Business Incorrect Q's Flashcards
A man tells his cousin that if she will wallpaper his dining room, he will pay her £500. The cousin does the job, but the man is refusing to pay the £500. The cousin is a decorator. Nothing was put in writing.
Which of the following statements best describes whether the man must pay the £500?
A - The man must pay the £500 as whenever money is offered there is a presumption to create legal relations.
B - The man need not pay the £500 as there is no presumption to create legal relations between family members.
C - The man must pay the £500 as whilst there is no presumption to create legal relations, that presumption can be rebutted given the cousin is a decorator.
D - The man must pay the £500 as there is a presumption to create legal relations given that consideration has been exchanged.
E - The man need not pay the £500 as there is no presumption to create legal relations in the absence of anything in writing.
Option C is correct. As the parties are cousins, there is a presumption that there is no intention to create legal relations. However, the more distant the relationship, the weaker the presumption and therefore it will be fairly weak in this case. As the cousin is a decorator, she would have little difficulty rebutting the presumption. Therefore, option C most accurately represents the legal position.
Option A is wrong. Merely offering money does not necessarily mean that there will be an intention to create legal relations.
Option B is wrong. Whilst it is correct to say that there is a presumption that there is no intention to create legal relations between family members, this presumption can be rebutted.
Option D is wrong. The presence of consideration does not automatically mean that there will be an intention to create legal relations – these are two distinct elements.
Option E is wrong. The absence of writing does not necessarily mean that there will be no intention to create legal relations.
A solicitor acts for a client who is the sole shareholder and director in a company. The client owns 100 ordinary shares of £1 each. All of the shares are fully paid. Due to the combination of operating in an increasingly saturated marketplace and the loss of a substantial customer, the client’s company has gone into insolvent liquidation. The company assets are valued at £150,000, and it owes creditors £350,000.
Which of the following best describes whether the client would need to contribute to the company’s funds?
A - The client would need to, because as the sole director of the company he is personally liable for all of the company’s debts.
B - The client would need to, because as a shareholder he is liable to the creditors.
C - The client would not need to, because as a director he is always protected by limited liability.
D - The client would not need to, because the company is liable for its own debts due to the concept of separate legal personality.
E - The client would not need to, because his shares are fully paid.
Option E is the best answer because the concept of limited liability would protect the client from any liability as a shareholder as his shares are fully paid.
Option A is not the best answer because directors are ordinarily protected from liability due to the company being a separate legal personality.
Option B is wrong because a shareholder is only liable in respect of any amounts unpaid on his shares.
Option C is not the best answer because there are some circumstances when a court can order a director to personally contribute to the assets of the company.
Option D is not the best answer because there are some circumstances when a director can be ordered by a court to contribute to the company’s assets.
An offer to sell a product was made by a seller to a buyer. The offer was made via email on 10 January. The email stated that the offer was open for 10 days and the seller must hear from the buyer accepting the offer before the deadline on 20 January. The buyer sent a letter accepting the offer by post on 17 January. The letter was delayed in the post and did not reach the seller until after the deadline. Having not heard from the buyer by 20 January, the seller sold the product to someone else.
Which of the following statements best describes whether there is a binding contract?
A
There is a binding contract between the buyer and the seller as the letter of acceptance was sent by post so the postal rule applies.
B
The offer was made via email so the postal rule does not apply and there is no binding contract between the buyer and the seller.
C
The buyer has a binding contract with the seller because the seller did not exclude the use of acceptance by post.
D
The seller indicated the need to hear from the buyer by the deadline on 20 January so the postal rule was excluded and there is no binding contract.
E
There is no binding contract between the buyer and the seller as the postal rule only applies to revocation of an offer.
Option D is correct. Acceptance is generally effective when received. However, an exception to this is the postal rule, where acceptance is effective when posted even if the letter is delayed. However, there are conditions to be met for the postal rule to apply, one condition being that the postal rule is only effective if it has not been excluded by the offeror. It is likely that the seller (the offeror in this case) impliedly excluded the postal rule by stating that the seller must hear from the buyer accepting the offer before the deadline on 20 January. The postal rule therefore does not apply and there is no binding agreement.
Options A and C are wrong. The postal rule is unlikely to apply on the facts.
Option B is wrong. The fact that the offer was made via email does not exclude the use of post as a method of communication.
Option E is wrong. The postal rule relates to acceptances and not to revocations.
A public limited company wishes to set up a new subsidiary as soon as possible. The company secretary therefore instructs a solicitor in this regard, and the solicitor applies to the Registrar of Companies to register the new company.
Which of the following statements about the application to register the company is correct?
A - The memorandum of association must be delivered with the application.
B - The articles of association must be delivered with the application.
C - Certified copies of passports of the directors must be delivered with the application.
D - An application for exemption from disclosure of the directors’ residential addresses to credit reference agencies must be delivered with the application.
E - Details of the company secretary must be included in the application.
Option A is correct. The memorandum of association must be submitted with the application under s.9 of the Companies Act 2006. Option B is wrong because articles must only be sent if the company does not elect to adopt the model articles. Similarly, the information/documents described in D & E are optional. There is no requirement to send copies of the directors’ passports (option C).
Four friends wish to set up a business together. In terms of finance, the new business will require equity capital which will be contributed equally by all four and debt capital (a bank loan). The bank has indicated that it would be willing to provide the loan regardless of the business medium chosen by the friends but would want personal guarantees from all four friends, all of whom own properties that would more than satisfy the loan.
The friends wish to keep formation costs to a minimum and they are happy to share equally in the fortunes of the business, good or bad. They want to have some sort of agreement to regulate their business relationship. Finally they wish to keep their affairs as private as possible.
Based on these facts, which of the following statements best summarises the advice that should be given to the friends on choice of business medium?
A - Either a limited liability partnership or a private limited company would be most suitable because both offer the benefit of limited liability in respect of the bank loan.
B - Either a limited liability partnership or a private limited company because both can offer a floating charge which the bank will want as security for the loan.
C - A general partnership because it offers the privacy the friends seek and formation costs can be minimal.
D - A private limited company because it has greater status and so will attract investors to help with start-up costs.
E - A limited liability partnership because it is the only medium which allows the friends to regulate their relationship in a written agreement.
Option C is the correct answer because the general partnership offers the friends privacy as nothing needs to be filed with the Registrar of Companies either when the partnership is set up or during the partnership’s lifetime. A partnership is formed as soon as two or more people are carrying on a business in common with a view of profit (s1 Partnership Act 1890) and so it can be set up with minimal formality or cost. The friends are keen to have a written agreement which the partnership option gives them. This will involve some cost but that would be the same for a limited liability partnership and for a company if a shareholders’ agreement is drawn up.
Option A is wrong because liability in respect of the bank loan cannot be avoided as the friends will be giving personal guarantees to the bank.
Option B is wrong because, whilst the limited liability partnership and the private limited company can both offer a floating charge, the bank has indicated that it would be willing to provide the loan regardless of choice of business medium. Other factors point towards the general partnership being the best choice for the friends.
Option D is wrong because the friends are not looking for investors as all start-up costs are covered by their own contributions and the bank loan.
Option E is wrong because a written agreement regulating the relationship between the partners is possible with a general partnership in the same way as with a limited liability partnership. A private limited company will have its own constitution (the articles) but a shareholders’ agreement can be drawn up to reflect the relationship between those setting up the company. Overall, a general partnership would seem to satisfy the friends’ aims best.
An antique writing desk is valued at £50,000. The owner decides to sell the desk at auction and hopes to achieve a minimum price of £35,000. The desk was made available at auction without a reserve price. There was little interest and the highest bid was £5,000. The auctioneer refused to sell the desk to the bidder explaining that the bid was far below the minimum price desired.
Which one of the following statements best describes what remedies are available to the bidder?
A - The auctioneer is obliged to accept the highest bid. There is therefore a sales contract for the desk and the bidder could sue the owner for damages.
B - The auctioneer is obliged to accept the highest bid. There is therefore a sales contract for the desk and the bidder could sue the auctioneer for damages.
C - The auctioneer is obliged to accept the highest bid. There is therefore a sales contract for the desk and the bidder could obtain the remedy of specific performance.
D - The auctioneer should have accepted the highest bid. There is no sales contract for the desk but the auctioneer may be liable in damages to the bidder.
E - No bid has been accepted and therefore there is no remedy against either the auctioneer or the owner.
Option D is correct. If there is no reserve the auctioneer is obliged to accept the highest bid. However, the offer to buy the desk at £5,000 was not accepted and so there can be no contract with the owner. Although the bidder has no remedy against the owner of the desk, she may have a remedy against the auctioneer for damages. It may help you to have a look at the case of Barry v Davies (2000).
Options A and C are wrong as there is no remedy against the owner of the desk, whether in damages or specific performance (which in this case would be a remedy against the owner).
Option B is wrong. Whilst the auctioneer’s failure to accept the highest bid is a breach of a unilateral promise to do so, there is no contract for the sale of the desk.
Option E is wrong. The breach of the unilateral promise does, however, give rise to a right to claim damages against the auctioneer.
Three friends, who run a successful retail business in partnership, decide to incorporate their business as they feel this will help their expansion plans. The assets of the retail business include freehold premises. A company is set up and in return for the business the friends are allotted shares in the new company. The friends are equal shareholders in the company and two of the friends are the only directors of it. The company performs well and so the friends decide to press ahead with expansion plans. They approach a bank and agree terms for a loan to the company. After board approval is given, the directors execute the loan agreement.
Which of the following best describes the ownership of the premises and the parties to the loan agreement?
A - The freehold premises are owned by the company and the parties to the loan agreement are the directors and the bank.
B - The freehold premises are owned by the shareholders and the parties to the loan agreement are the directors and the bank.
C - The freehold premises are owned by the shareholders and the parties to the loan agreement are the company and the bank.
D - The freehold premises are owned by the directors and the parties to the loan agreement are the directors and the bank.
E - The freehold premises are owned by the company and the parties to the loan agreement are the company and the bank.
Option E is correct because a company is a separate legal entity which exists separately from its shareholders and directors (Salomon v A Salomon and Co Ltd). When the partnership business was transferred to the company, the company became the owner of all the partnership assets, including the freehold premises. The loan agreement is executed by the directors on behalf of the company and therefore the parties to the loan agreement are the company and the bank.
Option A is wrong because the parties to the loan agreement are the company and the bank. The directors execute the agreement on behalf of the company.
Option B is wrong because the premises were transferred to the company on incorporation. The premises are therefore owned by the company. The directors execute the loan agreement on behalf of the company and therefore the company and the bank are the parties to the loan agreement.
Option C is wrong because the premises were transferred to the company on incorporation. The premises are therefore owned by the company.
Option D is wrong because the directors are agents of the company and act on its behalf. However, the company itself owns its assets, such as the freehold premises, and the company itself is a party to the loan agreement with the bank.
A client has decided to set up his own business as a hairdresser. He has interviewed a local stylist and a junior both of whom are keen to become involved. Neither has any significant assets nor money to put into the business and the client had not met either of them prior to the interview. Whilst the client is happy to listen to ideas on how to run the salon, he is not prepared to share control. He has found suitable leasehold premises and will need to borrow start-up costs of £40,000 from the bank. The bank has agreed the loan in principle subject to the client providing a personal guarantee. The client is not good with paperwork and is keen to keep his business affairs private.
Which of the following statements provides the best advice on the appropriate business medium for the client?
A - The client should form a private limited company, being the sole shareholder and director of it, so as to benefit from limited liability in respect of the bank loan.
B - The client should set up a general partnership with the stylist and the junior so as to share liability in respect of the bank loan.
C - The client should form a limited liability partnership with the stylist and junior as this will ensure the affairs of the business remain private.
D - The client should form a limited partnership with the stylist and junior as this will protect all of them from liability in respect of the bank loan.
E - The client should set up the business as a sole trader, with the stylist and junior being his employees, as this will ensure the affairs of the business remain private.
Option E is the best answer because the client wants to keep the affairs of the business confidential. There are no filing requirements for a sole trader. As a sole trader the client will have the control he desires. The client is giving a personal guarantee for the loan and so will be liable for it whatever business medium is chosen.
Option A is wrong because the client is giving a personal guarantee for the loan and will therefore be liable for it.
Option B is wrong because the client is giving a personal guarantee for the loan and the stylist and junior have no significant assets.
Option C is wrong because a limited liability partnership must file certain documents, such as annual accounts, with the Registrar of Companies.
Option D is wrong because there must be a general partner who has unlimited liability.
A client has an idea for a start-up business, and needs advice on the type of business he should set up. He intends to begin the business alone. The client used to run a business which collapsed, losing him significant amounts of money, so is wary of taking too many risks. He inherited quite a lot of money recently and intends to use £10,000 of it to start the business, which he believes is enough without having to borrow additional amounts. He has three children and intends to use the rest of his inheritance to pay for their school fees. It is important to him that this money is safe so that it can be used for this purpose.
Which of the following best represents the most appropriate type of business for the client?
A - Sole trader
B - Partnership
C - Limited liability partnership.
D - Private company limited by shares.
E - Public company limited by shares.
Option D is correct because a private company can have only one director and shareholder, and with it he will have the benefit of limited liability. If he buys £10,000 shares, his liability will be capped at this amount if he does not sign personal guarantees (unlikely as he does not currently need to borrow) or commit wrongful or fraudulent trading.
Option A is wrong because as a sole trader he would have unlimited liability and so his inheritance would be at risk.
Option B is wrong because he is starting the business alone and a partnership requires at least two partners (s1 Partnership Act 1890).
Option C is wrong because a limited liability partnership requires two members.
Option E is wrong because two shareholders and two directors are needed for a public company and it must have a minimum share capital of £50,000, £12,500 of which must be paid up. The client only intends to invest £10,000.
A woman and her husband recently incorporated their personal training business. They are the only directors and shareholders of the company. The woman owns 70% of the shares. Her husband owns 30%. They have both paid for their shares in full. Once the company had been incorporated, both the woman and her husband signed a loan agreement on behalf of the company to borrow £10,000.
Who is liable to repay the loan?
A - The woman and her husband as shareholders.
B - The woman and her husband as directors.
C - The company, the woman and her husband jointly.
D - The company only.
E - The woman only as the majority shareholder.
Option D is correct because the company is a separate legal person (Salomon v A Salomon and Co Ltd) and it is therefore the company which owes the money under the loan agreement.
Option A is wrong because liability of shareholders is limited to any amount unpaid on their shares (s.74 Insolvency Act 1986). Here the shares have been paid for in full.
Option B is wrong because the company is a separate legal person (Salomon v A Salomon and Co Ltd) so directors are not personally liable for the debts of the company unless they have traded wrongfully (s.214 Insolvency Act 1986).
Option C is wrong because the company is a separate legal person (Salomon v A Salomon and Co Ltd) and it is therefore the company alone which owes the money, not the shareholders or directors individually.
Option E is wrong because liability of shareholders is limited to any amount unpaid on their shares (s.74 Insolvency Act 1986). The fact that the woman is a majority shareholder is irrelevant as she has paid for her shares in full.
An uncle reaches an agreement with his nephew that the nephew will use the uncle’s van for a day and pay the uncle £200 for doing so. The van is ordinarily used by the uncle as part of his landscape gardening business. The nephew, who is a property developer, intends to use the van to clear a property prior to refurbishing it for sale.
Which of the following statements most accurately describes the situation with respect to their intention to create legal relations?
A - There is a presumption of intention to create legal relations because of the commercial nature of the agreement.
B - There is no intention to create legal relations because the parties have yet to perform their obligations under the agreement.
C - There is a presumption of no intention to create legal relations but this may be rebutted because of the nature of the transaction.
D - There is a presumption of no intention to create legal relations because it is a domestic agreement.
E - There is a presumption of intention to create legal relations but this is undermined by the fact the parties are related.
Option C is correct. It is generally presumed that an agreement between family members is a domestic agreement and is not intended to be a contract. However, there is a commercial context to this arrangement. The van is used as a business vehicle and is going to be used for a commercial purpose. This evidence may rebut the presumption.
Option A is wrong. As the parties are related, it is therefore necessary to start with the presumption of no intention to create legal relations then assess if the presumption is rebutted.
Option B is wrong. The contract is formed when the necessary elements (agreement, consideration and intention to create legal relations) are present. It is irrelevant that the contract has yet to be performed.
Option D is wrong. The statement itself is correct but does not take account of other relevant facts of the scenario which may rebut the presumption.
Option E is wrong. It begins with the wrong presumption.
A client approaches you for some advice on setting up a private limited company. The client is currently a partner in a general partnership and wants to know more about the key features of limited liability over unlimited liability. The client is keen to become both a director and a shareholder in the company.
Which of the following statements best describes a key feature of limited liability?
A - Limited liability absolves directors of personal liability to third parties.
B - Limited liability permits shareholders to limit the number of transactions entered into with third parties.
C - Limited liability ensures that directors will not be asked to make a personal contribution to the company.
D - Limited liability enables the directors and shareholders to share profits more equally than in a general partnership.
E - Limited liability ensures shareholders are only liable to the extent of what they have paid or agreed to pay for their shares.
Option E is the best answer - the individuals who own the shares in the company will not usually be liable for its debts – their liability is limited to the amount they paid or agreed to pay for their shares.
Option A is not the best answer because directors may well be personally liable for their actions particularly in relation to directors’ duties.
Option B is not the best answer because, although shareholders are entitled to vote, their power to limit the number of company transactions may well be curtailed by their lack of voting power and influence.
Option C is not the best answer because directors may well be asked to make a personal contribution to the company e.g. following a breach of a director’s duty.
Option D is not the best answer because profits are not as a rule shared equally in a limited company and certainly not because of the concept of limited liability.
A client would like to start a business and has decided to establish a private limited company with the Companies (Model Articles) Regulations 2008 (the “Model Articles”) as its articles of association unamended.
Which of the following statements best describes the advice relating to the application to incorporate a company with Model Articles?
A - There will need to be a company secretary.
B - There will need to be at least one director.
C - The directors’ residential addresses will appear on the public register.
D - A chairperson of the board of directors must be appointed.
E - The company will be a separate legal entity as soon as the application is made.
Option B is correct. In accordance with the Companies Act 2006, every company must have at least one director (and public companies must have two or more (s154 CA 2006)). Every company must have at least one director who is a natural person, ie a human being (s156A CA 2006) and directors must be 16 or over (s157 CA 2006) if they are an individual.
Option A is wrong because whilst companies may appoint a company secretary, it is no longer a requirement for a company to have a company secretary (s270 Companies Act 2006).
Option C is wrong because it is the directors’ service address that appears on the public register at Companies House. This is the address to which any official documents for that director must be sent. Usually, directors will choose to use the company’s registered office as their service address, rather than their residential (home) address. A director’s residential address will not appear on the public register unless the director chooses to use their residential address as their service address.
Option D is wrong because there is no requirement under the Companies Act or the Model Articles for there to be a chairperson.
Option E is wrong because the company will only become a separate legal entity from the date on which a certificate of incorporation is issued by Companies House, not when the application is submitted or the decision is made to incorporate.
Three women decide to go into business together. They each invest equal amounts of capital in the business and agree to share the profits equally. Two of the women want to take an active role in managing the business; the third woman is happy to take a less active role. The business has made a loss.
Have the three women been working in partnership together?
A - Yes, because they are in business together and intended to make a profit even though they have made a loss.
B - Yes, because they invested equal amounts of capital in the business.
C - No, because they have not registered their business as a partnership.
D - No, because there are no written constitutional documents.
E - No, because they clearly intended a split between management of the business and ownership which is inconsistent with a partnership.
Option A is correct. A partnership comes into existence when two or more persons are carrying on business in common with a view of profit. This is satisfied on the facts (even though the business has not yet made any profit).
Option B is wrong. A partnership can come into existence whether or not the parties have agreed to contribute equal amounts of capital.
Option C is wrong. Unlike a company, there is no requirement for a partnership to be registered.
Option D is wrong. Unlike a company, there is no requirement for the partnership to be based on written constitutional documents. The women can continue the partnership on the basis of an oral agreement (although they would be best-advised to sign a written partnership agreement).
Option E is wrong. If the women wanted to make a formal distinction between the management of the business and its ownership, then a company may be a better medium for that business given the formal distinction in a company between directors who manage the company and shareholders who own it. Nevertheless, there is nothing inconsistent in having a partnership in which some – but not all – partners manage the business. In a partnership, while the partners all own the business, they are not required to take part in the management of the business. The fact that only two of the three partners intend to take an active role in managing the business does not stop this being a partnership.
