Examination

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Foundation Level Business Law

3b FBLW
18 November 2002
Day 1 – early afternoon

INSTRUCTIONS TO CANDIDATES
Read this page before you look at the questions

THIS QUESTION PAPER BOOKLET IS ALSO YOUR ANSWER BOOKLET.

Sufficient space has been provided for you to write your answers and also for workings where questions
require them. For section B questions, you must write your answers in the shaded space provided. Please
note that you will NOT receive marks for your notes or workings.

You are allowed two hours to answer this question paper. All questions are compulsory.

Answer the ONE question in section A (this has 25 sub-questions and is on pages 2-8)
Answer the THREE questions in section B (these are on pages 9-14)

You are advised to spend 10 minutes reading through the paper before starting to answer the questions.
You should spend no more than 55 minutes on answering the ONE question in section A, which has 25
sub-questions.
You should spend no more than 55 minutes on answering the THREE questions in section B.

You are advised that, in section B questions, you will receive no marks if you exceed the word limits
indicated.

Hand this entire booklet to the invigilators at the end of the examination. You are NOT permitted to leave
the examination hall with this booklet.

Do NOT write your name or your student registration number anywhere on this booklet.

 The Chartered Institute of Management Accountants 2002

SECTION A — 50 MARKS
ANSWER ALL TWENTY-FIVE SUB-QUESTIONS – 2 MARKS EACH

Each of the sub-questions numbered from 1.1 to 1.25 inclusive, given below, has only ONE correct
answer.

REQUIRED:
Place a circle “O” around the letter A, B, C or D that gives the correct answer to each sub-question.
If you wish to change your mind about an answer, block out your first answer completely and then circle
another letter. You will NOT receive marks if more than one letter is circled.

Please note that you will NOT receive marks for any workings to these sub-questions.

Question One

1.1 Which of the following is correct?

(i) Auditors who provide negligent advice may be held liable for breach of contract by the company
which appointed them.

(ii) Auditors who provide negligent advice to the company which appointed them may be held liable
for breach of contract by the company and its shareholders.

(iii) Auditors who provide advice to a particular person and who know what the advice will be used
for may be held liable to that person in the tort of negligence if the advice proves to be incorrect
and was carelessly prepared.

A (i) only.

B (i) and (ii) only.

C (i) and (iii) only.

D (ii) and (iii) only.

1.2 Which ONE of the following is correct?

A All English courts must apply European Law even if it contradicts English Law.

B If European and English Law conflict, English courts cannot apply either law.

C An English court must apply English Law unless it obtains the government's permission to apply
European Law.

D All English courts are obliged to apply English Law even if it contradicts European Law.

FBLW 2 November 2002

1.3 Which of the following is correct?

(i) A contract is entered into voluntarily whereas criminal offences are imposed by the state.
(ii) A tort is entered into voluntarily whereas criminal offences are imposed by the state.
(iii) A contract is entered into voluntarily whereas a tort is imposed by the state.

A (i) only. B (ii) only. C (i) and (iii) only. D (ii) and (iii) only.

1.4 Which of the following is correct?

(i) A wrongful dismissal cannot also be an unfair dismissal.

(ii) An unfair dismissal can also be a wrongful dismissal.
(iii) An unfair dismissal must also be a wrongful dismissal.

A (i) only. B (ii) only. C (ii) and (iii) only. D (iii) only

1.5 Brian has been employed by Wye Ltd for 10 years. His contract of employment states that if either
Wye Ltd or Brian wishes to terminate the contract, each party must give the statutory minimum period
of notice.

Which ONE of the following is correct?

A Both Brian and Wye Ltd are entitled to 10 weeks’ notice.

B Brian is entitled to 10 weeks’ notice but Wye Ltd is entitled to only 1 week’s notice.

C Brian is entitled to 1 month’s notice and Wye Ltd is entitled to 10 weeks’ notice.

D Both Brian and Wye Ltd are entitled to 1 week’s notice.

1.6 Charles recently purchased some goods at an auction sale.

Which of the following is correct?

(i) The contract was concluded by the fall of the Auctioneer’s hammer.
(ii) The Auctioneer’s call for bids was an invitation to treat.
(iii) Once the bidding had started, the Auctioneer was unable to withdraw the goods from the sale.

A (i) only. B (i) and (ii) only. C (ii) and (iii) only. D (i), (ii) and (iii).

November 2002 3 FBLW

1.7 Tee Ltd placed some computers in its shop window with a notice which read:

“Special offer. Internet-ready computers for sale at £400.”

Which of the following is correct?

(i) The notice amounts to an invitation to treat.

(ii) When Anne called in to the shop and offered £350 for one of the computers, she had made a
counter offer.
(iii) Tee Ltd is obliged to sell a computer to anyone who can pay the price.

A (i) and (ii) only. B (i) only. C (i), (ii) and (iii). D (ii) only.

1.8 Which of the following is correct?

(i) A contract of guarantee is unenforceable unless it is evidenced in writing.

(ii) A contract to sell land must be in writing.
(iii) A contract of employment must be in writing.

A (i) and (ii) only. B (i) and (iii) only. C (ii) and (iii) only. D (i), (ii) and (iii).

1.9 Which of the following is INCORRECT?

(i) Legal title cannot pass on a contract induced by misrepresentation.

(ii) Misrepresentation renders a contract voidable.
(iii) A victim of negligent misrepresentation may seek rescission and damages.

A (i) only. B (ii) only. C (i) and (iii) only. D (ii) and (iii) only.

1.10 In which of the following is there a presumption that legal relations are intended?

A A promise by a father to make a gift to his son.

B A commercial transaction.
C A domestic arrangement.
D A social arrangement.

1.11 Which ONE of the following is correct?

A A contract is frustrated when something happens after it has been entered into which renders the
contract more difficult to perform.

B A contract is frustrated when a party expressly agrees to manufacture and supply goods and then
discovers that they will be far more expensive to produce than he thought at the time of the contract.

C A contract is frustrated when something happens after it has been entered into which renders the
contract impossible to perform.

D A contract is frustrated if it is impossible to perform at the time that it is made.

FBLW 4 November 2002

1.12 Exe Ltd was under contract to deliver goods by road to London for Wye Ltd for £2,000. After part of
the journey was completed, the delivery vehicle broke down and Wye Ltd was forced to arrange for
Zed Ltd to complete the delivery.

If there are no provisions in the contract to deal with this situation, which of the following is correct?

A Exe Ltd is entitled to part of the delivery fee.

B Exe Ltd is entitled to nothing.
C Exe Ltd is entitled to a reasonable sum for the work done.
D Exe Ltd is entitled to the full £2,000.

1.13 A Ltd contracted to deliver a quantity of goods to B Ltd for £5,000. The goods were delivered and
A Ltd submitted an invoice to B Ltd for the amount due which contained a number of new terms.

Which of the following is INCORRECT?

A The invoice is a contractual document and B Ltd is bound by the terms on the invoice.

B B Ltd is only bound by the terms if it was given notice of them at or before the time of the contract.

C B Ltd is bound by the terms if there is a sufficient course of dealings between A Ltd and B Ltd so that
B Ltd is assumed to know of the terms.

D If B Ltd is unaware of the terms, it can only be bound by them if it agrees to be so.

1.14 ABC Ltd has contracted with DEF Ltd. If ABC Ltd acts in breach of a warranty, which of the following is
correct?

(i) DEF Ltd may terminate the contract and sue for damages.
(ii) DEF Ltd may sue for damages but may not terminate the contract.
(iii) DEF Ltd may ignore the breach and continue with the contract.

A (i) only. B (i) and (iii) only. C (ii) and (iii) only. D (i), (ii) and (iii).

1.15 Which ONE of the following remedies is NOT available for a breach of a contract to provide personal
services?

A Damages.

B A decree of specific performance.

C An injunction.

D An action for the price.

November 2002 5 FBLW

1.16 Which of the following is INCORRECT?

(i) A liquidated damages clause will be void if it amounts to a penalty clause.

(ii) A liquidated damages clause will apply where it is a genuine attempt to pre-estimate the loss
caused by a breach of contract.
(iii) A liquidated damages clause cannot be valid if it is for an amount in excess of the actual loss
caused by the breach of contract.

A (i) and (ii) only. B (ii) only. C (i), (ii) and (iii). D (iii) only.

1.17 Which of the following is INCORRECT in relation to the remedy of rescission?

(i) Rescission is available automatically in the event of a breach of contract.

(ii) The victim of a misrepresentation may automatically claim rescission.
(iii) Rescission is designed to return the parties to their pre-contract position.

A (i) only. B (ii) only. C (i) and (ii) only. D (ii) and (iii) only.

1.18 Quentin was employed by Bee Ltd as its senior design consultant. Quentin contracted with Bee Ltd
that when his employment with the company ceased, he would not act in competition with it or solicit
its customers. After Quentin left Bee Ltd, he registered a company called Cee Ltd, which immediately
began working in competition with Bee Ltd and soliciting its customers. Bee Ltd complained to Quentin
about this conduct, but Quentin stated that as the work was being undertaken by Cee Ltd, a separate
legal entity, he had not acted in breach of the agreement with Bee Ltd.

Which ONE of the following is correct?

A Quentin is correct and cannot be said to be in breach of the agreement with Bee Ltd.

B If the court finds that Cee Ltd was set up by Quentin to avoid the agreement with Bee Ltd, it will “lift the
corporate veil” and enforce Quentin’s contract with Bee Ltd against Quentin and Cee Ltd.

C Cee Ltd will be bound by the agreement because a company is always liable for the actions of its
shareholders.

D The agreement between Bee Ltd and Quentin is of no legal effect as it attempts to regulate Quentin’s
activities after he has left Bee Ltd’s employment.

1.19 The Memorandum of Dee Ltd, a property development company, states that the company has power
to borrow in furtherance of its objects and that the directors have authority to borrow up to £200,000.
The board has resolved to purchase a piece of land for £300,000. The Midwest Bank plc has agreed
to make a loan of £250,000 to Dee Ltd to acquire the land.

Which ONE of the following is correct?

A The loan is void as Dee Ltd has acted ultra vires.

B As the directors have exceeded their authority, the bank cannot enforce the loan against Dee Ltd.

C As the directors have resolved to obtain the loan, the transaction is lawful.

D The loan is ultra vires the directors who will be personally liable for any loss caused to the company
unless their actions are ratified by the shareholders.

FBLW 6 November 2002

1.20 Which of the following is correct?

(i) A public company cannot commence trading until it has received a certificate from the Registrar
of Companies confirming that it has satisfied the minimum requirements as to authorised and
issued share capital.

(ii) If a public company commences trading without a trading certificate, and fails to meet its
obligations, the directors may be held jointly and severally liable for those obligations.

(iii) A private company may commence trading upon receipt of its certificate of incorporation.

A (i) and (ii) only. B (ii) and (iii) only. C (i) and (iii) only. D (i), (ii) and (iii).

1.21 Which ONE of the following is correct?

A The shares of all public limited companies are quoted on the Stock Exchange.

B The company secretary of a public limited company must be qualified.

C A private limited company must have at least two shareholders.

D A public limited company cannot trade until it has paid-up share capital of at least £50,000.

1.22 Which ONE of the following may requisition an extraordinary general meeting?

A Members holding not less than one-twentieth of the company’s issued share capital which carries
voting rights.

B Members holding not less than one-tenth of the company’s issued share capital which carries voting
rights.

C Members holding not less than one-quarter of the company’s issued share capital which carries voting
rights.

D Members holding not less than one-half of the company’s issued share capital which carries voting
rights.

1.23 What type of resolution is needed if a private company wishes to reduce, to 90%, the percentage
needed to authorise the provision of short notice?

A Elective. B Extraordinary. C Ordinary. D Special.

November 2002 7 FBLW

1.24 PRS Ltd wishes to use its assets as security for a loan to be made by B Bank plc to Peter, a
shareholder in PRS Ltd, so that he may purchase more of the company’s share capital.

Which ONE of the following is correct?

A The proposal is lawful, if approved by a special or written resolution and the correct procedure is
followed.

B The proposal is lawful, if the company passes an ordinary resolution and the correct procedure is
followed.

C The proposal is lawful, only if it is approved by the court and the correct procedure is followed.

D The proposal is unlawful, as a company cannot give financial assistance for the purchase of its own
shares.

1.25 Which ONE of the following correctly describes the “maintenance of capital” principle?

A A company cannot use its share capital which must be set aside as a fund for creditors.

B In general, a company can use its share capital for any reason whatsoever, as long as it ensures that
there is sufficient remaining to meet the company’s debts.

C In general, a company must use its capital for the purposes set out in its objects clause and cannot
return it to its members.

D A company cannot use its share capital and may only return it to its members with the permission of
the court.

Total = 50 Marks

FBLW 8 November 2002

SECTION B – 50 MARKS
ANSWER ALL THE QUESTIONS

Question Two

A Ltd contracted to install computerised security systems at each of B plc's 100 shops by 30 June 2002 for a
total price of £200,000.
The contract between A Ltd and B plc contained the following clause:
"A Ltd hereby agrees to pay B plc the sum of £1,000 per day by way of liquidated damages, in respect
of each unfinished shop for each day after 30 June 2002."
A Ltd sub-contracted with C Ltd which agreed to install the systems at 50 of B plc's shops by 30 June 2002.
On 1 February 2002, however, C Ltd wrote to A Ltd to explain that because of financial problems, the
company would be unable to complete the contract by 30 June 2002. On 4 February 2002, A Ltd agreed to
lend C Ltd £15,000 secured by a floating charge over C Ltd's stock. In addition, A Ltd promised to pay C Ltd
a bonus of £5,000 if the company completed the work on time.
Following this sequence of events, the following facts have emerged:

(i) C Ltd completed the work on time, but was placed in insolvent
liquidation on 1 July 2002. A Ltd has refused to pay the bonus of
£5,000.

(ii) A Ltd completed its contract with B plc, but was four days late in
finishing three of the shops. As a result, B plc has advised A Ltd Do not write in these
that the price of £200,000 will be reduced by £12,000 in accordance columns below
with the above liquidated damages provision.

For use For use

by the by the
Required Marks first second
available marker marker
(a) Delete as appropriate * and complete this sentence:
In this case, A Ltd is* / is not* liable to pay C Ltd the bonus of 1
£5,000 because

. (Maximum of 30 words)
(b) State the three characteristics of a floating charge
(i)

(ii)

(iii)
3
(Maximum of 10 words for each of the three sentences) Sub-total:
7

Requirements (c) – (e) of question two are on page 9

November 2002 9 FBLW

Question Two continued
Do not write in these
columns below

For use For use

by the by the
Required Marks first second
available marker marker
(c) Complete this sentence:
A Ltd will be entitled to recover its loan from the proceeds of the sale
of C Ltd's stock, as long as there is sufficient remaining after payment
of the . 2
(Maximum of 2 words)
(d) Delete as appropriate * and complete this sentence:
B plc can* / cannot* rely on the above liquidated damages clause to
1
reduce A Ltd's fee by £12,000 because

. (Maximum of 30 words) 3
(e) Complete this sentence:
If it could be shown that C Ltd had lied about its financial difficulties,
in order to pressurise A Ltd into promising to pay a bonus, then A Ltd
would not be liable to pay the bonus of £5,000 because

. (Maximum of 30 words) 4
Sub-total:
10
Total Marks for Question Two = 17

Total for Question Two = 17 Marks

Space for notes for Question Two

FBLW 10 November 2002

Question Three

Zed plc has decided to carry out the following:

(i) To appoint Michelle as the company’s managing director.

(ii) To borrow £5 million from Exe Bank plc secured by a fixed

charge over the company’s land and a floating charge over
the company’s stock.

(iii) To acquire Frank’s business by issuing to him 200,000

ordinary £1 shares in Zed plc.
Do not write in these
(iv) To purchase a number of its own shares on the Stock columns below
Exchange.

For use For use

by the by the
Required Marks first second
available marker marker
(a) Complete these sentences:
Michelle may be appointed managing director by
1
.
(Maximum of 3 words)
The appointment of all the other directors must be approved by the
1
.
(Maximum of 3 words)
(b) Complete these sentences:
The fixed and floating charges must be registered with the Registrar 1
of Companies within days. (State the number of days)

If they are not registered, they will be against the 2

liquidator, administrator or any creditor of the company.
(Maximum of 1 word)
(c) Delete as appropriate * and complete this sentence:
The 200,000 ordinary £1 shares to be issued by Zed plc
must* / need not* be offered to Zed plc’s existing shareholders first 1
because

. (Maximum of 30 words) 3
Sub-total:
9

Space for notes for Question Three

Requirements (d) and (e) of question three are on page 12

November 2002 11 FBLW
Question Three continued
Do not write in these
columns below

For use For use

by the by the
Required Marks first second
available marker marker
(d) Delete as appropriate * and complete this sentence:
Before Frank’s business can be acquired by Zed plc, it
must* / need not* be valued by the auditor because Zed plc is a 1

1
.
(Maximum of 3 words)

(e) Delete as appropriate * and complete the following sentences:

The types of fund which must be used by Zed plc to purchase its own
shares are
(Maximum of 3 words) 1
or .
1
(Maximum of 3 words)
1
As this is an/a off market* / market* purchase, it must be authorised
by 1
resolution. (Maximum of 2 words)
Sub-total:
6
Total Marks for Question Three = 15

Total for Question Three = 15 Marks

Space for notes for Question Three

FBLW 12 November 2002

Question Four

Michelle, Nicola, Owen and Paul have decided to go into business together selling mobile telephones
through a company limited by shares. A company is to be incorporated called MNOP Ltd and each person is
to subscribe for 25,000 ordinary £1 shares at a cost of £50,000.

Michelle, Nicola, Owen and Paul have agreed the following:

(i) Each is to be appointed as an executive director of MNOP

Ltd on a fixed term contract for six years.

(ii) The Memorandum of Association of the company is to be

worded to allow the company to diversify into any trade or
business which the members may wish to carry on in the
future.

(iii) The Articles of Association of MNOP Ltd will include the

following provision:

"Any member who wishes to sell his or her shares must Do not write in these
offer them to the other members who shall purchase them columns below
at a fair price as determined by the company’s auditor."

For use For use

by the by the
Required Marks first second
available marker marker
(a) Complete this sentence:
As Michelle, Nicola, Owen and Paul are to have service contracts for
1
a period exceeding years (State the number of years) on
terms that they cannot be dismissed by reasonable notice, the
contracts will need to be approved by the shareholders passing
1
(Maximum of 2 words) or
resolution. 1
(Maximum of 2 words)
(b) Complete this sentence:
To enable the company to diversify into any trade or business, the
clause (Maximum of 1 word) should include a 1

statement that

. 2
(Maximum of 20 words)
Sub-total:
6

Requirements (c) – (e) of question four are on page 14

November 2002 13 FBLW

Question Four continued

Do not write in these

columns below

Required Marks For use For use

available by the by the
first second
marker marker
(c) Delete as appropriate * and complete this sentence:
The shareholders of MNOP Ltd will * / will not * be bound by the 1
clause in the company’s Articles of Association concerning the sale of
shares because

. (Maximum of 30 words) 3
(d) Delete as appropriate * and complete these sentences:
As the 100,000 ordinary £1 shares have been issued for a total price
of £200,000, a total of £ (State the amount) must be 1
transferred to a account. (Maximum of 2 1
words) The amount held in that account may* / may not* be used to
1
pay a dividend.

(e) Delete as appropriate * and complete the following sentences:

Michelle, Nicola, Owen and Paul have each agreed to work under a
contract (Maximum of 2 words) which 1

means that they are employees* / independent contractors* of the 1

company. It follows that if any one of the directors is dismissed before
the expiry of 12 months he or she will* / will not* be entitled to sue 1

the company for dismissal. 2

(Maximum of 2 words)
Sub-total:
12
Total Marks for Question Four = 18

Total for Question Four = 18 Marks

End of Question Paper

FBLW 14 November 2002