CIMA BA4 · Chapter 13
Company administration and finance MCQs with Answers
10 multiple-choice questions on Company administration and finance for CIMA BA4 Fundamentals of Ethics, Corporate Governance and Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under English law, what is the principle established in Salomon v Salomon & Co Ltd?
- A) Members are personally liable for all of a company's debts
- B) Directors must hold shares in the company
- C) A registered company is a separate legal person, distinct from its members
- D) A company cannot be owned by a single person
Show answer & explanation
Answer: C) A registered company is a separate legal person, distinct from its members
Salomon established that a properly incorporated company has a separate legal personality from its members, even where one person holds almost all the shares. Consequently, the company owns its property and is liable for its own debts, and members' liability is limited to any amount unpaid on their shares.
Question 2
Under English law, which type of resolution requires a majority of not less than 75% of the votes cast?
- A) A special resolution
- B) An ordinary resolution
- C) A board resolution
- D) A written resolution of a public company
Show answer & explanation
Answer: A) A special resolution
Under section 283 of the Companies Act 2006, a special resolution requires a majority of not less than 75% (of the votes cast at a meeting, or of the total voting rights of eligible members for a private company's written resolution), while an ordinary resolution under section 282 needs a simple majority (more than 50%). Board resolutions are decisions of directors, and public companies cannot use the statutory written resolution procedure.
Question 3
Under English law, which of the following is a key difference between a public company (plc) and a private company?
- A) Only a private company has limited liability
- B) Only a public company has a separate legal personality
- C) Only a private company must file accounts
- 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
A private company is prohibited from offering its shares to the public; a public company may do so and may seek a listing. Both can have limited liability and separate legal personality, and both must file accounts with the Registrar of Companies.
Question 4
Under English law, a promoter signs a contract on behalf of a company before the company is incorporated. Who is liable on the contract?
- A) The company, automatically, once it is incorporated
- B) The promoter personally, subject to any agreement to the contrary
- C) No one, because the contract is void
- D) The Registrar of Companies
Show answer & explanation
Answer: B) The promoter personally, subject to any agreement to the contrary
Under section 51 of the Companies Act 2006, a pre-incorporation contract takes effect as one made with the person purporting to act for the company, who is personally liable, subject to any agreement to the contrary (see also Kelner v Baxter). A company cannot ratify a contract made before it existed; it would need to enter a new contract (novation).
Question 5
Under English law, how can the members of a company remove a director before the end of his term of office?
- A) By ordinary resolution at a general meeting, with special notice given to the company
- B) By special resolution passed as a written resolution
- C) Only by a court order
- D) Only if the articles expressly permit removal
Show answer & explanation
Answer: A) By ordinary resolution at a general meeting, with special notice given to the company
Section 168 of the Companies Act 2006 allows members to remove a director by ordinary resolution at a meeting, notwithstanding anything in the articles or any agreement with the director. Special notice (at least 28 days' notice to the company under section 312) must be given, and the director has the right to be heard and to make written representations (section 169). A written resolution cannot be used for this purpose (section 288).
Question 6
Under English law, which statutory duty of directors is breached when a director diverts a business opportunity that came to him as a director to his own private company?
- A) The duty to act within powers
- B) The duty to exercise independent judgement
- C) The duty to keep accounting records
- D) The duty to avoid conflicts of interest
Show answer & explanation
Answer: D) The duty to avoid conflicts of interest
Section 175 of the Companies Act 2006 requires a director to avoid situations in which he has, or could have, a direct or indirect interest that conflicts with the company's interests, including exploiting property, information or opportunity. This applies even if the company could not itself take the opportunity, unless the conflict is properly authorised.
Question 7
Under English law, a company issues 10,000 £1 ordinary shares at a price of £3.50 each, fully paid in cash. What amount is credited to the share premium account?
- A) £35,000
- B) £10,000
- C) £25,000
- D) £2,500
Show answer & explanation
Answer: C) £25,000
Share capital is credited with the nominal value: 10,000 x £1 = £10,000. The excess of issue price over nominal value goes to share premium: 10,000 x (£3.50 - £1.00) = 10,000 x £2.50 = £25,000. Total cash received is £35,000 (£10,000 + £25,000). The share premium account is subject to capital maintenance rules.
Question 8
Under English law, which statement about a floating charge is correct?
- A) It attaches to a specific identified asset, which the company cannot sell without the lender's consent
- B) It is a charge over a class of assets that changes over time, such as inventory, which the company can deal with in the ordinary course of business until crystallisation
- C) It can only be created by a sole trader
- D) It ranks ahead of all fixed charges on insolvency
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Answer: B) It is a charge over a class of assets that changes over time, such as inventory, which the company can deal with in the ordinary course of business until crystallisation
A floating charge hovers over a changing class of assets and allows the company to deal with them freely until an event, such as liquidation or default, causes it to crystallise into a fixed charge. A fixed charge attaches to specific assets. Fixed charges rank ahead of floating charges, and only companies and LLPs can create floating charges.
Question 9
Under English law, the members of a private company want to change its articles of association. Which statement is correct?
- A) The articles can 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 can only be altered with the consent of every member
- C) The articles can be altered by a resolution of the directors alone
- D) The articles can never be altered once the company is registered
Show answer & explanation
Answer: A) The articles can be altered by special resolution, and the alteration must be made bona fide for the benefit of the company as a whole
Section 21 of the Companies Act 2006 allows a company to amend its articles by special resolution, subject to any entrenched provisions. The courts have held that the alteration must be made bona fide for the benefit of the company as a whole (Allen v Gold Reefs of West Africa). Unanimity is only needed if an entrenchment provision requires it.
Question 10
Under English law, a private company is solvent. Its accumulated realised profits are £180,000 and its accumulated realised losses are £70,000. It also has an unrealised revaluation gain of £50,000. What is the maximum dividend it may lawfully pay?
- A) £160,000
- B) £110,000
- C) £180,000
- D) £230,000
Show answer & explanation
Answer: B) £110,000
Under section 830 of the Companies Act 2006, distributions may only be made out of profits available for the purpose: accumulated realised profits (not previously distributed or capitalised) less accumulated realised losses (not previously written off). £180,000 - £70,000 = £110,000. The unrealised revaluation gain of £50,000 cannot be distributed. (A public company must also satisfy the net assets test in section 831.)