Business Law and Practice — SQE1 practice questions
Company formation and governance under the Companies Act 2006, directors' duties, shareholder decisions, share capital and distributions, partnerships and LLPs, and corporate insolvency.
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3 free questions with answers
Priya is setting up a bakery business and intends to trade through a private limited company, Willow Bakes Ltd. Before the company is registered, Priya signs an order for two commercial ovens from Ferro Equipment Ltd, signing 'for and on behalf of Willow Bakes Ltd'. Nothing in the order deals with who will be liable if the company is not yet formed. Willow Bakes Ltd is incorporated one week later and the ovens are delivered to its premises. The invoice has not been paid and Ferro Equipment Ltd wishes to sue.
Which of the following best describes who is liable on the contract for the ovens?
- AWillow Bakes Ltd is automatically bound, because it took delivery of and used the ovens after its incorporation.
- BPriya is personally liable on the contract, because it was made on behalf of a company that had not yet been formed and there is no agreement to the contrary.
- CWillow Bakes Ltd may ratify the contract by a board resolution, after which it alone will be liable to Ferro Equipment Ltd.
- DNobody is liable, because a contract made in the name of a company that did not then exist is a nullity.
- EPriya is personally liable only if she knew at the time of signing that the company had not yet been incorporated.
Show answer and reasoning
Rule: A contract made on behalf of an unformed company takes effect, subject to any agreement to the contrary, as one made with the person acting for it, who is personally liable (CA 2006 s 51).
- A Taking delivery after incorporation does not make the company a party; at most a new contract would have to be inferred, which is not the general rule. (wrong rule)
- C A company cannot ratify a pre-incorporation contract because it did not exist when the contract was made; a novation would be needed. (wrong rule)
- D Section 51 prevents the contract being a nullity by making the person acting for the company liable. (wrong rule)
- E Liability under s 51 does not depend on the agent's knowledge that the company was unformed. (wrong rule)
Source: Companies Act 2006, s 51(1); Kelner v Baxter (1866) LR 2 CP 174; Phonogram Ltd v Lane [1982] QB 938
The articles of Hartley Tools Ltd provide that the directors must not enter into any contract worth more than £50,000 without the prior approval of the members by ordinary resolution. The board resolves to buy machinery for £80,000 from Ostler Supplies Ltd and the managing director signs the contract on the company's behalf. No members' approval is sought. Ostler's sales director had read Hartley's articles on the public register and knew of the restriction, but acted honestly throughout. Hartley Tools Ltd now wants to avoid the contract.
Can Hartley Tools Ltd avoid the contract with Ostler Supplies Ltd?
- AYes, because a contract made in breach of the articles is outside the company's capacity and is void.
- BYes, because Ostler knew of the restriction in the articles and so did not deal with the company in good faith.
- CYes, because Ostler is deemed to have notice of the contents of the articles filed at Companies House.
- DNo, because the directors' power to bind the company is deemed free of constitutional limitations in favour of a person dealing in good faith, and mere knowledge of the limitation is not bad faith.
- ENo, but the contract will only bind the company once the members ratify it by special resolution.
Show answer and reasoning
Rule: In favour of a person dealing in good faith, the directors' power to bind the company is deemed free of constitutional limitations, and knowledge of the limitation alone is not bad faith (CA 2006 s 40).
- A A company's capacity is not limited by anything in its constitution (s 39); this is a limit on the directors' authority, not capacity. (wrong rule)
- B Knowledge that the act exceeds the directors' powers is not, by itself, bad faith (s 40(2)(b)(iii)). (wrong rule)
- C A person dealing with a company is not bound to enquire into limits on the directors' powers (s 40(2)(b)(i)); constructive notice does not apply. (wrong rule)
- E The contract binds the company already under s 40; no ratification by special resolution is required. (wrong rule)
Source: Companies Act 2006, ss 39, 40(1)-(2)
Ashdown Ltd has 1,000 ordinary shares, each carrying one vote. Arun holds 400 shares, Bea 300, Cyrus 200 and Dana 100. A general meeting is properly convened to consider a special resolution to adopt new articles of association. Arun, Bea and Dana attend in person; Cyrus does not attend and appoints no proxy. A poll is validly demanded and taken: Arun and Bea vote in favour and Dana votes against.
Has the resolution to adopt new articles been passed?
- ANo, because a special resolution requires the support of members holding at least 75% of all the company's voting rights, including those of absent members.
- BNo, because only two of the three members voting supported the resolution, which is less than 75% of those voting.
- CNo, because the articles of a company may only be changed with the unanimous consent of its members.
- DYes, but it will not take effect until a copy of the resolution and the new articles has been registered at Companies House.
- EYes, because members holding 87.5% of the votes cast on the poll voted in favour, which exceeds the required 75%.
Show answer and reasoning
Rule: A special resolution on a poll at a meeting requires not less than 75% of the voting rights of the members who vote (CA 2006 s 283(5)).
- A The 75% of total voting rights test applies to written resolutions (s 283(2)); at a meeting on a poll it is 75% of votes cast. (wrong rule)
- B Counting members applies on a show of hands; here a poll was taken, so votes are counted by shares. (right rule, wrong facts)
- C Articles may be amended by special resolution under s 21; unanimity is not required. (wrong rule)
- D The resolution is passed when the vote is taken; filing within 15 days (s 30) is a separate obligation. (wrong rule)
Source: Companies Act 2006, ss 21(1), 283(1), (4)-(5), 30
Subtopics
| Company formation and constitution | 3 questions |
| Corporate insolvency | 3 questions |
| Directors: duties, appointment and removal | 6 questions |
| Partnerships and LLPs | 4 questions |
| Share capital, allotment and distributions | 4 questions |
| Shareholder and board decision-making | 5 questions |