Formative MCQs Flashcards
Two individuals want to start a business together and are keen to limit their liability. They are both going to be active in the running of the business. They do not want to spend a lot of money in the set up of the business, but they need the ability to raise some finance in the future in the business name.
Which of the following would be the best vehicle for their business?
(a)
A partnership
(b)
A limited liability partnership
(c)
A public limited company
(d)
A sole trader
(e)
A private limited company
(e) A private limited company.
This option has the ability to raise finance and limit the personal liability of the individuals.
Your client is in the process of setting up an online recruitment business. In the future, it is hoped that staff will be employed to undertake a variety of tasks within the business, but for now, all work is carried out by your client who has secured investment from a family member. It has been agreed verbally that the family member will not be entitled salary and will not have any involvement in the day-to-day running of the business. Your client intends to take a salary from the business, but he has not discussed this with the family investor.
You have advised your client on the choice of business medium for this venture and your client has decided that a partnership would be the best option. Your client is keen to keep legal work and formality to a minimum at this stage and has asked you to explain the implications of continuing without a partnership agreement until the business has a regular turnover.
Which of the following statements best describes the impact of your client accepting the investment and continuing without a partnership agreement?
(a)
Neither partner would be entitled to any salary, both partners would be entitled to equal shares in the profits of the partnership and decisions would be made by your client alone.
(b)
Neither partner would be entitled to any salary, your client would be entitled to all of the profits of the partnership and decisions would be made by your client alone.
(c)
Both partners would be entitled to equal salaries and equal shares in the profits of the partnership, but decisions would be made by your client alone.
(d)
Both partners would be entitled to equal salaries, equal shares in the profits of the partnership and decisions would require the consent of both partners.
(e)
Neither partner would be entitled to any salary, both partners would be entitled to equal shares in the profits of the partnership and decisions would require the consent of both partners.
(a) Neither partner would be entitled to any salary, both partners would be entitled to equal shares in the profits of the partnership and decisions would be made by your client alone.
The Partnership Act 1890 contains a default code, which applies to relations between the partners themselves in the absence of any contrary agreement. Here, there is a contrary agreement which provides that the family member will not be entitled to a salary and will not participate in decisions of the partnership. The default provisions will apply in respect of your client’s salary (no entitlement) and profit share (equal shares).
Two individuals (Partner A and Partner B) began trading together as a partnership five years ago. Two years ago a third partner, (Partner C) joined the partnership.
Partner A put in 75% of the start up capital and partner B put in the remaining 25%. Partner C has never contributed any capital but the partnership uses a warehouse owned by Partner C. The partners have never entered into any formal agreement.
Which of the following statements represents the correct position with regards to the rights to the profits of the partnership and a salary for each partner under the default provisions of the Partnership Act 1890?
(a)
The three partners are entitled to a share of the profits equal to the percentage of their original capital investment and no salary.
(b)
Partner A and Partner B are entitled to an equal share of the profits, but Partner C is not entitled to any profits. All three partners are entitled to an equal salary.
(c)
The three partners are entitled to an equal share of the profits and a salary in equal proportions to their original capital investment.
(d)
The three partners are entitled to an equal share of the profits but none of the Partners are entitled to a salary.
(e)
Partner A and Partner B are entitled to an equal share of the profits, but Partner C is not entitled to any profits. None of the partners are entitled to a salary.
(d) The three partners are entitled to an equal share of the profits but none of the Partners are entitled to a salary.
Under the Partnership Act 1890 all partners are entitled to an equal share of the profits, regardless of their original investment and the PA 1890 states that unless it is agreed to the contrary no partner shall take a salary.
You act for a partnership which is made up of 8 partners. There is no written partnership agreement. Profits have always been shared equally between the partners.
Three years ago, the partners all agreed to take out a loan to renovate their main office. The partners all contributed equally to repaying the loan. Unfortunately, the partnership has not been profitable, and they have recently defaulted on the loan repayments.
One of the partners is about to retire. No documentation has been drafted to confirm the details of her retirement. Can the partner who is about to retire be liable for repaying any of the loan?
(a) No, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, only the current partners will be jointly liable for debts of the partnership.
(b)
No, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, only the current partners will be jointly and severally liable for debts of the partnership.
(c) Yes, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, all those persons who were partners at the time that the loan agreement was entered into will be jointly liable for repaying the loan regardless of retirement.
(d)
No, because the partners have not entered into a written partnership agreement which deals with liability on retirement therefore once the partner retires, she is no longer a partner and therefore has no liability for any debts of the partnership.
(e) Yes, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, all those persons who were partners at the time that the loan agreement was entered into will be be jointly and severally liable for repaying the loan regardless of retirement.
(c) Yes, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, all those persons who were partners at the time that the loan agreement was entered into will be jointly liable for repaying the loan regardless of retirement.
Under the Partnership Act 1890 every partner is jointly liable for contractual debts and a partner will still be liable even though they have retired.
Client A and client B are looking to start up a new business offering commercial cleaning services locally. The only requirements of the clients are that (i) the profits and capital of the business are split equally between them and (ii) their liability is limited to their investment in the business (the ‘Agreed Terms’). Provided that these requirements are met, the clients want as little formality and documentation as possible.
What type of partnership would be most appropriate for the clients?
(a)
A limited liability partnership because although it is not a separate legal entity it does offer limited liability and does not require a written agreement to operate on the Agreed Terms.
(b)
A partnership because although it is not a separate legal entity, it offers limited liability and does not require a written agreement to operate on the Agreed Terms.
(c)
A limited liability partnership because it is a separate legal entity offering limited liability and does not require a written agreement to operate on the Agreed Terms.
(d)
A limited liability partnership because although it requires a written agreement to operate on the Agreed Terms, it is a separate legal entity offering limited liability.
(e)
A partnership because although it requires a written agreement to operate on the Agreed Terms and is not a separate legal entity, it does offer limited liability.
(c) A limited liability partnership because it is a separate legal entity offering limited liability and does not require a written agreement to operate on the Agreed Terms.
Whilst the other answer options might sound plausible, they are each incorrect. A partnership is not a separate legal entity and does not offer limited liability for the partners whereas the opposite is true for a limited liability partnership. Additionally, a partnership agreement is not legally required to set up a partnership or limited liability partnership and would not strictly be needed if the terms agreed matched the statutory default provisions.
A corporate client of your law firm has bought a shelf company named Shelfco 123 Ltd (‘Shelfco Ltd’) on your recommendation. Shelfco Ltd has unamended Model Articles for a private company limited by shares. The Board of Directors of Shelfco Ltd wishes to change the name of the company to a more suitable commercial name. What is the correct procedure for changing the company name of Shelfco Ltd under the Companies Act 2006? (Assume the name chosen by the client is available and not subject to any objections by another party.)
(a) To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s Board merely needs to pass a Board Resolution.
(b)
To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s shareholders may pass a special resolution. Alternatively, the Board may pass a Board Resolution.
(c)
To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s shareholders may pass an Ordinary Resolution. Alternatively, the Board may pass a Board Resolution.
(d) To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s shareholders must pass a special resolution.
(e)
To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s shareholders must pass an Ordinary Resolution.
(d) To change the name of Shelfco Ltd under the Companies Act 2006, Shelfco Ltd’s shareholders must pass a special resolution.
Section 77(1)(a) Companies Act 2006 requires the shareholders of Shelfco Ltd to pass a Special Resolution. Section 77(1)(b) does allow for the company to determine another method for changing the name in its articles but since Shelfco Ltd has unamended Model Articles, the only option is to use the special resolution procedure.
A company entered into a contract with an office equipment supplier to purchase 3 projectors. The contract was signed by the sole director on behalf of the company. The director and his wife are the shareholders of the company. The supplier delivered the projectors as agreed but the company failed to pay the purchase price.
Which statement best describes what legal action the supplier can take?
(a)
The supplier can sue the company and the director for the purchase price.
(b)
The supplier can sue the shareholders for the purchase price.
(c)
The supplier can sue the company and the shareholders for the purchase price.
(d)
The supplier can sue the sole director for the purchase price.
(e)
The supplier can sue the company for the purchase price.
(e) The supplier can sue the company for the purchase price.
The doctrine of separate legal liability means that the company is liable for its own debts.
You act for a private limited company that was incorporated last year. The company’s only asset is the company bank account which holds £10,000 on deposit. The company has asked for your advice on changing its current company name.
Which one of the following statements is correct in relation to the company’s change of name?
(a) The change of name will be effective as soon as the company has passed the required special resolution to change the company’s name.
(b)
The company will be issued with a new certificate of incorporation following the change of name which will confirm its new name and new company number. The change of name is effective once this new certificate has been issued by the Registrar of Companies.
(c)
The change of name will be effective once the Registrar of Companies has received notice of the relevant special resolution.
(d)
The change of name will be effective once the Registrar of Companies has issued the certificate of incorporation on a change of name.
(e)
The company will not be issued with a new certificate of incorporation following the change of name. The Registrar of Companies will change the company’s name online at Companies House only. The change of name is effective once the Registrar of Companies has received notice of the relevant special resolution.
(d) The change of name will be effective once the Registrar of Companies has issued the certificate of incorporation on a change of name.
A change of name will be effective once the Registrar of Companies has issued the certificate of incorporation on a change of name (s 16 CA 2006). The company registration number will not change.
Two individuals (A and B) want to incorporate a private limited company as soon as possible. A and B propose to each take 50% of the shares and become directors of the company. A is negotiating a supply agreement, on behalf of the not yet incorporated company with a company (C) to take effect once the company is incorporated. If A were to sign the agreement with C now, before the company is incorporated, who would be liable under the agreement?
(a)
Nobody, the contract would be void
(b)
A
(c)
A, B and the not yet incorporated company
(d) The not yet incorporated company, once it is incorporated.
(e)
A and B
(b) A
Under s 51(1) Companies Act 2006, the person signing the purported agreement between the unincorporated company and C would be personally liable
You are in the process of tailoring a shelf company (the “Company”) to meet a client’s requirements. The Company has adopted the unamended Model Articles of Association for Private Companies Limited by Shares. The client requires the Company’s name to be changed, the existing directors of the Company (“Existing Directors”) to be replaced with members of its team (the “New Directors”) and for the registered office of the Company to be changed before it is transferred to the client.
What board and shareholder resolutions are required to implement the client’s instructions most expeditiously (NOT including any resolutions required to convene meetings)?
(a)
A special resolution to change the company’s name, board resolutions to appoint the New Directors, board resolutions to accept the resignations of the Existing Directors and a special resolution to change the Company’s registered office.
(b)
A special resolution to change the company’s name, ordinary resolutions to appoint the New Directors, ordinary resolutions to remove the Existing Directors and a board resolution to change the Company’s registered office.
(c)
A special resolution to change the Company’s name, board resolutions to appoint the New Directors, ordinary resolutions to remove the Existing Directors and a board resolution to change the Company’s registered office.
(d)
A special resolution to change the Company’s name, board resolutions to appoint the New Directors, board resolutions to accept the resignations of the Existing Directors and a board resolution to change the Company’s registered office.
(e) An ordinary resolution to change the Company’s name, ordinary resolutions to appoint the New Directors, board resolutions to accept the resignations of the Existing Directors and an ordinary resolution to change the Company’s registered office.
(d) A special resolution to change the Company’s name, board resolutions to appoint the New Directors, board resolutions to accept the resignations of the Existing Directors and a board resolution to change the Company’s registered office.
This answer reflects the most expeditious and correct way of implementing the client’s required changes. While the other answer options might sound plausible, they are each incorrect. Since the Company has unamended Model Articles of Association for Private Companies Limited by Shares, a special resolution is required to change its name. Although it is possible to appoint directors by board resolution or by ordinary resolution, the most expeditious way of appointing the New Directors (and what is generally done in practice) is by board resolution. The Existing Directors would resign as directors and a board resolution would be passed accepting their letters of resignation. Changing the registered office of the Company would be effected by the passing of a board resolution, followed by the filing of the relevant form at Companies House.
A private limited company is planning to grant a service contract for a three-year term to one of its directors. The company was incorporated in 2010 and has adopted unamended model articles.
The company is keen for this to be approved by the shareholders as quickly as possible and has already been advised that this will need to be approved by way of an ordinary resolution.
All shareholders are understood to be generally available and responsive over the coming weeks.
Which of the following statements best describes the appropriate method the company should use?
(a)
The company should call a general meeting under the usual notice requirements to ensure that all shareholders have an opportunity to participate in the voting.
(b)
The company should use the written resolution procedure as this should allow the process to be shortened significantly.
(c)
The company should use the written resolution procedure to ensure that all shareholders have an opportunity to participate in the voting.
(d)
The company should use the short notice procedure in calling the general meeting to ensure that all shareholders have an opportunity to participate in the voting.
(e)
The company should use the short notice procedure in calling the general meeting as this should allow the process to be shortened significantly.
(b) The company should use the written resolution procedure as this should allow the process to be shortened significantly.
The written resolution procedure is the only procedure that can be used to potentially bring down the time period significantly. The fact pattern indicates that all shareholders are expected to be available and responsive so there is no reason to suggest that a written resolution would take longer than a general meeting whether on short notice or not. The company will need to comply with the provisions of s 188(5)(a) Companies Act 2006 and with the general rules on the written resolution procedure – see s 288 Companies Act 2006 onwards. Use of the short notice procedure for the sake of time is incorrect given that, in the case of directors’ long term service contracts, s 188(5)(b) Companies Act 2006 requires a memorandum setting out the proposed contract to be made available to the members (i) at the company’s registered office for not less than 15 days ending with the date of the meeting and (ii) at the meeting itself. In reality, therefore, this would only shorten the ‘normal’ procedure by one day – i.e. 15 days instead of 14 clear days. Use of the written resolution procedure for the reasoning that it will allow all shareholders to have an opportunity to participate in the voting is incorrect as the scenario states that all shareholders are due to be available and responsive over the coming weeks.
Your client is a manufacturing company (‘Company A’).
The managing director of Company A (‘the MD’) asks to speak to you about a proposed contract between Company A and a website design company (‘Company B’).
Company B is run by the MD’s close friend. The managing director has even invested in Company B himself and now owns 5% in Company B.
The MD wants to discuss this proposed contract at the upcoming board meeting of the 5 directors of Company A. The other directors of Company A are already aware that the MD has shares in Company B. Company A is a private limited company with unamended Model Articles.
Which of the following statements best summarises the advice you should give to the MD of Company A?
(a)
The MD should not declare their interest in the proposed contract with Company B as the other directors are already aware that the MD has an interest in the proposed transaction.
(b)
The MD should declare their interest in the proposed contract with Company B. If they do not, all 5 directors of Company A are at risk of breaching their directors’ duties contained within the Companies Act 2006.
(c)
The MD has a duty under s 175 of the Companies Act to avoid a conflict of interest. They are at risk of breaching that duty. They should therefore not propose that this contract is entered into at the board meeting of Company A.
(d)
The MD should declare their interest in the proposed contract with Company B at the board meeting of Company A. The MD will not be allowed to vote on the proposed contract at the board meeting.
(e) The MD should sell their 5% shares in Company B to avoid a breach of their directors’ duties in the Companies Act 2006.
(d) The MD should declare their interest in the proposed contract with Company B at the board meeting of Company A. The MD will not be allowed to vote on the proposed contract at the board meeting.
This is the effect of Model Article 14 and s 177 of the Companies Act 2006.
Director A is a director of Company B. Company B proposes to issue Director A with a service contract (the “Contract”) for a fixed term of three years (the “Term”) which contains the following provision at clause 11:
“The Company may not terminate the Contract before the expiry of the Term except for disciplinary reasons as set out in clause 15.”
What does Company B need to do before offering the Contract to Director A and what is the consequence of it failing to do so?
(a)
Company B must seek shareholder approval for the Contract by special resolution. If it fails to do so, clause 11 of the Contract would be void and deemed replaced with a clause allowing Company B to terminate the Contract on reasonable notice.
(b)
Company B must seek shareholder approval for the Contract by ordinary resolution. If it fails to do so, clause 11 of the Contract would be void and deemed replaced with a clause allowing Company B to terminate the Contract on six months’ notice.
(c)
Company B must seek shareholder approval for the Contract by special resolution. If it fails to do so, the Contract will be void.
(d)
Company B must seek shareholder approval for the Contract by ordinary resolution. If it fails to do so, the Contract will be void.
(e)
Company B must seek shareholder approval for the Contract by ordinary resolution. If it fails to do so, clause 11 of the Contract would be void and deemed replaced with a clause allowing Company B to terminate the Contract on reasonable notice.
(e) Company B must seek shareholder approval for the Contract by ordinary resolution. If it fails to do so, clause 11 of the Contract would be void and deemed replaced with a clause allowing Company B to terminate the Contract on reasonable notice.
This answer reflects the correct position. While the other answer option might sound plausible, they are each incorrect. Clause 11 of the Contract constitutes a “guaranteed term” of more than two years. As such, Company B cannot agree to such a provision unless it has been approved by the shareholders by ordinary resolution. If Company B enters into the Contract without the Term being approved by the shareholders as described, the contravening clause (clause 11) would be void to the extent of the contravention and the Contract would be deemed to contain a term entitling Company B to terminate it at any time by giving reasonable notice.
A private limited company, which operates a publishing business, has no subsidiaries and is owned by individual shareholders. One of its directors wishes to undertake some home improvements and has obtained a quotation of £8,000 from a firm of builders. The director has asked the other board members if the company would pay this sum to the builders up-front, on condition that the director repay the company in monthly instalments over the coming year. The board is happy to approve such an arrangement and has asked you whether or not it also requires shareholder approval.
Which of the following comprises the best advice to the company’s board?
(a)
No shareholder approval is necessary because the value of the transaction is below £10,000.
(b)
An ordinary resolution is necessary because the transaction is a quasi-loan.
(c)
No shareholder resolution is necessary because the Companies Act 2006 does not require approval of this transaction.
(d) An ordinary resolution is necessary because the transaction is a credit transaction.
(e)
No shareholder resolution is necessary because the company is not a wholly-owned subsidiary of any other company
(c) No shareholder resolution is necessary because the Companies Act 2006 does not require approval of this transaction.
No shareholder resolution is necessary. The transaction described is a quasi-loan, as defined in s 199 Companies Act 2006. The requirement in s 198 (2) for shareholders to approve a quasi-loan to a director of a company applies only if such company is either (i) a public company or (ii) a private company associated with a public company. The company in this case is a private limited company. Because it is owned by individuals and has no subsidiaries, we can conclude that it is not associated with a public company (s 256).
A company (the “Company”) has three directors, a company secretary and four shareholders, each shareholder holding 25% of the Company’s share capital. The Company has unamended Model Articles of Association for Private Companies Limited by Shares. One of its directors would like a loan of £30,000 from the Company (the “Loan”) to fund some renovation work on personal property. The board of the Company would like to implement this Loan and do not anticipate the shareholders objecting to it. The Company does not use the written resolution procedure for such matters.
What resolutions (board and shareholder) are required for the Company to implement the Loan?
(a)
Shareholder resolution: Special resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a copy of the Loan agreement, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
(b)
Shareholder resolution: Ordinary resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a memorandum setting out the wording of the resolution to be passed, (4) approve entry into the loan agreement, (5) authorise a shareholder to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
(c)
Shareholder resolution: Ordinary resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a memorandum setting out the nature, amount and purpose of the Loan, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
(d)
Shareholder resolution: Special resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a memorandum setting out the nature, amount and purpose of the Loan, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
(e) Shareholder resolution: Ordinary resolution to approve the loan.
Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a copy of the Loan agreement, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
(c) Shareholder resolution: Ordinary resolution to approve the loan. Board resolutions: (1) Approve notice of general meeting, (2) convene general meeting, (3) instruct company secretary to make available to the shareholders a memorandum setting out the nature, amount and purpose of the Loan, (4) approve entry into the loan agreement, (5) authorise a director to sign the Loan agreement on behalf of the Company, (6) instruct company secretary to deal with post meeting matters.
This answer reflects the correct position. While the other answer options might sound plausible, they are each incorrect. A company may not make a loan to its director unless the transaction has been approved by the shareholders passing an ordinary resolution. This is the only shareholder resolution required to implement the Loan. Since the Company does not use the written resolution procedure for such matters, a general meeting will need to be convened. A board meeting will therefore be required and board resolutions passed to convene the general meeting and approve the form of notice for the meeting. The ordinary resolution approving the Loan may not be passed unless a memorandum setting out the nature and amount of the Loan and the purpose for which it is required is made available for inspection by the shareholders for at least 15 days ending with the date of the general meeting at which it is voted on and at the general meeting itself. Once the ordinary resolution approving the Loan is passed by the shareholders, a second board meeting is required to implement the Loan. This will entail passing board resolutions to approve entering into the loan agreement and appointing a director to sign the document on behalf of the Company. A board resolution requiring the company secretary to deal with post meeting matters is also required.
