Examination papers and Examiners’ reports 2007

Examination paper 2007

Zone A
Time allowed: three hours
Answer four of the following eight questions, including at least one from
Part A and at least two from Part B.

Part A
1 ‘The various “theories of the company” provide no help either in
understanding, or in evaluating, UK company law.’
Discuss.
2 ‘The Combined Code gives listed companies little choice other than to
comply with a set of rules and principles that are entirely ineffective in
protecting shareholders from incompetent or dishonest directors.’
Discuss.
3 ‘The company law reform process has achieved no real reform of
company law.’
Discuss.
4 ‘Small shareholders are not well protected by company law.’
Discuss.

Part B
5 Vanilla Ltd was incorporated in 1970. Antonio owned 60% of the shares
and Beatrice owned the remainder. Antonio and Beatrice were the
company’s only directors. The company’s objects clause states that the
company will manufacture and sell traditionally made ice-cream. The
company’s articles state that Beatrice shall be entitled, at a board
meeting, to veto any decision to borrow more than £50,000.
In 2006, Cornetto and Dip, two brothers, each purchased one half of
Antonio’s shares. Having sold his shares, Antonio retired as a director,
and was replaced on the board of directors by Cornetto and Dip.
Cornetto and Dip have announced that the company will stop making
ice cream, and will convert the company’s ice-cream making factory into
prestigious apartments. Beatrice has learnt that the company has
already entered into a contract to employ Vesuvius, an architect, to
draw up plans for the conversion work. However, no contract has yet
been awarded to any building firm to carry out the conversion.
Cornetto and Dip call a board meeting to discuss their proposals,
including that the company should borrow £200,000 from Easybank Plc
to pay for some of the conversion work. Beatrice objects, and uses her
veto to block the loan. Nevertheless, Cornetto and Dip go ahead and

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make the company borrow the money from Easybank. Easybank is

aware of Beatrice’s power of veto, but never enquires whether she had
exercised it.
Advise Beatrice whether:
a. the company is bound by the contracts with Vesuvius and Easybank;
b. she can take any steps to prevent the company entering into a
contract for a building firm to undertake the conversion work.
6 Duntrading Ltd is a wholly owned subsidiary of Parent Plc. Sarah is the
Chief Executive of Parent and was, until recently, the only director of
Duntrading. However, two months ago she retired as a director of
Duntrading. In her place she caused Parent to appoint Mark, her son, to
be Duntrading’s only director.
Mark is only 18, and has very little business experience. He soon finds
himself unable to cope with the pressure of running the company. He
slowly realises that Duntrading is in financial difficulties, but has little
idea how he should respond. He tells his mother of his concerns, but she
replies that he must learn to think for himself. To save money, he
cancels the company’s insurance policies. He writes to the board of
Parent telling them he is doing this, but they take no steps to stop him.
Mark also persuades Northern Bank Plc to increase the company’s
overdraft, telling them that ‘he can personally assure them that the
company is in good financial health and will be able to repay the
overdraft’. Two weeks later, Duntrading’s (uninsured) premises are
destroyed by a fire. The company goes into insolvent liquidation.
Advise Mark, Sarah and Parent whether they are each likely to face any
personal liability in respect of the foregoing events.
7 Amy was dismissed as the managing director of Lamb Ltd in March
2007. She has since begun legal proceedings claiming compensation
from Lamb arising from her dismissal. Lamb has not replied to any
correspondence relating to the claim. Amy has also discovered the
following: that Lamb has paid off its trade creditors and has ceased to
trade; that MG Ltd, Lamb’s parent company, has transferred Lamb’s
remaining assets into MG; and that MG is having financial difficulties.
Advise as to the effect of limited liability on Amy’s claim.
8 Max holds 20% of the shares in Bumble Ltd. Larry holds the remaining
80%. They along with Bumble are the parties to a shareholders’
agreement which provides that the authorised share capital of the
company cannot be increased without the agreement of all the parties
to the shareholders’ agreement. Article 156 of Bumble’s articles of
association also provides for Max to increase his votes by 500% on any
resolution to remove him from the board of directors.
Max and Larry have a disagreement. The general meeting then passes a
resolution removing article 156 from the articles of association.
Thereafter Max is removed from the board of directors. Max also learns
that Bumble intends to increase its authorised share capital.
Discuss within the context of the articles of association and the
shareholders’ agreement what Max can do about his situation.

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