ACCA LW · Chapter 8
Legal personality, company formation and constitution MCQs with Answers
11 multiple-choice questions on Legal personality, company formation and constitution for ACCA LW Corporate and Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
What principle was established by Salomon v A Salomon & Co Ltd?
- A) Directors are personally liable for all of a company's debts
- B) A company formed by one dominant shareholder is merely his agent
- C) A registered company is a legal person separate from its members, even where one person controls it
- D) A company can only be formed by at least seven independent members
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Answer: C) A registered company is a legal person separate from its members, even where one person controls it
The House of Lords held that a properly registered company is a separate legal entity, so Mr Salomon was not liable for its debts and his secured debentures were valid even though he held almost all the shares. The decision is the foundation of the 'veil of incorporation'. Companies can now be formed by a single member.
Question 2
In Lee v Lee's Air Farming Ltd, Mr Lee was the controlling shareholder and sole director of a company and was also employed by it as a pilot. Why was his widow entitled to compensation when he was killed at work?
- A) Because the court lifted the veil of incorporation
- B) Because he was a partner in the business
- C) Because directors are always treated as employees for compensation purposes
- D) Because the company was a separate legal person, it could enter a contract of employment with him
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Answer: D) Because the company was a separate legal person, it could enter a contract of employment with him
Following the separate personality principle in Salomon, the company and Mr Lee were different persons, so a valid contract of employment could exist between them even though he controlled the company. He was therefore a 'worker' for compensation purposes. The court upheld rather than lifted the veil.
Question 3
A former managing director, bound by a restrictive covenant not to solicit his former employer's customers, set up a company to solicit them. In Gilford Motor Co v Horne, what did the court do?
- A) It refused relief because the company was a separate legal person
- B) It held the covenant void as an unlawful restraint of trade
- C) It lifted the veil and granted an injunction against both him and the company because the company was a sham to evade his obligation
- D) It ordered the company to be wound up on the just and equitable ground
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Answer: C) It lifted the veil and granted an injunction against both him and the company because the company was a sham to evade his obligation
The court will disregard the separate personality of a company used as a mere façade or sham to evade an existing legal obligation. In Gilford Motor Co v Horne the company was a device to evade the covenant, so an injunction was granted against both. Prest v Petrodel later described this as the 'evasion principle'.
Question 4
Which of the following is an example of the veil of incorporation being lifted by STATUTE rather than by the courts at common law?
- A) The decision in Jones v Lipman that a company was a sham used to avoid a contract to sell land
- B) The decision in Gilford Motor Co v Horne
- C) The decision in Prest v Petrodel Resources concerning the evasion principle
- D) Personal liability of a director for wrongful trading under s214 Insolvency Act 1986
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Answer: D) Personal liability of a director for wrongful trading under s214 Insolvency Act 1986
Statutory provisions that impose personal liability despite separate personality include fraudulent and wrongful trading (ss213 and 214 Insolvency Act 1986), use of a prohibited name of a liquidated company (s216-217), and a public company trading without a trading certificate. The other options are common law cases where the courts lifted or considered lifting the veil.
Question 5
Under s51 Companies Act 2006, who is liable on a contract made on behalf of a company before it has been incorporated?
- A) The company, automatically, once it is incorporated
- B) The person who made the contract on the company's behalf, subject to any agreement to the contrary
- C) The company's first shareholders in proportion to their shareholdings
- D) No one, because the contract is void
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Answer: B) The person who made the contract on the company's behalf, subject to any agreement to the contrary
Section 51 provides that a contract purporting to be made by or on behalf of a company before incorporation has effect as a contract made with the person acting for the company, who is personally liable, subject to any agreement to the contrary. The company cannot ratify it after incorporation, although it may enter a new contract (novation) on the same terms.
Question 6
Which of the following is a key difference between a public and a private limited company under the Companies Act 2006?
- A) Only a private company has a separate legal personality
- B) Only a public company may have limited liability
- C) Only a private company must have articles of association
- D) Only a public company may offer its shares to the public
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Answer: D) Only a public company may offer its shares to the public
Section 755 prohibits a private company from offering its securities to the public. Both public and private companies are separate legal persons, both can be limited, and both must have articles (if none are registered, the relevant model articles apply). A public company must also meet the authorised minimum share capital and obtain a trading certificate before doing business.
Question 7
A company has just been incorporated and registered as a public company. Before it can do business or exercise any borrowing powers, what must it obtain?
- A) A special resolution of its members approving trading
- B) A trading certificate from the Registrar, confirming that the nominal value of its allotted share capital is not less than the authorised minimum
- C) Approval of its articles by the court
- D) A confirmation statement accepted by the Registrar
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Answer: B) A trading certificate from the Registrar, confirming that the nominal value of its allotted share capital is not less than the authorised minimum
Under s761 Companies Act 2006 a company registered as public on its original incorporation must not do business or exercise borrowing powers until the Registrar has issued a trading certificate. The certificate is issued only if the nominal value of the allotted share capital is not less than the authorised minimum set under s763, and each allotted share must be paid up to at least one-quarter of its nominal value and the whole of any premium. Doing business without one is an offence, and the directors may be personally liable if the company fails to meet the resulting obligations. A private company never needs a trading certificate, and nor does a private company that later re-registers as public, because its share capital is checked on re-registration instead.
Question 8
Under s33 Companies Act 2006, the articles of association form a contract. Between whom does this contract operate?
- A) Between the company and any person named in the articles, in any capacity
- B) Between the company and its creditors
- C) Between the company and its members, and between the members themselves, in their capacity as members
- D) Between the directors and the Registrar of Companies
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Answer: C) Between the company and its members, and between the members themselves, in their capacity as members
Section 33 makes the constitution binding on the company and its members as if they had each covenanted to observe it. The contract is enforceable only in respect of membership rights, so in Eley v Positive Government Security Life Assurance a solicitor could not enforce an article appointing him as solicitor, as this was an outsider right (compare Hickman v Kent or Romney Marsh Sheep Breeders' Association). Creditors and the Registrar are not parties to the s33 contract.
Question 9
A company wishes to alter its articles. Which of the following correctly states the law?
- A) The articles may be altered by special resolution, and the alteration must be made bona fide for the benefit of the company as a whole
- B) The articles may be altered by ordinary resolution of the directors
- C) The articles can never be altered once registered
- D) The articles may only be altered with the consent of every member
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Answer: A) The articles may be altered by special resolution, and the alteration must be made bona fide for the benefit of the company as a whole
Under s21 Companies Act 2006 a company may amend its articles by special resolution. Following Allen v Gold Reefs of West Africa and Greenhalgh v Arderne Cinemas, the alteration must be made in good faith for the benefit of the company as a whole, judged by asking whether it benefits a hypothetical member. Unanimity is required only where provisions are entrenched under s22 in a way that requires it.
Question 10
What is the position under s31 Companies Act 2006 regarding a company's objects?
- A) Every company must state its objects in its memorandum of association
- B) A company's objects are limited to the business stated on its certificate of incorporation
- C) A company can never restrict its objects
- D) Unless the articles specifically restrict them, a company's objects are unrestricted
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Answer: D) Unless the articles specifically restrict them, a company's objects are unrestricted
Under the Companies Act 2006 a company's objects are unrestricted unless its articles specifically restrict them. A company may choose to include restrictions, but under s39 the validity of an act done by the company cannot be called into question on the ground of lack of capacity because of anything in its constitution. The memorandum is now only a brief statement by the subscribers that they wish to form a company.
Question 11
What is the legal effect of the certificate of incorporation issued by the Registrar of Companies?
- A) It allows the company to trade only once it has been approved by the shareholders
- B) It is merely provisional until confirmed by the court
- C) It is conclusive evidence that the requirements of the Companies Act as to registration have been complied with and that the company is duly registered
- D) It authorises the company to offer shares to the public, whether private or public
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Answer: C) It is conclusive evidence that the requirements of the Companies Act as to registration have been complied with and that the company is duly registered
Under s15 Companies Act 2006 the certificate of incorporation is conclusive evidence that the company has been duly registered and that registration requirements have been complied with. From the date on the certificate the company is a body corporate. A private company may not offer shares to the public regardless of the certificate.