Becker Revision Kit

ACCA
PAPER F4
CORPORATE AND BUSINESS LAW

(ENGLISH)
STUDY QUESTION BANK
For Examinations to August 2015
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STUDY QUESTION BANK – CORPORATE AND BUSINESS LAW (ENG) (F4)
CONTENTS
Question Page Answer Marks Date worked
ENGLISH LEGAL SYSTEM
1 Sources of law 1 1001 10

2 Definitions 1 1002 10
3 Powers of the Courts (ACCA D04) 1 1003 10
TORT LAW
4 Foreseeability 1 1004 10
5 Standard of Care 1 1006 10
ELEMENTS OF CONTRACT LAW
6 Buyer and Seller 1 1006 10

7 Machine tools 2 1007 10
8 Intention to create legal relations 2 1007 10
9 Consideration (ACCA D02) 2 1009 10
10 Offer (ACCA J10) 3 1010 10
CONTRACT LAW – TERMS
11 Representations 3 1011 10
CONTRACT LAW – BREACH
12 Damages for breach 3 1012 10

13 Trotter 3 1014 10
EMPLOYMENT LAW
14 Liabilities of an employer 3 1015 10

15 Redundancy and payments (ACCA J04) 3 1015 10
AGENCY
16 Duties of an agent 4 1016 10

17 Almaviva 4 1017 10
PARTNERSHIP
18 Bernard and John 4 1018 10

19 Partnerships and companies 5 1019 10
20 Limitation of liability in partnerships (ACCA D06) 5 1020 10
FORMATION OF A COMPANY
21 Lifting the veil 5 1021 10

22 Documents and procedures (ACCA D99) 5 1022 10
©2014 DeVry/Becker Educational Development Corp. All rights reserved. (iii)

CORPORATE AND BUSINESS LAW (ENG) (F4) – STUDY QUESTION BANK
Question Page Answer Marks Date worked
MEMORANDUM AND ARTICLES
23 Domingo Ltd 5 1023 10

24 Happy Days Ltd 6 1025 10
SHARES
25 Slowbutsure plc 7 1026 10
CAPITAL MAINTENANCE
26 Prospect plc 7 1028 10
LOAN CAPITAL
27 Ordinary shares, preference shares,

debentures (ACCA J08) 7 1029 10
28 Definitions 7 1030 10
29 Richard 8 1032 10
DIRECTORS
30 Removal of director 8 1033 10

31 Thomas 8 1034 10
32 Ashgrove Ltd 9 1035 10
OTHER COMPANY OFFICERS
33 Company auditor 9 1036 10
COMPANY MEETINGS AND RESOLUTIONS
34 Types of resolution 9 1039 10

35 Mr and Mrs Grabber 9 1040 10
INSOLVENCY AND ADMINISTRATION
36 Administration and liquidation 9 1041 10
FRAUDULENT AND CRIMINAL BEHAVIOUR
37 Large plc (ACCA J06) 10 1042 10
Tutorial note:
The suggested answers may include details of decided cases and statutes that are in addition to the
details provided in the F4 Study System. These further details are not necessary for a candidate to
succeed in passing examination questions and should be regarded as “bonus” information.
(iv) ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

Question 1 SOURCES OF LAW
Explain what is meant by case law, legislation and EU law as sources of English law and outline
their relative importance.
(10 marks)
Question 2 DEFINITIONS
(a) Case law is based mainly on the doctrine of judicial precedent. In that context, define the
following terms:
(i) Ratio decidendi; (2 marks)

(ii) Obiter dicta; (2 marks)
(iii) Per incuriam. (2 marks)
(b) Explain the occasions on which judicial precedent will not be binding. (4 marks)
(10 marks)
Question 3 POWERS OF THE COURTS
(a) Explain the powers of the courts in interpreting legislation, paying particular regard to
the rules they use in so doing. (7 marks)
(b) Explain the effect of the Human Rights Act 1998 on this process. (3 marks)
(10 marks)
Question 4 FORESEEABILITY
In the context of the tort of negligence, explain what is meant by foreseeability, and why it is
important.
(10 marks)
Question 5 STANDARD OF CARE
“Negligence is the failure to maintain the proper standards in discharging the duty of care owed
to another person.” Explain, with examples, what is meant by the expression “standard of care”
in the context of the law of tort.
(10 marks)
Question 6 BUYER AND SELLER
On Friday 27 November Buyer sends a fax to Seller offering to buy 1,000 tons of sugar at the current
market price. The fax is received in Seller’s offices after a short delay at 5.00pm. Seller has a problem
with faxing a reply, so he posts a letter in the last post on Friday, accepting the offer. This reaches
Buyer at 2.30pm on Monday 30 November. Meanwhile, at 9.30am on 30 November, Buyer sends a
further fax to Seller withdrawing his offer. This reaches Seller and is read by him immediately at
9.45am on 30 November.
Required:
From the point of view of the law of contract, advise Seller on his legal position with Buyer.
(10 marks)
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1

Question 7 MACHINE TOOLS
The employees of Machine Tools Ltd have been called out on an unofficial strike during a period in
which the firm has a major export order to fulfil. Their contracts contain a “no-strike” clause under
which they have undertaken to submit disputes to arbitration. Cecil, who is in no way connected with
Machine Tools Ltd and who is a member of the “Break the Unions” campaign, offers to pay the
employees an additional £20 per week if they return to work immediately. The employees do so and
complete the order on time. Cecil later refuses to pay.
Required:
In the context of contract law, advise the employees as to whether they are entitled to the
promised sum from Cecil.
(10 marks)
Question 8 INTENTION TO CREATE LEGAL RELATIONS
(a) Explain the importance of intention to create legal relations in the making of contracts.
(4 marks)
(b) After a party three friends, X, Y and Z, joined forces to complete X’s football pools
competition entry, and light-heartedly agreed to share the winnings. X signed the coupon in
his own name, paid the competition entry fee and posted the coupon to the organisers. The
entry won £60,000 and Y and Z claim to be entitled to share X’s winnings.
Required:
State whether Y and Z will be entitled to share the winnings (2 marks)
(c) Jenny agreed to give her son a financial allowance during his studies for his accountancy
examinations. After he has completed the first six months of his training Jenny and her son
have an argument and she withdraws his allowance.
Required:
State whether Jenny will be liable to continue the payments. (2 marks)
(d) Mike is shop steward for the Bolton Pie Factory and seeks advice over whether a recent
collective agreement reached by the union is binding. Both employers and unions have
committed themselves in writing but the letter is headed “without prejudice”.
Required:
State whether the agreement is binding. (2 marks)
(10 marks)
Question 9 CONSIDERATION
(a) Define consideration as it is understood in English contract law. (3 marks)
(b) In the context of contract law, explain and distinguish between the following terms:
(i) executory consideration; (2 marks)

(ii) executed consideration; (2 marks)
(iii) past consideration. (3 marks)
(10 marks)
2 ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

Question 10 OFFER
In relation to the law of contract:
(a) define an offer; (5 marks)
(b) explain the specific meaning and effect of
(i) a counter-offer; (3 marks)

(ii) a unilateral offer. (2 marks)
(10 marks)
Question 11 REPRESENTATIONS
(a) In the context of the law of contract, explain what is meant by a “representation”.
(4 marks)
(b) Explain how a person who relies on a misleading representation may be entitled to
claim remedies for breach of contract. (6 marks)
(10 marks)
Question 12 DAMAGES FOR BREACH
In the context of the law of contract, explain and illustrate the principles which are applied by the
Courts in assessing the damages arising from a breach of contract.
(10 marks)
Question 13 TROTTER
Trotter was a pig farmer and bought a food storage hopper from Frost, the manufacturer. Frost’s
workmen omitted to unseal a ventilator on top of the hopper. Trotter was unaware of this since the
ventilator could not be seen from the ground.
Trotter stored pignuts in the hopper and they became mouldy because of lack of ventilation.
Several pigs fed on the nuts died of an infection caused by the mould.
Required:
Advise Trotter as to whether he has a claim against Frost for loss of the pigs, lost sales and lost
profit.
(10 marks)
Question 14 LIABILITIES OF AN EMPLOYER
In relation to employment law, explain the possible liabilities of an employer if one of his
employees suffers an injury at work.
(10 marks)
Question 15 REDUNDANCY AND PAYMENTS
Explain the operation of the law relating to redundancy, including a consideration of the way in
which redundancy payments are calculated.
(10 marks)

Question 16 DUTIES OF AN AGENT
(a) In relation to agency law, explain the implied duties that an agent owes towards his
principal. (6 marks)
(b) Fred asks Catherine to buy for him 500 shares in a particular company. Catherine already
owns 300 of these shares herself and transfers these into Fred’s name.
She then buys the remaining 200 shares from another person and transfers them to Fred at a
higher price than she paid.
Fred has now discovered the full facts about both of these transfers.
Required:
Advise Fred. (4 marks)
(10 marks)
Question 17 ALMAVIVA
Almaviva owns a restaurant and has on several occasions authorised Figaro to purchase wine for him.
On one occasion Figaro orders some wine for Almaviva from Bartolo without authority, because he
thinks Almaviva will be pleased with it. Almaviva does like the wine and wishes to obtain it, but
Bartolo refuses to deliver it. He has changed his mind about selling because he has found he can obtain
a better price elsewhere.
Required:
In the context of the law of agency, advise Almaviva.

(10 marks)
Question 18 BERNARD AND JOHN
Bernard and John are in partnership selling electronic goods. Bernard deals with the day-to-day
running of the shop, and buys and sells goods: John is a dormant partner. The partnership agreement
prohibits either of them from ordering goods to a value of more than £5,000 without the agreement of
the other, nor may either partner purchase items for his personal use with the firm’s money without the
other’s agreement. They agree to buy goods only from a list of specified suppliers.
Bernard orders goods to a value of £10,000 from Wensleydale Electric Products Ltd, a supplier not
included on the agreed list. He also buys a car for £20,000 for his own use with a partnership cheque.
One evening, after a night at the pub, Bernard assaults a customer of the firm who had argued with him
that day at work about a refund.
Required:
In the context of the law of partnership, advise John whether he is liable for any of the above
acts.
(10 marks)

Question 19 PARTNERSHIPS AND COMPANIES
(a) State the principal features which distinguish an ordinary business partnership from a
company. (5 marks)
(b) State the effect of the Limited Liability Partnerships Act 2000 on the status of business
partners. (5 marks)
(10 marks)
Question 20 LIMITATION OF LIABILITY IN PARTNERSHIP
In relation to partnership law explain the difference between and the rules applicable to the
following:
(a) limited partnerships (4 marks)

(b) limited liability partnerships (6 marks)
(10 marks)
Question 21 LIFTING THE VEIL
(a) Explain what is meant by “lifting the veil” of incorporation of a company. (3 marks)
(b) Describe specific circumstances in which this can occur. (7 marks)
(10 marks)
Question 22 DOCUMENTS AND PROCEDURES
Describe the documents and procedures involved in a public limited company being registered
and starting to trade.
(10 marks)
Question 23 DOMINGO LTD
Duncan, Edward and Gemma were in partnership making pet food and toys for many years before
incorporating as Domingo Ltd in 2007. They hold the issued share capital equally. The business has
grown considerably since incorporation and they now wish to make a number of changes – primarily
developing into new markets and plan to raise additional equity finance to do so.
They recognise this could dilute their control and thus wish to entrench themselves as directors. This is
of particular concern to Edward who has had an increasingly bad relationship with Duncan and Gemma
over the past few years.
At the last board meeting it was agreed that:
(i) the company’s future activities are to include the manufacture and distribution of computer
games via toy shops;
(ii) £60,000 of equity shares are to be issued;
(iii) the following clause is to be incorporated into the articles: “Any member who intends to
transfer shares shall offer them first to existing members, who may purchase them equally
between them at fair value”.

Required:
(a) Explain the procedures required to bring the planned changes into effect. (6 marks)
(b) Advise whether there is an alternative method for Domingo Ltd to finance the
developments which will avoid the problems of reduced control. (4 marks)
(10 marks)
Question 24 HAPPY DAYS LTD
Tutorial note: This is a longer question than you would expect to see in the exam, but overall it is a
good test of knowledge and understanding of the issues raised.
The articles of Happy Days Ltd include the following provisions:
(1) All disputes between the company and its members shall in the first instance be referred to
arbitration.
(2) Alan, Brian and Charles shall be the directors of the company for life.
(3) David shall be employed as the company accountant.
(4) The directors shall have power to declare a dividend to be paid to the shareholders.
(5) Every member who intends to transfer his shares shall inform the directors who will take the
shares between them at a fair value.
Alan, Brian and Charles are members of the company. David is not.
Required:
Consider the following situations, and advise Philip, Brian and Michael respectively:
(a) Edward, a shareholder, wishes to sell his 3,000 shares in the company and offers to sell them
to Alan, Brian and Charles. They refuse to buy them. Edward intends to bring an action
against Alan, Brian and Charles for breach of contract.
Advise Edward.
(b) At a properly convened and conducted general meeting the second article referred to above is
altered to read as follows: “Alan, Brian and Charles shall be directors of the company until
they attain the age of 65 years”. Charles will be 65 years of age in August this year and
wishes to challenge the alteration. Charles holds 15% of the issued share capital of the
company.
Advise Charles.
(c) David’s work has been unsatisfactory and for the last two years the directors have employed
Frank as a company accountant. David wishes to challenge the failure to employ him in
accordance with the articles.
Advise David.
(10 marks)

Question 25 SLOWBUTSURE PLC
The directors of Slowbutsure plc require funds for expansion and re-equipment of the company’s
factory. They are aware of the recent acquisition of a substantial shareholding by American-Australian
Multinational Inc. They suspect that this company intends to make a take-over bid, subsequently to
close down the British factory and to transfer manufacture abroad.
Required:
Explain to the directors the factors they ought to consider before making an issue of new shares
in the context of:
(a) case law; and (7 marks)

(b) the Companies Act 2006. (3 marks)
(10 marks)
Question 26 PROSPECT PLC
You are the company secretary of Prospect plc. The board of directors of Prospect plc propose to
execute the following matters at the next board meeting:
(a) To dispense with pre-emption rights and allot 50,000 £1 ordinary shares to Harry wholly for
cash.
(b) To allot 25,000 £1 ordinary shares to Jim in return for a computer programme that Jim has
written for the company.
Required:
Prepare a report for the board on the company law procedures it must follow to achieve these
two proposals.
(10 marks)
Question 27 ORDINARY SHARES, PREFERENCE SHARES, DEBENTURES
In relation to company law explain the meaning of the following:
(a) ordinary shares; (3 marks)

(b) preference shares; (3 marks)
(c) debentures. (4 marks)
(10 marks)
Question 28 DEFINITIONS
Company debentures can be secured by fixed or floating charges, or they can be unsecured.
(a) Explain the terms “fixed charge” and “floating charge” and state which has priority.
(6 marks)
(b) Describe in what circumstances a company might issue unsecured debentures. (4 marks)
(10 marks)

Question 29 RICHARD
Richard is the founder, managing director and controlling shareholder of RST Ltd. For some years
Richard kept the company afloat by making a number of unsecured loans to it. At the last tally the
company owed him £20,000, and yet needed a further loan of £5,000. Richard is willing to advance the
money, but realising that the company is very likely to go into liquidation, and with a view to salvaging
something for himself from the company’s assets, he arranges for the company to grant him a formal
floating charge over all the assets of the company. The floating charge states that it secures the £5,000
paid to the company at the time the charge was executed, and also the £20,000 outstanding debt owed
him by the company.
The company goes into insolvent winding-up three months after the floating charge is executed. The
company’s assets are estimated at a little over £25,000 and its unsecured debts add up to £20,000.
Required:
In the context of company law, discuss the competing claims of Richard, who is a secured
creditor, and the company’s unsecured creditors.
(10 marks)
Question 30 REMOVAL OF DIRECTOR
Members of a company have decided that they wish to remove one of the directors of the company
before the expiration of the director’s 10 year service contract.
Required:
In the context of company law, advise the members how the director’s removal might be
achieved; the means by which the director could oppose the removal; and the legal consequences
to the company if the director is removed.
(10 marks)
Question 31 THOMAS
Thomas is a director of Financing plc. He proposes to his colleagues on the board that he should
borrow a six figure sum from the company and that his wife Tania should buy a property held in the
company’s name which the board has found to be surplus to the company’s future requirements.
Required:
(a) Set out the principles of company legislation dealing with transactions with directors,
and the steps that must be followed to effect the proposed transactions.
(7 marks)
(b) Outline the consequences in company law of carrying out transactions in breach of the
provisions you have described. (3 marks)
(10 marks)

Question 32 ASHGROVE LTD
Derek is a director and shareholder of Ashgrove Ltd. He is spending an increasing amount of time at
the company’s head office, and he needs to move house to be nearer. He asks the company for a loan
to cover the cost of the move, and requests that the loan be repaid by being offset against future
dividend payments to him by the company.
Required:
In the context of company law, explain whether this transaction is permitted and, if so, what
steps should be taken to effect it.
(10 marks)
Question 33 COMPANY AUDITOR
Explain the role of the company auditor. In answering the question pay particular regard to the
following issues relating to an auditor’s:
(a) qualification;
(b) appointment;
(c) removal;
(d) rights and duties.
(10 marks)
Question 34 TYPES OF RESOLUTION
Describe the different types of resolution which can be passed by the members of a company and
the differences between them.
(10 marks)
Question 35 MR AND MRS GRABBER
Mr and Mrs Grabber have opened a grocery shop, and have formed a company to run the business
called “Grabbers Goodies Ltd”. Mr and Mrs Grabber are the only members and directors.
Mr Grabber has written to you, his accountant, as follows:
“You convinced me of the advantages of incorporating a company, but now that we are up and running,
some of the formalities seem totally unnecessary given that there are only two of us as shareholders. In
particular, the law seems to expect my wife and me to sit down solemnly and hold an annual general
meeting every year, at which we submit our accounts to ourselves. It seems a complete waste of time
which we should be spending running the business.”
Required:
Draft a letter in reply to Mr Grabber, advising him of the ways in which the Companies Act 2006
makes the administration of a private company less onerous.
(10 marks)
Question 36 ADMINISTRATION AND LIQUIDATION
In the context of corporate insolvency, define administration and liquidation, and outline the
purpose of each.
(10 marks)

Question 37 LARGE PLC
In January the board of directors of Large plc decided to make a take-over bid for Median plc. After
the decision is taken, but before it is announced, the following events occur:
(i) Nic, a director of Large plc, buys shares in Median plc;
(ii) Nic tells his friend Oz about the likelihood of the take-over and Oz buys shares in Median
plc;
(iii) Oz in turn passes on the information to his friend Pat, who also buys shares in Median plc;
(iv) at a dinner party Oz, without actually telling him about the take-over proposal, advises his
brother Quentin to buy shares in Median and Quentin does so.
When the take-over bid is finally made public, the stock-market price of shares in Median plc rises
significantly and all the above make significant profits when they immediately sell their holdings.
The take-over bid, however, is referred for investigation on the basis that it might breach monopoly
legislation. Before the report disapproving of the take-over bid on competition grounds is officially
announced, the following further events occur:
(v) Mandarin, a senior civil servant receives a copy of the report, whereupon he sells shares he
has in Median plc, thus avoiding a loss when the shares fall back on the stock exchange
following the official release of the report.
(vi) Minion, a minor civil servant, who works for Mandarin, reads a copy of the report lying on
Mandarin’s desk. He needs money to pay off an outstanding tax bill and so he decides to sell
some shares in Median plc before their price falls.
Required:
Consider the legal position of Nic, Oz, Pat, Quentin, Mandarin and Minion, in the light of the law
relating to insider dealing.
(10 marks)

Answer 1 SOURCES OF LAW
Case law, statute and EU law are the main sources of law in England and Wales:
Case law
Case law is the judicial interpretation, explanation and application of law by reference to individual
cases. As far as possible a judge will follow principles enunciated by his predecessors of equal or
higher rank. This is the “doctrine of precedent”. Case facts, the decisions made and, most importantly,
the legal reasoning behind those decisions, are recorded and used as precedents for dealing with similar
issues in future.
Case law has been used to enunciate the basic principles of the common law of England and Wales.
Common law governs the basic principles of, the law of contract and the law of tort. The concept of
damages – money compensation for harm suffered in consequence of wrongdoing – is a common law
feature.
Equity is another branch of case law, underpinned by principles of fairness and good conscience rather
than by strict adherence to the general principles of the common law. It acts as a “gloss” on the
common law, to allow for the application of natural justice where the common law might not do so, and
offers remedies such as injunctions and rescission or specific performance of contracts where a mere
money award might not be adequate to resolve matters. The fiduciary responsibilities of partners,
company directors and others in positions of trust have been developed through the application of
equity.
A civil court will be aware of both common law and equitable considerations when deciding cases. If
there is a conflict, equitable principles prevail.
Case law combines the certainty of precedent with the flexibility of each case being examined on its
own merits rather than there being a rigid adherence to strict rules,
Statute and delegated legislation
Statutes are sets of rules and regulations created by, or under the delegated authority of, Parliament.
Parliament being the sovereign authority in the UK, statute is the superior form of law. Acts of
Parliament and delegated legislation are absolutely binding on everyone within their jurisdiction,
although they can be modified or repealed by later statutes.
Statutes contain specific rules, rather than statements of principle, and as such are less flexible than
case law. Statute is used to set down standard rules for matters such as the running of companies and
partnerships, regulating employment rights, and specifying criminal offences.
“Delegated legislation” describes rules such as local by-laws and ministerial statutory instruments
which have the authority of statutes but which are made outside the mainstream legislative process,
under statutory authority. This mechanism compensates for the limited time and expertise available in
parliament to make direct legislation.
European Union law
The UK as a member of the European Union is bound by the provisions of EU treaties – the primary
sources of law – and by subordinate rules deriving from its membership. EU law takes precedence
over domestic law.

The detailed law affecting member states comes from the following secondary sources:
 Regulations, issued by the Council or the Commission, are self-executing and therefore
directly applicable in each member state without further national legislation.
 Directives to member states to bring their law into line in a particular way by a particular date
become law once they are adopted by the member states in accordance with their own
legislative processes.
 Decisions of the Council or the Commission are addressed on matters of policy to member
states, companies or individuals. They are binding on the recipients, and may also give third
parties the right to rely on them in legal proceedings.
Answer 2 DEFINITIONS
(a) Terms
Ratio decidendi
The duty of a judge is not to “make” the law but to identify, interpret and apply both case law
and statute.
In passing judgement the judge summarises the facts and arguments which have been
presented to him, and then gives his reasoned decision.
The specific legal reasoning behind the decision is described as the “ratio decidendi” and is
looked to as a precedent in later cases.
Obiter dicta
Statements which go beyond the ratio – “obiter dicta” (things said in passing) – are not
binding in future decisions, but can be referred to as persuasive authority. These dicta might
deal with matters ancillary to the main judgement, or a statement of hypothetical
circumstances which would have led to a different decision.
Per incuriam
This means literally “through lack of care”: if a precedent has been set without proper
consideration of the relevant laws or facts, this can be a reason for its not being followed in
later cases.
(b) Avoiding judicial precedent
The general rule is that precedents set by higher courts bind judges in lower courts.
However, it is not rigid. A precedent will not be binding if:
 the decision has been reversed on appeal in a higher court – the appeal decision
itself then becomes a precedent;
 it has been overruled by statute, or by a higher court in a later case;
 the facts of the case are materially different, so that the cases can be distinguished
from one another;

 it was made “per incuriam” – with a lack of proper attention to relevant laws or
facts.
This gives a useful degree of flexibility to the system – although it does lead to complaints
that case law has developed into a bulky and complex field.
Answer 3 POWERS OF THE COURTS
(a) Interpreting legislation
In the English legal system the conventional judicial view is that judges do not make the law,
but that they interpret and apply it. Where a case involves the application of a statute, it is the
judge who interprets the words used in the statute to give it meaning.
Judges are expected to follow any definition provisions within the statute itself, and under the
Interpretation Acts, and to interpret statutes in the way most favourable to the operation of the
Human Rights Act 1998.
Beyond this, judges have considerable power in deciding the actual meaning of statutes, and
they are able to deploy a number of competing, sometimes contradictory, mechanisms for
deciding the meaning of the statute before them. These include maxims encouraging the
contextual interpretation of words within particular statutes, and summarising words which
follow specific lists in statutes, and some principal rules including:
The literal rule
Under this rule, the judge is required to consider what the legislation actually says rather than
considering what it might mean. In order to achieve this end, the judge should give words in
legislation their literal meaning, that is, their plain, ordinary, everyday meaning, even if the
effect of this is to produce what might be considered an otherwise unjust or undesirable
outcome.
The golden rule
This rule can be deployed to modify the effect of the literal rule, where the application of the
literal rule would result in what appears to the court to be an obviously absurd result – but it
must find genuine difficulties before it declines to use the literal rule in favour of the golden
one.
There may be two apparently contradictory meanings to a particular word used in the statute,
or the provision may simply be ambiguous in its effect. In such situations, the golden rule
operates to ensure that preference is given to the meaning that does not result in the provision
being an absurdity. Thus in Adler v George (1964) the defendant was found guilty, under the
Official Secrets Act 1920, with obstruction “in the vicinity” of a prohibited area, although she
had actually carried out the obstruction “inside” the area.
Purposive interpretation
At common law, the judiciary developed a “mischief” rule to permit the court to go behind
the actual wording of a statute in order to consider the problem that the statute is supposed to
remedy. This rule is increasingly being moulded into a generally purposive approach adopted
by modern jurists, whereby the legislation is interpreted to give effect to parliament’s
intended purpose in passing it – this is in line with the principles of interpreting European
Law.

The particular judge interpreting the statute has wide flexibility in determining which rules he
sees fit to use, or which rule best suits his own viewpoint of how the law should be
interpreted. In the eyes of critics, therefore, it is said that judges do go some way to
“making” the law rather than merely interpreting it.
(b) Effect of the Human Rights Act 1998
The Human Rights Act 1998 (HRA), which incorporated the European Convention on
Human Rights into United Kingdom law, requires courts to take into account any previous
decision of the European Court of Human Rights (ECHR).
More importantly (to this question), the Act requires all legislation to be read so far as
possible to give effect to the rights provided under the Convention. This power has the
potential to invalidate interpretations of statutes determined before the HRA was enacted.
However, the Act does not permit a court to invalidate incompatible legislation, merely to
make a declaration of incompatibility and leave it to the legislature to remedy the situation
through new legislation.
Answer 4 FORESEEABILITY
Meaning of “foreseeability” in negligence
Foreseeability in negligence means:
 the extent to which the action or omission of a person might have been expected to cause
damage to another person;
 the extent to which a particular person or class of persons might be expected to be damaged
as a result of that action or omission;
 the extent to which the consequences actually resulting from that action or omission might
have been expected.
Test of foreseeability
Foreseeability is measured by reference to what could reasonably have been expected by the person
committing the action or omission, having regard to his skill and knowledge, the skill and knowledge
that would be reasonable for a person of his position, and all the relevant circumstances. He will be
liable in negligence only for reasonably foreseeable damage to a reasonably foreseeable person or class
of persons, of a reasonably foreseeable type of damage.
Foreseeability of damage, and foreseeability of victim
The test of foreseeability of damage and of class of victim was firmly established in the case of
Donoghue v Stevenson (1932) where it was held that a person owes a duty of care to avoid injurious
acts or omissions which could be reasonably foreseen, if pursued, to cause harm to another person. The
persons to whom the duty is owed, said the court, are those who are so closely connected to the events
that they could be reasonably foreseen to be likely victims – they were described in the judgement as
“neighbours”.
Following that reasoning, the court in the Donoghue case went on to rule that a manufacturer of
foodstuffs should owe a duty of care to consumers of the foodstuff not to allow the product to be
contaminated during production.

In the case of Bourhill v Young (1943) by contrast, a dangerous driver was held not to have owed a
duty of care to witnesses of the aftermath of an accident he caused who were in no fear for their own
safety or that of their loved ones. Such a class of persons would not have been reasonably foreseeable
at the time he caused the accident.
Foreseeability of type of damage
The test of foreseeability of type of damage was established in cases such as the Wagon Mound (1961).
If the type of damage suffered by the injured party was not reasonably foreseeable by the tortfeasor
when the tort was committed, there is no liability. In the Wagon Mound case freak conditions caused a
discharge of non-inflammable oil to ignite, causing damage by fire. The shippers who had negligently
discharged the slick were held not to be liable for the fire damage, since this was so unexpected and
unlikely as not reasonably to have been foreseen as a consequence of discharging the oil.
However, if the type of damage was foreseeable, the tortfeasor is liable for the full consequences, even
if they are greater than might have been expected. In Smith v Leech, Brain & Co (1962) an employee
who developed cancer in consequence of suffering a relatively minor burn in an industrial accident was
entitled to damages for the full suffering – personal (i.e. bodily) injury was a foreseeable consequence
of the employer’s practices, and the employer could not avoid liability just because the consequences
were more grave than might have been imagined beforehand.
Special knowledge
Foreseeability is tested by the standards of a reasonable person of the tortfeasor’s position, taking
account of his actual knowledge and skills. If the tortfeasor has special knowledge, general or special
to the parties, he is expected to use it. Thus in Paris v Stepney Borough Council (1951) an employer
who knowingly employed a partially sighted employee was held to owe a higher standard of care to
him than to the fully sighted employees. Likewise, in Jebson v Ministry of Defence (2000) an
employer who provided transport to employees who were expected to be drunk owed them a higher
standard of care than would have been reasonable for sober passengers.
Just and fair
The tests of foreseeability are modified by judicial discretion not to impose a duty where it would not
be just and fair to do so. For example, although companies’ published accounts are commonly used as
reference documents by investors planning their investments, which would make the investors
foreseeable neighbours of the publishing companies and their directors and auditors, it has been held
that there is no duty of care. It would not be just and fair to impose a duty upon companies, directors
and auditors in this way – it would “open the floodgates of litigation” against them, and this would be
unreasonable (Caparo v Dickman 1990).
Tutorial note: There would, however, be liability if the parties could be shown to have acted
fraudulently – with deliberate intent to mislead.
Conclusion
Foreseeability is an important test in negligence, because it determines whether or not a person has a
liability to those who suffer by his actions or omissions, and fixes the extent of his liability.

Answer 5 STANDARD OF CARE
Negligence is the common law recognition that a failure to take “reasonable” care, thereby causing
foreseeable harm to one’s neighbour, should entitle the injured party to claim compensation (Donoghue
v Stevenson – manufacturer’s liability to consumer of defective product).
The measure of how much care is “reasonable” is described as the standard of care. Generally an
individual’s standard of care will be measured by that of a “reasonable” person of his or her standing.
Therefore an unskilled, non-specialist person who does not hold himself out as having any special skills
will have a relatively low standard and an expert will have higher standards.
However, if a person puts himself into a position where he would be expected to show special care, his
standard will be higher, even if his level of personal competence is low (Nettleship v Weston even a
learner-driver must demonstrate reasonable care to other road users, passengers, etc).
An example of this hypothetical or minimum standard of care in a business context arises in the
Companies Act 2006, s.174, which imposes an objective standard of care upon company directors to
exercise the care, skill and diligence that would be exercised by a reasonably diligent person with the
general knowledge, skill and experience that may be reasonably be expected of a person carrying out
that director’s functions within the company, and the general knowledge, skill and experience of the
director himself.
This standard reflects the test applied in establishing liability of directors for wrongful trading in
proceedings under s.214 IA86.
Likewise, at common law a person with special business knowledge and skill must use them (e.g.
accountants (Dorchester v Stebbing); bankers (Hedley Byrne v Heller)).
Special knowledge about the risks will also raise the standard (Paris v Stepney – the standard of an
employer’s duty towards employees with known disabilities may be higher than that owed to able-
bodied workers).
Answer 6 BUYER AND SELLER
Seller should be advised as follows:
The situation will be governed by the principles of offer and acceptance in contract law. A contract is
not made unless and until the offeree communicates unequivocal assent to the terms of the offer, while
the offer is still in force. The acceptance must actually reach the offeror in a timely way.
Similarly, if the offeror withdraws his offer, notice of the revocation must reach the offeree before he
signifies his acceptance. If it arrives after the offer has been accepted, it arrives too late.
The ruling in Entores v Miles Far East Corporation established that where message transmission is
instantaneous, such as by fax, telephone or telex, the information is communicated when and where the
other party receives it (further rules apply to internet contracting).
The question here is whether, by posting the letter on the Friday afternoon, Seller accepted in a timely
and effective fashion. If he did, then Buyer's revocation fax on Monday morning will have been
communicated too late.
Timely acceptance
The general rule is that acceptance should be communicated by a method that is at least as speedy as
that by which the offer was communicated. Since the offer here was sent by fax, it should have been
accepted by fax, or by an equally speedy means (e.g. by telephone or email).

If the offeree chooses a slower method, he risks the offer’s being revoked or lapsing before his
acceptance is communicated.
Post is a slower means of communication than fax. Unless the offer in this case specified that it could
be accepted by post, and the postal rule applied, posting would not have been a timely mode of
acceptance. There is no suggestion in the given facts that the postal rule did apply. There would be no
communication of acceptance here unless and until the letter actually arrived, and to be effective, it
should have done so while the offer was still in force. It is too late to accept an offer once one has
notice that it has been revoked: Dickinson v Dodds.
The letter of acceptance arrived and was communicated at 2.30pm on Monday 30 November. By that
time, Seller was already on notice of Buyer’s revocation of his offer, having received Buyer’s fax at
9.45am on that day. There is no contract between Buyer and Seller.
Answer 7 MACHINE TOOLS
In English law, a promise is only enforceable if it is supported by valuable consideration: that it, if the
person to whom the promise has been made does, or refrains from doing, something which is of
economic value and which goes beyond his or her existing obligations in law generally or to the person
making the promises.
By returning to work, the employees are carrying out their existing obligation under their contract with
Machine Tools Limited: as such, it could be argued that they are doing no more than they are already
obliged.
However the agreement here, to return to work in exchange for a “reward” of £20 per week, is not
made with Machine Tools Limited: it is made with Cecil, who has his own motives. Cecil has made a
promise (to pay the additional £20 per week) not in return for the workers doing something they are
already bound to do for him (he had no contract with them) but in return for them forgetting their strike
and carrying out their contract with Machine Tools. Thus the workers are doing something of value at
his request in return for his promise, which is therefore binding.
The Courts have long accepted that performance of an existing contractual duty to one person can be
regarded as good consideration for a contract with another person (Shadwell v Shadwell (1860)).
The employees should therefore be advised that on that basis, they will be entitled to enforce the
payment from Cecil.
Tutorial note: The facts here are similar to those in New Zealand Shipping Company v Satterthwaite,
which followed Shadwell v Shadwell, in which the extra payment was allowed.
Answer 8 INTENTION TO CREATE LEGAL RELATIONS
(a) Importance
Contracts are agreements intended to be legally binding. If two parties make an agreement
without intending it to be legally binding, it is not a contract in the eyes of the law.
The law presumes that parties who are in commercial relations intend any agreement between
them to be legally binding. If, however, they clearly state in the terms of the agreement that it
is not intended to create legal obligations, the Courts will respect their wishes. In Jones v
Vernon’s Pools the Court held that a football pools coupon which contained a clause saying
that it was “binding in honour only” was not legally binding.

On the other hand, in social or domestic agreements there is a presumption that the parties do
not intend to be legally bound, in the absence of clear evidence to the contrary. In Balfour v
Balfour the defendant agreed to pay his wife £30 per month as a housekeeping allowance
while he was away in Ceylon. The defendant failed to maintain the payments. The Court
held that the arrangement was purely domestic and was not legally binding.
(b) Entitlement to winnings
Y and Z’s claim to share X’s winnings will depend on whether the evidence shows that the
parties intended their agreement to create legal relations, and whether it shows that each of
them gave some consideration.
The facts here are similar to those in Simpkins v Pays where it was held that the plaintiff was
entitled to one-third of the winnings, since the Court decided that legal relations were
contemplated by the parties and there was mutual consideration in the arrangements between
them.
However, here we are told that the arrangement between the friends was “light-hearted”, and
that X paid for and deal with the mechanics of submitting the entry. This would suggest that
the parties did not consider the arrangement to be legally binding, and gave no consideration
for the arrangement. If that is so, Y and Z will not be entitled to a share.
(c) Liability for payments
Agreements made in a social or domestic context are presumed by law not to be intended by
the parties to have any legal consequences.
In Jones v Paddavaton, the facts of which are similar to those given here, it was confirmed
that this is the approach to take where the parties to the agreement are relatives (in the Jones
case, mother and daughter) unless they can show a contrary intention by words or conduct.
In the situation given in the question, it would appear that the presumption applies and Jenny
would probably be unable to enforce the agreement in Court. The Court is likely to view this
family arrangement as a private matter and outside its jurisdiction.
(d) Is agreement binding?
Agreements which contain a commercial element are presumed to be intended by the parties
to have legal consequences, (as explained in part (a) above). The presumption can be
rebutted, however, by the parties’ words or conduct, or by statute.
Under employment legislation there is a conclusive presumption that a collective agreement

is not intended to be binding between union and employer unless expressly stated in writing
to be legally enforceable.
More generally, negotiations made “without prejudice” are regarded as being intended not to
be admissible in Court and therefore not legally binding (provided the party relying on it has
been acting in good faith).
In this situation, therefore, there can be little doubt that Mike, representing the rest of the
workforce, is not bound by their collective agreement.

Answer 9 CONSIDERATION
(a) Definition
English law does not enforce every promise which is made. It does not enforce gratuitous
promises (i.e. promises given for no return) unless they are given by way of a formal, signed
and witnessed document in the form of a “deed”. For a simple promise to be enforceable in a
court of law it is necessary that the person to whom the promise was made, the promisee,
should have done something in return for the promise from the promisor. That something
done in return for a promise is “consideration” and can therefore be understood as the price
paid for a promise.
The element of bargain implicit in the idea of consideration may be seen in Sir Frederick
Pollock’s definition of it, subsequently adopted by the House of Lords/Supreme Court of the
United Kingdom in Dunlop v Selfridge (1915), as “An act or forbearance of one party, or the
promise thereof, is the price for which the promise of the other is bought, and the promise
thus given for value is enforceable.”
An alternative and shorter definition of consideration is “some benefit to the promisor or

detriment to the promise”.
It is not necessary for both elements in the definition to be present to support a legally
enforceable agreement. Although in practice there usually is a reciprocal exchange of benefit
and detriment, as long as the promisee acts to their detriment it is immaterial whether that act
actually benefits the promisor or not. The promisee will still have provided consideration and
the promise made to elicit that action will be legally enforceable against the promisor.
(b) Types of consideration
(i) Executory consideration
One party or both parties to a contractual agreement may do so on terms that their contractual
obligation is to be performed at some later time (e.g. where goods are bought on credit, the
purchaser’s consideration is that he will pay at some agreed later date). This future benefit is
described as “executory consideration”.
The future promise(s) is legally binding and enforceable in a court of law. A contract made
on the basis of executory consideration is known as an executory contract.
(ii) Executed consideration
Consideration which is performed simultaneously with the making of the contract is referred
to as “executed” consideration.
Executed consideration is a performance of the giver’s consideration, and “buys” the

performer the right to enforce the other party’s consideration.
Executed consideration is “good” consideration in law.
(iii) Past consideration
An action or promise which has been done or made before the contract is proposed known as
“past” consideration – it was already a matter of history before any agreement was made.

Past consideration is not truly reciprocal to a later promise, and so it does not count as valid
consideration. No agreement purporting to be based upon this spent act or promise can be
supported.
For example, in Re McArdle (1951) a son and his wife lived in his family’s house with his
mother, and the wife made various improvements to the house. The rest of the family later
promised to pay the wife for the work she had done, but failed to do so. It was held that the
wife’s work had been finished before the promise was given, it was past consideration and
the family’s promise could not be enforced.
There are exceptions to the rule that past consideration will not support a valid contract: for
example, where a person is asked to give services in the course of his profession or trade, he
has an implied right to be paid the due fee, even if no fee was agreed at the outset.
Answer 10 OFFER
(a) Definition
An offer is an expression of the terms upon which an individual is willing to enter into a
binding contractual relationship with another person, such that if it is accepted by the other
person it will create an agreement. The person who makes the offer is the “offeror”; the
person who receives the offer is the “offeree”. The central legal feature of an offer is that it
may, through acceptance by the offeree, result in a legally enforceable contract.
Not all statements will amount to an offer. It is important to be able to distinguish what the
law will treat as an offer from other statements, which will not form the basis of an
enforceable contract, such as:
 a mere statement of intention, which cannot form the basis of a contract even
although the party to whom it was made acts on it (Re Fickus (1900));
 a mere supply of information, as in Harvey v Facey (1893). In that case a

landowner sent a telegram to a would-be buyer stating a minimum price that he
would accept for the land. The buyer tried to rely on this price as an offer price.
The telegram was held to be simply a statement of information, and was not an
offer capable of being accepted.
An offer must be capable of acceptance:
 It must be clear. A vague “offer” is not a true offer in common law (Scammel v
Ouston (1941)).
 It cannot be accepted if it has expired
An offer can be made to one person, a group of persons or even to the whole world and can
be accepted and made binding through the conduct of the offeree (Carlill v Carbolic Smoke
Ball Co (1893)).

(b) Meaning and effect of “counter-offer” and “unilateral offer”
(i) Counter-offer
A counter-offer arises where the offeree tries to change the terms of the original offer, rather
than directly accepting it. The consequence of making a counter-offer is to bring the original
offer to an end so it is no longer possible for that original offer to be accepted at a later time.
For example, in Hyde v Wrench (1840), Wrench offered to sell his farm for £1,000. Hyde
made a counter-offer of £950, which Wrench rejected. Hyde then informed Wrench that he
accepted the original offer. It was held that this did not create a contract. Hyde’s counter-
offer had effectively ended the original offer and it was no longer open to him to accept it.
A counter-offer must not be confused with a request for information. Such a request does not
end the offer, which can still be accepted after the new information has been elicited. In
Stevenson v McLean (1880) it was held that a request by the offeree as to the length of time
the offeror would give for payment did not terminate the original offer, so that it remained
open for the offeree to accept.
(ii) Unilateral offer
A unilateral offer is one where one party promises something in return for some action on the
part of another party, without necessitating an express acceptance. If the offeree starts
performing the task requested, he is deemed to have accepted, and the offeror may not
revoke.
Reward offers and challenges are examples of unilateral promises.
The leading case on the matter is Carlill v Carbolic Smoke Ball Co (1893), where a company
promised to pay £100 to anyone who caught influenza after using their health product. The
company later tried to revoke the offer, after customers had accepted the challenge by buying
and using the product. It was held that the company was bound by its promise to pay users in
the event of their catching influenza.
Similarly in Errington v Errington (1952), a father promised his son and daughter-in-law that
he would transfer ownership a house to them when they had paid off the outstanding
mortgage (which was in his name). After the father’s death, while the couple were still
making repayments, his widow sought to revoke the promise. It was held that the promise
could not be withdrawn as long as the mortgage payments continued to be met.
Answer 11 REPRESENTATIONS
Tutorial note: Note that this question and answer deal with rights and remedies in relation to
representations and terms rather than with rights and remedies in misrepresentation. This reflects the
examiner’s approach to the subject.
(a) Representations
A representation is statement of fact made during pre-contract negotiations by one party to

the other as an inducement to him to enter the contract. It is not necessarily a term of the
contract, and so does not in itself create obligations in contract law for the person making the
representation.

(b) Remedies for breach of contract
A person who relies on a misleading representation does not automatically have any
contractual remedies. He may only seek remedies for breach of contract if the representation
has become a term of the contract.
For example, in Phillips v Brooks a rogue induced a jeweller to accept a worthless cheque in
payment for jewellery by misrepresenting his identity. It was held that the rogue’s identity
was not a term of the contract.
Tutorial note: The jeweller did, however, get rights to make claims in misrepresentation,
but not for breach of contract.
If the parties explicitly include the representation as a term, it will become part of the contract
and the injured party can sue for breach if it is not fulfilled. If it is not expressly included in
the contract, the question of whether a representation is to be treated as a term will be for the
court to decide. There are a number of factors to take into account, for example:
 If the representation relates to something which goes to the heart of the contract, so
that the contract would not otherwise have been made, it is likely to be treated as a
term.
 If the representation is made close in time to the conclusion of the contract it is

`more likely to be treated as a term than if it had been made early on and then not
returned to by the parties.
 If the representation is made on the basis on one of the parties’ skill and judgement,
upon which the other party relies, it is likely to be treated as a representation.
Remedies for breach of contract may also be available if a representation induces a collateral
contract and is then not fulfilled. The leading case here is Shanklin Pier Ltd v Detel Products
Ltd (1951) in which a paint manufacturer made various representations which induced a
business to specify its use by contractors. The paint proved to be unsuitable and the business
was held to be entitled to claim against the manufacturer for breach of warranty, even though
it had not contracted directly with the manufacturer.
Answer 12 DAMAGES FOR BREACH
The right to damages arises at common law. The principle behind such damages is that of
compensation, i.e. to put the plaintiff in the same monetary position he would have been in had the
contract been properly performed.
Damages are assessed on the following principles:
The rule in Hadley v Baxendale – Remoteness of damage
The plaintiff cannot be compensated for loss which is too “remote”. The defendant is liable for loss
either:
 arising naturally (i.e. according to the usual course of things, from the breach of contract as
the probable result of it); or
 such as may reasonably be supposed to have been in the contemplation of both parties, at the
time they made the contract as the probable result of the breach itself.

The first limb of the rule in Hadley v Baxendale deals with “normal” damage which arises in the
ordinary course of events. The second limb of the rule deals with “abnormal” damage which arises
from special circumstances. In order to be liable under the second limb the defendant must have been
aware, at the time of making the contract, of the probability of the loss, or should have been able to
foresee it from the circumstances.
Victoria Laundry v Newman Industries Ltd (1949)
A laundry required a new boiler to expand their business and purchased a boiler from the defendants.
The defendants knew that the laundry required the boiler for immediate use, but delayed delivery for
five months. The laundry claimed:
 loss of profit the laundry would have made if the boiler had been delivered on time;
 loss of profit in not obtaining a lucrative dyeing contract.
Held: The laundry succeeded in its claim, but not on the second. The court of Appeal held that
Newman Industries could not have been reasonably expected to know of the highly lucrative dyeing
contracts but could have anticipated some special damage.
Measure of damage
The plaintiff must take steps to mitigate his loss. He is debarred from claiming compensation for any
part of the damage which is due to his neglect of such duty.
Brace v Calder (1895)
The plaintiff was the manager of a partnership business and was wrongly dismissed when the
partnership was dissolved. The continuing partners offered to re-employ the plaintiff but he
refused.
Held: The plaintiff was entitled to nominal damages only, as he should have mitigated his
loss by accepting the offer of re-employment.
The amount of money adjudged to be due to the plaintiff must be assessed as at the time the contract
was broken. Thus, any change in the value of sterling after this date must be ignored.
The fact that it is difficult to assess such damage, and that it may indeed be more a matter of guesswork
than of mathematical accuracy, is no bar to the plaintiff’s recovery.
Damages may be available for mental distress or inconvenience where the purpose of the contract was
the giving of pleasure, or the avoidance of stress, such as a package-holiday contract (Jarvis v Swan’s
Tours). Likewise, in Kingston-upon-Hull City Council v Dunnachie (2003) damages were awarded for
loss of self-respect resulting from unfair dismissal.
Liquidated damages and penalty clauses
It is possible for the parties to a contract to agree in advance what sum shall be payable in the event of a
breach.
A sum fixed in this manner may be a genuine pre-estimate of the loss which will be caused to one party
if the contract is broken by the other. If so, it is known as liquidated damages and constitutes the
amount which the plaintiff is entitled to recover in the event of a breach, without his being required to
prove actual damage.

On the other hand, the sum fixed may be in the nature of a threat held over the other party as a security
to the promises that the contract will be performed. Such a sum is known as a penalty and is not
recoverable. Hence, if a plaintiff sues for the recovery of a penalty, he will be awarded only the loss he
has in fact suffered.
Tutorial note: Jarvis v Swans Tours (1973) provides a memorable example of a case on the claiming
of damages for mental distress, disappointment, etc.
Mr Jarvis, a lonely provincial solicitor, took only two weeks’ holiday per year. He booked a winter
sports holiday with a package tour operator. The holiday had been described the brochure as “a
house party … with a special resident host”. The brochure promised a “Welcome party...afternoon tea
and cakes … (and) a yodler evening”. There would be ski packs for guests, and “You’ll be in for a
great time”. There were 13 people in the group for the first week. Mr Jarvis was alone for the second,
and there was no representative at the hotel. There was no welcoming party. Skis were available on
only two days. The cake for tea consisted of potato crisps and dry nutcake. The yodeller was a local
man who sang a few songs wearing his ordinary work clothes.
It was held that the statements in the brochure were contractual undertakings which had not been
fulfilled, so that there was a breach of contract. Mr Jarvis received damages of twice the cost of his
holiday.
Answer 13 TROTTER
Frost has supplied a hopper which was not fit for its purpose of storing animal feed. The failure to
unseal the ventilator has resulted in the pignuts becoming mouldy. It must be established on the facts
that this in turn led to the pigs becoming infected and that this led to their death. The facts of this
scenario are very similar to those in H Parsons Livestock v Uttley Ingham & Co.
Before considering the main issue of remoteness of damage it is necessary to consider whether Trotter
had contributed to the death of the pigs. From the facts there appears to be no contribution as he could
not see the ventilator to check whether it had been unsealed.
Remoteness
The question at issue is whether the death of the pigs and loss of sales and profit is in law recoverable
as a result of the defective hopper.
It has to be considered whether these consequences were of such a kind that a reasonable man, at the
time of making the contract for the supply of the hopper, would contemplate them as being probable to
occur.
It can be argued that reasonable persons could contemplate such consequences. They may not have
foreseen the actual illness and death but the risk of mould if the hopper were defective would have been
foreseeable, and feeding mouldy food could have been foreseen as causing some illness. Therefore,
Frost is likely to be liable for the actual illness and death of the pigs.
As far as the claim for consequential financial loss from lost sales/profit is concerned, it could be
argued under the rules in Hadley v Baxendale that this branch of loss is not recoverable, it is too
remote.

Answer 14 LIABILITIES OF AN EMPLOYER
An employer may be liable in the civil and criminal law when an employee suffers injury at work.
(a) Civil Law
 Tort of negligence
An action may be brought by an employee against his employer on the grounds that
the employer is in breach of his common law duty of care to provide a safe system
of work and that in consequence the employee has suffered injury. The standard of
care is that of the “reasonable employer” and takes into account factors such as the
foreseeability of injury; the cost of preventing it and the experience of the
employee.
 Tortious breach of statutory duty
Various pieces of legislation such as the Health and Safety at Work Act 1974 place
duties on employees to provide specific forms of protection for employees (e.g.
protective clothing, fencing for machinery, etc). If an employer is in breach of his
statutory duty, an employee may bring an action in tort if he suffers injury.
It should also be noted that whether an action is based on negligence or breach of statutory
duty, various defences may be available to the employer. For example, contributory
negligence and, very exceptionally, volenti non fit injuria (consent).
(b) Criminal law
The protective legislation referred to in (a) above operates to impose criminal liability on an
employer in breach, in addition to the individual employee having an action in tort.
Inspectors from the Health and Safety Executive and other similar bodies have power to
obtain evidence in the event of an accident in the workplace.
Their powers include the right to enter and inspect a factory and to require production of
relevant documents. They may also serve improvement notices on employers, requiring
modifications to remedy hazards within a stated period of time. In addition they may serve
prohibition notices requiring the immediate cessation of production where it is regarded as a
threat to safety. Another possibility is that the inspectorate may prosecute an employer and
bring him to trial in a Magistrates’ Court or the Crown Court where he may, on conviction, be
fined and/or sent to prison.
Tutorial note: In (a) another possibility is that the employer could be civilly liable for breach of his
express or (more usually) implied contractual obligations to provide adequate plant and equipment,
adequate supervision, a safe system of work and competent fellow employees.
Answer 15 REDUNDANCY AND PAYMENTS
There are two major purposes behind the law relating to redundancy. The first purpose is to encourage
employers to consider alternatives to dismissing their employees (e.g. by redeploying them). There is a
statutory requirement for an employer to consult a recognised trade union or elected employees’
representatives in good time to consider ways in which any redundancies can be avoided.
The second purpose is to ensure that, where employees are dismissed on the grounds of redundancy,
they receive at least a minimum level of payment to fund them while they seek alternative employment.

The law relating to redundancy is currently to be found in the Employment Rights Act 1996 (ERA)
which defines redundancy as “dismissal attributable wholly or mainly to:
 the fact that his employer has ceased, or intends to cease, to carry on the business for the
purposes of which the employee was employed by him, or has ceased, or intends to cease to
carry on that business in the place where the employee was so employed; or
 the fact that the requirements of that business for employees to carry out work of a particular
kind, or for employees to carry out work of a particular kind in the place where they were so
employed, have ceased or diminished or are expected to cease or diminish.”
An individual will not be entitled to redundancy payments unless they meet qualification requirements
laid down in ERA. Most importantly, the employee must have been continuously employed by the
same employer or by an associated company for a period of two years.
Normally employees who resign are not entitled to claim redundancy payment (although they may do
so if, say, they have been constructively dismissed).
Employees who have been dismissed by way of redundancy are entitled to claim a redundancy
payment from their former employer. Under the ERA the payment is calculated on the basis of the
person’s age, length of continuous service and weekly rate of pay subject to statutory maxima.
Employees aged 18 – 21 are entitled to ½ week’s pay for each year of service, those aged 22 – 40 are
entitled to 1 week’s pay for every year of service, and those aged 41 – 65 are entitled to 1½ week’s pay
for every year of service.
The maximum number of years’ service that can be claimed is 30. The maximum level of pay that can
be claimed is £330/week.
Answer 16 DUTIES OF AN AGENT
(a) Implied duties of agent to principal
Duties owed by an agent to his/her principal derive from:
 their contract which may include expressly agreed obligations;

 legislation in respect of certain agency contracts (e.g. the Partnership Act 1890);
 implied obligations in common law to:
 obey the principal’s lawful instructions;

 perform the agency with reasonable care and skill;
 not delegate authority;
 render true account to the principal of matters relating to the agency;
 fiduciary duties owed to the principal to:
 avoid conflict of interest;

 not make secret profits;
 not accept bribes.

(b) Sale of shares
The sale by Catherine of 800 of her own shares to Fred does not necessarily prejudice his
economic interests. However, it is a breach of her fiduciary duty as there is a conflict of
interest which is not revealed to and approved by the principal. Fred may rescind the contract
with Catherine within reasonable time of discovery of the breach and/or claim damages for
her breach of duty. Alternatively, he may reclaim Catherine’s profit from a transaction.
Fred may refuse to pay Catherine any commission due on the deal.
The purchase by Catherine of the 200 shares from another person with the subsequent sale at
a higher price to Fred is a further clear breach of her fiduciary duty. She has made a secret
profit from unauthorised use of her position. Fred can by recover the excess amount he paid
for the shares, depriving Catherine of her profit. He is not obliged to pay her any
commission. Even though no bribe is involved, there is a serious breach of trust which could
allow Fred to terminate any long-term agency contract with Catherine, and claim damages for
breach of duty.
Answer 17 ALMAVIVA
Almaviva should be advised as follows:
If a contract made by an agent is to be adopted by his principal retrospectively, by ratification, certain

conditions must be satisfied:
 The agent must have contracted expressly as an agent, naming the principal or making
identification of the principal possible.
 The principal must be in existence and capable of making the contract when it is made. It is
too late if the principal later acquires contractual capacity. The best example of this is the
case of Kelner v Baxter. In that case a company promoter agreed to buy wine for a hotel
company which was in the process of being formed but did not then exist. It was held that
the company when it was formed could not ratify the contract. Moreover, the promoter
remained personally liable and had to pay for the wine himself.
 The principal must at the time of ratification know all the material facts unless it is clear that
he has chosen to ratify what was done irrespective of its nature.
The principal can ratify only the entire contract: he cannot choose merely to ratify part of it.
Of the conditions set out above the essential one in this case is whether Figaro named or identified
Almaviva as his principal. This seems likely if Figaro has previously bought wine for Almaviva from
the same supplier.
Ratification is retrospective and if Almaviva can ratify. The fact that wine may have been sold before
ratification will not preclude Almaviva from suing for damages for breach of contract for non-delivery
of the wine.
If, however, Almaviva cannot ratify (for example, because he was not named or identified) he cannot
sue: there will have been no contract with him.
However, there would still be a contract between Bartolo and Figaro, who would be treated as having
made the contract as principal. Figaro could sue Bartolo for his breach of contract and account to
Almaviva for the proceeds of the action.

Answer 18 BERNARD AND JOHN
John should be advised as follows:
The partnership agreement between Bernard and John is contractually binding on both of them. If
either breaks the agreement the other can sue. Serious breach would be grounds for dissolution of the
partnership, as mutual trust would have come to an end. However, outsiders will not automatically
know the extent of the authority that each partner has to make business commitments for the firm.
Apparent authority – general
Partners will bind the firm by their acts which have been actually authorised under the partnership
agreement or subsequently between themselves.
Additionally, s.5 Partnership Act 1890 states that each partner is an agent of his fellow-partners, and
his acts in the usual way of business bind the firm. Thus, where a partner deals with a person who
knows him to be a partner in a transaction which is usual for that (type of) business, he binds the firm
(unless the outsider knows that the partner’s authority does not extend to cover the transaction)
The effect of this apparent authority means that if a partner (or any agent) acts in a way apparently
consistent with the normal business of a firm, even though this act is not actually authorised, the firm is
bound. In Mercantile Credit Co v Garrod (1962) a partner in a garage who did not have the authority
under the agreement to sell cars did so, and the outsider was entitled to believe that that was a normal
activity of a garage.
Goods from Wensleydale Electric Products
Although this purchase contravenes two provisions of the partnership agreement, Bernard, whilst
exceeding his actual authority, has acted within apparent authority: buying these goods would appear to
be a normal activity of the firm. The firm will be bound unless it could be shown that Wensleydale
was aware of the restriction in the partnership agreement – this is unlikely.
Purchase of car
Again, the seller of the car (unless he knew of the restriction) will be entitled to believe that Bernard
had authority to buy it, and that it was to be used for business purposes. John’s only recourse is to sue
Bernard on behalf of the firm for re-imbursement of the cash.
Assault
Partners are liable jointly and severally for their fellow-partners’ torts (s.10 Partnership Act 1890),
provided that these were committed in the course of the firm’s business.
However, although the motivation for the assault may have arisen from an argument concerning the
firm’s business, the assault itself is no part of that business, and so John cannot be liable. The customer
may sue Bernard as an individual, but has no claim against John or the firm.

Answer 19 PARTNERSHIPS AND COMPANIES
(a) Principal distinguishing features
The principal features which distinguish ordinary partnerships from companies are:
Ordinary partnership Company
Created by agreement (express or implied). Created by registration.
Not a legal person in itself. A separate legal person.
Unlimited liability of partners. Liability of members limited to amount

payable for their shares.
Dissolved by death, bankruptcy, etc of a Continues in existence regardless of change in

partner. membership.
Property held in the names of individual Owns its own property.

partners.
No new partners without the consent of Shares may be transferred without consent of
others. other members.
Normal maximum number of partners is 20. No upper limit on number of members.
Minimum number is two. Single-member companies possible.
Each partner has the right to take part in Ownership of shares in itself does not confer
management. the right to manage.
Loans can be secured only by a fixed charge Fixed or floating charges are possible.
on assets.
No requirement to publish accounts. Accounts must be published, and these must

comply with the Companies Act.
No statutory audit. Audit required for companies whose annual

turnover exceeds £5.6 million.
Profits are subject to income tax. Profits are subject to corporation tax.
(b) Limited Liability Partnerships Act 2000
The Limited Liability Partnerships Act 2000 allows partnerships to be registered with the
Registrar of Companies in the same way as companies, so as to enjoy many of the benefits of
limited liability without losing the flexibility of being organised as a partnership.
Under the Act firms of two or more persons are allowed to register on terms that the members
have limited liability for the firm’s debts and obligations. The firm becomes a person
separate from its members, in the same way that a registered company is a person separate
from its shareholders.
Like a company, a LLP has designated members to carry out the same sort of duties that
company directors have (e.g. to be responsible for signing and filing annual accounts).

Like a company, the firm will be obliged to prepare and file annual accounts and returns, and
to provide the Registrar with details of members’ names and addresses. There is no
equivalent obligation for unlimited partnerships although many professional bodies require
members’ firms to account to them (e.g. the Law Society).
Members’ liabilities will be limited to such amount as they agree when they become
members, except that they can be made personally liable in negligence, and may be fined if
they “knowingly or wilfully authorise” a default from the relevant rules and regulations.
The business will be taxed as a partnership, and members’ internal relationships will be
governed in the manner of conventional partnerships – thus they will share appropriations of
profit as in a conventional partnership rather than by the payment of share dividends typical
of companies.
Answer 20 LIMITATION OF LIABILITY IN PARTNERSHIP
The members of ordinary partnerships have unlimited liability if the business runs into financial
difficulties. However, it is possible for partners to limit their liability:
(a) The limited partnership
The Limited Partnerships Act 1907 allows firms to register as “limited partnerships”. The
following rules apply to limited partnerships:
 limited partners are not liable for partnership debts beyond the extent of their
capital contribution, but in the ordinary course of events they are not permitted to
remove their capital;
 at least one of the partners must retain full, that is, unlimited, liability for the debts
of the partnership;
 a partner with limited liability is not permitted to take part in the management of the
business enterprise and cannot usually bind the partnership in any transaction. If a
partner does get involved with management and business of the firm, he loses his
limited liability;
 the partnership must be registered with the Registrar of Companies.
(b) The limited liability partnership
The Limited Liability Partnerships Act 2000 provides for a new form of business entity, the
limited liability partnership (LLP). Although stated to be a partnership, the new form is a
corporation, with a distinct legal existence apart from its members. As such it has the ability:
 to hold property in its own right; and

 to sue and be sued in its own name.
It enjoys perpetual succession, so that changes in its membership will not have any effect on
its existence.
Most importantly however, the new legal entity allows its members to benefit from limited
liability in that they are not liable for more than the amount they have agreed to contribute to
its capital.

The Limited Liability Partnerships Regulations 2001 extend the provisions relating to the
insolvency and winding up of registered companies to LLPs. Thus the relevant sections of
the Companies Act 1985, the Insolvency Act 1986, the Company Directors Disqualification
Act 1986 and the Financial Services and Markets Act 2000 have been appropriately modified
to apply to LLPs.
To form a limited liability partnership:
 two or more persons must subscribe to an incorporation document;

 the incorporation document must be delivered to the Companies Registry;
 a statement of compliance must be completed by a solicitor or subscriber to the
incorporation document.
The incorporation document must include:
 the name of the LLP (subject to restrictions);

 the address of the registered office;
 the names and addresses of those who will be members on incorporation of the LLP;
 the names of at least two designated members, whose duty it is to ensure that the
administrative and filing duties of the LLP are complied with. If no such members
are designated then all members will be assumed to be designated members.
Answer 21 LIFTING THE VEIL
(a) Veil of incorporation
It was established in Salomon v Salomon & Co Ltd that a registered company is a legal person
separate from its members. This principle is often referred to as the veil of incorporation.
Generally, the law will not go behind the separate personality of the company from the
members. However, there are exceptions to the principle in Salomon’s case, where the veil is
lifted and the law ignores the personality of the company and has regard to the economic
realities behind the legal facade. These exceptions are either specifically provided for in the
Companies Act 2006 and the Insolvency Act 1986 or emerge from the case law.
(b) Circumstances
Statute
 It is a crime for a company not to display its name as required by law at its places of
business, official, registered office, on business letters and contracts and so on (s.84
CA06). In default, its directors are liable with the company in criminal law.
 If a public company trades without a statutory trading certificate, the company's

officers (directors and others) become personally liable on debts if the company
defaults for 21 days or more (s.767 CA06).
 Any person who is a knowing party to a company’s being run with the intention of
defrauding creditors can be ordered to contribute to the company’s assets in a
winding-up (s.213 IA86).
 Directors who continue running an ailing company at a time when they know or
ought to be aware that there is no reasonable prospect of avoiding insolvent
winding-up can be ordered to contribute to its assets when it is liquidated (s.214
IA86).

 Groups of companies must prepare group accounts (s.330 CA06).
Case law
 Public interest: For example, at common law a company registered in England is an

alien enemy if its agents or the persons in control of its affairs are alien enemies. In
determining whether alien enemies have such control, the court looks at the number
of alien enemy shareholders and the value of their holding. (Daimler Co Ltd v
Continental Tyre & Rubber Co Ltd)
 True purpose: The court will also look to see the real purpose of the company when
it is patently a sham. In Gilford Motor Co Ltd v Horne the defendant, a former
employee of the plaintiff, was subject to a covenant against soliciting the plaintiff’s
clients. The court granted an injunction against Horne and the company which he
had formed, as he was using this company to breach his covenant.
 Just and equitable: A displaced director may seek a winding-up order under
s.122(1)(g) IA86 on the ground that it is just and equitable to do so. Such an order
will be granted where the company is in essence a quasi-partnership, that is to say
the corporate veil is lifted in order to view the underlying commercial reality:
Ebrahimi v Westbourne Galleries Ltd.
Answer 22 DOCUMENTS AND PROCEDURES
Registration of a public limited company
Incorporation under the Companies Act 2006 (CA06) requires companies to register certain documents
with the Registrar of Companies (electronically or as hard copy). These documents are as follows:
 Memorandum of association: a signed, dated statement by the founder member(s) of the

company, known as the “subscribers” to the memorandum, that they wish to incorporate a
company and wish to take up shares in it.
 Articles of association containing the company’s constitutional regulations, in writing,

numbered and signed by the subscribers (alternatively, the company may adopt the default
provisions of the statutory model articles which support CA06).
 A statement detailing the nominal value, number and amount paid up on the shares to be
taken on formation by the subscribers.
 A statement of the first directors (there must be at least two for a public limited company)
and its company secretary (a compulsory officer for a public limited company). They
directors and secretary must give their names, addresses for service, and their individual
consents to act. The addresses for service may be the company’s registered office.
 An application for registration showing:
 the proposed name of the company and the general location of its registered office
(which must be in England and/or Wales), together with a statement of its precise
address;
 that the liability of the members is to be limited by shares;
 that the company is to be a public limited company.

 A declaration of compliance showing that the company’s formation complies with the
Companies Act.
 The relevant filing fee (currently in the region of £15-£50 depending on whether the
application is electronic or in hard copy, and whether the application is for a same-day or
standard service).
The registration is complete when the Registrar issues a Certificate of Incorporation, showing the
company’s name, registered number and date of incorporation. The certificate is conclusive proof that
the registration requirements have been complied with.
Starting to do business
A private company is free to commence business and to borrow money as soon as it is incorporated,
but a public company must not start its business or borrow money, until the Registrar has also issued a
“trading certificate” under s.761 CA06
The company must make a special application for the s.761 certificate, giving information to satisfy the
Registrar that the nominal value of its allotted share capital is not less than the required minimum,
currently £50,000; and that the amount paid up on its allotted share capital is also in accordance with
the minimum requirement (25% nominal value plus the whole of any premium).
It is an offence for a company to trade in contravention of s.761, and the company and any officer of
the company in default may be fined – directors may also be made personally liable on offending
contracts if the company defaults. If a public company does not obtain a trading certificate within one
year of its registration, the court may wind up the company (Insolvency Act 1986, s.122).
Answer 23 DOMINGO LTD
(a) Procedures required to effect the planned changes
(i) Diversification into new products
By s.31 CA06, unless a company’s constitution specifically restricts its objects, its objects are
unrestricted. This means that unless there is a restricting provision in Domingo Ltd’s articles
of association (or, since it was incorporated before CA06, its memorandum of association,
which is now deemed to be part of the articles) limiting its activities to pet food and toy
manufacture, the company will be free to diversify without formality.
Indeed, even if there is a restriction, ss.39–40 of the Act would validate transactions in the
new line of business in favour of outsiders dealing with the company.
As a matter of best practice, however, the directors should inspect the company’s constitution
to see if there is any restriction and, if there is, amend the provision by formally altering the
articles (s.21 CA06). This requires a special resolution: a 75% vote in favour of the
alteration, counted in a general meeting of Duncan, Edward and Gemma in their capacity as
members.
Alternatively, since Domingo is a private company, it can be achieved by way of a written

resolution.
Given the division of shareholdings (33.3% each) the three friends will have to be unanimous
in passing the resolution.

(ii) Equity share issue
The new issue must be dealt with by Duncan, Edward and Gemma in their capacity as
directors. They need to ensure that the issue is properly authorised.
Companies such as Domingo Limited which were incorporated before CA06 were required to
set a constitutional upper authorised limit on the number of shares to be issued. This
requirement is abolished by CA06 but it would be good practice for the directors to obtain an
ordinary resolution to dispense with the provision in the company’s constitution.
They should also check the company’s articles for any restrictions on their right to allot
shares – if there is none, then by s.550 CA06, since Domingo is a private company with only
one class of shares, they have statutory authority to allot further shares of the same class.
If there is a restriction, or if the new shares are to be of a different class from those held by
Duncan, Edward and Gemma, the directors will need formal authority, which may be given
by ordinary resolution (s.551 CA06) passed at a general meeting or by written resolution.
The authority may be general or specific to this particular issue, and it may be conditional or
unconditional. It must state the number of shares to which it applies.
Authority to allot will be limited to a statutory maximum of five years, but can be revoked,
varied or renewed at any time by ordinary resolution (s.551 CA06). If directors allot without
authority the allotment is valid but the directors may be liable to a fine (s.549 CA06).
By s.561 CA06 the issue of new equity shares for cash should be pre-emptively offered to
existing members. Clearly, here, though, the members are wishing to raise new cash from
new investors. They should pass a special resolution disapplying s.561 before the new issue
is made.
(iii) Transfer of shares
The amendment to the articles introducing a right of first refusal for existing shareholders
should another wish to transfer their shares, would be a valid alteration and can be effected by
a special resolution under s.21 CA06.
Once included within the articles it will be contractually binding on all members by reason of
s.33 CA06 (which deems the articles to be a binding contract amongst the members and the
company). The provision could be enforced by any member against another directly.
(Rayfield v Hands)
(b) Alternative finance
Domingo could raise finance for the diversification in the form of a loan. The formal
document acknowledging the debt is known as a debenture.
The company may find it easier to obtain finance if they offer security for the loan. As an
incorporated body there are two options.
Domingo may secure the loan with a fixed charge on a specific asset or class of assets. The
company would then, however, be unable to deal further with the assets without the
chargeholder’s consent, which makes this sort of security only really appropriate for long
term, fixed assets. The advantage of the charge is its appeal to the chargeholder who could
resort to the assets in priority to all other creditors in the event of an insolvent winding up.

The other option is to offer security in the form of a floating charge secured over a class of
assets present or future. This could include circulating assets, such as stock, debts, and the
undertaking of the company generally. Domingo would be free to deal with the assets unless
the charge crystallises (because, for example there is a default on paying the interest on the
loan). At that point the assets currently within the class would form the security for the
lender.
Answer 24 HAPPY DAYS LTD
The articles of association take effect as a contract between the company and members, and between
members inter se: s.33 Companies Act 2006. In most respects the contract is like any other,
enforceable by both parties. However, the Courts have been loath to award damages in favour of a
shareholder for breach of this contract as to do so would reduce the company’s capital available to its
creditors.
(a) Advice to Edward
Alan, Brian and Charles are members of the company and thus have a contract with Edward,
another member, by virtue of s.33.
The company’s articles require the directors to purchase shares at a fair value from any
shareholder desirous of selling. The situation is similar to Rayfield v Hands where the Court
ordered the directors to purchase the shareholder’s shares, thus enforcing the contract in the
articles against the directors personally as members, not as directors of the company.
Edward would not be bound by provision (i) of the company’s articles, referring disputes
between the members and the company to arbitration, as this dispute is only between
members.
(b) Advice to Charles
The contract in the articles is unusual in that it is subject to unilateral variation. The articles
can always be altered by the members by way of special resolution (75% approval; 14 days’
notice or a written resolution of a private company): s.21 Companies Act 2006. This right is
fundamental and it is not possible to contract out of it.
However, a company may have a provision in the articles entrenching some or all of the
articles by imposing stricter conditions than s.21 on their alteration. In that case, the
entrenching requirement would have to be followed, failing which the position could only be
altered by unanimous consent of the members or by court order (s.22 CA06).
Assuming that article 2 is not entrenched, Charles, holding only 15% of the votes, will not be
in a position to prevent the article being altered by special resolution. Furthermore, there is
no statutory minority protection on changes or articles.
However, the courts will intervene if an alteration has not been made bona fide for the benefit
of the company as a whole, and will set aside alterations. The position here is difficult to
advise on definitively. Whilst mere hardship on some members does not prevent an alteration
being beneficial overall (Sidebottom v Kershaw, Leese & Co), if Charles could show that this
alteration is being motivated in bad faith against him, he could object. A fortiori, current UK
legislation outlaws discrimination on grounds of age.
On the other hand, Charles should be aware of the overarching power of members to remove
directors from office by ordinary resolution (s.168 CA06). The existence of this provision
may make it pointless for the courts to intervene.

If the alteration does proceed, and Charles loses his position in the company, he may have a
claim for breach of employment or service contract with the company (Southern Foundries v
Shirlaw; re New British Iron Co ex parte Beckwith).
(c) Advice to David
The facts are similar to the leading case on the contract in the articles and the enforcement of
outsider rights (Eley v Positive Life Assurance Co). In that case it was held that the effect of
the s.33 contract does not extend beyond the members and the company as amongst
themselves (although the articles can be referred to establish the terms of an independent
contract). Applying that case, David does not therefore have the benefit of s.33. He cannot
sue the company for its refusal to use him as the company’s accountant despite the provision
in the articles.
His only recourse would be if he could establish a separate express contract outside the
articles, impliedly or expressly incorporating the terms of the articles. In that case, he might
have a successful action for breach of contract (Beckwith’s case above).
Answer 25 SLOWBUTSURE PLC
Tutorial note: The majority of marks are allocated to (a) and case law knowledge is essential.
Discuss the principles, explain them and give authority for the explanations. Cases to cite are Hogg v
Cramphorn, Howard Smith v Ampol Petroleum Ltd. Details of cases will be helpful here.
In (b) knowledge of procedure is required under s.549 CA06 (authority to allot) and s.561 CA06 (pre-
emption and exclusion of pre-emption rights). Explain in list form if easier.
(a) General principles
Directors have a statutory duty to comply with the company’s constitution and to use their
powers for the proper purpose (s.171 CA06).
Case law has established that, in the absence of specific authority to the contrary, a board’s
power to issue shares is granted for the purpose of raising capital.
The directors of Slowbutsure can therefore issue shares to raise capital for the expansion as
this would be a proper exercise of their authority.
An issue of shares for any other reason is voidable at the option of the company and the
directors may be sued for breach of duty, unless the members have authorised the allotment
in advance and/or resolved to relieve the directors of liability.
In Hogg v Cramphorn the directors of a company learned of a prospective take-over bid

which they genuinely believed would not be in the company’s best interests. To defeat the
bid they issued shares to be held on trust for the company’s employees. The court held the
issue was an improper exercise of the directors’ powers but the issue was ratified by the
members in general meeting.
An issue of shares to ensure a take-over bid would also be an improper exercise of power.
In Howard Smith Ltd v Ampol Petroleum Ltd the directors of a company in receipt of a take-
over bid, which they supported, issued shares to the bidder to destroy the majority voting
power of the existing shareholders, who they knew would vote against the take-over. The
directors genuinely believed that the majority shareholders were acting against the company’s
best interests; nevertheless the court held the issue was voidable and ordered that it be set
aside.

The directors’ improper exercise of power may usually be ratified by a majority of the
members, as in Hogg v Cramphorn, unless the majority are acting in bad faith.
Tutorial note: in Clemens v Clemens (1976), new shares in a two-person company with a
55:45 percentage split in holdings were allotted to an employee to dilute the holding of the
minority shareholder from 45% to below 25%. The allotment was ratified by the majority
shareholder. This was held to be an abuse of the majority member’s authority, and the
allotment was declared void.
The directors of Slowbutsure must thus ensure that if the issue is designed to prevent a take-
over bid, the issue is given prior approval, or is ratified.
If they are majority shareholders they must ensure their ratifying vote is exercised in the best
interests of the company.
(b) CA06 – Directors’ authority
Slowbutsure is a public company. Directors of a public company have no automatic authority

to allot shares: they must be explicitly given it (s.551 CA06) by the Articles or an ordinary
resolution.
The authority may be either general or specific but it must not last for more than five years. .
Any director who allots shares without authority is liable to a fine but the allotment is valid.
The directors of Slowbutsure should check that they have the authority to allot shares. If not,
they should call a general meeting so that authority can be granted.
Pre-emption
Shares allotted for cash must be offered to the existing shareholders on a pro rata basis:
(s.561 CA06). Shareholders must be given at least twenty-one days to exercise their right of
pre-emption.
An allotment made in contravention of s.561 is valid but the directors are liable to
compensate those members who were not offered shares.
Exclusion of pre-emption
Shares must be offered to the existing members if the allotment is for cash unless pre-emption
rights have been excluded by special resolution. Slowbutsure directors must therefore
ascertain whether or not the pre-emption rights of current shareholders have been excluded.
If they have not, they must issue the new shares first to existing shareholders, who will
include American Australian.

Answer 26 PROSPECT PLC
Tutorial note: It is unusual for the examiner to ask for answers in the form of a letter, report or
similar, but is a special format is specified, candidates should be sure to comply: marks will be
deducted for not using the correct style. Make sure not to use your own name or that of a real firm,
and use polite, professional language.
To: The Board of Directors

From: Company Secretary
Date: 7 September 2012
Subject: Allotment, pre-emption rights and payment for shares
Further to your inquiry, this report gives the law relating to allotment of shares by a public limited
company and the procedure to achieve the Board’s proposals:
(a) to dispense with pre-emption rights and allot 50,000 £1 shares to Harry wholly for cash;
(b) to allot 25,000 ordinary £1 shares to Jim in return for a computer programme.
Allotment rules
The law relating to allotment vests the power to issue shares with the company, which may delegate the
general power of allotting new shares to the board of directors (s.549 CA06). Whilst there is some
relaxation of rules for private companies, the directors of a public limited company must be expressly
authorised by either a general meeting of the members or the articles of association (s.551 CA06). If
necessary, therefore, a meeting must be convened to grant the appropriate rights.
The law relating to pre-emption rights is clearly stated in s.561 CA06. No company either public or
private is to allot any equity securities which are to be paid wholly in cash unless it has first offered the
new issue pro rate to the existing equity shareholders. The purpose of this is to allow existing members
to maintain their relative stakes in the company in the same proportions.
Payment for shares must be worth the nominal value and premium at which the shares are being
allotted – special rules apply under CA06 and I will deal with these when examining the particular
procedures necessary for the allotment to Jim.
The s.561 pre-emption rights in a public limited company may only be dispensed with by special
resolution of the members (requiring a 75% majority vote on 14 days’ notice). Thus the decision to
allow the allotment will still rest with existing members.
(a) Allotment to Harry
Given the rules outlined above, the procedure would be:
(i) Approval of the allotment in principle at a board meeting;
(ii) General meeting of the company at which the special resolution is moved
authorising the allotment and/or, disapplying the pre-emption right. The special
resolution will need to be registered at Companies House if passed;
(iii) Allotment of the shares and the recording of the allotment in the company’s
statutory books (the register of members and the share capital account). A return of
allotment must go to the Registrar of Companies.

(b) Allotment to Jim
Jim is not paying for the shares in cash but selling the rights to a computer programme; s.561
will not apply here because the payment for shares is not cash.
However, the valuation of the transaction must be considered. A company may not issue
shares for discounted consideration. It must receive payment equal in worth to the nominal
value and any premium at which the shares are allotted to the allottee.
Payment for shares by non-cash consideration is covered by s.593 CA06. This states that a
public company shall not allot shares as fully or partly paid otherwise than for cash unless the
consideration has been independently valued under and a report submitted to the company
during the six months preceding the allotment (a copy of the report is also sent to the
proposed allotee).
Appropriate procedure would therefore entail:
(i) board meeting to approve the allotment and instruct company’s auditors to produce
report;
(ii) on receipt of the report to proceed with the allotment provided the report considers
it reasonable;
(iii) record the allotment in the register of members, share capital account and (if
relevant) share premium account;
(iv) file the report and return on allotments with the Registrar of Companies.
Please come back to me with any further queries.
[Signed – Company Secretary to Prospect plc]
Answer 27 ORDINARY SHARES, PREFERENCE SHARES, DEBENTURES
(a) Ordinary shares
As defined in Borland’s Trustees v Steel (1901) a share “…is the interest of a shareholder in
the company measured by a sum of money, for the purpose of liability in the first place, and
of interest in the second…”
The nominal value of the shares held represents the maximum liability of a shareholder in a
limited liability company.
However, the actual liability of a shareholder is the amount remaining unpaid on any shares
held. When companies issue shares they may not require the full nominal value of the shares
to be paid at once. This allows the company the possibility of raising further capital from its
members as it becomes necessary in the future.
The amount already paid to the company is referred to as called-up capital. Any uncalled
capital represents the amount of potential liability.
If the shares are fully paid up then the shareholder has no further liability towards meeting the
company’s debts. In regard to return, shares enjoy an advantage of other securities. If the
company is profitable, not only will they enjoy dividend payments but the market value of
their shares will go up. On the other hand if the company does not do well, they may well not
receive any payment and the value of their shares will diminish.

(b) Preference share
Preference shares represent a more secure form of investment than the ordinary share. The
reason for this is that preference shares receive a fixed rate of dividend before any payment is
made to the ordinary shareholders and usually they enjoy priority over ordinary shares with
regard to repayment of capital.
The actual rights enjoyed by the preference will be stated in the company’s articles of
association.
Dividend rights in relation to preference shares are usually cumulative, which means that a
failure to pay the dividend in one year has to be made good in subsequent years. Although,
as with ordinary shares, the holders of preference shares are members of the company, their
voting rights are restricted to any period when their dividends are in arrears.
(c) Debenture
Debentures are documents that acknowledge a company’s borrowing, although the term has
been extended to cover the loan itself. As debenture holders lend money to the company they
are its payables (creditors), they are not members.
As payables (creditors) they are entitled to receive interest, whether the company is profitable
or not. It may even be necessary to use the company’s capital to pay the debenture interest.
Share dividends on the other hand must never be paid from capital.
It is usual for the company to provide security for the amount it has borrowed by issuing
debentures. There are two methods of securing debentures: by means of a floating charge, or
by means of a fixed charge, both of which have to be properly registered. In the case of a
floating charge the security is provided by all of the company’s property, some of which may
be continuously changing (e.g. stock-in-trade). The charge only crystallises (i.e. fixes on the
specific property) when the company commits some act of default, and until then it is free to
deal with the property in its ordinary course of business. The disadvantage of floating
charges are that they come after fixed charges when it comes to paying a company’s debts, so
if all the assets are used to pay off those prior debts, there may well be nothing left to pay the
holders of the floating charges.
Answer 28 DEFINITIONS
(a) Fixed and floating charges
Tutorial note: A charge is a mortgage-type right, granted to a creditor by his debtor as

security for the debt. Should the debtor default on the debt, or other specified conditions
arise, the creditor can “call in” the charge, and look to the secured asset in settlement of all
or part of the debt.
There are two categories of charge:
(1) Fixed charge
This attaches to a specific, identifiable asset (such as land and buildings, or plant
and machinery) which is expected to be retained long-term by the debtor.
Assets subject to a fixed charge are difficult to trade. In the event of insolvency,
the fixed charge holder’s rights over the asset prevail over all other creditors. The
charge-holder therefore enjoys a high degree of security.

(2) Floating charge
A floating charge gives the debenture holder the right to look to a particular
category of potentially circulating assets (such as stock, or the business undertaking
in general), rather than to a particular identifiable asset.
The charge does not attach to particular assets unless and until it crystallises, in the
event of a default. The company can therefore continue to deal with its assets of
that class unless and until it defaults on the debt agreement.
On crystallisation the relevant assets are earmarked for the charge-holder and, after
payment of some statutory debts such as unpaid wages and salaries, the balance can
be used towards clearing the debt to the charge-holder.
Floating charges can only be issued by companies; they are neither legally
recognised nor commercially feasible for other debtors.
Priority of charges
If a company issues a number of different charges, the rules of priority are as follows:
 Fixed charges have priority over floating charges over the same assets (unless,
exceptionally, the fixed charge-holder was on actual notice that an earlier floating
charge had express priority)
 Where there are charges of equal status over the same asset(s), the first in time
prevails.
(b) Unsecured debentures
Debentures are normally issued to secure a loan made to a company for a specific purpose by
a bank or other finance provider, or by public companies as an alternative form of investment
for public investors.
In the first case, such debentures are almost always secured on all or part of the company’s
assets. In the second case, this would not be practical, since public issues of debentures are
made in large numbers. However, the company will sometimes set up a trust for the
debenture holders, and grant the trustees a charge over company assets which they can call in
for the debenture holders should the company default on its payments.
Debentures do not carry membership or voting power, but the holder receives interest
(normally at a fixed annual rate) is payable as a company debt, and therefore has priority over
share dividends. This can be a considerable advantage for investors looking for a sound
investment which yields a consistent level of income, and also has priority over shareholders
not only with interest payment but also in the event of insolvency.

Answer 29 RICHARD
The liquidator of RST will consider whether, under the provisions of the Insolvency Act 1986 (IA86),
he can set aside Richard’s floating charge under s.245 of that Act, or as a preference under s.239 or as
an undervalue transaction under s.238.
(a) Invalidity under s.245
A liquidator may set aside floating charges made by a company in favour its director during
the two years before it commences insolvency proceedings (and in favour of other persons,
within the 12 months before insolvency proceedings), if the company was insolvent at the
time of the transaction or became so as a result, except insofar as the transaction secured new
consideration for the company.
Richard took the floating charge only three months before the winding up, which brings the
transaction into the range of s.245. Therefore, unless Richard can prove that the company
was solvent (that is, it could pay its debts as they fell due) at the time he was given the
floating charge, it will be valid only for the later introduction of £5,000 and not for the
original £20,000 (Re Fairway Magazines Limited (1992)).
(b) Preference under s.239
Company transactions made within 6 months before liquidation (or 12 months in the case of
connected persons, such as directors, or their associates) can be set aside as preferences if :
 the company was insolvent at the time of the transaction; and
 the transaction was motivated by a desire to put the other party in a better position
than other creditors should the company go into insolvent liquidation.
The liquidator usually has to prove that these requirements existed, but with connected
persons the insolvency and the desire to prefer are presumed unless the connected person can
prove otherwise.
Therefore, if Richard can prove that the company was solvent, the charge is valid. Otherwise
it will be invalid for the £20,000 he was owed as an ordinary creditor (unless he can prove it
was a normal transaction in which there was no desire to prefer him). Under the
circumstances outlined in the given facts, this will be difficult.
(c) Undervalue under s.238
If a company entered into transaction at an undervalue (a gift or a transaction in return for

which the consideration given was substantially less than its true value) within the two years
before a liquidation, the transaction may be set aside by the liquidator if the company was
insolvent at the time of the transaction (or became insolvent by giving the undervalue).
Here the only new value Richard has given in return for the charge is £5,000. The original
£20,000 was past consideration, not given in return for the charge.
Conclusion
The liquidator is likely to take the matter to Court unless Richard reaches agreement with him. The
courts would be likely to find that Richard’s charge is invalid (as a preference, undervalue or s.245
invalidation) except in so far as it covered the newly introduced £5,000. For this sum he would rank
above the ordinary, unsecured creditors. He would be an unsecured creditor for the original £20,000.

Answer 30 REMOVAL OF DIRECTORS
The members should be advised as follows:
There are two issues to be considered here: first, whether the members have the power to remove a
director, and second, whether the director can take any steps to oppose his removal.
Members’ power of removal
By s.168 CA06 a director can be removed by the members at any time, regardless of the provisions of
his service contract.
The section requires the members to pass an ordinary resolution (requiring a simple majority), of which
the company must have been given special notice of twenty eight days. The company must, in turn,
have given the director and the members at least 14 days’ notice of the resolution.
This matter must be considered at a meeting of the company – the director is entitled to attend and
speak on the resolution. The resolution cannot be moved as a written resolution of a private company.
Unless there is special provision in the articles of association, individual members have no automatic
right to move a s.168 resolution (nor to move any other resolution).
However, members representing 5% of the voting rights in a public limited company can requisition a
resolution to be put to the members at the next AGM (s.338 CA06).
Alternatively, by s.303 CA06 members holding 10% of the paid up voting capital of a public or a
private company can requisition a general meeting, and specify a resolution to be put at the meeting.
Opposing removal
Several options could be available to the director.
At the meeting
(1) When facing a s.168 resolution a director has the statutory right to have a written statement in
his support circulated to the members. He may also attend and speak at the meeting at which
the resolution is moved, even if he would not have a right otherwise to address the meeting.
(2) If the director is also a shareholder he may exercise his voting power against removal. In
Bushell v Faith the three members of a company were also its directors. Not only did this
give Faith the right to vote against his own removal from office, but the company’s articles
contained a clause providing that the voting strength of a director facing removal would be
weighted to outvote the other members. Bushell and her sister failed to remove Faith from
his directorship.
The members should check the company’s constitution for similar provision.
Remedies in quasi-partnership
If the company is closely controlled by participating shareholders and the director in question is one of
them, he may be able to rely on the decision in re Bird Precision Bellows (1984) where it was held that
an injunction could be granted under s.994 CA06 to prevent removal from directorship.
Participation in management, said the judge, can be a legitimate expectation of a member of such a
company. Any attempt to deprive him of his right to participate could be regarded as unfairly
prejudicial conduct by the company, and s.994 would provide relief.

Consequences of removal
We are told that the director has a ten-year service contract. By s.188 CA06, directors’ service
contracts exceeding two years must be approved by the members by ordinary resolution. If this
contract was properly approved, removal of the director is a breach and damages will be payable.
The rate of compensation may be provided for in the contract itself, or in the company’s articles, or it
may be fixed by the Court as was the case in Southern Foundries v Shirlaw (Shirlaw was removed from
the board of Southern Foundries with six years still to run under a ten year contract).
If the contract had not been properly approved under CA06, or if the director is in breach of his duties
to the company and this is what led to his removal, the contract can be terminated by the company by
notice, without compensation (Shuttleworth v Cox Bros of Maidenhead).
If, as discussed above, the company is a quasi-partnership, and the director is removed he might be able
to seek the liquidation of the company under s.122(1)(g) Insolvency Act 1986 (the “just and equitable”
ground) (Ebrahimi v Westbourne Galleries). However, this is an extreme remedy, and a s.994-type
order would be preferred by the court, if feasible.
Answer 31 THOMAS
(a) Principles of company legislation
A director owes duties of good faith to the company and must always act in its best interests.
CA06 provides, amongst other things, that if a director knows or ought reasonably to know
that he is directly or indirectly interested in a proposed transaction or arrangement with the
company he must declare it to the other directors, before the company enters into the
transaction or arrangement (s.177)
CA06 also provides that a director must avoid conflicts of interest (s.175). This includes the
taking of loans (s.197) unless they have been approved by the members by ordinary
resolution or fall within certain limited exceptions, such as the granting of small loans to
directors, or loans that are made in the ordinary course of business.
In public companies, the restrictions and prohibitions apply equally to the connected persons
of a director, which include the director’s spouse.
Steps to be followed
Disclosure
Thomas appears to have complied with the requirement to disclose his interests to the board
under s.177, but the board should ensure that the disclosure and the board’s decision are
properly minuted.
Approval of loan
Unless the loan is in the ordinary course of business, and on arm’s length terms or under an
in-house home improvement scheme, it must be approved by ordinary resolution of the
members (and of the members of the holding company if the loan is to a director of the
holding company).
Details of the nature, amount, and purpose of the loan, and of the company’s liability under
any other transaction connected to it, must be circulated to the members or be available for
inspection at the Registered Office for at least 15 days before the resolution.

Approval of land transaction
The transaction will need shareholder approval under s.190 CA06, which provides that a
transfer of substantially valuable assets to or from a director, shadow director or connected
person requires the prior approval of the members by ordinary resolution.
A transaction involves “substantial value” if it exceeds the lower of £100,000 or 10% of the
company’s net assets (transactions not exceeding £5,000 are exempted this requirement, even
if that exceeds the 10% figure, but this seems unlikely here).
(b) Effect of non-compliance
Loan
If the requirements for approval are broken the transaction may be affirmed by ordinary
resolution (s.214 CA06).
If it is not affirmed, the transaction is voidable by the company, and the director and other
parties concerned will be liable to account to the company for benefits taken and compensate
the company for any loss (s.213 CA06).
The director or other party will not be liable if he can show that he took all reasonable steps
to secure the company’s compliance, or did not know of the relevant circumstances of the
contravention.
Property transaction
If the property is sold to Tania without the necessary approval of the company in general
meeting before or within a reasonable time of the transaction being entered into, the contract
is voidable. Thomas and/or Tania must account for any gain and indemnify the company for
any loss flowing from the transaction.
Relief from liability
Under s.1157 CA06 the court could grant Thomas relief in whole or in part from liability if it
appears that he acted honestly and reasonably and that, in all the circumstances, he ought to
be excused.
Answer 32 ASHGROVE LTD
Legality of directors’ loans
A company may not make a loan to a director unless it has been approved in advance by an ordinary
resolution of the members (s.197 CA06). If the requirements for approval are broken the transaction
may be affirmed by ordinary resolution (s.214 CA06).
If it is not affirmed, the transaction is voidable, and the director and any other parties concerned (e.g.
other directors) are liable to account to the company for the benefits taken, and to compensate it for any
loss (s.213 CA06).
Breach of s.197 also exposes the director and the other board members who are party to the transaction
to a charge of breach of duty to the company.

Applicability of statutory exceptions
There are some exceptions to the requirement for prior approval. For example approval is not required
for small loans not exceeding £10,000 per director (outstanding at any one time) (s.207 CA06).
However, if the request here were to bring Derek’s loan account to more than that amount, approval
would be necessary.
Two further possibilities arise under s.209 CA06. A loan does not require members’ approval if it is
given by a money lending company:
 as a loan in the ordinary course of business and on ordinary commercial terms; or

 as a home-loans on in-house terms no more favourable than other employees of the firm
enjoy.
We do not know from the given facts whether the company is a money lending company. Even if it is,
repayment the loan by way of the offset of dividend payments would not seem to fall into the category
of a transaction in the “ordinary course of business”; similarly, it is unlikely that this is the sort of
arrangement that would be available to other employees.
In conclusion, therefore, it seems likely that the loan should be approved in advance by the members.
Procedure for approval
An ordinary resolution, as required under s.197, requires a simple majority vote in favour, taken at a
general meeting of the members or, since this is a private company, by written resolution.
Although he is a shareholder, Derek might be advised as a matter of best practice to refrain from
voting, and counting towards the quorum, on the resolution.
Details of the nature, amount, and purpose of the loan, and of the company’s liability under any other
transaction connected to it, must be circulated to the members or be available for inspection at the
Registered Office for at least 15 days before the resolution.
Directors’ loans of any size must be disclosed in the annual financial statements.
Answer 33 COMPANY AUDITOR
Auditors are appointed to ensure that the interests of the shareholders in a company are being met.
Their key function is to produce reports confirming, or otherwise, that the accountancy information
provided to shareholders is reliable.
The law relating to company auditors is to be found in ss.485-539 CA06. Every company, other than
small private companies (with a turnover of less than £5.6m and balance sheet total of less than £2.8m)
and dormant companies, is required to appoint an auditor, who must be appropriately qualified and in
other respects eligible.
The UK Corporate Governance Code expressly addresses the relationship between a company and its
auditors, providing as a principle that “the board should establish formal and transparent arrangements
for considering how they should apply the financial reporting and internal control principles and for
maintaining an appropriate relationship with the company’s auditors”. There should be an audit
committee of non-executive directors to review and monitor the external auditor’s independence and
objectivity and the effectiveness of the audit process, and to develop and implement policy on the
engagement of the external auditor to supply non-audit services.

(a) Qualifications
A company auditor must be a member of, a statutorily “recognised supervisory body”. This
in turn requires them to hold a professional accountancy qualification. “Supervisory bodies”
are ones established in the UK to control the eligibility of potential company auditors and the
quality of their operation (Schedules 10 and 11 CA06). The recognised supervisory bodies
include:
 the Institute of Chartered Accountants in England and Wales;
 the Institute of Chartered Accountants of Scotland;
 the Institute of Chartered Accountants in Ireland;
 the Association of Chartered Certified Accountants.
The Supervisory Bodies are also recognised as “qualifying bodies”, meaning that
accountancy qualifications awarded by them are recognised professional qualifications for
auditing purposes.
A person is ineligible for appointment as auditor if he is an officer or employee of the

company; and/or a partner or employee of an officer or employee, or a member of a
partnership of which such a person is a partner.
It is a criminal offence to act while ineligible.
(b) Appointment and removal
The first auditors are usually appointed by the directors and hold office until the conclusion
of the first meeting at which accounts are laid, or until the end of the 28 day period following
circulation of the accounts in a private company. They can, of course, be re-elected. If
auditors are not appointed the Secretary of State may appoint auditors to act (ss.486, 490
CA06).
Thereafter, auditors must be appointed annually (ss.485, 489 CA06), usually at the annual
general meeting of public limited companies. In private companies, the appointment period
is the 28 days following circulation of the previous year’s accounts for consideration by the
members (s.485 CA06).
In a private company, if no (re)appointment is made, the previous year’s auditor is deemed

reappointed unless the members have voted not to reappoint him, or to remove him (s.487
CA06).
(c) Removal
An auditor may be removed at any time by ordinary resolution of the company (s.510 CA06).
This does, however, require special notice. Any auditor who is to be removed or not re-
appointed is entitled to make written representations and require these to be circulated or
have them read out at the meeting.
An auditor may resign at any time (s.516 CA06). Notice of resignation must be accompanied
by a statement of any circumstances that the auditor believes ought to be brought to the
attention of members and creditors, or alternatively, a statement that there are no such
circumstances. The company must file a copy of the notice with the Registrar of Companies
within 14 days (s.517 CA06). Where the auditor’s resignation statement states that there are
circumstances that should be brought to the attention of members, then he may require the
company to call a meeting to allow an explanation of those circumstance to the members of
the company.

(d) Rights and duties
The auditors have the right of access at all times to the company’s books and accounts, and
officers of the company are required to provide such information and explanations as the
auditors consider necessary. It is a criminal offence to make false or reckless statements to
auditors.
Auditors are entitled to receive notices and other documents in connection with all general
meetings, to attend such meetings and to speak when the business affects their role as
auditors
Where a private company operates on the basis of written resolutions rather than meetings,
then the auditor is entitled to receive copies of all such proposed resolutions as are to be sent
to members.
Auditors are required to make a report on all annual accounts laid before the company in
general meeting during their tenure of office. They are specifically required to report on:
 whether the accounts have been properly prepared in accordance with the Act;
 whether the individual and group accounts show a true and fair view of the profit or
loss and state of affairs of the company and of the group, so far as concerns the
members of the company; and
 whether the information in the directors’ report is consistent with the accounts
presented.
Auditors are required to investigate:
 whether the company has kept proper accounting records and obtained proper
accounting returns from branches;
 whether the accounts are in agreement with the records,
and state:
 whether they have obtained all the information and explanations that they
considered necessary;
 whether the requirements concerning disclosure of information about directors’ and

officers’ remuneration, loans and other transactions have been met; and rectify any
such omission.
The Companies Act places further duties on auditors relating to such matters as:
 the valuation of non-cash consideration for share allotment by a public company

(s.593);
 purchase or redemption of the company’s own shares by way of a permissible

capital payment (s.709).

Answer 34 TYPES OF RESOLUTION
Tutorial note: There are three types of resolution which can be passed by company members;
ordinary, special and written.
(a) Ordinary resolutions
These need a simple majority (i.e. over 50 %) of members voting in person or by proxy, and
are required for any action which the Companies Act requires members’ approval, without
stating that any other type of resolution is needed.
Examples include (re)appointment of auditors, approval of a dividend, approval of directors’

property transactions, and of loans to directors.
Notice is the same as that for the relevant meeting (21 days for a public limited company
annual general meeting, 14 days for other general meetings).
Special notice (28 days from the proposer to the company) is required for resolutions for the
removal of a director or auditor. The company must then pass on the notice to the director or
auditor and to the members of the company, giving them at least 14 days’ notice.
Tutorial note: Special notice should not be confused with special resolutions (see below).
(b) Special resolution
Certain actions are specified in the Companies Act to require a special resolution, i.e. a 75 %
majority of members voting and a minimum of 21 or 14 days’ notice (according to whether
the meeting is an annual or ordinary general meeting). These are events which involve
particularly significant changes to a company (e.g. change of name, change of articles of
association, re-registration of company as private or public and reduction of capital).
(e) Written resolutions
The members of a private company can pass any type of resolution by means of a written
resolution. The shareholders with voting rights adopt it with the same majority as would
have been required for the matter to be considered in a general meeting.
The company must keep a register of written resolutions.
Resolutions to remove a director or auditor before the expiry of his term of office cannot be
passed by written resolution. The director or auditor is entitled to attend and address the
members at a general meeting at which the resolution is moved.

Answer 35 MR AND MRS GRABBER
Tutorial note: It is unusual for a question to ask for an answer in the form of a letter, but if it is
required it is essential that letter format be used. Marks will be awarded for style and presentation.
The letter should not include a candidate or practitioner’s real name or address, and should be worded
politely and formally.
A good understanding of the relaxation of rules for private companies is needed in this answer.
Remember to advise on what aspects of these provisions will be useful to Mr and Mrs Grabber.
Accounts & Co
Address of Firm
Mr Grabber
Grabber’s Goodies Ltd
Address
(Date)
Dear Mr Grabber
Company meetings
Thank you for your recent letter. In answer to your inquiry about general meetings and related matters,
I am pleased to advise you as follows:
Annual General Meetings
Until recent years there was a universal requirement for companies to hold Annual General Meetings
(AGMs) which, as you point out, could be onerous and an unproductive use of time in businesses
where the members were actively and closely involved in the affairs of the business. However, I am
pleased to reassure you that it is no longer a requirement for private companies, such as Grabber’s
Goodies Limited.
Deregulation of private companies
The Companies Act 2006 only requires general meetings to be convened in private companies should
the directors feel it necessary, or should a substantial shareholder formally demand a meeting.
Business that would hitherto have needed to be transacted at AGMs (or other general meetings) can be
facilitated by the use of written resolutions of the members.
Continuing formalities required
However, this does not absolve you and Mrs Grabber of the need to attend periodically to the formal
matters laid down by company law. For example, the annual accounts must be approved by the
directors, signed by a director on behalf of the board, and circulated in whole or in abstract to the
members.
Since you and Mrs Grabber are both the members and the directors of the company, your consideration
of the accounts as directors will also serve as circulation to you as members. Should you take on
another member, however, you should remember that he will be entitled to the papers.

Likewise, as members it will be necessary from time to time for you to pass formal resolutions, for
example, to reappoint your auditors or if you wish to make constitutional changes to the company (for
example, changing its name,), to approve dividend payments, or to restructure the company’s capital.
These matters could be considered and resolved in formal general meetings or by written resolutions,
but in either case must be properly recorded, in the minutes of the meeting or in a register of written
resolutions.
Practical considerations
Notwithstanding the deregulation of private companies, you will therefore see that there remain various
matters which must be formally considered from time to time. Furthermore, many business proprietors
still find it beneficial to set aside time to review the business’s performance and to plan for the future
away from the demands of everyday business. You may want to plan to do this once or twice a year. It
need not be a formal meeting, but you could at the same time attend to the legal formalities such as the
consideration and approval of the accounts in your capacity as directors.
I hope that the above is helpful, and I will be happy to discuss it with you if you so wish.
Yours sincerely
(Signature of accountant)
Answer 36 ADMINISTRATION AND LIQUIDATION
Administration and liquidation are processes governed by the Insolvency Act 1986 (amended by the
Enterprise Act 2000) by which all or part of an ailing company may be salvaged, or the life of a
company is brought to an end.
Administration
Administration is a process whereby the management and control of a company which is in financial
difficulties is put into the hands of a professionally qualified Insolvency Practitioner with a view to
returning it to solvency or so as to improve its realisation value in winding up.
Administration offers an alternative to liquidation. The procedure was introduced into English
corporate law in 1986 to give companies in difficulty an opportunity to find a means to survival.
Administration may be commenced by the company itself, by its directors or floating charge creditors
(if the company is not already in insolvency proceedings, and has not been in administration during the
preceding 12 months), or by court order. An administration order will only be granted if the court is
satisfied that there is a realistic prospect of returning the company to solvency and/or that it offers
creditors better prospects than from an immediate winding up.
Creditors with floating charges over the whole, or substantially the whole, of the company’s assets and
undertaking, are entitled to have the administrator of their choice appointed.
Administration has the effect of freezing the pre-administration debts of the company while the
company remains in administration. This means that the company cannot be put into winding up, and
secured creditors may not enforce their security, unless the court gives them leave.
The administrator assumes control of the company, and puts together proposals to lay before the
members and creditors for approval within three months of his appointment (although this period can
be extended). Proposals might include the capital restructuring of the company and/or the hiving off of
assets. The court or the party who appointed the administrator can give him directions at any time, and
can grant him further time to rescue the company, or release him if it proves impracticable.

Liquidation
Liquidation (or “winding up” – these terms are synonymous) is the process by which the company’s
existence is brought to an end. Creditors are paid off, surplus assets are returned to the shareholders,
and the company’s registration is struck off.
Liquidation may be started either by a court order – a compulsory winding-up order – granted in
response to a petition brought by, for example, creditors or an aggrieved member; or by special
resolution of the members – a voluntary winding up.
For a compulsory winding up, the petitioner (who may be the company, a member or members, the
directors, the Department of Trade and Industry, or creditors, as appropriate) must satisfy the court that
there are relevant grounds for winding up, under s.122(1) IA86. The grounds include the company’s
inability to pay its debts; its suspension of business for 12 months or more, and a blanket provision, that
it would be “just and equitable” for the company to be wound up.
A voluntary winding up may be for any reason, provided the members resolve by special resolution. If
the company is insolvent (i.e. will be unable to pay its debts in full) the creditors must be called to a
creditors meeting at which the directors will explain matters. In those circumstances the creditors have
special rights of involvement in the winding up.
The Court, or in a voluntary winding up, the members, appoint a liquidator to take charge of and realise
the company’s assets, settle a list of creditors, pay them in the statutory order, and effect the dissolution
of the company. Surplus assets are paid to the members. In a voluntary winding up, if the company is
insolvent the creditors have a right to override the members’ choice of liquidator.
Dissolution is finally effected by the liquidator’s notifying the Registrar of Companies that there are no
remaining transactions, assets, or debts capable of being settled. The registrar will strike the company
off the register, thereby bringing the company’s legal existence to an end.
Answer 37 LARGE PLC

Tutorial note: This question involves the various criminal offences connected with what is known as
insider dealing. In order to understand how such practices operate it is essential to distinguish
between the nominal value of shares and the market value of the share, what the share is actually
worth. Whilst the former is fixed in the company’s memorandum of association, the latter is free to
fluctuate with demand. It is, of course, the fact that share prices fluctuate in this way that provides the
possibility of individuals making large profits, or losses, in speculating in shares.
At a basic level, the value of shares may be seen as a reflection of the underlying profitability of the
company: the more profitable the company, the greater its potential to pay dividends and the higher the
value of its shares. Once the actual performance of a company is revealed in its accounts and
statements, the market value of its share capital will be adjusted in the market to reflect its true worth,
either upwards if it has done better than expected, or downwards if it has done worse than was
expected.
Share valuation depends upon accurate information about a company’s performance or its prospects.
To that extent knowledge is money, but such price sensitive/affected information is usually only
available to the individual share purchaser after the company has issued its information to the public.
If, however, the share buyer could gain prior access to such information, then they would be in the
position to predict the way in which share prices would be likely to move and consequently to make
substantial profits.
Dealing in shares on the basis of access to unpublished price sensitive information provides the basis
for what is referred to as “insider dealing” and is governed by part V of the Criminal Justice Act 1993
(CJA).

Section 52 of the CJA sets out the three distinct offences of insider dealing:
 an individual is guilty of insider dealing if they have information as an insider and deal in
price-affected securities on the basis of that information.
 an individual who has information as an insider will also be guilty of insider dealing if they
encourage another person to deal in price-affected securities in relation to that information.
 an individual who has information as an insider will also be guilty of insider dealing if they
disclose it to anyone other than in the proper performance of their employment, office or
profession.
The CJA goes on to explain the meaning of some of the above terms. Thus s.54 defines what securities
are covered by the legislation and these are set out in the second Schedule to the Act and specifically
includes shares and debentures.
Dealing is defined in s.55, amongst other things, as acquiring or disposing of securities, whether as a
principal or agent, or agreeing to acquire securities.
Section 56 defines “inside information” as:
 relating to particular securities;
 being specific or precise;
 not having been made public; and
 being likely to have a significant effect on the price of the securities.
Section 57 states that a person has information as an insider only if they know it is inside information
and they have it from an inside source. The section then goes on to consider what might be described
as primary and secondary insiders. The first category of primary insiders covers those who get the
inside information directly through either:
 being a director, employee or shareholder of an issuer of securities; or
 having access to the information by virtue of their employment, office or profession.
The term “insider” also extends to anyone who receives, either directly or indirectly, any inside
information from anyone who is a primary insider. Thus anyone receiving information from an insider,
even second or third hand, is to be treated as an insider. It is important to note that if the primary
insider merely recommends that the second party should buy shares, without passing on information,
then although the tipper has committed an offence under s.52(2) in recommending the shares, the tipee
does not commit any offence under the Act because they have not received any specific information as
required by s.56.
Section 53 provides defences for those accused of insider dealing and requires the individual concerned
to show one of three things, either:
 that they did not expect the dealing to result in a profit attributable to the price-sensitive
information;
 that they reasonably believed that the information had been previously disclosed widely
enough to ensure that those taking part in the dealing would be prejudiced by not having the
information;
 that they would have done what they did even if they did not have the information.
On summary conviction an individual found guilty of insider dealing is liable to a fine not exceeding
the statutory maximum and/or maximum of six months imprisonment. On indictment the penalty is an
unlimited fine and/or a maximum of seven years imprisonment.

Applying the general law to the problem scenario, one can conclude as follows:
(i) Nic is an “insider” as he receives inside information as a result of his position as director of
Large. The information fulfils the requirements for “inside information” as it relates to:
particular securities, the shares in Median; is specific, in that it relates to the takeover; has not
been made public; and is likely to have a significant effect on the price of the securities. On
that basis Nic is clearly guilty of an offence under s.52 when he buys the shares in Median.
(ii) When Nic tells his friend Oz about the likelihood of the take-over he commits the second
offence of disclosing information he has as an insider. Oz then becomes an insider himself
and is guilty of dealing when he buys shares in Median.
(iii) This situation is similar to that in (ii) in that when Oz passes on the information to his friend
Pat he is also guilty of disclosing information he has as an insider and equally Pat becomes an
insider himself and is guilty of dealing when he buys shares in Median.
(iv) When Oz advises his brother Quentin to buy shares in Large, he commits the third offence
under s.52 of encouraging another person to deal in price-affected securities in relation to
inside information. Quentin on the other hand has committed no offence for the reason that,
although he has bought shares in Large, he has not received any specific information and
therefore cannot be guilty of dealing on the basis of such information.
(v) Mandarin gets inside information about the takeover bid from his employment and is guilty
of the offence of insider dealing when he sells the shares in order to avoid a loss in the value
of the shares in Median.
(vi) Minion appears to have engaged in insider dealing, but it is open to him to claim advantage of
the defence under s.53 that he would have had to sell his shares to pay the tax bill in any case.

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ACCA

CORPORATE AND BUSINESS LAW

STUDY QUESTION BANK

For Examinations to August 2015

Ali ARAJ - sweatboy01@gmail.com

Copyright ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

Ali ARAJ - sweatboy01@gmail.com

Question Page Answer Marks Date worked

ENGLISH LEGAL SYSTEM

1 Sources of law 1 1001 10

ELEMENTS OF CONTRACT LAW

6 Buyer and Seller 1 1006 10

CONTRACT LAW – TERMS

CONTRACT LAW – BREACH

12 Damages for breach 3 1012 10

14 Liabilities of an employer 3 1015 10

16 Duties of an agent 4 1016 10

18 Bernard and John 4 1018 10

21 Lifting the veil 5 1021 10

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Question Page Answer Marks Date worked

MEMORANDUM AND ARTICLES

23 Domingo Ltd 5 1023 10

25 Slowbutsure plc 7 1026 10

26 Prospect plc 7 1028 10

27 Ordinary shares, preference shares,

30 Removal of director 8 1033 10

OTHER COMPANY OFFICERS

33 Company auditor 9 1036 10

COMPANY MEETINGS AND RESOLUTIONS

34 Types of resolution 9 1039 10

INSOLVENCY AND ADMINISTRATION

36 Administration and liquidation 9 1041 10

FRAUDULENT AND CRIMINAL BEHAVIOUR

37 Large plc (ACCA J06) 10 1042 10

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Question 1 SOURCES OF LAW

(i) Ratio decidendi; (2 marks)

Question 3 POWERS OF THE COURTS

Question 5 STANDARD OF CARE

Question 6 BUYER AND SELLER

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Question 7 MACHINE TOOLS

Question 8 INTENTION TO CREATE LEGAL RELATIONS

(a) Define consideration as it is understood in English contract law. (3 marks)

(i) executory consideration; (2 marks)

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In relation to the law of contract:

(a) define an offer; (5 marks)

(b) explain the specific meaning and effect of

(i) a counter-offer; (3 marks)

Question 12 DAMAGES FOR BREACH

Question 14 LIABILITIES OF AN EMPLOYER

Question 15 REDUNDANCY AND PAYMENTS

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Question 16 DUTIES OF AN AGENT

Advise Fred. (4 marks)

In the context of the law of agency, advise Almaviva.

Question 18 BERNARD AND JOHN

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Question 19 PARTNERSHIPS AND COMPANIES

Question 20 LIMITATION OF LIABILITY IN PARTNERSHIP

(a) limited partnerships (4 marks)

Question 21 LIFTING THE VEIL