THIS PAPER IS NOT TO BE REMOVED FROM THE EXAMINATION HALLS

UNIVERSITY OF LONDON LA3021 ZA

DIPLOMA IN THE COMMON LAW

LLB

ALL SCHEMES AND ROUTES

BSc DEGREES WITH LAW

Company Law

Tuesday 19 May 2015: 14.30 – 17.45

Candidates will have fifteen minutes during which they may read the paper
and make rough notes ONLY in their answer books. They then have the
remaining THREE HOURS in which to answer the questions.

Candidates should answer FOUR of the following EIGHT questions, including

at least ONE from Part A and at least TWO from Part B.

Candidates should answer all parts of a question unless otherwise stated.

Permitted materials
A student is permitted to bring into the examination room two of the following
(this could include two editions of the same publication): either Blackstone’s
Statutes on Company Law (OUP) or British Companies Legislation (Sweet &
Maxwell, previously published by CCH editions) or Core Statutes on
Company Law (Palgrave Macmillan) and one copy of each of the following:
Companies Act 1985; Business Names Act 1985; Companies Consolidation
(Consequential Provisions) Act 1985; Companies (Tables A to F) Regulations
1985 (S.I. 1985 No. 805); Insolvency Act 1986; Company Directors
Disqualification Act 1986; Financial Services Act 1986; Companies Act 1989;
Companies (Single Member Private Limited Companies) Regulations 1992
(S.I. 1992 No. 1699); Financial Services and Markets Act 2000; Criminal
Justice Act 1993; Insolvency Act 1994; Insolvency (No 2) Act 1994.; Public
Offers Of Securities Regulations 1995 (S.I. 1995 No. 1537); Companies Act
2006.

© University of London 2015

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PART A

1. ‘The limited liability company is an excellent legal vehicle for running a

large business that has many shareholders. However, it is poorly
suited to the smaller business with fewer shareholders.’

Discuss.

2. Compare the protection afforded to a minority shareholder by section

33 Companies Act 2006 with that provided by section 994 Companies
Act 2006.

3. ‘The UK corporate governance regime encourages those running large

public companies to maximise short-term profits instead of pursuing the
company’s long-term success.’

Do you agree, and what more could be done to encourage managers

to pursue the long-term success of the company?

4. Explain:

(a) what is meant by the following types of director: executive, non-

executive, de facto, de jure, shadow and nominee; and

(b) whether there are, and whether you think there ought to be, any
differences in the legal duties owed by each of these different
types of director.

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PART B

5. Megaholdings Plc is the parent company of a large corporate group.

Its various subsidiaries operate in a number of different industries,
including house-building. Arnold, a director of Megaholdings, learns
that a large piece of vacant land in London is about to be sold by
auction. The land is suitable for house-building, but houses can only
be built if the Local Authority gives its permission. The Local Authority
says it will give permission, but only on condition that the company
building the houses carries out very expensive landscaping works once
the houses have been built. Arnold calculates that carrying out these
works will make building houses on the land unprofitable.

To get around this problem, Megaholdings incorporates a wholly-

owned subsidiary, Shellbuild Ltd, with a share capital of £1. Shellbuild
Ltd purchases the land and, in return for being given permission to
build houses on the land, enters into an agreement with the Local
Authority to carry out the landscaping works. Shellbuild quickly builds,
and sells, the houses for a substantial profit, which is immediately paid
to Megaholdings as a dividend and as ‘management charges’.
Shellbuild has now informed the Local Authority that it is insolvent, and
does not intend to carry out the landscaping works.

During the construction of the houses, Megaholdings told

Shellbuild’s sole director, Lorraine, that she must keep costs to an
absolute minimum. Megaholdings was aware that Shellbuild was using
a number of very dangerous work practices in order to cut costs, but
Megaholdings did nothing to stop this. Cecilia, a bricklayer employed
by Shellbuild, was badly injured as a result.

Advise:

(a) the Local Authority whether it can force Megaholdings to pay for
the costs of carrying out the landscaping works; and

(b) Cecilia, whether she can claim damages from Megaholdings for
the injuries she has suffered.

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6. Rustic Timbers Ltd makes low-price furniture, which it sells through
supermarkets. The company has three directors, Archie, Bella and
Charles. Archie is a qualified accountant, and the company’s
chairman. Bella, who has a full-time job as a presenter of television
programmes on furniture design, has not attended any of Rustic
Timbers’ board meetings for over a year.

Rustic Timbers has been running at a substantial loss for many

months. Archie calls a board meeting to discuss the company’s
financial problems. Bella does not attend the meeting. Charles
argues the company should cease trading immediately. Archie
disagrees. He says the company might just survive if it opens its own
furniture store, selling its products directly to the public. He admits the
scheme is very risky, but argues the risk is worth taking to protect the
jobs of its current employees. He tells Charles he knows of a suitable
store to purchase for £105,000, which is currently owned by his
daughter, Paula. Charles objects to this, but Archie uses his casting
vote as Chairman to pass a resolution purchasing the store.

Charles storms out of the board meeting, and has since refused to
speak to Archie. After six months it is clear Archie’s strategy has
failed, the company’s losses have increased, and the company is now
being wound up. Joan has been appointed as the company’s
liquidator. She has discovered that, although the price paid for the
store at the time was quite reasonable, it has since fallen in value.

Advise Joan what action might be taken in respect of the foregoing

events.

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7. Bookworms Ltd was incorporated in 1902, and runs a chain of
bookshops. The objects clause in Bookworms’ constitution states that
it shall operate a chain of bookshops. Sarah owns 26% of the
company’s shares, but is not a director of the company. In recent
years the company’s sales have fallen, and the board has decided the
company should stop selling books and convert all its shops to cafes.
Sarah strongly objects to this.

Bookworms’ board has been trying, for some weeks, to negotiate a

building contract with Quickbuild Plc, to convert Bookworms’ London
bookshop into a café. James, who has been working as an intern for
Bookworms, is keen to prove himself. He visits Quickbuild’s offices,
finalises negotiations with Quickbuild’s managing director, Alice, and
signs the contract on Bookworms’ behalf. Alice is concerned whether
James is exceeding his authority. She speaks to James’ secretary at
Bookworms, who tells her James has full authority to sign any contract
for Bookworms.

Bookworms’ board also recently decided to award a one-year-service

contract to Petra, one of Bookworms’ directors. Bookworms’ articles
say that any employment contract awarded to a director must be
approved unanimously by all of its shareholders. However, the board
deliberately chose not to get shareholder approval, believing that Sarah
was bound to refuse her consent.

Advise Sarah whether:

(a) Bookworms is bound by the contract with Quickbuild;

(b) she, Sarah, could prevent Bookworms converting any other

stores into cafes;

(c) Bookworms is bound by the contract with Petra;

(d) the directors of Bookworms have breached their duties to the

company.

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8. Buildit Ltd has three directors, Ai, Chao and Ju. The company
engages in property development. Ai and Chao each own 45% of the
company’s shares, and Ju owns the remainder. In 2013, the company
borrowed £100,000 from Feng, who is Ai’s brother. The loan is
interest free, but its repayment can be demanded at any time by Feng.

In November 2014, the company was offered a very profitable

opportunity. Ai and Chao decided to take the opportunity for
themselves. Immediately before doing so, Ai and Chao circulated a
‘written resolution’ between themselves (but not Ju), as shareholders of
Buildit, authorising themselves to take the opportunity for their own
personal benefit. They have since made a personal profit of £1million
each from this opportunity.

At a subsequent board meeting of Buildit, Ju demands that the

company sue Ai and Chao ‘for their flagrant breach of duty’. Ai and
Chao refuse Ju’s request. They argue that their conduct was
authorised by the shareholders. They also point out that if proceedings
were taken, Ai’s brother would immediately demand repayment of his
loan, causing the company to collapse.

Advise Ju whether, if she started a derivative claim against Ai and

Chao, she would be likely to be given permission by the court to
continue that claim. Would your answer be any different if the
company’s articles provided that ‘Ju shall not be entitled to bring a
derivative claim on behalf of the company’.

END OF PAPER

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