Foundation Level

Business Law

3b
INSTRUCTIONS TO CANDIDATES Read this page before you look at the questions

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19 November 2001 Day 1 – early afternoon

You are allowed TWO hours to answer this question paper. Answer the ONE question in section A (this has 25 sub-questions, and is on pages 2 – 7). Answer TWO questions ONLY from section B (these questions are on pages 8 and 9). Write your examination number in the boxes provided on the front of the answer book. Write FBLW on the line marked "Subject" on the front of the answer book. Write your examination number on the special answer sheet for section A. Detach the sheet from the booklet and insert it into your answer book before you hand this in. Do NOT write your name or your student registration number anywhere on your answer book. Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered.

© The Chartered Institute of Management Accountants 2001

SECTION A — 50 MARKS ANSWER ALL TWENTY-FIVE SUB-QUESTIONS – 2 MARKS EACH
Each of the sub-questions numbered from 1.1 to 1.25 inclusive, given below, has only ONE correct answer.

Question One 1.1 Which of the following statements is correct? (i) In the event of a conflict between equity and the common law, the common law prevails. An Act of Parliament can overrule any common law or equitable rule. B (ii) only. C Neither (i) nor (ii). D Both (i) and (ii).

(ii) A

(i) only.

1.2 A B C D

All criminal cases commence in the County Court. the Crown Court. the Court of Appeal. the Magistrates Court.

1.3 A B C D

In the tort of negligence, if a claimant is partly responsible for his/her own injuries, then no compensation can be recovered from the defendant. the defendant is fully liable if he/she was mainly responsible for the injuries. if the defendant was negligent, he/she remains fully liable for all the injuries caused. the compensation will be reduced to take account of the claimant’s share of the responsibility.

1.4

An employer must provide an employee with a written statement of particulars of the employment within one month of the employment commencing. as soon after the commencement of employment as possible. within two months of the employment commencing. within a reasonable time of the employment commencing.

A B C D

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1.5 A B C D

Which ONE of the following statements is correct? An employer is obliged to provide a careful and honest reference. An employer is obliged to provide a safe system of work. An employer is obliged to provide employees with smoking facilities during authorised breaks at work. An employer with fewer than 20 employees is obliged to provide an itemised written pay statement.

1.6

The vast majority of contracts are "simple". What is the meaning of the word "simple" in this context? The terms of the contract are set out in writing. The contract does not need to be in any particular form to be binding. The contract contains fewer than ten provisions. The contract is not supported by consideration.

A B C D

1.7

A Ltd placed the following advertisement in a local newspaper: "We are able to offer for sale a number of portable colour television sets at the specially reduced price of £5∙90. Order now while stocks last." The advertisement contained a mistake in that the television sets should have been priced at £59∙00. B Ltd immediately placed an order for 100 television sets. Which ONE of the following statements is correct?

A B C D

B Ltd has accepted an offer and is contractually entitled to the 100 television sets. A Ltd can refuse to supply B Ltd as the advertisement is not an offer, but an invitation to treat. A Ltd can only refuse to sell the television sets to B Ltd if it has sold all its stock. As B Ltd has not yet paid for the television sets, the company has no contractual right to them.

1.8 A B C D

Which ONE of the following statements is correct? If a person signs a contract, he/she is bound by all its terms. A contract which has not been signed is not binding on any of the parties. A person who signs a contract is deemed to have read it. A person who has not read a contract cannot be bound by it.

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1.9 A B C D

Which ONE of the following statements is correct? If the creditor agrees to accept less than the full amount due, the debt is discharged at common law. At common law, a creditor who has agreed to accept less than the full amount due, may go back on his word and recover the balance. Payment of less than the full amount due by a third party cannot discharge the whole debt. Payment of less than the amount due cannot discharge the whole debt, even if made early at the request of the creditor.

1.10 Which ONE of the following is not an equitable remedy? A B C D Damages. Specific performance. Rescission. Injunction.

1.11 Which of the following statements is correct? (i) As a general rule, a contract will only be discharged if all its terms have been precisely performed. If a contract becomes impossible to perform through no fault of either contracting party, the contract is frustrated and unenforceable, unless its terms provide for the frustrating event. B (ii) only. C Neither (i) nor (ii). D Both (i) and (ii).

(ii)

A

(i) only.

1.12 In breach of contract, C Ltd refused to sell a motor car to D Ltd at the agreed price of £10,000. If the type of motor car is readily available on the market at a price of £9,000, which ONE of the following is correct? A B C D D Ltd is entitled to an order of specific performance, forcing C Ltd to carry out its contract. D Ltd is entitled to damages of £1,000. D Ltd is entitled to nominal damages only. D Ltd is not entitled to damages.

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1.13 In relation to E Ltd, a company limited by shares, which ONE of the following statements is correct? A B C D The liability of the company and its shareholders is limited, but the directors are fully liable for the company’s debts. The liability of the company and its directors is limited, but the shareholders are fully liable for the company’s debts. The liability of the company, its directors and shareholders is limited. The liability of the directors and shareholders is limited, but the company is fully liable for its own debts.

1.14 Adam, Ben and Carol have carried on business together in partnership since July 2001. In September 2001, they decided to enter into a formal partnership agreement. The partners agreed the terms of the agreement in October 2001 and signed the completed agreement in November 2001. According to the law, when did the partnership commence? A July 2001. B September 2001. C October 2001. D November 2001.

1.15 Which of the following statements is correct? (i) It is not possible to register a company limited by shares with the same name as a company already on the register. Once on the register, a company limited by shares cannot change its registered office. B (ii) only. C Both (i) and (ii). D Neither (i) nor (ii).

(ii)

A

(i) only.

1.16 The authorised share capital of Wye Ltd is £250,000 divided into 250,000 ordinary £1 shares. The asset value of each share is £2. Angela and Brian are the only shareholders. Each has taken 50,000 shares and each has, so far, paid £10,000. Which ONE of the following statements is correct? A B C D The issued share capital of Wye Ltd is £250,000, and the paid up capital is £20,000. The issued share capital of Wye Ltd is £100,000, and the paid up capital is £20,000. The issued share capital of Wye Ltd is £250,000, and the paid up capital is £100,000. The issued share capital of Wye Ltd is £20,000, and the paid up capital is £20,000.

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1.17 Which of the following statements is correct? (i) The Articles of Association of a company limited by shares contain the internal regulations of the company. The Articles of Association form a contract between the shareholders and the company. B (ii) only. C Both (i) and (ii). D Neither (i) nor (ii).

(ii)

A

(i) only.

1.18 Which of the following resolutions may be used to increase a company’s authorised capital? (i) (ii) A Ordinary resolution. Written resolution. B (ii) only. C Both (i) and (ii). D Neither (i) nor (ii).

(i) only.

1.19 XYZ plc has issued shares on terms that they will be bought back by the company 12 months after the date of issue. What are these shares called? A B C D Ordinary shares. Bonus shares. Preference shares. Redeemable shares.

1.20 Which ONE of the following statements is INCORRECT in relation to elective resolutions? A B C D An elective resolution may only be passed by private companies. An elective resolution may be used to reduce the majority of votes necessary to authorise short notice to 90%. An elective resolution may be used to authorise directors to issue shares for longer than the usual five years. An elective resolution may be used to dispense with the requirement to re-elect directors annually.

1.21 Which ONE of the following is INCORRECT? A B C D A public company must have at least two directors. A private company must have at least one director. Both public and private companies must have a qualified company secretary. A public company must have at least two shareholders.

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1.22 Immediately before XY Ltd was placed in insolvent liquidation, Alex, the company’s sole director, arranged for the company to make an early repayment of an unsecured loan of £15,000 which he had provided to the company. Which ONE of the following is correct? A B C D The repayment may amount to a "preference", and Alex may be required to hand back the £15,000 to XY Ltd. Alex may be fined. The repayment of the loan is valid so long as Alex was acting in good faith. XY Ltd and Alex may be guilty of fraud.

1.23 The court has decided that Jill, a director of Jay Ltd, has been wrongfully trading, in that she continued to carry on business at a time when she should have known that insolvency was inevitable. What are the possible consequences for Jill? A B C D Jill may be fined. Jill may be imprisoned. Jill may be required to contribute to the assets of Jay Ltd. Jill may be required to sell her shares in Jay Ltd.

1.24 Jack has acted in breach of his fiduciary duty as a director of JK Ltd. If the breach does not amount to fraud on the minority, which ONE of the following is correct? A B C D The breach cannot be ratified by the shareholders. The breach may be ratified by a written or ordinary resolution. The breach may be ratified by a provision in the company’s Memorandum of Association. The breach may be ratified by a resolution of the board of directors.

1.25 Zed plc holds its board meetings on the fifteenth day of each month. At the meeting on 15 June 2001, the board discussed a potential contract with RST Ltd. On 1 July 2001, Lucy, a director of Zed plc, bought shares in RST Ltd. On 25 July 2001, Zed plc contracted with RST Ltd. When should Lucy have declared her interest to the board of Zed plc? A 15 June 2001. B 1 July 2001. C 15 July 2001. D 15 August 2001.

(Total = 50 marks)

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SECTION B – 50 MARKS ANSWER TWO QUESTIONS ONLY
Question Two

(a) Explain how the law determines whether negotiating parties have reached agreement. (15 marks) (b) In September 2001, Exe Ltd ("Exe") telephoned Seller Ltd ("Seller") and ordered 5,000
computer speaker systems at a price of £150,000. It was agreed that the goods would be delivered within five days and that payment should be made within 28 days of the receipt of the goods. Following the telephone conversation, Seller sent Exe a document described as a "sales contract" which set out Seller's terms and conditions. The sales contract contained a tear-off "acknowledgement" section which Exe was asked to sign and return to Seller. One week later, Exe signed the acknowledgement and returned it to Seller together with a letter which stated that the contract was to be governed by Exe's terms and conditions, a copy of which was enclosed. The speaker systems were delivered and Exe paid the £150,000 by the due date. Exe has now received a demand from Seller for £3,000 "transport costs", and has been referred to one of Seller's terms which provides, in small print: "If the purchaser does not arrange for the collection of the goods purchased, the seller will arrange for them to be transported subject to reimbursement by the purchaser who is fully liable for the cost". Exe is refusing to pay, and has referred Seller to its own terms and conditions which include the statement: "Any price which Exe Ltd agrees to pay shall be deemed to include all transport costs".

Required:
As the Company Secretary of Seller Ltd, write a memorandum to your Sales Director, explaining whether the company is entitled to recover the £3,000 transport costs from Exe Ltd.

(10 marks) (Total = 25 marks)

Question Three

(a) Explain how the law determines whether an individual is an employee or an independent
contractor.

(13 marks) (b) Tom was employed as a mechanic by Cee plc. In October 2001, he had an argument with
Keith, the workshop manager, who lost his temper and told Tom to collect his possessions and leave, as he was dismissed with immediate effect.

Required:
Prepare a memorandum, in your role as Company Secretary, addressed to the Senior Human Resources Officer of Cee plc, explaining whether Tom has any remedies against Cee plc.

(12 marks) (Total = 25 marks)

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Question Four Danny, Edward and Fozia each hold one third of the issued share capital of DEF Ltd. Danny's service contract states that he is to be the company's sole director until May 2003. Recently, DEF Ltd contracted to borrow a substantial sum of money from Zed Bank plc in order to re-equip the company's production lines, which Danny considered to be inefficient. The bank advised DEF Ltd that the loan would be subject to the company providing security in the form of a fixed charge over the company's factory and a floating charge over the company's stock. Edward and Fozia have objected to Danny's decision to obtain the loan, as they believe that the existing production lines are capable of lasting a further two years. They also believe that Danny should have obtained shareholder approval before committing the company to the loan, and have advised him that they are considering removing him as a director.

Required:
(a) Explain the differences between fixed and floating charges. (8 marks) (b) Identify the steps which may be taken by Zed Bank plc in the event of the company
defaulting on the loan.

(6 marks) (c) Explain whether Edward and Fozia are correct so far as company law is concerned, in
believing that shareholder approval was needed before DEF Ltd could obtain the loan, and whether they can arrange for the company to withdraw from the loan.

(4 marks) (d) Explain whether Edward and Fozia have the ability to remove Danny as a director. (4 marks) (e) Explain whether Edward and Fozia have the ability to change the Articles of Association so
that in future all decisions must be approved by the shareholders.

(3 marks) (Total = 25 marks)

End of paper

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