Examination

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Foundation Level Business Law

3b FBLW
20 May 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. An
additional blank page (14) is included towards the back of this booklet if you require more space for notes
or workings. Please note that you will NOT receive marks for your notes or workings. Do NOT remove any
sheets from this booklet: cross through neatly any work that is not to be marked. Avoid the use of
correction fluid.

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 2-9)
Answer the THREE questions in section B (these are on pages 10-13)

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.

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.

TURN OVER

For office use only Total One Two Three Four

Marks awarded (First marker) for each question

Marks awarded (Second marker) for each question

© 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 ONE of the following statements is correct?

A The aim of the criminal law is to regulate behaviour within society by the threat of punishment.

B The aim of the criminal law is to punish offenders.

C The aim of the criminal law is to provide a means whereby injured persons may obtain compensation.

D The aim of the criminal law is to ensure that the will of the majority is imposed upon the minority.

1.2 Which ONE of the following is correct?

A The House of Lords is obliged to apply English Law, even if it contradicts European Law.

B The House of Lords must apply European Law even if it contradicts English Law.

C If European and English Law conflict, the House of Lords cannot apply either Law.

D The House of Lords must apply English Law unless it obtains government permission to apply
European Law.

1.3 Which ONE of the following is correct?

A Professional advisers cannot be liable in respect of negligent advice in the tort of negligence, but may
be liable for breach of contract.
B Professional advisers cannot be liable for breach of contract in respect of negligent advice but may be
liable in the tort of negligence.
C Professional advisers may be liable in respect of negligent advice in either contract or tort.

D Professional advisers cannot be liable in respect of negligent advice in either contract or tort.

For office use only Total 1.1 1.2 1.3

Marks awarded (First marker) for each sub-question
Marks awarded (Second marker) for each sub-question
FBLW 2 May 2002
1.4 What is the legal effect of the following statement in a newspaper?

"For sale. Computer, monitor and laser printer. Good condition. £500."

A The statement is an offer for sale.

B The statement is a “mere puff or boast”.

C The statement has no legal effect.

D The statement is an invitation to treat.

1.5 On 1 September, Seller Ltd wrote to Buyer Ltd offering to sell a machine at a price of £10,000, and
stating that Buyer Ltd must accept by 10 September. On 3 September, Buyer Ltd wrote to Seller Ltd
and stated "I accept. Will you accept payment over three months?" On 5 September, Seller Ltd sold
the machine to New Ltd, and on 6 September received a second letter from Buyer Ltd accepting the
offer and offering to make immediate payment.

Which ONE of the following is correct?

A There is no contract between Seller Ltd and Buyer Ltd because the offer was withdrawn on
5 September when the machine was sold to New Ltd.

B There is no contract between Seller Ltd and Buyer Ltd because Buyer Ltd’s letter of 3 September
amounted to a counter-offer which destroyed Seller Ltd’s original offer.

C Seller Ltd and Buyer Ltd contracted on 3 September.

D Seller Ltd and Buyer Ltd contracted on 6 September.

1.6 Which of the following examples of performance amounts to good consideration?

(i) The performance of an existing duty under the general law.

(ii) The performance of an existing contract in return for a promise by a third party.

(iii) The performance of an act, followed by a promise to pay for that act.

A (i) only.

B (ii) only.

C (i) and (ii) only.

D (iii) only.

TURN OVER

For office use only Total 1.4 1.5 1.6

Marks awarded (First marker) for each sub-question
Marks awarded (Second marker) for each sub-question

May 2002 3 FBLW

1.7 Which ONE of the following is INCORRECT?

A A term may be implied into a contract by statute.

B A term may be implied into a contract by a court on the ground that the term is customary in the
parties' trade.
C A term may be implied into a contract by a court on the ground that it would make the contract more
equitable.
D A term may be implied into a contract by a court on the ground of business efficacy.

1.8 Which ONE of the following is INCORRECT?

A A condition is a term which the parties intended to be of fundamental importance.

B A warranty is a term which the parties did not intend to be of fundamental importance.

C If a condition is breached, then the contract must be terminated.

D If a warranty is breached, then the innocent party cannot terminate the contract.

1.9 Which ONE of the following contracts might be specifically enforceable?

A Alan has contracted to sell his house to Bob but has changed his mind and no longer wishes to sell it.

B Chris has contracted to buy a new Ford motor car but the garage is now refusing to honour the
contract.

C Diane has contracted to purchase a number of tins of fruit for her business but the seller has now
stated that he no longer wishes to proceed with the contract.

D Eduardo has contracted to sing at a concert organised by Fernando, but Eduardo has withdrawn as he
has received a more lucrative offer from Giovanni.

1.10 In the event of a breach of contract, what is the purpose of damages?

(i) To punish the contract breaker.

(ii) To compensate the innocent party.

(iii) To put the innocent party in the same position as if the contract had been carried out correctly.

A (i) only.

B (ii) and (iii) only.

C (iii) only.

D (i), (ii) and (iii).

For office use only Total 1.7 1.8 1.9 1.10

Marks awarded (First marker) for each sub-question
Marks awarded (Second marker) for each sub-question

FBLW 4 May 2002

1.11 Which of the following statements suggests that John is an independent contractor in relation to the
work he carries out for Zed Ltd?

(i) He is required to provide his own tools.

(ii) He is required to carry out his work personally and is not free to send a substitute.

(iii) He is paid in full without any deduction of income tax.

A (i) and (ii) only.

B (ii) and (iii) only.

C (i) and (iii) only.

D (i), (ii) and (iii).

1.12 Which ONE of the following is normally implied into a contract of employment?

A A duty to provide a reference.

B A duty to provide work.

C A duty to pay wages.

D An employee’s duty to disclose his own misconduct.

1.13 A business has been registered under the name "The Mark Jones Partnership Co Ltd". What type of
business organisation must this be?

A A partnership.

B A private limited company.

C A public limited company.

D Any of the above as this is a business name.

1.14 Which ONE of the following statements is INCORRECT in relation to a public company limited by
shares?

A The company must have at least one director.

B The company must have at least two shareholders.

C The company must have issued at least £50,000 of shares.

D The company must state in its Memorandum of Association that it is a public limited company.

TURN OVER

For office use only Total 1.11 1.12 1.13 1.14

Marks awarded (First marker) for each sub-question
Marks awarded (Second marker) for each sub-question

May 2002 5 FBLW

1.15 Which of the following is correct?

(i) Purchasing a “shelf company” enables business to commence more quickly.

(ii) It is generally cheaper to purchase a “shelf company” than to arrange for a solicitor or
accountant to register a new company.
(iii) Incorporating a company by registration enables the company’s documents to be drafted to the
particular needs of the incorporators.

A (i) and (ii) only.

B (ii) and (iii) only.

C (i) and (iii) only.

D (i), (ii) and (iii).

1.16 Which ONE of the following is INCORRECT?

A If a company’s object is to carry on business as a “general commercial company”, the company may
carry on any trade or business whatsoever.
B If a company acts outside its objects clause, it has acted ultra vires and the transaction is void.

C A company may ratify an ultra vires act by passing a special resolution.

D Any shareholder may apply for an injunction to prevent the directors from taking the company into an
ultra vires transaction.

1.17 Which of the following statements is correct?

(i) The Memorandum of Association of a private company limited by shares may be altered by
special resolution.
(ii) The Memorandum of Association of a private company limited by shares may be altered by a
written resolution.
(iii) The Memorandum of Association of a private company limited by shares may be altered by an
ordinary resolution.

A (i) only.

B (ii) only.

C (i) and (ii) only.

D (ii) and (iii) only.

For office use only Total 1.15 1.16 1.17

Marks awarded (First marker) for each sub-question
Marks awarded (Second marker) for each sub-question
FBLW 6 May 2002
1.18 Bee Ltd has an issued share capital of 1,000 ordinary shares of £1 each. Some of the shareholders
would like to pass an elective resolution in order to dispense with the need to re-appoint the auditor
annually.
What is the minimum number of votes which must be cast in order to pass the resolution?

A 500. B 501. C 750. D 1,000.

1.19 Which ONE of the following is correct?

A A company intending to issue new shares for cash must first offer them to the directors.

B A company may dispense with the requirement to first offer new shares to the directors by passing a
special resolution.
C A company issuing new shares for cash must first offer them to the existing members.

D A company issuing new shares for a non-cash consideration must first offer them to the existing
members.

1.20 Which ONE of the following is INCORRECT in relation to an increase in a company’s authorised share
capital?

A The board must resolve to increase the authorised capital.

B The shareholders must pass a resolution to increase the authorised capital.

C The authorised capital clause is contained in a company's Memorandum of Association.

D The increase in authorised capital must be confirmed by the court.

1.21 Which ONE of the following is correct?

A The shareholders may dismiss a director irrespective of anything in the company’s Articles of
Association if they pass an ordinary resolution to do so, of which special notice has been given to the
company.
B The shareholders may dismiss a director irrespective of anything in the company’s Articles of
Association if they pass an extraordinary resolution to do so, of which special notice has been given to
the company.
C The shareholders may dismiss a director irrespective of anything in the company’s Articles of
Association if they pass a written resolution to do so, of which special notice has been given to the
company.
D The shareholders may dismiss a director irrespective of anything in the company’s Articles of
Association if they pass an elective resolution to do so, of which special notice has been given to the
company.

TURN OVER

For office use only Total 1.18 1.19 1.20 1.21

Marks awarded (First marker) for each sub-question
Marks awarded (Second marker) for each sub-question
May 2002 7 FBLW
1.22 Which of the following is correct?

(i) Directors may vote themselves such salary payments as they think fit, irrespective of anything in
the company’s Articles of Association.
(ii) Directors are only entitled to be paid for their services if the constitution of the company so
provides.
(iii) Directors must be paid a salary.

A (i) only.

B (ii) only.

C (i) and (ii) only.

D (iii) only.

1.23 Which of the following is correct?

(i) Individual shareholders cannot interfere with the management of the company unless
authorised by the company’s Articles of Association.
(ii) The majority shareholders can interfere with the management of the company unless prevented
by the company’s Articles of Association.
(iii) Irrespective of anything in the company’s Articles of Association, the directors must act in
accordance with the directions issued by the shareholders in the form of special resolutions.

A (i) only.

B (ii) only.

C (i) and (ii) only.

D (iii) only.

1.24 Which of the following can enforce the fiduciary duties owed by a director?

(i) The majority shareholders.

(ii) The company.

(iii) Individual directors.

A (i) and (ii) only.

B (ii) only.

C (ii) and (iii) only.

D (iii) only.

For office use only Total 1.22 1.23 1.24

Marks awarded (First marker) for each sub-question
Marks awarded (Second marker) for each sub-question

FBLW 8 May 2002

1.25 Which ONE of the following correctly describes the circumstances in which directors may be held
liable to contribute to the assets of insolvent companies in respect of “wrongful trading”?

A Where the directors have the intention of defrauding creditors.

B Whenever a company’s liabilities exceed its assets.

C Whenever a company becomes insolvent.

D Where directors knew or ought to have known that insolvency was inevitable.

(Total = 50 Marks)

End of Section A

Section B begins on page 10

TURN OVER

For office use only Total 1.25

Marks awarded (First marker) for each sub-question
Marks awarded (Second marker) for each sub-question

May 2002 9 FBLW

SECTION B – 50 MARKS
ANSWER ALL THREE QUESTIONS

IMPORTANT
MARKS ARE AWARDED FOR CORRECTLY COMPLETING THE SHADED BOXES WITH THE
CORRECT ANSWER WHERE A MARK IS INDICATED IN THE RIGHT-HAND COLUMN.

DO NOT WRITE IN THE MARGINS NOR IN THE COLUMNS FOR USE BY MARKERS.

Question Two

George Thompson has carried on business for a number of years as a self-employed retailer of office
furniture. He has now decided to incorporate his business, and to register GT Limited to acquire the
business.

Do not write in these

columns below

For use For use

by the by the
Required Marks second first
available marker marker
(a) Complete this sentence:
"In order to register a private limited company, George will need to
submit certain documents to the
who will issue a certificate of incorporation if everything is in order."
(maximum of three words in the gap) 2
(b) Complete these sentences:
"One of the documents which George will need to submit contains the
company's name, the situation of the company's registered office, a
statement that the liability of the members is limited, and the
authorised share capital and its division into shares. This document is
called the and also
contains the
which sets out the business(es) which the company is authorised to
carry on."
(maximum of three words in each gap) 4
(c) In no more than 30 words (in the shaded box below), explain how
GT Limited's proposed Articles of Association may be affected by the
provisions of Table A.

4
Sub-total:
10

Parts (d) and (e) of Question Two are on page 11

FBLW 10 May 2002

Question Two continued
Do not write in these
columns below

For use For use

by the by the
Required Marks second first
available marker marker
(d) Complete this sentence:
"If, at a later date, George wishes to increase the authorised share
capital of the company, he may do so by passing
resolution."
(maximum of two words in the gap) 2
(e) In no more than 30 words (in the shaded area below), explain the
liability of both the company and George in the event of the business
becoming insolvent.

Sub-total:
6

Total for Question Two = 16 Marks

TURN OVER
May 2002 11 FBLW
Question Three

During the sale of a motor car by S (Motor Dealers) Ltd to Anne, the company told her that the car had
travelled only "5,000 miles since the installation of a new engine and gearbox".

After purchasing the car, Anne paid £700 to have the car repainted, but later discovered that it had travelled
more like 50,000 miles since the installation. She attempted to return the car and obtain a refund, but
S (Motor Dealers) Ltd refused because it had honestly believed its statement to be correct.

As a result, Anne is considering taking legal action against the company for misrepresentation.

Please do not write in

these columns below

For use For use

by the by the
Required: Marks second first
available marker marker
(a) In no more than 30 words (in the shaded area below), define
misrepresentation.

4
(b) State (in the shaded area below), the three types of
misrepresentation.
2
2
2

(c) In no more than 30 words (in the shaded box below), identify the
type(s) of misrepresentation S (Motor Dealers) Ltd has made and the
remedy available to Anne.

4
(d) In no more than 30 words (in the shaded area below), explain
whether the statement by S (Motor Dealers) Ltd to Anne is also a
term of the contract.

4
Total: 18

Total for Question Three = 18 Marks

FBLW 12 May 2002

Question Four

Greg, Harry and Ian are the sole shareholders of GHI Ltd. The company has an authorised share capital of
£100,000 divided into 100,000 ordinary £1 shares. Greg is the sole director of the company and Harry is the
company secretary. At present, the issued share capital is held as follows:

Greg: 51,000 shares

Harry: 29,000 shares
Ian: 20,000 shares
Total: 100,000 shares

The company, which has been valued at £300,000, has decided on the following transactions:

• To raise £60,000 in cash by issuing shares to Fiona.

• To borrow £40,000 from AB Bank plc. Do not write in these
columns below
Required:
For use For use
by the by the
Marks second first
Complete the following sentences: Available marker marker
(a) "In order to facilitate the issue of the new shares, the authorised
capital must be increased by at least ordinary £1
shares."
(one figure in the shaded area) 2
(b) "In order to issue the shares, Greg must be authorised by the
shareholders or by the “
(maximum of three words in the shaded area) 2
(c) "Fiona will become a member of the company when she has been
entered in the . She must also
be sent a within two months

of allotment."
(maximum of three words in each of the shaded areas) 4
(d) In no more than 30 words (in the shaded area below), explain how
Greg's voting power within GHI Ltd will be affected by the issue of
shares to Fiona.

4
(e) "If AB Bank plc requires security in the form of a debenture containing
a charge, then the company will not be able to
deal freely with the assets charged in the ordinary course of
business. However, GHI Ltd will be able to deal freely with assets
which are secured by a charge." 4
(one word in each shaded area)
Total: 16

Total for Question Four = 16 Marks

End of Question Paper

TURN OVER FOR ADDITIONAL SPACE FOR WORKINGS AND NOTES
May 2002 13 FBLW
You may use this sheet for notes and workings
(no marks are awarded for workings)

FBLW 14 May 2002

 DO NOT WRITE ON THIS SHEET

May 2002 15 FBLW

 3b

FBLW

Business Law

Day 1 – early afternoon

FBLW 16 May 2002