Law - Nov 2002

Examination Question and Answer Book Write here your full examination number Centre Code: Hall Code: Desk Number:

Foundation Level

3b

Business Law

FBLW 18 November 2002 Day 1 – early afternoon

INSTRUCTIONS TO CANDIDATES Read this page before you look at the questions THIS QUESTION PAPER BOOKLET IS ALSO YOUR ANSWER BOOKLET. Sufficient space has been provided for you to write your answers and also for workings where questions require them. For section B questions, you must write your answers in the shaded space provided. Please note that you will NOT receive marks for your notes or workings. You are allowed two hours to answer this question paper. All questions are compulsory. Answer the ONE question in section A (this has 25 sub-questions and is on pages 2-8) Answer the THREE questions in section B (these are on pages 9-14) You are advised to spend 10 minutes reading through the paper before starting to answer the questions. You should spend no more than 55 minutes on answering the ONE question in section A, which has 25 sub-questions. You should spend no more than 55 minutes on answering the THREE questions in section B. You are advised that, in section B questions, you will receive no marks if you exceed the word limits indicated. Hand this entire booklet to the invigilators at the end of the examination. You are NOT permitted to leave the examination hall with this booklet. Do NOT write your name or your student registration number anywhere on this booklet.



The Chartered Institute of Management Accountants 2002

SECTION A — 50 MARKS ANSWER ALL TWENTY-FIVE SUB-QUESTIONS – 2 MARKS EACH Each of the sub-questions numbered from 1.1 to 1.25 inclusive, given below, has only ONE correct answer. REQUIRED: Place a circle “O” around the letter A, B, C or D that gives the correct answer to each sub-question. If you wish to change your mind about an answer, block out your first answer completely and then circle another letter. You will NOT receive marks if more than one letter is circled. Please note that you will NOT receive marks for any workings to these sub-questions. Question One 1.1

Which of the following is correct? (i)

Auditors who provide negligent advice may be held liable for breach of contract by the company which appointed them.

(ii)

Auditors who provide negligent advice to the company which appointed them may be held liable for breach of contract by the company and its shareholders.

(iii)

Auditors who provide advice to a particular person and who know what the advice will be used for may be held liable to that person in the tort of negligence if the advice proves to be incorrect and was carelessly prepared.

A

(i) only.

B

(i) and (ii) only.

C

(i) and (iii) only.

D

(ii) and (iii) only.

1.2

Which ONE of the following is correct?

A

All English courts must apply European Law even if it contradicts English Law.

B

If European and English Law conflict, English courts cannot apply either law.

C

An English court must apply English Law unless it obtains the government's permission to apply European Law.

D

All English courts are obliged to apply English Law even if it contradicts European Law.

FBLW

2

November 2002

1.3

Which of the following is correct? (i)

A contract is entered into voluntarily whereas criminal offences are imposed by the state.

(ii)

A tort is entered into voluntarily whereas criminal offences are imposed by the state.

(iii)

A contract is entered into voluntarily whereas a tort is imposed by the state.

A

(i) only.

B

(ii) only.

1.4

Which of the following is correct?

C

(i) and (iii) only.

(i)

A wrongful dismissal cannot also be an unfair dismissal.

(ii)

An unfair dismissal can also be a wrongful dismissal.

(iii)

An unfair dismissal must also be a wrongful dismissal. B

(ii) only.

C

(ii) and (iii) only.

D

(ii) and (iii) only.

D

(iii) only

A

(i) only.

1.5

Brian has been employed by Wye Ltd for 10 years. His contract of employment states that if either Wye Ltd or Brian wishes to terminate the contract, each party must give the statutory minimum period of notice.

Which ONE of the following is correct? A

Both Brian and Wye Ltd are entitled to 10 weeks’ notice.

B

Brian is entitled to 10 weeks’ notice but Wye Ltd is entitled to only 1 week’s notice.

C

Brian is entitled to 1 month’s notice and Wye Ltd is entitled to 10 weeks’ notice.

D

Both Brian and Wye Ltd are entitled to 1 week’s notice.

1.6

Charles recently purchased some goods at an auction sale.

Which of the following is correct?

A

(i)

The contract was concluded by the fall of the Auctioneer’s hammer.

(ii)

The Auctioneer’s call for bids was an invitation to treat.

(iii)

Once the bidding had started, the Auctioneer was unable to withdraw the goods from the sale.

(i) only.

November 2002

B

(i) and (ii) only.

C

3

(ii) and (iii) only.

D

(i), (ii) and (iii).

FBLW

1.7

Tee Ltd placed some computers in its shop window with a notice which read:

“Special offer. Internet-ready computers for sale at £400.” Which of the following is correct? (i)

The notice amounts to an invitation to treat.

(ii)

When Anne called in to the shop and offered £350 for one of the computers, she had made a counter offer.

(iii)

Tee Ltd is obliged to sell a computer to anyone who can pay the price.

A

(i) and (ii) only.

B

(i) only.

1.8

Which of the following is correct?

(i), (ii) and (iii).

D

(i)

A contract of guarantee is unenforceable unless it is evidenced in writing.

(ii)

A contract to sell land must be in writing.

(iii)

A contract of employment must be in writing.

A

(i) and (ii) only.

1.9

Which of the following is INCORRECT?

A

C

B

(i) and (iii) only.

C

(ii) and (iii) only.

D

(i)

Legal title cannot pass on a contract induced by misrepresentation.

(ii)

Misrepresentation renders a contract voidable.

(iii)

A victim of negligent misrepresentation may seek rescission and damages.

(i) only.

B

(ii) only.

C

(i) and (iii) only.

D

(ii) only.

(i), (ii) and (iii).

(ii) and (iii) only.

1.10 In which of the following is there a presumption that legal relations are intended? A

A promise by a father to make a gift to his son.

B

A commercial transaction.

C

A domestic arrangement.

D

A social arrangement.

1.11 Which ONE of the following is correct? A

A contract is frustrated when something happens after it has been entered into which renders the contract more difficult to perform.

B

A contract is frustrated when a party expressly agrees to manufacture and supply goods and then discovers that they will be far more expensive to produce than he thought at the time of the contract.

C

A contract is frustrated when something happens after it has been entered into which renders the contract impossible to perform.

D

A contract is frustrated if it is impossible to perform at the time that it is made.

FBLW

4

November 2002

1.12 Exe Ltd was under contract to deliver goods by road to London for Wye Ltd for £2,000. After part of the journey was completed, the delivery vehicle broke down and Wye Ltd was forced to arrange for Zed Ltd to complete the delivery. If there are no provisions in the contract to deal with this situation, which of the following is correct? A

Exe Ltd is entitled to part of the delivery fee.

B

Exe Ltd is entitled to nothing.

C

Exe Ltd is entitled to a reasonable sum for the work done.

D

Exe Ltd is entitled to the full £2,000.

1.13 A Ltd contracted to deliver a quantity of goods to B Ltd for £5,000. The goods were delivered and A Ltd submitted an invoice to B Ltd for the amount due which contained a number of new terms. Which of the following is INCORRECT? A

The invoice is a contractual document and B Ltd is bound by the terms on the invoice.

B

B Ltd is only bound by the terms if it was given notice of them at or before the time of the contract.

C

B Ltd is bound by the terms if there is a sufficient course of dealings between A Ltd and B Ltd so that B Ltd is assumed to know of the terms.

D

If B Ltd is unaware of the terms, it can only be bound by them if it agrees to be so.

1.14 ABC Ltd has contracted with DEF Ltd. If ABC Ltd acts in breach of a warranty, which of the following is correct?

A

(i)

DEF Ltd may terminate the contract and sue for damages.

(ii)

DEF Ltd may sue for damages but may not terminate the contract.

(iii)

DEF Ltd may ignore the breach and continue with the contract.

(i) only.

B

(i) and (iii) only.

C

(ii) and (iii) only.

D

(i), (ii) and (iii).

1.15 Which ONE of the following remedies is NOT available for a breach of a contract to provide personal services? A

Damages.

B

A decree of specific performance.

C

An injunction.

D

An action for the price.

November 2002

5

FBLW

1.16 Which of the following is INCORRECT?

A

(i)

A liquidated damages clause will be void if it amounts to a penalty clause.

(ii)

A liquidated damages clause will apply where it is a genuine attempt to pre-estimate the loss caused by a breach of contract.

(iii)

A liquidated damages clause cannot be valid if it is for an amount in excess of the actual loss caused by the breach of contract.

(i) and (ii) only.

B

(ii) only.

C

(i), (ii) and (iii).

D

(iii) only.

1.17 Which of the following is INCORRECT in relation to the remedy of rescission?

A

(i)

Rescission is available automatically in the event of a breach of contract.

(ii)

The victim of a misrepresentation may automatically claim rescission.

(iii)

Rescission is designed to return the parties to their pre-contract position.

(i) only.

B

(ii) only.

C

(i) and (ii) only.

D

(ii) and (iii) only.

1.18 Quentin was employed by Bee Ltd as its senior design consultant. Quentin contracted with Bee Ltd that when his employment with the company ceased, he would not act in competition with it or solicit its customers. After Quentin left Bee Ltd, he registered a company called Cee Ltd, which immediately began working in competition with Bee Ltd and soliciting its customers. Bee Ltd complained to Quentin about this conduct, but Quentin stated that as the work was being undertaken by Cee Ltd, a separate legal entity, he had not acted in breach of the agreement with Bee Ltd. Which ONE of the following is correct? A

Quentin is correct and cannot be said to be in breach of the agreement with Bee Ltd.

B

If the court finds that Cee Ltd was set up by Quentin to avoid the agreement with Bee Ltd, it will “lift the corporate veil” and enforce Quentin’s contract with Bee Ltd against Quentin and Cee Ltd.

C

Cee Ltd will be bound by the agreement because a company is always liable for the actions of its shareholders.

D

The agreement between Bee Ltd and Quentin is of no legal effect as it attempts to regulate Quentin’s activities after he has left Bee Ltd’s employment.

1.19 The Memorandum of Dee Ltd, a property development company, states that the company has power to borrow in furtherance of its objects and that the directors have authority to borrow up to £200,000. The board has resolved to purchase a piece of land for £300,000. The Midwest Bank plc has agreed to make a loan of £250,000 to Dee Ltd to acquire the land. Which ONE of the following is correct? A

The loan is void as Dee Ltd has acted ultra vires.

B

As the directors have exceeded their authority, the bank cannot enforce the loan against Dee Ltd.

C

As the directors have resolved to obtain the loan, the transaction is lawful.

D

The loan is ultra vires the directors who will be personally liable for any loss caused to the company unless their actions are ratified by the shareholders.

FBLW

6

November 2002

1.20 Which of the following is correct?

A

(i)

A public company cannot commence trading until it has received a certificate from the Registrar of Companies confirming that it has satisfied the minimum requirements as to authorised and issued share capital.

(ii)

If a public company commences trading without a trading certificate, and fails to meet its obligations, the directors may be held jointly and severally liable for those obligations.

(iii)

A private company may commence trading upon receipt of its certificate of incorporation.

(i) and (ii) only.

B

(ii) and (iii) only.

C

(i) and (iii) only.

D

(i), (ii) and (iii).

1.21 Which ONE of the following is correct? A

The shares of all public limited companies are quoted on the Stock Exchange.

B

The company secretary of a public limited company must be qualified.

C

A private limited company must have at least two shareholders.

D

A public limited company cannot trade until it has paid-up share capital of at least £50,000.

1.22 Which ONE of the following may requisition an extraordinary general meeting? A

Members holding not less than one-twentieth of the company’s issued share capital which carries voting rights.

B

Members holding not less than one-tenth of the company’s issued share capital which carries voting rights.

C

Members holding not less than one-quarter of the company’s issued share capital which carries voting rights.

D

Members holding not less than one-half of the company’s issued share capital which carries voting rights.

1.23 What type of resolution is needed if a private company wishes to reduce, to 90%, the percentage needed to authorise the provision of short notice? A

Elective.

November 2002

B

Extraordinary.

C

7

Ordinary.

D

Special.

FBLW

1.24 PRS Ltd wishes to use its assets as security for a loan to be made by B Bank plc to Peter, a shareholder in PRS Ltd, so that he may purchase more of the company’s share capital. Which ONE of the following is correct? A

The proposal is lawful, if approved by a special or written resolution and the correct procedure is followed.

B

The proposal is lawful, if the company passes an ordinary resolution and the correct procedure is followed.

C

The proposal is lawful, only if it is approved by the court and the correct procedure is followed.

D

The proposal is unlawful, as a company cannot give financial assistance for the purchase of its own shares.

1.25 Which ONE of the following correctly describes the “maintenance of capital” principle? A

A company cannot use its share capital which must be set aside as a fund for creditors.

B

In general, a company can use its share capital for any reason whatsoever, as long as it ensures that there is sufficient remaining to meet the company’s debts.

C

In general, a company must use its capital for the purposes set out in its objects clause and cannot return it to its members.

D

A company cannot use its share capital and may only return it to its members with the permission of the court.

Total = 50 Marks

FBLW

8

November 2002

SECTION B – 50 MARKS ANSWER ALL THE QUESTIONS Question Two A Ltd contracted to install computerised security systems at each of B plc's 100 shops by 30 June 2002 for a total price of £200,000. The contract between A Ltd and B plc contained the following clause: "A Ltd hereby agrees to pay B plc the sum of £1,000 per day by way of liquidated damages, in respect of each unfinished shop for each day after 30 June 2002." A Ltd sub-contracted with C Ltd which agreed to install the systems at 50 of B plc's shops by 30 June 2002. On 1 February 2002, however, C Ltd wrote to A Ltd to explain that because of financial problems, the company would be unable to complete the contract by 30 June 2002. On 4 February 2002, A Ltd agreed to lend C Ltd £15,000 secured by a floating charge over C Ltd's stock. In addition, A Ltd promised to pay C Ltd a bonus of £5,000 if the company completed the work on time. Following this sequence of events, the following facts have emerged: (i)

C Ltd completed the work on time, but was placed in insolvent liquidation on 1 July 2002. A Ltd has refused to pay the bonus of £5,000.

(ii)

A Ltd completed its contract with B plc, but was four days late in finishing three of the shops. As a result, B plc has advised A Ltd that the price of £200,000 will be reduced by £12,000 in accordance with the above liquidated damages provision.

Required

Do not write in these columns below

Marks available

For use by the first marker

For use by the second marker

(a) Delete as appropriate * and complete this sentence: In this case, A Ltd is* / is not* liable to pay C Ltd the bonus of £5,000 because

1

3

. (Maximum of 30 words) (b) State the three characteristics of a floating charge (i) (ii) (iii) (Maximum of 10 words for each of the three sentences)

3 Sub-total: 7

Requirements (c) – (e) of question two are on page 9

November 2002

9

FBLW

Question Two continued Do not write in these columns below For use For use by the by the first second Marks available marker marker

Required (c) Complete this sentence:

A Ltd will be entitled to recover its loan from the proceeds of the sale of C Ltd's stock, as long as there is sufficient remaining after payment of the . (Maximum of 2 words)

2

(d) Delete as appropriate * and complete this sentence:

(e)

B plc can* / cannot* rely on the above liquidated damages clause to reduce A Ltd's fee by £12,000 because

1

. (Maximum of 30 words)

3

Complete this sentence: If it could be shown that C Ltd had lied about its financial difficulties, in order to pressurise A Ltd into promising to pay a bonus, then A Ltd would not be liable to pay the bonus of £5,000 because

. (Maximum of 30 words)

4 Sub-total: 10

Total Marks for Question Two =

17

Total for Question Two = 17 Marks Space for notes for Question Two

FBLW

10

November 2002

Question Three Zed plc has decided to carry out the following: (i)

To appoint Michelle as the company’s managing director.

(ii)

To borrow £5 million from Exe Bank plc secured by a fixed charge over the company’s land and a floating charge over the company’s stock.

(iii)

To acquire Frank’s business by issuing to him 200,000 ordinary £1 shares in Zed plc.

(iv)

To purchase a number of its own shares on the Stock Exchange.

Required

Do not write in these columns below

Marks available

For use by the first marker

For use by the second marker

(a) Complete these sentences: Michelle may be appointed managing director by .

1

(Maximum of 3 words)

The appointment of all the other directors must be approved by the

1

. (Maximum of 3 words)

(b) Complete these sentences: The fixed and floating charges must be registered with the Registrar of Companies within days. (State the number of days) If they are not registered, they will be against the liquidator, administrator or any creditor of the company.

1

2

(Maximum of 1 word)

(c) Delete as appropriate * and complete this sentence: The 200,000 ordinary £1 shares to be issued by Zed plc must* / need not* be offered to Zed plc’s existing shareholders first

1

because

. (Maximum of 30 words)

3 Sub-total: 9

Space for notes for Question Three

Requirements (d) and (e) of question three are on page 12 November 2002

11

FBLW

Question Three continued Do not write in these columns below For use For use by the by the first second Marks available marker marker

Required (d) Delete as appropriate * and complete this sentence: Before Frank’s business can be acquired by Zed plc, it must* / need not* be valued by the auditor because Zed plc is a

1 1

. (Maximum of 3 words)

(e) Delete as appropriate * and complete the following sentences: The types of fund which must be used by Zed plc to purchase its own shares are (Maximum of 3 words)

or

. (Maximum of 3 words)

1 1

As this is an/a off market* / market* purchase, it must be authorised

1

by

1

resolution. (Maximum of 2 words) Sub-total: 6 Total Marks for Question Three =

15

Total for Question Three = 15 Marks

Space for notes for Question Three

FBLW

12

November 2002

Question Four Michelle, Nicola, Owen and Paul have decided to go into business together selling mobile telephones through a company limited by shares. A company is to be incorporated called MNOP Ltd and each person is to subscribe for 25,000 ordinary £1 shares at a cost of £50,000. Michelle, Nicola, Owen and Paul have agreed the following: (i)

Each is to be appointed as an executive director of MNOP Ltd on a fixed term contract for six years.

(ii)

The Memorandum of Association of the company is to be worded to allow the company to diversify into any trade or business which the members may wish to carry on in the future.

(iii)

The Articles of Association of MNOP Ltd will include the following provision: "Any member who wishes to sell his or her shares must offer them to the other members who shall purchase them at a fair price as determined by the company’s auditor."

Do not write in these columns below

Required

Marks available

For use by the first marker

For use by the second marker

(a) Complete this sentence: As Michelle, Nicola, Owen and Paul are to have service contracts for a period exceeding years (State the number of years) on terms that they cannot be dismissed by reasonable notice, the contracts will need to be approved by the shareholders passing

1

1

(Maximum of 2 words) or

resolution.

1

(Maximum of 2 words)

(b) Complete this sentence: To enable the company to diversify into any trade or business, the 1

clause (Maximum of 1 word) should include a statement that

.

2

(Maximum of 20 words) Sub-total: 6

Requirements (c) – (e) of question four are on page 14

November 2002

13

FBLW

Question Four continued Do not write in these columns below Marks available

Required

For use by the first marker

For use by the second marker

(c) Delete as appropriate * and complete this sentence: The shareholders of MNOP Ltd will * / will not * be bound by the clause in the company’s Articles of Association concerning the sale of shares because

. (Maximum of 30 words)

1

3

(d) Delete as appropriate * and complete these sentences: As the 100,000 ordinary £1 shares have been issued for a total price of £200,000, a total of £ (State the amount) must be transferred to a

account. (Maximum of 2

words) The amount held in that account may* / may not* be used to

1 1 1

pay a dividend.

(e) Delete as appropriate * and complete the following sentences: Michelle, Nicola, Owen and Paul have each agreed to work under a contract (Maximum of 2 words) which

1

means that they are employees* / independent contractors* of the

1

company. It follows that if any one of the directors is dismissed before the expiry of 12 months he or she will* / will not* be entitled to sue

1

the company for

2

dismissal. (Maximum of 2 words)

Sub-total: 12 Total Marks for Question Four =

18

Total for Question Four = 18 Marks

End of Question Paper

FBLW

14

November 2002