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Foundation Level Business Law

3b FBLW
19 May 2003
Monday 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. Do not
exceed the stated number of words. 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 2-10)
Answer the THREE questions in section B (these are on pages 12-17)

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 2003

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 is the superior source of English law?

A A precedent established by the House of Lords.

B A provision in an Act of Parliament.

C A government pronouncement.

D A Statutory Instrument.

1.2 Which ONE of the following most accurately describes the ratio decidendi?

A It is a statement of law by a court which is binding on all higher courts which are called upon to decide
a similar case.

B It is a statement of law by a court which is not binding on lower courts which are called upon to decide
a similar case.

C It is a statement of law by a court which is binding on all lower courts which are called upon to decide
a similar case.

D It is a statement of law by a court which is binding on all future courts which are called upon to decide
a similar case.

FBLW 2 May 2003

1.3 Which of the following statements are CORRECT?

(i) To succeed in the tort of negligence a claimant must prove that the defendant owed
him/her a duty of care.

(ii) To succeed in the tort of negligence the claimant must prove that the defendant has
broken a duty to take care.

(iii) To succeed in the tort of negligence a claimant must prove he/she suffered loss or
harm as a result of the defendant’s breach of the duty to take care.

A (i) and (ii) only.

B (ii) and (iii) only.

C (i) and (iii) only.

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

1.4 Which ONE of the following cannot be carried out by a simple contract?

A A contract for the sale of a motor car.

B A contract of employment.

C A contract for the sale of land.

D A contract for the provision of services.

1.5 Jack was induced to enter into a contract with Karl by Karl’s negligent misrepresentation.

Which of the following are CORRECT?

(i) Jack has a remedy against Karl in the tort of negligence.

(ii) Jack has a remedy against Karl under the Misrepresentation Act 1967.

(iii) Jack has a remedy against Karl in the tort of deceit.

A (i) only.

B (i) and (ii) only.

C (ii) and (iii) only.

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

May 2003 3 FBLW

1.6 In relation to the Unfair Contract Terms Act 1977, which of the following are CORRECT?

(i) A clause which attempts to exclude liability for death or personal injury caused by
negligence is only valid if it is reasonable.

(ii) A clause which attempts to exclude liability for damage to property is void unless it is
reasonable.

(iii) The Unfair Contract Terms Act applies to contractual terms and to occupiers’ liability.

A (i) only.

B (ii) only.

C (i) and (iii) only.

D (ii) and (iii) only

1.7 In relation to contractual performance, which ONE of the following is INCORRECT?

A A person who has substantially performed the contract is entitled to the contract price less so much as
is necessary to repair the defects.

B If one party is prevented from performing the contract by the other party, he or she may claim
compensation on a quantum meruit basis.

C A person who has carried out part of the contract is always entitled to a part of the contract price.

D A person who has carried out all of his contractual obligations is entitled to all of the contract price.

1.8 Tee Ltd has contracted to use Vee Ltd’s “Grand Hotel” for a business conference. Which of the
following would be regarded as a valid reason for Vee Ltd for the unavailability of the hotel on the
agreed date under the law of frustration?

(i) The hotel was closed due to flood damage.

(ii) The hotel was double booked.

(iii) The hotel manager had arranged to have the hotel redecorated. The decorators had
failed to complete the work by the agreed date.

A (i) only.

B (iii) only.

C (ii) and (iii) only.

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

FBLW 4 May 2003

1.9 Which of the following entitles the innocent party to cancel the contract?

(i) A breach of a warranty.

(ii) A breach of a condition.

(iii) An express term authorising termination of the contract.

A (i) only.

B (i) and (ii) only.

C (ii) and (iii) only.

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

1.10 In relation to the remedy of damages, which ONE of the following is INCORRECT?

A A victim of a breach of contract may be unable to recover damages if he has failed to mitigate his loss.

B Mitigation and remoteness of damage are irrelevant where a creditor is suing to recover an agreed
debt.

C A penalty clause in a contract cannot be enforced.

D Damages cannot be claimed for a breach of a contract to provide personal services.

1.11 In relation to a claim for wrongful dismissal, which of the following statements are INCORRECT?

(i) Only employees below the normal retiring age may claim.

(ii) There is no qualifying period.

(iii) There is frequently no limit on the amount of compensation that a tribunal can award.

(iv) Claims must be made within 3 months of the dismissal.

A (i) only.

B (ii) only.

C (ii) and (iii) only.

D (i) and (iv) only.

May 2003 5 FBLW

1.12 Which ONE of the following does not automatically give rise to a claim for unfair dismissal?

A Dismissal on grounds of age.

B Dismissal on grounds of race.

C Dismissal on grounds of disability.

D Dismissal on grounds of sex.

1.13 Claire's employment with Wye Ltd began 8 years ago. Her contract of employment states that she
may be required to work at any of the company's offices in London, Birmingham or Manchester. Claire
has for the entire 8 years worked at the company's London office. The company has now asked Claire
to move to its Manchester office.

Which ONE of the following statements is CORRECT?

A Claire cannot be required to move to the Manchester office.

B Claire's contract contains a mobility clause which permits her employer to require her to work at any of
the company's offices.

C The fact that Claire has always worked in the London office prohibits her employer from requiring her
to move to any of the company's other offices.

D If Claire is required to move to the Manchester office, she may make a claim for automatic unfair and
wrongful dismissal.

1.14 A business operates under the name "High Street Furnishings”.

Which ONE of the following types of business organisation must this be?

A A partnership.

B A sole tradership.

C A private limited company.

D Any type of business organisation as "High Street Furnishings" is a business name.

FBLW 6 May 2003

1.15 Which of the following are CORRECT?

(i) A company is owned by its shareholders and managed by its directors.

(ii) A company is entitled to own property in its own name.

(iii) If business is carried on through a company limited by shares, the shareholders can
never incur personal liability over and above the amount due on their shares even if the
veil of incorporation is lifted.

A (i) only.

B (i) and (ii) only.

C (i) and (iii) only.

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

1.16 Which of the following statements are INCORRECT?

(i) A public limited company may commence trading as soon as it receives a certificate of
incorporation.

(ii) A private company may re-register as a public company by passing a special

resolution.

(iii) A public company cannot pass an elective resolution.

A (i) only.

B (ii) only.

C (i) and (iii) only.

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

1.17 Which of the following is a consequence of corporate personality?

(i) The company is fully liable for its own debts.

(ii) A shareholder has limited liability.

(iii) The general rule is that if a wrong has been done to the company, the company alone
is entitled to sue.
A (i) only.

B (i) and (ii) only.

C (ii) and (iii) only.

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

May 2003 7 FBLW

1.18 Which ONE of the following resolutions does not generally have to be filed at Companies House?

A Ordinary.

B Special.

C Extraordinary.

D Elective.

1.19 In relation to the Annual General Meeting (AGM), which ONE of the following is INCORRECT?

A So long as a company holds its first AGM within 18 months of its incorporation, it need not hold it in
the year of its incorporation or in the following year.

B In general, there must not be a gap of more than 15 months between AGMs.

C In general, notice of 21 clear days must be given to the members of the intention to hold an AGM.

D A majority in number of members holding at least 75% of the issued share capital may agree to less
than 21 clear days' notice for an AGM.

1.20 In order for a private company to be able to purchase its own shares out of capital, the directors must
make a statutory declaration containing a statement that, in their opinion, the company will be able to
carry on business as a going concern and will be able to pay its debts as they fall due for a period of

A 6 months.

B 12 months.

C 18 months.

D 24 months.

1.21 Which of the following would be regarded as an issue of shares for an improper purpose?

(i) An issue of shares in return for a non-cash consideration.

(ii) An issue of shares to enable the directors to maintain control of the board.

(iii) An issue of shares to prevent a take-over bid.

A (i) only.

B (i) and (ii) only.

C (ii) and (iii) only.

D (iii) only.

FBLW 8 May 2003

1.22 Which of the following are CORRECT?

(i) A board resolution to borrow money is binding on the company.

(ii) A decision by the managing director to borrow money is binding on the company.

(iii) The shareholders may veto any decision to borrow money by passing an ordinary
resolution.

A (i) only.

B (i) and (ii) only.

C (ii) and (iii) only.

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

1.23 Which of the following are INCORRECT?

(i) The first directors are appointed by a resolution of the members at the company’s first
Annual General Meeting.

(ii) A director is a person who occupies the position of director by whatever name he or
she is called.

(iii) A shadow director is a person in accordance with whose directions or instructions the
directors of the company are accustomed to act.

A (i) only.

B (i) and (ii) only.

C (ii) and (iii) only.

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

1.24 Section 459 of the Companies Act 1985 empowers the court to grant a remedy in the event of a
company’s affairs being conducted in a manner “… unfairly prejudicial to the interests of its
members…”.

Who may petition for an order under this Section?

(i) Any member.

(ii) The holders of at least 10% of the company’s issued share capital.

(iii) The directors.

A (i) only.

B (i) and (ii) only.

C (ii) and (iii) only.

D (iii) only.

May 2003 9 FBLW

1.25 The directors of a company limited by shares owe a duty to have regard to the interests of the
company’s employees in general, as well as the interests of its members.

Who may enforce this duty?

A The company.

B The employees.

C The shareholders.

D The directors.

Total = 50 Marks

End of Section A

FBLW 10 May 2003

SECTION B – 50 MARKS
ANSWER ALL THREE QUESTIONS

Question Two

Edward, who is a self-employed builder, has experienced the following difficulties.

(i) He contracted to build a conservatory for Fiona at a total cost of £15,000. On completion of the job,
however, Fiona refused to pay the amount due, despite the fact that she had no complaints as to the
quality of the workmanship. Instead, Fiona sent a letter to Edward stating that she had decided that
the price was too high and that she was enclosing a cheque for £10,000 “in full and final settlement of
the account”. At first, Edward agreed to accept the amount and cashed the cheque. Later, however,
he changed his mind and decided to commence legal action against Fiona to recover the balance.

(ii) He contracted to carry out some building work for George for £8,000. After approximately half the work
had been completed, Tom, who had worked for Edward for only 8 months, negligently caused some
damage to George’s property. As a result, George refused to allow Edward to complete the work
despite the fact that Tom was instantly dismissed.

(iii) In March 2003, he contracted to build an extension for Henry commencing in December 2003. In
April 2003, Henry advised Edward that he had sold the house and no longer required the extension
to be built.

Do not write in these

columns below

For use
For use by the
Required: Marks by the first second
available marker marker
(a) Delete as appropriate * and complete this sentence:
“At common law, Edward can* /cannot* sue Fiona to recover the
1
balance due of £5,000 because

.” (Maximum of 30 words) 3
(b) Delete as appropriate * and complete this sentence:
“Edward will* /will not* be liable for the damage caused by Tom to
George’s property because 1

.” (Maximum of 30 words) 3
Sub-total: 8

May 2003 11 FBLW

Question Two continued
Do not write in these
columns below

For use
For use by the
Required: Marks by the first second
available marker marker
(c) Delete as appropriate and complete this sentence:
“Edward will* /will not* be entitled to claim compensation from George 1
in respect of the work carried out for him because

3
.” (Maximum of 30 words)
(d) Complete this sentence:
“Tom will have a claim against Edward for 1
(Maximum 1 word) dismissal, but not for
(Maximum 1 word) dismissal because 1

2
.” (Maximum of 20 words)
(e) Delete as appropriate and complete this sentence:
“By cancelling the contract before it was due to be carried out, Henry 1
has acted in (Maximum 1 word) breach of contract.
Edward will* /will not* have to wait until after December 2003 1
before he can sue for breach of contract.

Total for Question Two = 18 Marks

FBLW 12 May 2003

Question Three

Adam, Ben and Chris are the only directors and shareholders in ABC Ltd, each holding 100,000 ordinary
£1 shares. The company is a retailer of computers and has traded very successfully. However, a large
supermarket chain began to sell computers at prices well below those charged by ABC Ltd and, as a result,
sales fell and indebtedness increased.

An emergency board meeting was called on 1 April 2002 to discuss ABC Ltd’s problems. The meeting was
attended by the company’s auditor who advised that insolvency appeared inevitable. The board unanimously
agreed to the following:

(i) The company would continue trading for a further twelve months in the hope that matters would
improve.

(ii) Adam (who had already provided the company with an unsecured loan of £10,000) would lend a
further £20,000, subject to the company providing him with security in the form of a floating charge in
respect of "all money" owed to him by the company.

(iii) Ben would provide the company with an unsecured loan of £15,000 which the company would repay
in full on 1 April 2003.

Unfortunately, matters did not improve and the company continued to suffer financial difficulties. The
company repaid Ben’s loan of £15,000 on 10 January 2003 and the company was placed in insolvent
liquidation on 15 March 2003. At the date of liquidation, Adam was, in fact, owed £35,000 by the company,
as he had made loans of £25,000 following the issue of the floating charge.

Do not write in these

columns below

Required: For use For use

by the by the
Marks first second
available marker marker

(a) Complete this sentence in the shaded area below:

“The directors may be caught by the “wrongful trading” provisions of
the Insolvency Act 1986 because

(Maximum of 30 words) 4
(b) Complete this sentence:
“As a result of the wrongful trading provisions, the directors may be
(Maximum 2 words) for some
of the company’s debts, even though they have been trading on the
company’s behalf.” 2
(c) Complete this sentence:
“Because ABC Ltd has issued a floating charge to a connected
person and gone into insolvent liquidation within the relevant time
limit of months, Adam may rely on the charge for £ , 1 and 2
but must stand as an unsecured creditor for £ ”. 2
Sub-total: 11

May 2003 13 FBLW

 Required: For use For use
by the by the
Marks first second
available marker marker

(d) Complete these sentences:

“The repayment of Ben’s loan is likely to be challenged by the
(Maximum one word) as a “preference”. Because 1
Ben is a , (Maximum 2 words) 2
it will be presumed that the company was influenced by a desire to
prefer him.”

Total for Question Three = 14 Marks

FBLW 14 May 2003

Question Four
Lucy, Mike, Neil and Owen are the only directors and shareholders in LMNO Ltd, each holding 25% of the
company’s issued share capital. The company carries on business as a wholesaler of books.

(i) The board has unanimously decided that a number of amendments need to be made to the
constitution and administration of the company. The Articles of Association are to be amended and the
company is to dispense with the need to hold an AGM.

(ii) The contract of employment of Pat, the Senior Sales Manager of LMNO Ltd, included a provision that
if she left the company she would not compete with it for a period of 12 months from the date of
leaving within the normal area of the company’s operations. Pat left, set up a company called
P (Books) Ltd, and, on behalf of the company, sent advertising materials to all LMNO Ltd customers.

LMNO Ltd owns 15% of the shares in PQR Ltd, which owned a book retailing business. The board of
LMNO Ltd wrote to the auditors of PQR Ltd explaining, in confidence, that LMNO Ltd was considering
making an offer for all the issued share capital of PQR Ltd and would like confirmation, therefore, that the
most recent audit report provided an accurate picture of PQR Ltd’s finances. The auditor replied and
provided the necessary confirmation.
As a result, LMNO Ltd acquired the entire share capital of PQR Ltd. The
board of LMNO Ltd now believes that the audit report was carelessly
prepared and this resulted in PQR Ltd’s assets being overvalued and Do not write in these
LMNO Ltd paying far too much for the company’s shares. columns below

For use
For use by the
Required: Marks by the first second
available marker marker
(a) Complete this sentence:
“In order to alter the Articles of Association, the shareholders need to
1
pass a (Maximum 1 word) or
resolution.” (Maximum 1 word). The resolution must be filed at 1
Companies House within days of the date the resolution was 1
passed.”
(b) Delete as appropriate * and complete these sentences:
“To remove the need to hold an AGM, 1
(Maximum 2 words) resolution must be passed. This type of resolution
must be agreed to by % of the shareholders and the 1

auditor must* /need not* be notified.” 1

(c) Delete as appropriate * and complete these sentences:

“By competing with LMNO Ltd, Pat has acted
(Maximum 4 words) and the 1
company will* /will not* be entitled to obtain
1 and 1
(Maximum 2 words) to prevent further competition.

LMNO Ltd is* / is not* entitled to take action against 1

Pat* / Pat and P (Books) Ltd* because 1

.” (Maximum of 30 words) 3
sub-total: 14

May 2003 15 FBLW

 For use
Required: For use by the
Marks by the first second
available marker marker
(d) Delete as appropriate * and complete this sentence:
“LMNO Ltd will* /will not* be able to sue the auditor of PQR Ltd for
1
compensation because

.” (Maximum of 30 words) 3

Total for Question Four = 18 Marks

End of Question Paper

FBLW 16 May 2003