The Chartered Institute of Management Accountants 2001

POST EXAM GUIDE

May 2001 Exam
Business Law
(FBLW)
CIMA publishes a Question and Answer booklet for each paper of
the May 2001 exam which is essential reading for students and
tutors. The published answers are written by the Examiner and
should be read together with the post exam guide.
Paper 3b - Business Law
Post Exam Guide May 2001 2
All objecti ve test questions are awarded 2 marks each.
Question 1.1
Which ONE of the following is the highest court in England?
A The Court of Appeal.
B The House of Lords.
C The High Court.
D The Crown Court.
The answer is B.
Question 1.2
Which part of a case decided by the courts is binding on lower courts dealing with the same
material facts?
A Obiter dicta.
B The decision of the judge.
C The ratio decidendi.
D All the above.
The answer is C.
Question 1.3
In the tort of negligence, damages are payable in respect of
A reasonably foreseeable losses.
B losses which are a direct consequence of the breach of duty.
C all the losses caused by the breach of duty.
D losses which are within the contemplation of the parties.
The answer is A.
Paper 3b - Business Law
Post Exam Guide May 2001 3
Question 1.4
Which of the following statements is/are correct?
(i) An employer is vicariously liable for the torts of employees committed in the course of
their employment.
(ii) An employer is vicariously liable for the torts of independent contractors, if they were
committed whilst carrying out work for the employer.
A (i) only.
B (ii) only.
C Both (i) and (ii).
D Neither (i) nor (ii).
The answer is A.
Question 1.5
Which of the following statements is/are correct?
(i) A contract of employment must be in writing.
(ii) An employer must provide written particulars of the employment for the employee.
A (i) only.
B (ii) only.
C Both (i) and (ii).
D Neither (i) nor (ii).
The answer is B.
Question 1.6
Which ONE of the following statements is incorrect?
A It is automatically unfair to dismiss an employee for trade union activity.
B It is automatically unfair to dismiss an employee who becomes pregnant.
C It is automatically unfair to dismiss an employee who enforces a statutory right.
D It is automatically unfair to dismiss an employee who refuses to obey a reasonable
instruction.
The answer is D.
Note: The original question contained an error. Candidates who attempted this question were
given full marks.
Paper 3b - Business Law
Post Exam Guide May 2001 4
Question 1.7
Which ONE of the following is incorrect?
A An employer is obliged to provide an employee with a reference.
B An employer must allow Health and Safety representatives reasonable paid time off
work to perform their functions.
C An employer must provide an employee with a safe working environment.
D Employees who have three months continuous employment are entitled to paid
leave.
The answer is A.
Question 1.8
Which of the following statements is/are correct?
(i) If an agreement is stated to be binding in honour only, the parties have decided that
the agreement should not have contractual force.
(ii) If an agreement is not in writing, the parties are presumed to have intended that it
should not be legally enforceable.
A (i) only.
B (ii) only.
C Neither (i) nor (ii).
D Both (i) and (ii).
The answer is A.
Question 1.9
A contract entered into as a result of a misrepresentation is
A enforceable.
B voidable.
C void.
D absolutely valid.
The answer is B.
Paper 3b - Business Law
Post Exam Guide May 2001 5
Question 1.10
Which ONE of the following does NOT discharge a contract?
A Precise performance of all the contractual obligations.
B A subsequent event causing the contract to be impossible to perform.
C Breach of a warranty.
D The agreement of the parties, contained in a deed, to the effect that the contract
should be discharged.
The answer is C.
Question 1.11
Which ONE of the following remedies for breach of contract must be awarded by the court if
there has been a breach of contract?
A An injunction.
B Damages.
C Specific performance.
D Rescission.
The answer is B.
Question 1.12
Which ONE of the following statements is incorrect?
A Payment by the debtor of less than the full amount of the debt will satisfy the whole
debt at common law, if paid early at the request of the debtor.
B Payment by a third party of less than the full amount of the debt will discharge the
whole debt at common law.
C Payment of less than the full amount of the debt will discharge the whole debt at
common law, if agreed to by the creditor.
D Payment of less than the full amount of the debt will discharge the whole debt at
common law, if extra consideration is provided by the debtor.
The answer is C.
Paper 3b - Business Law
Post Exam Guide May 2001 6
Question 1.13
Which of the following statements is/are correct?
(i) A contractual term which attempts to exclude liability for damage to property caused
by negligence is void unless reasonable.
(ii) A contractual term which attempts to exclude liability for death or personal injury is
void.
A (i) only.
B (ii) only.
C Neither (i) nor (ii).
D Both (i) and (ii).
The answer is D.
Question 1.14
In relation to company law, which ONE of the following statements is correct?
A A company limited by shares is fully liable for all its debts.
B Shareholders are fully liable for the debts of the company.
C Directors are fully liable for the debts of the company.
D A company secretary is fully liable for the debts of the company.
The answer is A.
Question 1.15
Which ONE of the following statements in relation to partnership law is incorrect?
A In England, a partnership has no existence separate from the partners.
B Each partner can bind the firm in contract if acting in the ordinary course of business.
C Partners are not liable for debts contracted before they became partners.
D To be binding, a partnership agreement must be in writing.
The answer is D.
Paper 3b - Business Law
Post Exam Guide May 2001 7
Question 1.16
Which of the following statements is/are correct?
(i) A companys authorised share capital must be stated in its Memorandum of
Association.
(ii) A company may not increase its authorised share capital.
A (i) only.
B (ii) only.
C Both (i) and (ii).
D Neither (i) nor (ii).
The answer is A.
Question 1.17
Which ONE of the following statements is correct in relation to companies limited by shares?
A All new shares issued must be offered to the existing members first.
B All new shares issued for cash must be offered to the existing members first in the
case of a public company only.
C All new shares must be offered to the existing members first in the case of a private
company.
D All shares issued for cash must be offered to the existing members first.
The answer is D.
Question 1.18
Which ONE of the following statements is incorrect?
A A private company limited by shares must have at least one director.
B A public company limited by shares must have at least two directors.
C A private company must have authorised share capital of at least 30,000.
D A public company must have an authorised share capital of at least 50,000.
The answer is C.
Paper 3b - Business Law
Post Exam Guide May 2001 8
Question 1.19
In order for a private company to alter its Articles of Association, the shareholders must pass
A a special resolution.
B an ordinary resolution.
C an extraordinary resolution.
D an elective resolution.
The answer is A.
Question 1.20
In relation to directors, which ONE of the following statements is incorrect?
A The board of directors is the agent of the company.
B The board of directors is the agent of the shareholders.
C The board may appoint a person to be the managing director.
D Proceedings at board meetings are regulated by the companys Articles of
Association.
The answer is B.
Question 1.21
Which ONE of the following statements is/are correct?
(i) In general, it is illegal for a company to provide financial assistance for the purchase
of its own shares.
(ii) A private company may provide financial assistance for the purchase of its own
shares as long as it follows the correct procedure.
A (i) only.
B (ii) only.
C Both (i) and (ii).
D Neither (i) nor (ii).
The answer is C.
Paper 3b - Business Law
Post Exam Guide May 2001 9
Question 1.22
Which ONE of the following resolutions is required to enable a company to borrow money?
A A special resolution.
B An ordinary resolution.
C An extraordinary resolution.
D A board resolution.
The answer is D.
Question 1.23
Which ONE of the following statements is incorrect?
A The Articles of Association form a contract between the shareholders and the board.
B The Articles of Association form a contract between the shareholders and the
company.
C The Articles of Association form a contract between each shareholder and the other
shareholders.
D The Articles of Association are only contractual in respect of ordinary membership
rights.
The answer is A.
Question 1.24
Which ONE of the following statements is correct?
A A floating charge has priority over a fixed charge.
B The preferential creditors take priority over fixed charge holders.
C A fixed charge has priority over a floating charge.
D Unsecured creditors take priority over floating charge holders.
The answer is C.
Question 1.25
In relation to elective resolutions, which ONE of the following statements is incorrect?
A The resolution must be passed by all the members.
B The resolution applies only to private companies.
C The resolution may be used to dispense with the need to lay accounts before the
general meeting.
D The resolution must be agreed to by all the members present and voting.
The answer is D.
Paper 3b - Business Law
Post Exam Guide May 2001 10
Question 2(a)
Identify and explain the sources of English Law.
Total marks =15
Rationale
The question is designed to test candidates knowledge of the sources of English law.
Suggested Approach
Candidates should identify the sources and provide a brief explanation of each. The
explanation of each source should include a comment as to the relative importance of the
source in relation to the others.
Marking Guide Marks awarded
Custom/common law 3
Equity 2
Legislation (including delegated legislation) 4
European Law 4
Other sources 2
Examiner s Comments
Common Errors
Most candidates who attempted this question scored well. Those who did not failed to do so
because of a lack of technical knowledge or because the question was misread or both.
Examples include explaining the distinction between civil and criminal law and providing in-
depth explanations of one aspect of the law such as the tort of negligence.
Paper 3b - Business Law
Post Exam Guide May 2001 11
Question 2(b)
As the Finance Director of Bee plc, write an internal memorandum to the board explaining
whether Bee plc appears to be entitled to receive any compensation from A and Co.
Total marks =10
Rationale
The question is designed to test candidates knowledge of the extent to which accountants
may be held liable to compensate those who suffer financial loss as a result of reliance upon
their negligent advice, and candidates ability to communicate the advice appropriately.
Suggested Approach
Candidates should present their answer in the form of a memorandum from the Finance
Director to the board of Bee plc.
The answer should proceed to establish that no contract exists between A and Co and
Bee plc but that liability can arise in the tort of negligence in certain instances, and in
particular where the claimant can establish that the advice was given without reasonable
care by the defendant, who knew the person who would use it, and the purpose for which
it would be used.
Marking Guide Marks awarded
Memorandum format 2
A and Co have no contract with Bee plc but liability may arise in the
tort of negligence. Bee plc must establish that A and Co owed it a duty
of care, acted in breach of that duty and loss resulted as a
consequence 5
To establish a duty of care, Bee plc must show a relationship of
proximity between itself and A and Co 3
Examiner s Comments
Common Errors
The most common error was to argue that Bee plc had an action in misrepresentation. A
misrepresentation is an untrue statement of fact which induces a contract. There was no
contract between Bee plc and A & Co, so the law of misrepresentation was not relevant. It
follows that whether Bee plc could recover compensation from A & Co depended upon
whether the latter could be held liable in the tort of negligence. Further information is available
from the Examiners Answers.
Paper 3b - Business Law
Post Exam Guide May 2001 12
Question 3(a)
By reference to examples, explain:
(i) the remedies available to the innocent party in the event of a breach of a condition or
warranty; (12 marks)
(ii) how the law determines whether a contractual term is a condition or a warranty.
(8 marks)
Total marks =20
Rationale
The remedies available for a breach of contract reflect the fact that not all contractual terms
have the same importance. The question is designed to test candidates knowledge of the
manner in which the law determines the status of contractual terms, the different status of
conditions and warranties and the remedies for a breach of each type of term.
Suggested Approach
The candidate should identify and define conditions and warranties and proceed to
explain the remedies for the breach of each type of term by reference to examples.
Candidates should then explain how the courts determine the status of a term which is
regarded as innominate, i.e., does not fall neatly into either category.
Marking Guide Marks awarded
A condition is a major, and a warranty a relatively minor, term in a
contract. This is reflected in the available remedies. Condition -
innocent party may terminate the contract; warranty - damages only 8
Use of examples such as previous cases to demonstrate the
distinction (Poussard v Spiers and Pond (1876), and Bettini v Gye
(1876) 4
To determine status courts look for the intention of the parties as
expressed in the contract. If term expresses the right to terminate,
condition. If expresses damages only, warranty. If Parliament uses the
word condition-right to terminate. If still unclear, look to the
consequences of the breach 8
Examiner s Comments
Common Errors
Again most candidates scored well, clearly defining conditions and warranties and the
available remedies in respect of any breach. Part (ii) was less well answered than part (i).
Many candidates simply repeated the information already provided in part (i).
Paper 3b - Business Law
Post Exam Guide May 2001 13
Question 3(b)
Explain whether Charlotte is entitled to any compensation in respect of Zed plcs actions.
Total marks =5
Rationale
The question contains a problem based upon a hypothetical but realistic set of facts. The
question is designed to test the ability of a candidate to recognise the status of a contractual
term and to explain the available remedies.
Suggested Approach
Candidates should proceed by noting that it is not immediately possible to categorise the
terms as conditions or warranties.
The answer should then proceed to identify the characteristics of Clause 2 which are
likely to result in it being classified as a condition.
Marking Guide Marks awarded
Charlotte is self-employed no question of any employment rights.
The contract has not become impossible to perform and, therefore, is
not frustrated 2
The contract contains a term which expressly allows the company to
terminate in the event of a specified act by Charlotte. It follows that so
long as Charlotte knows or is assumed to know of the clause, it is
likely to be seen as condition and the company is entitled to cancel her
contract without compensation 3
Examiner s Comments
Common Errors
The main error was for candidates to simply assess whether in their opinion failing to turn up
for a board meeting was serious or not. As stated in the Examiners Answers, the court
attempts to determine the intention of the parties, who may classify any term as a condition or
a warranty. The contract between Charlotte and the company expressly states that failure to
attend the board meeting will entitle the company to terminate the contract. Assuming this to
have been agreed by Charlotte, a court is unlikely to impose its own view on the parties but to
recognise that they considered attendance at the board meeting to be of fundamental
importance, and therefore a condition. Some credit was allowed for those who identified
"frustration" as a possible argument, and for the fact that Charlotte had no employment rights.
Paper 3b - Business Law
Post Exam Guide May 2001 14
Question 4(a)(i)
In relation to companies limited by shares, explain how directors may be appointed and
dismissed.
Total marks =8
Rationale
The question is designed to test candidates knowledge of the means available to appoint and
dismiss directors.
Suggested Approach
Candidates should proceed to identify the various methods of appointment and dismissal
of directors using an essay format.
Marking Guide Marks awarded
First directors appointed upon incorporation of the company.
Subsequent directors appointed according to the companys articles of
association. Most companies empower the board to appoint directors
subject to confirmation by the shareholders by ordinary resolution at
the next general meeting 4
The company may dismiss a director by an ordinary resolution of
shareholders irrespective of anything in the articles of association.
(Section 303 Companies Act (1985). Special note of 28 days must
be given to the director who may speak at the meeting, and who may
be entitled to damages 4
Examiner s Comments
Common Errors
This question was generally well answered. However, common errors include:
confusing special and ordinary resolutions and the requisite majorities;
confusing resolutions which need to be passed by the shareholders rather than the board.
Paper 3b - Business Law
Post Exam Guide May 2001 15
Question 4(a)(ii)
In relation to companies limited by shares, explain the duties owed by directors to
shareholders.
Total marks =8
Rationale
The question is designed to test candidates knowledge of duties of directors to those who
own the company.
Suggested Approach
Candidates should proceed by identifying directors duties as fiduciary, common law and
statutory. An essay format would be appropriate to then explain the extent of each duty.
As there are numerous examples of statutory duties, credit will be given for examples
additional to those shown in the Examiners Answers.
Marking Guide Marks awarded
The identification of directors duties as fiduciary , i.e. a duty to act in
good faith and in the best interests of the shareholders. For example a
duty not to allow a conflict of interest and duty, and a duty not to make
secret profits 3
Common law duties to act with reasonable care and skill. Statutory
duties for example not to act in a manner unfairly prejudicial to the
interests of the shareholders (Section 459 Companies Act 1985) 5
Examiner s Comments
Common Errors
The most common error was a tendency to make vague statements about directors being
required to do the right thing for the company and its shareholders, rather than specifying
fiduciary, common law and statutory duties.
Paper 3b - Business Law
Post Exam Guide May 2001 16
Question 4(b)
As the company secretary of AB Ltd write an internal memorandum to the board explaining:
(i) whether the shareholders can force the directors to cause AB Ltd to sue XY Ltd; (6 marks)
(ii) whether the shareholders themselves can sue XY Ltd. (3 marks)
Total marks =9
Rationale
The question is designed to test candidates knowledge of the division of power within a
company between the directors and the shareholders.
Suggested Approach
Candidates should present their answer in the form of a memorandum from the company
secretary to the board of AB Ltd, explaining that although whether to sue or not is a board
decision, the shareholders are in a position to threaten dismissal, but the shareholders
cannot proceed themselves.
Marking Guide Marks awarded
The directors are the managers of the company. It is they who decide
whether or not an action should be brought. Shareholders as such,
have no power to interfere with management decisions 3
However, Claire, Debbie and Edward hold 60% of the shares in total.
It follows that they have the power to dismiss Asif and Ben if they so
wish and thus are in a powerful position to persuade the board to
comply with their wishes 3
The Rule in Foss v Harbottle provides that where a wrong has been
done to the company the company should sue. It follows that the
shareholders have no right to proceed themselves 3
Examiner s Comments
Common Errors
The most common error was to believe that because the dissenting shareholders had a
majority of shares they were legally entitled to interfere with the management of the company
and force the directors to comply with their wishes. This is incorrect. Legally shareholders have
no power to interfere with management, unless authorised to do so by the company's articles of
association. In practice, of course, a majority may be able to wield such pressure that the
board would feel obliged to comply, but this is a matter of commercial reality rather than the
law. Part (ii) was well answered, most candidates correctly stating that the contract was
between AB Ltd and XY Ltd and nothing to do with the shareholders. Some thought that the
shareholders could sue in the companys name, but such a "derivative" action would only be
available where the alleged wrongdoers had voting control. In this case voting control was held
by shareholders who were not members of the board.