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Company Finance and Financial Reporting

Part of our SQE1 Business Law and Practice guide → View the full SQE1 Business Law and Practice guide

30 Apr 2026

Learn the essential principles of company finance, charge registration, accounting obligations, and audit exemptions tested in SQE1 exams.

Company Finance and Financial Reporting

Business Law and Practice > Company Finance and Financial Reporting

A bank takes a charge described as "fixed" over a company's book debts—but the company can use the proceeds freely. You call it fixed; the examiner calls it floating. Get this wrong, and you lose priority marks, creditor recovery scenarios, and ultimately, SQE1 points. This guide cuts through the substance-over-label trap, covers equity and debt financing, secured charge registration, statutory accounting obligations, and the examinable pitfalls that separate confident candidates from those who stumble.

What is Company Finance and Financial Reporting in SQE1?

Company finance law governs how businesses raise money (equity or debt), how they secure that debt through charges, and how they must account for and report their financial position. For SQE1, you need to understand the legal framework around secured lending, charge registration, and statutory accounting obligations. This is a heavily tested area because it touches core company law principles and is essential for transactional practice.

Key Principles for SQE1

  • Equity Finance: Raising money by issuing shares to investors. Shareholders own part of the company and have voting rights, but money doesn't have to be repaid. Funds come from capital, not debt obligations. Equity financing is covered in detail in Shareholders and Share Capital.

  • Debt Finance: Raising money through loans or bonds. Creditors are not owners but have a legal right to repayment with interest. Debt can be secured (backed by company assets) or unsecured. Understanding debt financing is essential when exploring different types of business organisations and how they raise capital compared to partnerships and LLPs.

  • Fixed Charge: A charge on a specific, identified asset (e.g., the company's freehold property). The company cannot deal with the asset without the charge holder's consent. Fixed charges rank first in a liquidation, ahead of floating charges.

  • Floating Charge: A charge on a class of assets (e.g., "all stock and work in progress") which the company is free to deal with in the ordinary course of business until the charge crystallises (typically on insolvency or breach). Lower priority than fixed charges. Understanding floating charges is critical in Corporate Insolvency scenarios where charge priorities determine creditor recovery.

  • Charge Registration (s.859A CA 2006): Charges must be registered at Companies House within 21 days or they become void against a liquidator or administrator. Late registration is not available. This is a critical SQE1 trap—the deadline is absolute.

  • Priority of Charges: Fixed charges rank first, then floating charges in the order they were created (by date of creation). Unsecured creditors rank after all charges. Priority determines how much secured creditors recover in a liquidation.

  • Debenture: A formal debt instrument, often secured by a charge, used to raise capital from multiple investors. Debentures can carry fixed or floating charges.

  • Accounts Obligation (ss.394-396 CA 2006): Companies must prepare annual accounts that give a true and fair view of financial position and performance. Failure to do so is a breach of statutory duty.

  • Filing Requirements: Private companies must file accounts within 9 months of the period end; public companies within 6 months. Late filing incurs penalties and can lead to director liability.

  • Audit Threshold: A company is exempt from audit if it meets at least two of three criteria: turnover ≤ £10.2m, balance sheet ≤ £5.1m, and ≤ 50 employees. Many small companies qualify for exemption.

Exam tip

The fixed/floating distinction turns entirely on substance—can the company actually deal with the asset freely in the ordinary course of business? If facts show the company has de facto control, it's floating, regardless of what the charge document says. Examiners reward candidates who apply Re Spectrum Plus Ltd to the facts rather than reading labels.

Quick Comparison: Fixed Charge vs Floating Charge

| Feature | Fixed Charge | Floating Charge | |---------|--------------|-----------------| | Assets Covered | Specific, identified asset(s) | Class of assets (e.g., stock, receivables) | | Company's Freedom to Deal | Cannot deal without consent | Can deal freely until crystallisation | | Crystallisation | N/A—always fixed | Occurs on insolvency, breach, or notice | | Priority in Liquidation | First (before floating charges) | Second (after fixed charges, by date) | | Legal Test | Substance over label; courts examine reality | Same substance test (Re Spectrum Plus Ltd) | | Registration | s.859A CA 2006, 21-day deadline | s.859A CA 2006, 21-day deadline |

Quick Summary

  • Fixed vs floating charges determined by substance over label; freedom to deal is the key test
  • Charges must be registered within 21 days (s.859A CA 2006)—the deadline is absolute; no late registration
  • Fixed charges rank first in liquidation; floating charges rank after preferential creditors and unsecured creditors (prescribed part carved out)
  • Re Spectrum Plus Ltd [2005]: a charge labelled "floating" is fixed if the company cannot deal freely with the asset
  • Accounts must give a true and fair view; companies audit-exempt if meeting two-of-three criteria (turnover, balance sheet, employee numbers)
  • Equity raises ownership stakes; debt creates creditor rights and requires security through charges

How This Appears in SQE1 Questions

Scenario: ABC Ltd grants a charge on its property on 1 March. The company fails to register the charge and it is discovered on 23 March (22 days later). The company enters liquidation a week later. Is the charge valid against the liquidator?

You'll encounter questions asking you to:

  • Identify the type of charge given facts about assets and the company's freedom to deal. Watch for substance over label traps—the company calls it a "floating charge" but the facts show it's actually fixed because the company has no freedom to deal. This is where examiners separate top scorers from the rest.

  • Calculate priority in a scenario where a company has multiple charges and is insolvent. Work through the waterfall: fixed charges first, then floating charges by date, then unsecured creditors.

  • Spot the registration trap: A charge was created 22 days ago and not registered. It is void against a liquidator. Students often miss that the 21-day deadline is absolute and there is no late registration procedure.

  • Address audit exemption: Determine whether a company is audit-exempt by checking turnover, balance sheet, and employee numbers (need two of three).

  • Account for true and fair view obligation and what happens if directors breach this duty.

Common Mistakes Students Make

  • Relying on the charge label: If the charge agreement says "floating charge," students assume it is floating. Courts look at substance (Re Spectrum Plus Ltd [2005]) and Agnew v Commissioner of Inland Revenue [2001]—a charge is fixed if the company has no practical freedom to deal with the asset.

  • Missing the 21-day registration deadline: Students forget this is absolute. Registration after 21 days is not possible; the charge is void against a liquidator or administrator.

  • Confusing equity and debt: Equity is ownership (shares); debt is a loan. These have very different legal rights and priorities.

  • Overlooking the audit exemption threshold: Students assume all companies must have audited accounts. They don't—check the two-of-three criteria.

  • Getting floating charge priority wrong: Floating charges rank after fixed charges and unsecured creditors rank after floating charges. The prescribed part carved out from the floating charge for unsecured creditors complicates this further.

  • Forgetting substance over label: Always ask: can the company actually deal freely with the asset? If not, it's likely fixed.

Want to test this now? Try a few SQE1-style questions below before moving on.

Test Yourself

Test yourself

Quick check questions based on this article.

Question 1

Scenario

A solicitor acts for a private company limited by shares. The company has two directors, one of whom is also the company's accountant. The company's annual accounts for the year ending 30 June show a net profit of £180,000. The directors wish to pay a dividend of £100,000. The solicitor reviews the accounts and notices that the company's profit and loss account includes a gain of £60,000 from the revaluation of the company's investment property. The retained earnings brought forward from the previous year are £50,000. There are no accumulated realised losses. The solicitor also notes that one of the directors has a personal interest in receiving a large dividend, as that director owes a personal debt of £80,000 to a third party. The solicitor considers whether the SRA Standards and Regulations are relevant to the advice being given.

What is the maximum lawful dividend that the company may pay?

Question 2

Scenario

A solicitor acts for a private company limited by shares. The company's directors are preparing the annual accounts and ask the solicitor for advice on the duty to keep adequate accounting records. The company operates a chain of three retail shops. Each shop maintains its own till records and bank account. The directors keep a central spreadsheet summarising monthly income and expenditure but do not maintain detailed records of individual transactions at each shop. The company's turnover is £4 million per year. One director argues that the central spreadsheet is sufficient because the company is small. The solicitor considers the requirements of the Companies Act 2006 and the potential consequences if the records are inadequate. The solicitor is also aware that the SRA Standards and Regulations require a solicitor to act competently when advising on compliance matters.

Which of the following best describes the company's obligation to keep accounting records under the Companies Act 2006?

Question 3

Scenario

A solicitor acts for a private company limited by shares. The company's directors ask the solicitor to explain the concept of a true and fair view in the context of the company's annual accounts. The company's accountant has prepared the accounts, which the directors are about to approve. One director asks whether the accounts can depart from accounting standards if doing so would give a true and fair view of the company's financial position. Another director believes that strict compliance with accounting standards automatically satisfies the true and fair requirement. The directors also ask whether the true and fair requirement applies only to public companies. The solicitor must advise accurately, bearing in mind the SRA obligation of competence in giving advice on matters within the solicitor's knowledge.

Which of the following correctly states the position regarding the true and fair view requirement under the Companies Act 2006?

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