ICAEW BL · Chapter 8
Companies: formation, legal personality and constitution MCQs with Answers
10 multiple-choice questions on Companies: formation, legal personality and constitution for ICAEW BL Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Kara runs her catering business through Kara's Kitchen Ltd. She holds 99 of its 100 fully paid shares and is its sole director. The company owes a supplier £40,000 and cannot pay. Kara has given no personal guarantee. Can the supplier recover the debt from Kara personally?
- A) Yes, because a director is personally liable for all the company's contracts
- B) No, because the company is a legal person separate from its members, so the debt is the company's and not Kara's
- C) Yes, because as the 99% shareholder Kara owns the company's assets and liabilities directly
- D) Yes, but only for 99% of the debt, in proportion to her shareholding
Show answer & explanation
Answer: B) No, because the company is a legal person separate from its members, so the debt is the company's and not Kara's
Salomon v A Salomon & Co Ltd established that a registered company is a separate legal person, distinct from its members, even where one person holds almost all the shares and controls it. The company owns its assets and is liable for its debts. Members' liability is limited to any amount unpaid on their shares, and Kara's shares are fully paid. Directors are not personally liable on company contracts merely because they are directors, and no guarantee was given, so the supplier's claim is against the company alone.
Question 2
Tamsin contracts to sell her warehouse to Harbourside Ltd. Before completion she changes her mind and, to avoid completing the sale, transfers the warehouse to Coastline Ltd, a company she has just formed and of which she is the sole director and shareholder. Harbourside Ltd seeks an order for specific performance against both Tamsin and Coastline Ltd. Is the court likely to make the order against Coastline Ltd?
- A) No, because Coastline Ltd is a separate legal person and not a party to the contract of sale
- B) No, because specific performance can be ordered only against the original contracting party
- C) Yes, but only if Harbourside Ltd can show that Coastline Ltd paid less than market value
- D) Yes, because the company is a device used to evade Tamsin's existing legal obligation, so the court may look behind it
Show answer & explanation
Answer: D) Yes, because the company is a device used to evade Tamsin's existing legal obligation, so the court may look behind it
The courts will look behind the corporate veil where a company is interposed to evade an existing legal obligation (the evasion principle, Prest v Petrodel Resources). In Jones v Lipman, on similar facts, a seller transferred land to a company he controlled to avoid completing a sale, and specific performance was ordered against both him and the company. Separate personality does not protect a company used as a sham to evade a legal duty, and the price Coastline paid is not the test.
Question 3
Which of the following is NOT required to be delivered to the registrar when applying to register a private company limited by shares?
- A) An audited opening statement of financial position
- B) A memorandum of association
- C) A statement of capital and initial shareholdings
- D) A statement of the company's proposed officers
Show answer & explanation
Answer: A) An audited opening statement of financial position
An application for registration must include the application form, a memorandum of association, a statement of capital and initial shareholdings, and a statement of proposed officers. It must also include a statement of compliance and, unless model articles are adopted in full, the articles. No audited financial statements are required on incorporation.
Question 4
After the registrar issues a certificate of incorporation for Fenwick Ltd, a creditor discovers an irregularity in the application for registration: one subscriber signed the memorandum before the application was fully completed. The creditor argues that Fenwick Ltd was never validly formed. Is the argument likely to succeed?
- A) Yes, because any irregularity in the application makes the registration void
- B) Yes, provided the creditor applies to the court promptly
- C) No, because under s15(4) the certificate is conclusive evidence that the registration requirements were complied with and the company is duly registered
- D) No, but Fenwick Ltd must re-register before it can lawfully trade
Show answer & explanation
Answer: C) No, because under s15(4) the certificate is conclusive evidence that the registration requirements were complied with and the company is duly registered
Under s15(4) Companies Act 2006, the certificate of incorporation is conclusive evidence that the requirements of the Act as to registration have been complied with and that the company is duly registered. Irregularities in the registration process cannot later be relied on to argue that the company does not exist (compare Jubilee Cotton Mills v Lewis, where the certificate was conclusive even though it bore the wrong date). The company does not need to re-register, and a creditor cannot have the registration set aside on this ground.
Question 5
Vireo plc was registered as a public company on its incorporation. Before it obtains a trading certificate, its directors sign a contract on its behalf to buy equipment from Altus Ltd. Vireo plc then fails to pay. What is the legal position?
- A) The contract is void, so Altus Ltd has no claim against anyone
- B) The contract is valid, but the company and its officers in default commit an offence, and if the company fails to meet its obligations after being called on to do so, the directors are jointly and severally liable to indemnify Altus Ltd
- C) The contract is voidable at Vireo plc's option, because it was not entitled to trade
- D) The contract is valid and there are no further consequences, because the trading certificate is a mere formality
Show answer & explanation
Answer: B) The contract is valid, but the company and its officers in default commit an offence, and if the company fails to meet its obligations after being called on to do so, the directors are jointly and severally liable to indemnify Altus Ltd
Under s761 Companies Act 2006, a company registered as a public company on its original incorporation must not do business or exercise borrowing powers until the registrar issues a trading certificate confirming that its allotted share capital is at least the authorised minimum. Under s767, breach is an offence by the company and every officer in default, but the validity of the transaction is not affected. If the company fails to comply with its obligations within 21 days of being called on to do so, the directors at the time are jointly and severally liable to indemnify the other party for its resulting loss.
Question 6
Halyard Ltd proposes a special resolution at a general meeting to amend its articles. On a poll, 800 votes are cast in favour and 280 against, and 120 votes are not cast because those members abstain. What is the outcome?
- A) The resolution passes, because a majority of the votes cast were in favour
- B) The resolution passes, because abstentions are counted as votes in favour
- C) The resolution passes, because more than two-thirds of the votes cast were in favour
- D) The resolution fails, because fewer than 75% of the votes cast were in favour
Show answer & explanation
Answer: D) The resolution fails, because fewer than 75% of the votes cast were in favour
A special resolution requires a majority of not less than 75% of the votes cast. Votes cast = 800 + 280 = 1,080, and abstentions are ignored. The proportion in favour is 800 ÷ 1,080 = 74.07% (to two decimal places), which is below 75%, so the resolution fails. A simple majority is enough only for an ordinary resolution, and two-thirds is not the statutory test.
Question 7
The articles of Meridian Ltd state that 'Ainsworth & Co shall act as the company's solicitors'. Gerald, a partner in Ainsworth & Co, is also a shareholder. The company appoints different solicitors, and Gerald sues to enforce the article. Will he succeed?
- A) Yes, because as a shareholder he can enforce every provision of the articles
- B) Yes, because the articles form a binding contract between the company and any person they name
- C) No, because under s33 the articles are a contract enforceable only in respect of members' rights in their capacity as members
- D) No, because articles of association are not legally binding at all
Show answer & explanation
Answer: C) No, because under s33 the articles are a contract enforceable only in respect of members' rights in their capacity as members
Under s33 Companies Act 2006, the articles bind the company and its members as if they were a contract. However, they can be enforced only for rights held in the capacity of member (Eley v Positive Government Security Life). The right to act as solicitor is an outsider right, so Gerald cannot enforce it even though he holds shares. The articles are binding, but only within these limits.
Question 8
The articles of Quayside Ltd are altered by special resolution so that a member who carries on a business competing with the company can be required to transfer their shares, at a fair value, to persons nominated by the directors. A shareholder who runs a competing business challenges the alteration. What is the most likely outcome?
- A) The alteration is valid if passed bona fide in the interests of the company as a whole
- B) The alteration is void because articles can never be changed to affect existing shareholders
- C) The alteration is void because compulsory transfer provisions require the consent of every member
- D) The alteration is valid only if approved by the court
Show answer & explanation
Answer: A) The alteration is valid if passed bona fide in the interests of the company as a whole
A company may alter its articles by special resolution (s21), but the alteration must be made bona fide for the benefit of the company as a whole (Allen v Gold Reefs). Courts have upheld alterations allowing the expropriation of members who compete with the company, because removing a competitor can benefit the company (Sidebottom v Kershaw Leese). Court approval and unanimity are not required.
Question 9
Kestrel Bakeries Ltd was incorporated under the Companies Act 2006 and adopted the model articles without amendment. Its board now wants the company to start a software consultancy business. Is the company legally free to do so?
- A) No, because it must first amend the objects clause in its memorandum of association
- B) Yes, because a company's objects are unrestricted unless its articles specifically restrict them
- C) No, because its objects are limited to the business it carried on when it was incorporated
- D) Only if the registrar approves the change in its line of business
Show answer & explanation
Answer: B) Yes, because a company's objects are unrestricted unless its articles specifically restrict them
Under s31 Companies Act 2006, a company's objects are unrestricted unless its articles specifically restrict them. The model articles contain no restriction on objects, so Kestrel Bakeries Ltd may move into any lawful business. Under the 2006 Act the memorandum is a simple statement by the subscribers and no longer contains objects. No registrar approval is needed for a change of business.
Question 10
Which of the following statements about the differences between a private and a public company limited by shares is correct?
- A) A private company must have at least two directors, whereas a public company may have one
- B) A private company may offer its shares to the general public, whereas a public company may not
- C) A private company must hold an annual general meeting, whereas a public company need not
- D) A public company must have at least two directors, whereas a private company may have only one
Show answer & explanation
Answer: D) A public company must have at least two directors, whereas a private company may have only one
Under s154 Companies Act 2006, a private company must have at least one director and a public company at least two, so option A reverses the rule. Private companies are prohibited from offering their shares to the public (s755), which is a main reason to become a public company. Public companies must hold an AGM every year (s336), whereas private companies generally need not.