Topic 16

Question 1

What is a ‘legal person’?

Answer 1

A legal person is an entity with a legal existence that can enter contracts, sue, and be sued. This includes:

Individuals (in both personal and formal roles, such as executors).
Groups like trustees.
Legal entities like limited companies.

Question 2

What are the key characteristics of a sole trader?

Answer 2

No legal separation between the owner and the business.
The owner is personally liable for all business debts.
Keeps all profits after paying income tax and National Insurance.

Question 3

What are the key features of a company?

Answer 3

A company is a separate legal entity from its shareholders and employees.
The certificate of incorporation proves its formation.
Key information (e.g., shareholders, directors) is held at Companies House.
Governed by its memorandum and articles of association, which outline rules and borrowing powers.
Limited liability: Shareholders can only lose the amount they invested if the company becomes insolvent.

Question 4

What is a partnership and how does it differ from a company?

Answer 4

A partnership is not a separate legal entity; partners jointly own assets.
Partners are jointly and severally liable for the partnership’s debts.
Should have a written agreement covering profit sharing and what happens if a partner leaves.

Question 5

How do LLPs differ from standard partnerships?

Answer 5

LLPs offer limited personal liability, similar to companies.
Must be registered with Companies House.
Taxed like partnerships, meaning partners pay tax as self-employed individuals rather than being subject to corporation tax.

Question 6

What are the key requirements for a legally binding contract?

Answer 6

A legally binding contract must meet the following conditions:

Offer and acceptance – One party makes an offer, and the other accepts without changes.
Consideration – Something of value must be exchanged (e.g., money or a promise).
Capacity to contract – Both parties must have legal capacity (e.g., not be minors or lacking mental capacity).
Contract terms – Must be clear, complete, and free from doubt.
Intention to create a legal relationship – The agreement must not be a casual or informal arrangement.
Legality of object – The contract must not be for illegal or immoral purposes.
Entered into freely – There must be no misrepresentation, duress, or undue influence.
Special Rule for Contracts Involving Land:

Must be made in writing.
Transfers of ownership must be performed by deed.

Question 7

What is the general rule on disclosure of information in contracts?

Answer 7

Most contracts follow caveat emptor (‘let the buyer beware’), meaning each party is responsible for gathering their own information.
Exception: Insurance contracts historically required utmost good faith (uberrima fides), meaning all material facts had to be disclosed.

Question 8

How did the Consumer Insurance (Disclosure and Representations) Act 2012 change disclosure rules?

Answer 8

Consumers no longer need to volunteer material facts.
Instead, they must answer insurers’ questions fully and accurately.
If they volunteer extra information, it must not be misleading.

Question 9

What happens if a consumer misrepresents information when applying for insurance?

Answer 9

Honest and reasonable misrepresentation → The insurer cannot refuse a later claim.
Careless misrepresentation → The insurer may:
Adjust the claim based on what they would have done if they had the correct information.
Refund premiums if they would have refused cover completely.
Exclude claims related to undisclosed conditions.
Deliberate or reckless misrepresentation → The insurer can reject the claim entirely and may keep the premiums.

Question 10

What are the main remedies available for breach of contract?

Answer 10

The main remedies include:

Damages – Financial compensation to place the injured party in the position they would have been in if the contract had not been breached.
Specific performance – A court order requiring the breaching party to fulfil their contractual obligations.
Injunction – A court order preventing a party from doing something.

Question 11

What is an agent in legal terms?

Answer 11

An agent is a person who acts on behalf of another (the principal) and can enter into contracts on their behalf. Examples include:

Independent financial advisers (IFAs) acting for clients.
Estate agents selling property for a client.

Question 12

What are the key considerations regarding an agent’s authority?

Answer 12

Agents must only act within their authority as given by the principal.
If an agent exceeds their actual authority but acts within apparent authority, the principal may still be bound.
If an agent goes beyond all authority, they may be personally liable.
The principal can ratify (approve) the agent’s actions after the fact.

Question 13

What is an agent?

Answer 13

Acts on behalf of the principal within specific boundaries.

Question 14

What is a principal?

Answer 14

The party who grants authority to the agent.

Question 15

What is an apparent authority?

Answer 15

When the principal’s words or actions give the impression that the agent has authority.

Question 16

What is ratification?

Answer 16

When the principal retroactively approves an agent’s actions that exceeded their authority.

Question 17

What are the two types of property in England and Wales?

Answer 17

Realty – Immovable property such as land and buildings. A court will restore it to the owner if they are dispossessed.
Personalty – All other types of property, including possessions and financial assets.

Question 18

What are the differences between joint tenants and tenants in common?

Answer 18

Joint tenants – Each owner owns 100% of the property collectively. If one dies, their share automatically passes to the surviving owner(s), regardless of any will or intestacy laws.
Tenants in common – Each owner has a specific share of the property. If one dies, their share is passed on according to their will or intestacy laws.

Question 19

How does joint ownership affect mortgage liability?

Answer 19

Most joint mortgages are on a joint and several liability basis, meaning all owners are equally responsible for repayments.
If one owner cannot pay, the others must cover the shortfall.

Question 20

What is power of attorney, and when might it be needed?

Answer 20

Power of attorney is a legal arrangement where a person (the donor) gives another person (the donee or attorney) the authority to act on their behalf. It may be needed if:

A person wants to ensure their affairs are managed if they lose mental capacity (e.g., due to dementia).
Someone with UK-based affairs moves abroad.

Question 21

What is an enduring power of attorney (EPA), and how does it work?

Answer 21

An EPA allows an attorney to continue managing the donor’s affairs if they become mentally incapacitated.
It must be registered with the Office of the Public Guardian (OPG) when the donor starts losing capacity.
It can only be revoked with the Court of Protection’s consent.

Question 22

What replaced EPAs, and what are the types of LPAs?

Answer 22

From 1 October 2007, EPAs were replaced by lasting powers of attorney (LPAs) under the Mental Capacity Act 2005.
There are two types of LPAs:
Health and welfare – Covers decisions about medical care and living arrangements; can only be used once the donor loses capacity.
Property and financial affairs – Covers bank accounts, benefits, and property; can be used while the donor still has capacity if they allow it.
An LPA must be registered with the OPG before taking effect.

Question 23

What happens if someone loses mental capacity without an LPA or EPA?

Answer 23

The Mental Capacity Act 2005 allows for supported and substituted decision-making.
The Court of Protection can appoint a deputy to manage the person’s affairs.
However, a deputy’s powers are more limited than an attorney’s, and the appointment process takes time.
This is why individuals are encouraged to set up an LPA in advance.

Question 24

What is a will, and why is it important?

Answer 24

A will is a written declaration of an individual’s wishes regarding the distribution of their assets after death. It can also include burial instructions. Writing a will is essential for financial planning, as it ensures control over the estate and prevents intestacy, where assets are distributed according to legal rules rather than personal wishes.

Question 25

What are the legal requirements for making a valid will in England and Wales?

Answer 25

A valid will must: Be in writing. Be properly executed, meaning: The testator (the person making the will) must be at least 18 years old. It must be signed by the testator in the presence of two witnesses. Witnesses cannot be beneficiaries (or the spouse of a beneficiary), or the beneficiary will lose their inheritance.

Question 26

How can a will be changed or revoked?

Answer 26

A testator can modify a will using a codicil, a formal document recording the changes. A will is automatically revoked by marriage, remarriage, or civil partnership, unless it was made in anticipation of the change.

Question 27

Who is responsible for distributing a deceased person’s estate, and how is it done?

Answer 27

If there is a valid will, the named executor(s) handle the estate's distribution. They must apply for a grant of probate, which gives them legal authority to follow the will's instructions. If there is no will (intestacy), a close relative (e.g., spouse) applies for letters of administration and distributes the estate according to intestacy rules.

Question 28

What is a deed of variation, and when is it used?

Answer 28

A deed of variation allows beneficiaries to change how an estate is distributed after the testator’s death. It must: Be agreed upon by all affected parties. Be executed within two years of death. Be reported to HMRC within six months if it affects inheritance tax (IHT). Not be made in exchange for money or goods (money’s worth).

Question 29

What does it mean to die intestate?

Answer 29

A person dies intestate if they do not leave a valid will. This also applies if their will is deemed invalid or does not cover all their assets (partial intestacy). The distribution of their estate is determined by the rules of intestacy, which follow strict legal guidelines with no flexibility.

Question 30

How is an estate distributed if someone dies intestate in England and Wales?

Answer 30

If the deceased leaves a spouse but no children → The spouse inherits the entire estate. If there is both a spouse and children → The spouse receives: Personal chattels (possessions such as furniture and jewellery). £322,000 of the estate. Half of the remaining estate absolutely. The other half of the remaining estate is shared equally among the children. If there are children but no spouse → The children inherit the entire estate equally. If there is no spouse and no children → The estate passes to parents. If they are deceased, it goes to siblings. If no living relatives can be found → The estate passes to the Crown.

Question 31

Who is responsible for distributing an estate under intestacy?

Answer 31

An administrator is appointed to manage the estate and distribute assets according to intestacy rules. The administrator must apply for letters of administration, which give them legal authority to act.

Question 32

What is a trust, and what is its purpose?

Answer 32

A trust (also called a settlement) is a legal arrangement where a person (the settlor) places assets into a trust for the benefit of others (beneficiaries). The assets are managed by trustees, who ensure they are used according to the trust’s terms.

Question 33

Who are the key parties involved in a trust?

Answer 33

Settlor – The person who creates the trust and originally owns the assets placed in it. Trustees – Individuals appointed to manage the trust’s assets and distribute them according to the trust deed. Trustees must be 18 or over and have mental capacity. Beneficiaries – The individuals or organisations who benefit from the trust. They may be named specifically or included as a group (e.g. “all my children”).

Question 34

What responsibilities do trustees have?

Answer 34

Follow the trust deed – The document outlining how the trust is managed. Act in the best interests of beneficiaries – Balancing different needs fairly, e.g. income vs capital growth. Follow the Trustee Act 2000 when investing, ensuring: Investments are suitable and diversified. Professional advice is obtained and considered. Investments are reviewed regularly.

Question 35

When is a person considered insolvent?

Answer 35

A person is insolvent if: Their liabilities exceed their assets. They cannot meet their financial obligations when they become due.

Question 36

How does bankruptcy differ from insolvency?

Answer 36

Bankruptcy is a legal process that formalises insolvency. A person can be declared bankrupt if: They apply for bankruptcy themselves. A creditor petitions for their bankruptcy if they are owed at least £5,000. Most bankruptcy orders last 12 months, during which time the person is known as an undischarged bankrupt. Consequences of bankruptcy: The official receiver takes control of most assets to pay off debts. Essentials like clothing, household items, and work-related tools are exempt. Bankrupt individuals cannot borrow money (except small amounts) during the bankruptcy period. They may struggle to get credit or a mortgage even after bankruptcy ends.

Question 37

What is an IVA, and how does it work?

Answer 37

An IVA is an alternative to bankruptcy where a debtor agrees with creditors to repay debts over a set period. It must be approved by creditors representing at least 75% of the debt and is supervised by an insolvency practitioner. Advantages of an IVA: May allow interest to be frozen. Can reduce the overall debt. Offers legal protection from creditors if payments are made. However, individuals with an IVA will find it difficult to obtain credit, even after the agreement ends.

Question 38

How does a CVA help struggling businesses?

Answer 38

A CVA is similar to an IVA but applies to companies. It allows a business to: Make an agreement with creditors to manage debts. Continue trading instead of going into administration. The directors or a liquidator can propose a CVA, but not the creditors. Creditors representing 75% of the debt must approve it.

Question 39

How does the FCA help consumers protect themselves from scams?

Answer 39

The FCA operates ScamSmart, a website that: Provides guidance on spotting and avoiding scams. Allows consumers to check if a firm is authorised or on a warning list. Includes a questionnaire to help determine if an investment or pension scheme is a scam. Allows consumers to report scams or unauthorised firms.

Question 40

How has the Financial Ombudsman strengthened protection for scam victims?

Answer 40

The Financial Ombudsman has raised the standard for negligence. Banks must prove ‘gross negligence’ to deny refunds. If they can't, the victim must be refunded with interest.

Question 41

How does The Pensions Ombudsman protect consumers from pension scams?

Answer 41

If a pension provider fails to conduct proper warnings and checks before transferring funds, The Pensions Ombudsman is likely to side with the victim, ensuring they are compensated.