ACCA - Association of Chartered Certified Accountants Business and Corporate Law Questions and Answers — Questions and Answers
Question 1: An agent, appointed by a company to purchase raw materials, frequently buys from a specific supplier and always pays on time. The company later instructs the agent not to exceed a certain credit limit with this supplier, but this instruction is not communicated to the supplier. The agent then places an order that exceeds this new internal limit. The supplier, unaware of the new restriction, provides the goods. Which type of authority did the agent have that would bind the company to the contract with the supplier?
- Express authority
- Implied authority
- Apparent (or ostensible) authority (Correct answer)
- Authority by ratification
Correct answer: Apparent (or ostensible) authority
Apparent (or ostensible) authority arises when a principal's conduct leads a third party to reasonably believe that an agent has authority to act on the principal's behalf, even if the agent does not have actual authority. In this scenario, the company's previous course of dealing (allowing the agent to purchase and paying on time) created a representation to the supplier that the agent had the authority to make such contracts. The internal restriction was not communicated, so the supplier was entitled to rely on the agent's apparent authority.
Question 2: Which of the following scenarios would most likely persuade a UK court to 'lift the corporate veil'?
- A sole director and shareholder of a company causes it to become insolvent through poor business decisions.
- A parent company forms a subsidiary in another country to take advantage of lower tax rates.
- A director, subject to a restrictive covenant from a previous employment contract, forms a new company to carry on the same business and breaches the covenant. (Correct answer)
- A group of companies is structured as a single economic unit for operational efficiency.
Correct answer: A director, subject to a restrictive covenant from a previous employment contract, forms a new company to carry on the same business and breaches the covenant.
The corporate veil is lifted only in exceptional circumstances, typically when the corporate structure is used as a 'façade' or 'sham' to evade a pre-existing legal obligation or to commit fraud. Setting up a company specifically to circumvent a personal legal duty, such as a restrictive covenant, is a classic example where the court may disregard the separate legal personality of the company to hold the individual accountable, as seen in cases like *Gilford Motor Co Ltd v Horne*.
Question 3: An employee with three years of continuous service is dismissed with full notice pay as stipulated in their contract. However, the dismissal was for a reason that was not one of the five potentially fair reasons for dismissal under the Employment Rights Act 1996, and no formal disciplinary procedure was followed. Which type of claim is the employee most likely to succeed with?
- Wrongful dismissal
- Unfair dismissal (Correct answer)
- Breach of statutory duty
- Constructive dismissal
Correct answer: Unfair dismissal
Unfair dismissal is a statutory claim based on the reason for the dismissal and the procedure followed by the employer. To be eligible, an employee generally needs two years of service. Since the dismissal was not for a potentially fair reason and a fair procedure was not followed, a claim for unfair dismissal is likely. A wrongful dismissal claim, which concerns a breach of contract (e.g., failure to give proper notice), would fail because the employee received their full contractual notice pay.
Question 4: According to the Companies Act 2006, which of the following is a general duty owed by a director to the company?
- A duty to guarantee the profitability of the company.
- A duty to prioritise the interests of the company's employees above all other stakeholders.
- A duty to exercise independent judgment. (Correct answer)
- A duty to personally disclose the company's financial accounts to the public.
Correct answer: A duty to exercise independent judgment.
The Companies Act 2006 codifies the general duties of directors. Section 173 specifically states that a director of a company must exercise independent judgment. While directors must consider employee interests as part of their duty to promote the company's success (s172), this does not mean prioritising them above all others. There is no duty to guarantee profitability, and the disclosure of accounts is a duty of the company, not a personal duty of the director in this manner.
Question 5: For a simple contract to be legally binding under English law, which of the following elements is NOT required?
- The contract must be in writing. (Correct answer)
- There must be consideration.
- There must be an intention to create legal relations.
- There must be offer and acceptance.
Correct answer: The contract must be in writing.
The essential elements for a legally binding simple contract are: offer, acceptance, consideration, and an intention to create legal relations. While it is often advisable for contracts to be in writing for clarity and evidence, it is not a general requirement for a simple contract to be valid. Many simple contracts can be formed orally or by conduct. Certain specific types of contracts, like those for the sale of land, do require writing, but this is not a universal rule.
Question 6: In a compulsory liquidation of an insolvent company in the UK, which of the following creditors will be paid LAST from the proceeds of the company's assets?
- Preferential creditors (e.g., certain employee wage arrears).
- Secured creditors with a floating charge.
- Shareholders. (Correct answer)
- Unsecured creditors (e.g., trade suppliers).
Correct answer: Shareholders.
The Insolvency Act 1986 sets out a strict hierarchy for the distribution of assets in a liquidation. After secured creditors, the costs of the liquidation, and preferential and unsecured creditors are paid, any remaining funds are distributed to the shareholders. As they are the owners of the company and took the ultimate risk, they are last in line and often receive nothing in an insolvent liquidation.
ACCA - Association of Chartered Certified Accountants Business and Corporate Law Questions and Answers
An agent, appointed by a company to purchase raw materials, frequently buys from a specific supplier and always pays on time.
The company later instructs the agent not to exceed a certain credit limit with this supplier, but this instruction is not communicated to the supplier.
The agent then places an order that exceeds this new internal limit.
The supplier, unaware of the new restriction, provides the goods.
Which type of authority did the agent have that would bind the company to the contract with the supplier?