Business Law Exam Questions

Question 1

Freddie is a wine merchant and has until now operated as a sole trader. He is interested in buying his own vineyard in France. However, he has heard that this is a risky business and is very concerned to protect his family from business failure as much as possible.

To this end, he decided to form a company. He is the only director and shareholder and the wine business was transferred at full market value (£250,000). Freddie taking 10,000 ordinary shares at £1 each, and agreeing to leave the balance outstanding by way of loan, secured by way of fixed and floating charge over the company’s premises and stock in the UK.

Freddie has told all his suppliers that the company is solvent and so they have been happy to continue doing business with him, notwithstanding the change of business medium.

In the event that things go wrong in France and that the company fails

(1) Advise Freddie as to any personal liability he may have to his suppliers (20 marks)

(2) Does your advice differ if you learn that Freddie knew that the venture in France was likely to fail but he was prepared to take the risk to see if it might work, thinking that he was well protected in any event by the security arrangements he had in place? (20 marks)

Total= 40 marks

Question 2

In the case of Adams v Cape Industries plc (1990) the court discussed the circumstances under which the corporate veil will be lifted. Critically analyse the issue of lifting or piercing the corporate veil with reference to relevant case law.

Total= 40 marks

Question 3

John, Sarah and Lucy are the directors of ‘Quirky Wedding Cakes Ltd’. Rhiannon is an employee of this company and she seeks advice from you because she is concerned about the way the company affairs are conducted.

Her concerns are about the following:

1. In June 2017, ‘Quirky Wedding Cakes Ltd’ was invited to enter into new commercial opportunities with an events organising company ‘Lively Parties Ltd’. The Board considered this to be a good opportunity but the company was too young (it was only incorporated in June 2015) to take up this opportunity for expansion. John and Sarah, however, later decided that they would exploit this new opportunity personally. They started collaborating with ‘Lively Parties Ltd’ and they made £ 10,000 each out of this collaboration.

2. John, Sarah and Lucy have never submitted the company’s annual documentation to the Companies House and they do not seem to be particularly engaging with the administrative demands of running a company.

Advise Rhiannon whether any breaches of directors’ duties have occurred.

Total= 40 marks

Section B. Answer Two of the THREE questions ONLY in this section. Each question carries 30 marks.

Question 1

Analyse, using examples to illustrate your analysis:

(i) The role of the articles of association as the constitution of the company; and (ii) the proposition that the articles of association of a company form a contract

between it and the members.

Question 2

Total = 30 marks

Gerhardt and Bruno set up a company, Marble Limited, 5 years ago to deal with import and export of Italian marble. They are the only directors and both hold 50,000 ordinary shares of £1 each.

The company have traded successfully and last month the directors at a board meeting decided to expand. Bruno has proposed that the expansion be funded by

the fresh issue of a further 50,000 shares to other potential investors. Gerhardt has alternatively suggested that they instead borrow money from commercial lenders to finance their expansion.

Advise Bruno and Gerhardt on the commercial and legal implications of their proposals for financing expansion.

Total = 30 marks

Question 3

You are advising the board of New Solutions plc (‘Solutions’) on their strategy for growth. Solutions are a family company with control held by two board directors/shareholders, who were the company founders (Alice & Bernard). Two daughters (Clare & Dorothy) are also on the board.

They ask you to clarify their understanding, on the comparative advantages and disadvantages of:

(1) financing growth of the company through relying on borrowing from banks; or

(2) alternatively on issuing preference shares in return for investment. Total= 30 marks