Business Law and Practice

• Topic 01

  Business Structures and Formation

  29 questions
• Topic 02

  Corporate Governance and Compliance

  36 questions
• Topic 03

  Partnership Governance

  21 questions
• Topic 04

  Business Finance

  54 questions
• Topic 05

  Taxation

  33 questions
• Topic 06

  Insolvency and Termination

  25 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. When are the first directors of a company appointed?

   • A
     The first directors are appointed by ordinary resolution at a general meeting held within one month of incorporation
   • B
     The first directors are elected by the shareholders at the company's first annual general meeting after incorporation
   • C
     The first directors are appointed by Companies House based on the qualifications listed in the memorandum of association
   • D
     The first directors are named in the statement of proposed officers in the application for registration (form IN01) delivered to Companies House on incorporation
     Correct answer
   Explanation

   Under s.12 CA 2006, the application for registration (form IN01) must include a statement of proposed officers, naming the persons who are to be the first directors of the company. These persons become directors on incorporation when the Registrar issues the certificate of incorporation. Subsequent directors are appointed in accordance with the company's articles -- typically by board resolution or by ordinary resolution of the shareholders.

2. A company is deciding between raising £1 million through a bank loan or issuing new ordinary shares. The current shareholders own 100% of the company's shares. If the company issues new shares to an outside investor, what is the main governance consequence for the existing shareholders?

   • A
     The existing shareholders will be required to contribute additional capital to match the new investment
   • B
     The existing shareholders will automatically lose their pre-emption rights under s.561 CA 2006
   • C
     The existing shareholders' proportionate voting power and control of the company will be diluted
     Correct answer
   • D
     The existing shareholders will become personally liable for the company's debts
   Explanation

   When a company issues new ordinary shares to an outside investor, the percentage of the total share capital held by each existing shareholder decreases. Since ordinary shares carry voting rights, this reduces the existing shareholders' proportionate voting power and control. Pre-emption rights under s.561 CA 2006 actually protect against unwanted dilution by requiring new shares to be offered to existing shareholders first. The separate legal personality of a company means shareholders are not personally liable for its debts (per Salomon v A Salomon & Co Ltd).

3. A sole trader runs a small retail business. Which of the following best describes the legal personality of the sole trader's business?

   • A
     The business has separate legal personality but the sole trader remains jointly liable for its debts
   • B
     The business has limited separate legal personality, meaning the sole trader is liable only for debts incurred in the course of trade
   • C
     The business acquires separate legal personality once the sole trader registers with HMRC for self-assessment
   • D
     The business has no separate legal personality; there is no legal distinction between the individual and the business
     Correct answer
   Explanation

   A sole trader business has no separate legal personality. In law, the individual and the business are one and the same. This means the sole trader personally owns all business assets, is personally entitled to all profits, and is personally liable for all debts and obligations of the business. This is in contrast to a company or LLP, which are separate legal persons from their members.