I am studying the ATT course and the description of a 'close company' seems a bit brief (or maybe just I don't understand)
A close company is a company which is resident in the UK and is controlled by either
5 or fewer participants
any number of directors who are also shareholders
any number of directors who are also shareholders - does this mean that every director has to be a shareholder?
I assumed that every director was always a shareholder - I looked this up and found that this is not true, a director does not have to be a shareholder.
Not every director needs to be a shareholder though in most OMB (owner managed businesses) it is as the person running the company (director) who also owns it (shareholder).
What the rule is getting at is a close company is one that either has less that 5 shareholders (irrespective if they are directors or not) or any number of shareholders if the shareholders are also directors (though in practice this will be unlikely as you arent likely to have a situation where 10 directors are all shareholders.). Dont think have ever come across something like this.
Consider this: a company has share capital of £10,000 held equally between ten shareholders (i.e., 1000 £1 shares each). Six of the shareholders are directors, as is one other person, who does not own any shares. The remaining four shareholders are not directors.
In this case, there is no permutation of shareholders where five of them together have control of the company, so it fails the first test (by "fail", I mean, it is not a close company by that definition). However, the six directors who are also shareholders do have control together, even though they do not constitute all of the company's directors. Therefore it is caught by the second test and is a close company.
The definition of a close company is much more complex than that, however, and you should look at CTM60060et seq. where you will see there is another category: where the majority of assets would be distributed to five or fewer participators, or to directors who are participators, on a winding up of the Company.
Suppose our company now increases its capital to £20,000 by introducing ten new shareholders, who each take 1,000 new shares, and also raises a debenture loan of £12,000, secured by a first floating charge on its assets, but which gives the debenture holders no voting rights. No new directors are appointed. The 6 shareholder/directors subscribe £2,000 each to the debebture. If the company were wound up now, it would have assets available for distribution of (say) £36,000 after paying all creditors*.
Control is not concentrated into any five participators together (25% max), so not close;
Control is not in the hands of the 6 shareholding directors (30%), so, again, not close; but,
On a winding-up the six shareholding directors would receive more than half of the available assets (£19,200), so close.
* (Technically, the debenture would be repaid before trade debts, but that's not important here.)
