CASE 10

Sim, Tim and Una formed a partnership, under the Partnership Act 1890, to run a pottery business trading under the name STU Potteries. On formation, Sim introduced 6,000 into the business, Tim introduced 3,000 and Una introduced 1,000. All of them took an active part in the operation of the business and the partnership agreement stated that all profits and losses should be divided in proportion to the capital contribution. However, as Una was the person who would actually be making the pottery, it was agreed that she would not be liable for any more than her initial contribution towards any future debts. After some time, Sim provided the partnership with an advance of 1,000 in order to sustain the operation of the business.

Unfortunately, the business is not successful and has made significant losses. Today the partners decide that it would be best to stop trading and dissolve the partnership. Its assets are worth 5,000 and its external debts are 9,000.

Question 29

Work out how much each partner will have to contribute to paying the external debts;

Question 30

Make a decision as to how Sim's advance of 1,000 will be dealt with.

CASE 11

Dee and Eff are major shareholders in Fan Ltd. They are also its only directors.

Question 31

According to s830 Companies Act 2006 dividends may only be paid out of

A the net assets of the company

B the current year's profits

C accumulated realisable profits less accumulated realisable losses

D accumulated realised profits less accumulated realised losses

Question 32

Last year Fan Ltd's financial statements showed an accumulated loss of 2,000. This year Fan Ltd made a profit of 3,000 and, due to a revaluation, the value of its land and buildings increased by 5,000.

As a consequence, Dee and Eff recommended, and the shareholders approved, the payment of 4,000 in dividends.

What is the maximum dividend that Fan Ltd can pay to its shareholders?

A 4,000

B 2,000

C 3,000

D 1,000

Question 33

What are the potential consequences for Dee and Eff as directors and shareholders should there have been an illegal dividend payment?

A Face criminal negligence charges

B Face civil wrongful trading charges

C Pay a fine decided by the court

D Repay dividends back to Fan Ltd

CASE 12

Jon, who is 65 years of age, has just retired from his employment with a pension and a lump sum payment of 100,000. He is keen to invest his money but has absolutely no knowledge of business or investment. He does not wish to take any great risk with his investment but he would like to have a steady flow of income from it.

He has been advised that he can invest in the following range of securities:

1 Preference shares

2 Ordinary shares

3 Debentures secured by a fixed charge

4 Debentures secured by a floating charge

Question 34

In relation to the above investment forms, which is the most secure?

A Ordinary shares

B Preference shares

C Debentures secured by a fixed charge

D Debentures secured by a floating charge

Question 35

In relation to the above investment forms, which may have a cumulative right to dividends?

A Debentures secured by a floating charge

B Ordinary shares

C Preference shares

D Debentures secured by a fixed charge

Question 36

In relation to the above investment forms, which NORMALLY participates in surplus capital?

A Preference shares

B Ordinary shares

C Debentures secured by a fixed charge

D Debentures secured by a floating charge

CASE 13

A number of years ago, Cold Ltd entered into the following borrowings in the same year in an endeavour to sustain its business:

1 It borrowed 50,000 from Dee, secured by a floating charge. The floating charge was created on 1 April and it was registered on 15 April.

2 It borrowed 50,000 from Ezra. This loan was secured by a floating charge created on 3 April and registered on 12 April.

3 It borrowed 50,000 from Fixit Bank. This loan was secured by a fixed charge. It was created on 5 April and was registered on 16 April.

All three charges are on some or all of the same assets of Cold Ltd. The three creditors are now aware that these secured assets are not sufficient to repay all their loans. They are also aware that none of the charges contain negative pledge clauses.

Question 37

Think whether or not the three charges have been validly registered with the Registrar of Companies.

Question 38

ASSUMING* all three charges have been validly registered:

(i) state the order in which the three creditors will be ranked for payment;

(ii) think about your reasoning.

*Please note. You are advised NOT to alter your answer to part (a) based on the assumption in the question requirement of part (b) that the three charges were validly registered. They may have been, on the other hand they might not have been.

CASE 14

Earlier this year Ger was disqualified from acting as a company director for a period of 10 years under the Company Directors Disqualification Act 1986 for engaging in fraudulent trading.

However, he decided to continue to pursue his fraudulent business and, in order to avoid the consequences of the disqualification order, he arranged for his accountant Kim to run the business on his instructions. Although Kim took no shares in the company, and was never officially appointed as a director, he nonetheless assumed the title of managing director.

Question 39

Identify which of the following categories of director applies to each of Ger and Kim.

De facto director

De jure director

Non-executive director

Shadow director

Kim

Ger

Question 40

Which of the following characteristics apply to non-executive directors?

A They attend, but do not vote at, board meetings

B They are involved in the day-to-day business of the company

C They have contracts of employment with the company

D They owe fiduciary duties to the company

CASE 15

Lazo is one of the directors of Popov plc.

Question 41

According to the Companies Act 2006, generally a company director owes duties to which of the following?

A To any individual member of the company as well as all its creditors

B To any individual member of the company but not any of its creditors

C To the company as well as any individual members of it

D To the company only but not any individual members of it

Question 42

According to the Companies Act 2006, which type of a company director is the one owing the duties?

A Any company director

B Executive directors only as they are responsible for executing the company's strategy

C Non-executive directors only as they are responsible for forming the company's strategy

D The managing director only as he is responsible for the day-to-day management of the company

Question 43

The board of Popov plc has been in negotiations with a few different companies trying to select the most suitable one to which an important 5 year contract would be awarded.

Lazo has recently been approached by Hannah, the managing director of Montana Ltd, one of the companies interested in the potential contract with Popov plc. In the private meeting between the two Hannah offered Lazo as a "thank you" gift a two-week holiday in the Maldives, saying he would be flown in in Montana Ltd's company jet, stay at Montana Ltd's luxurious residence and have unlimited use of Montana Ltd's newest yacht. Hannah said it was a way of expressing Montana Ltd's appreciation of the hard work done so far by Lazo in the negotiations and insisted that he deserved a bit of a rest too.

Lazo, thinking that Hannah had made a few fair points, was easily convinced and, without informing the rest of Popov plc's directors of the event, soon left to enjoy his holiday. Returning from it well rested, with a fresh and clear mind, he immediately recommended Montana Ltd to the board, convincing everyone that following detailed research he had realised it was the best company to award the contract to.

According to the Companies Act 2006, which TWO of the below duties has Lazo breached?

A Duty to exercise reasonable care, skill and diligence

B Duty not to accept benefits from third parties

C Duty to act within powers

D Duty to declare any interest in a proposed transaction or arrangement with the company

Question 44

Nas, a majority shareholder in Popov plc, has recently found out about Lazo's holiday and is very upset by the recent events.

What action can he take in relation to these events?

A He can sue Lazo for breach of duty and this will remove Lazo from his position as a director

B He can require the board to sack Lazo

C As he is a majority shareholder he can, at a general meeting of which special notice has been given, pass an ordinary resolution for Lazo's removal

D As he is a majority shareholder he can achieve Lazo's removal through a written resolution and no general meeting is required

CASE 16

The board of directors of Sea Ltd is considering a proposal that the company buy a ship from one of its directors, Tan, at its fair market value of 150,000. They know that Tan proposes to vote in favour of the contract at the board meeting called to approve the contract. They also know that as a shareholder Tan proposes to vote in favour of the resolution at the members' meeting. They also know that in both situations Tan will be voting in his own selfish interests, rather than in the interests of Sea Ltd.

Question 45

Think whether or not the board alone can commit Sea Ltd to this contract and why.

Question 46

Think whether Tan is in breach of any the seven general duties owed by a director to his company:

(i) at the board meeting;

(ii) at the general meeting.

CASE 17

Cee is a director of BB plc, which hosts corporate events. She has never been formally appointed as chief executive but has conducted the day-to-day business of the company as if she had been. The other directors have never objected to her making it appear she is the chief executive and have always agreed with her decisions and carried out the contracts she has entered into on behalf of the company. Cee has recently decided that BB plc should branch out into other areas of business and has entered into a contract on behalf of BB plc to sell marquees.

Dan is the chairman of BB plc. Without consulting the other directors he placed an order in the name of BB plc for champagne. In fact the champagne was delivered to his own house and he used it at his daughter's wedding.

Question 47

Which of the following categories of director best describes Cee?

A De facto

B Non-executive

C Shadow

D De jure

Question 48

Which of the following best describes the legal position of the contract for the sale of marquees?

A Cee has acted with express authority as the other directors have always allowed her to do anything.

B Cee has acted with implied authority as the contract is incidental to the hosting of corporate events.

C Cee has acted with apparent authority of a chief executive as she has entered into a commercial contract.

D Cee has acted with implied authority of a chief executive as she has entered into a commercial contract.

Question 49

Dan is the chairman of BB plc. Without consulting the other directors he placed an order in the name of BB plc for champagne. In fact the champagne was delivered to his own house and he used it at his daughter's wedding.

In relation to the contract made by Dan for the purchase of the champagne, state whether the following are true or false

A BB plc is bound by this contract because Dan is the chairman TRUE / FALSE

B BB plc is not bound by this contract because Dan used the champagne for his personal use TRUE / FALSE

C BB plc is bound by this contract because it is within Dan's implied authority TRUE / FALSE

D BB plc is bound by this contract because it is within Dan's apparent authority TRUE / FALSE

CASE 18

Fop Ltd is well known for its granite range of high quality kitchens.

Gi is the managing director of Fop Ltd. Hi, Io and Jay are the rest of the company's directors. The company's articles contain a clause according to which the board are required to obtain sanction of an ordinary resolution for any single borrowing exceeding 3 million.

Last month the following events occurred:

Question 50

On behalf of Fop Ltd Gi entered into a 3-year contract with a new granite supplier, Kigran plc, without discussing this in advance with the other three board members. Io and Jay were most unhappy about it when they found out as they wanted to continue using the services of the existing granite supplier, Logran Ltd. They felt Logran Ltd was better value for money as it offered granite much more cheaply. Gi, however, argued that the new supplier would be able to provide better quality granite and therefore was the better option in the long term. However, Io and Jay insisted that Fop Ltd should not be bound by the new contract with Kigran plc and just extend its contract with Logran Ltd.

Which of the following is correct in relation to the contract between Fop Ltd and Kigran plc?

A Fop Ltd will not be bound because Gi had no actual authority to enter into the contract

B Fop Ltd will not be bound because although Gi acted within his implied authority, two out of four directors refuse to honour the contract

C Fop Ltd will be bound because Gi as a managing director had implied authority to enter into this contract of a commercial nature on the behalf of the company

D Fop Ltd will be bound because irrespective of whether Gi had any authority or not the contract has already been entered into on the behalf of the company

Question 51

Unknown to the rest of the directors of Fop Ltd, Hi entered on the behalf of Fop Ltd into a contract for the purchase of a brand new powerful computer, monitor and large multi-function laser printer with Myoffice Ltd. At the time of the purchase Hi told Myoffice Ltd that he was buying the equipment for the head office of Fop Ltd but in fact he took delivery of it in his own house and kept it there for his personal use. The invoice sent to Fop Ltd by Myoffice Ltd has remained outstanding as the rest of the directors, having found out about the purchase, refuse to pay it from the company's bank account.

Which of the following is correct in relation to the contract between Fop Ltd and Myoffice Ltd?

A Fop Ltd will not be bound because Hi had no actual or apparent authority to enter into the contract

B Fop Ltd will not be bound because Hi purchased the equipment for his personal use

C Fop Ltd will be bound because although Hi had no actual authority, as a director of Fop Ltd he had implied authority to enter into any contract of an administrative nature on the behalf of the company

D Fop Ltd will be bound because irrelevant of whether Hi had any authority or not the contract has already been entered into on the behalf of the company

Question 52

All four directors of Fop Ltd agreed that a new factory building was needed for the business and approached the company's bank for a loan. The loan of 5 million went ahead easily as it was secured by a fixed charge on the new building purchased by Fop Ltd. Since it was an urgent matter and the financing was needed quickly in order to complete the factory purchase, the board finalised everything without obtaining any permission from the members.

Which of the following is correct in relation to the loan agreement between Fop Ltd and its bank?

A Fop Ltd will not be bound because the board had no actual authority to enter into the contract, obtaining no permission from the members as required by the comFopy's Articles

B Fop Ltd will be bound because the loan was secured by a fixed charge on the company's factory

C Fop Ltd will be bound because although the board had no actual authority, the bank is presumed to have dealt with the company in good faith

D Fop Ltd will be bound because irrelevant of whether the board had any authority or not the contract has already been entered into on the behalf of the company

CASE 19

Flora is the company secretary of Flower plc, a company whose business is providing gardening services. Flora has recently entered into the following contracts in the name of Flower plc. The directors of Flower plc have only recently become aware of these contracts.

They are really perturbed since Flora has not followed the company's purchase order policy and they refuse to pay the invoices for these contracts.

Question 53

Flora entered into an extremely expensive, long-term contract with Glophoto plc for the maintenance of Flower plc's photocopiers.

Is Flower plc bound to pay the invoice?

A Yes because Flora had actual authortity

B Yes because this contract falls within Flora's implied authority, it is a commercial contract for Flowers's business

C Yes because Flora had implied authority because of her position as company secretary

D No because this was a very expensive contract beyond her authority as company secretary

Question 54

Flora entered into a contract to hire a car from Hiro Ltd which she used for her own, non-business related, purposes.

Is Flower plc bound to pay the invoice?

A Yes because Flora had actual authortity

B Yes because this contract falls within Flora's implied authority, it is a commercial contract for Flowers's business

C Yes because Flora had implied authority

D No because she used the car for her own purposes

Question 55

Flora entered into a contract with Indiflora plc to landscape the garden of her, Flora's, personal house.

Is Flower plc bound to pay the invoice?

A Yes because Flora had actual authortity

B Yes because this contract falls within Flora's implied authority, it is a commercial contract for Flowers's business

C No because Flora had no authority

D No because the landscaping was done at her own house