote is tainted and, with only three directors, the quorum requirement (two) is met by Tom and Elena — the resolution survives, but only just.
• Section 190: £180,000 exceeds £100,000. This is a substantial property transaction. An ordinary resolution of the members is required, and no one obtained one.
• Consequence: the arrangement is voidable at the company's instance, and Priya is liable to account for any gain and indemnify the company for loss.

Note what the question didn't need: any breach of section 172, any bad faith, any suggestion the price was wrong. The transaction can be commercially perfect and still be voidable. That's the marks.

Section 172(3) and the shift towards creditors

One nuance that has become properly examinable: the duty in section 172 is subject to any rule of law requiring directors to consider or act in the interests of creditors. The Supreme Court in BTI 2014 LLC v Sequana SA confirmed that this creditors' interests duty is engaged when insolvency becomes imminent or probable — it isn't a standalone duty owed to creditors, but a modification of what "the company's interests" means as financial distress bites. Which takes us neatly to the third pillar.

Insolvency triggers: when the clock actually starts

Candidates lose marks here mostly through imprecision. "The company was struggling" is not a legal test. Section 123 of the Insolvency Act 1986 gives you the tests, and you should be able to recite them.

The statutory tests

• Failure to satisfy a statutory demand for a debt exceeding £750, unpaid or unsecured for three weeks.
• Unsatisfied execution of a judgment debt — the bailiff returns empty-handed.
• Cash flow test — the company is unable to pay its debts as they fall due, which the courts read as extending to debts falling due in the reasonably near future.
• Balance sheet test — liabilities, including contingent and prospective liabilities, exceed assets.

A company can be balance-sheet solvent and cash-flow insolvent, or the reverse. Fact patterns exploit exactly that gap.

Which procedure, and who benefits

Map the options against who is driving and what outcome they want. Compulsory liquidation on a creditor's winding-up petition. Creditors' voluntary liquidation where the directors accept the company cannot continue. Members' voluntary liquidation — solvent, with a declaration of solvency. Administration, with its statutory purposes in order of priority: rescuing the company as a going concern, achieving a better result for creditors as a whole than winding up, or realising property to distribute to secured or preferential creditors. A company voluntary arrangement, binding unsecured creditors on the requisite majorities. And the standalone moratorium introduced by the Corporate Insolvency and Governance Act 2020, which buys breathing space under a monitor's supervision.

Clawback and personal exposure

This is the highest-yield insolvency territory for MCQs, because each claim has a defined relevant period and a defined mental element:

• Transactions at an undervalue (s.238) — two years before the onset of insolvency; the company must have been unable to pay its debts at the time or become so as a result.
• Preferences (s.239) — six months, extended to two years for connected persons; requires a desire to prefer, which is presumed where the recipient is connected.
• Avoidance of certain floating charges (s.245) — twelve months, or two years for a connected person; the charge is invalid except to the extent of new value given.
• Wrongful trading (s.214) — the director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation and failed to take every step to minimise creditor loss.
• Fraudulent trading (s.213) — carrying on business with intent to defraud creditors; a much higher evidential bar, and correspondingly rarer.

Layer on disqualification under the Company Directors Disqualification Act 1986, where an unfitness finding produces a ban of between two and fifteen years, and you have the full picture of directors' downside risk.

How to revise BLP so it survives exam pressure

BLP rewards drilling more than reading. The material is rule-dense and the rules interlock, so passive re-reading of notes produces a comfortable feeling of competence that evaporates in the hall.

Three things that work:

1. Build a resolution table and rehearse it weekly. One column: the decision. Next: board or members. Next: ordinary or special resolution. Next: any special notice or filing requirement. Twenty rows will cover most of what FLK1 asks.
2. Drill by sub-topic, not by whole subject. Doing fifteen questions purely on directors' duties exposes the boundary between s.175 and s.176 far faster than a mixed set. Tagged question banks make this straightforward — the Ant Law SQE Question Bank lets you filter down to sub-topic level and then feed your wrong answers back into a spaced-repetition queue, which is where the actual learning happens.
3. Time yourself from the start. The real papers give you roughly 85 seconds per question. BLP fact patterns tend to be long — share structures, multiple directors, dates — and it is easy to burn three minutes on one question and rob yourself later.

On pass rates: they move between sittings, and there's no point memorising a figure from a report that may already be superseded. Look at the SRA's published statistics on sqe.sra.org.uk when you want the current position, and read them as trend information rather than a verdict on your chances. Candidates who prepare across all thirteen FLK subjects rather than gambling on favourites tend to do markedly better — that's the more useful takeaway.

And keep the wider qualification picture in view while you revise. Passing SQE1 and SQE2 is one strand; you also need a qualifying degree or equivalent, two years of qualifying work experience signed off appropriately, and to satisfy the SRA's character and suitability requirements. The QWE clock can run in parallel with your revision, which is precisely why so many candidates sit FLK1 while working. Check the procedural detail on sra.org.uk rather than relying on what a colleague told you eighteen months ago.

Your next session

Pick one thing this week: draft the resolution table from memory, then check it against the Companies Act. Whatever you got wrong is your revision list for the fortnight. Then test it under timed conditions — thirty questions across company formation, directors' duties and insolvency, no notes, no pausing.

If you want a ready-made set to drill against, the Ant Law SQE Question Bank at antlaw.ai has BLP questions tagged down to sub-topic, full-length mocks that mirror the SRA's format and timing, and an AI tutor you can interrogate when an explanation doesn't land. Start with the sub-topics you've been quietly avoiding. They're usually the ones on the paper.