ACCA LW Formation and constitution of business organisations: practice questions with answers

Question 1

Which case established that a properly formed company is a legal person separate from its members, even where one person holds almost all of its shares?

1. A Gilford Motor Co Ltd v Horne
2. B Kelner v Baxter
3. C Erlanger v New Sombrero Phosphate Co
4. D Salomon v Salomon & Co Ltd

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Answer: D. In Salomon v Salomon & Co Ltd the court held that a company validly incorporated is a legal person distinct from its members, even where one person owns almost all the shares and controls the business. The company's debts are its own, and the members' liability is limited to any amount unpaid on their shares. This is often described as the 'veil of incorporation'.

Question 2

In agency law, apparent (ostensible) authority arises where:

1. A The principal expressly instructs the agent to make a particular contract on its behalf
2. B The principal represents to a third party that the agent has authority, and the third party relies on it
3. C The agent tells the third party that it has the principal's authority to make the contract
4. D An emergency makes it necessary for the agent to act to protect the principal's property

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Answer: B. Apparent (or ostensible) authority arises by estoppel: where the principal, by words or conduct, represents to a third party that a person has authority to act on its behalf, and the third party relies on this, the principal cannot later deny that authority. The representation must come from the principal, not the agent. It is distinct from actual authority (express or implied, given by the principal to the agent) and from agency of necessity.

Question 3

What is the purpose of the confirmation statement that a company must deliver to the registrar of companies?

1. A To file the company's audited annual financial statements with the registrar
2. B To confirm that the company's members have approved the directors' remuneration for the year
3. C To confirm, at least once every 12 months, that the information the registrar holds about the company is up to date, or to notify any changes
4. D To confirm that the company is able to pay its debts as they fall due over the next 12 months

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Answer: C. Every company must deliver a confirmation statement to the registrar at least once in every 12-month period. In it the company confirms that the information on the public register (for example its registered office, officers, share capital, shareholders and people with significant control) is correct, or notifies any changes. It replaced the former annual return. It is separate from the filing of annual accounts.

Question 4

Which of the following is required before a person can act as an agent of necessity on behalf of another?

1. A It must be impossible, or not practicable, for the agent to obtain the principal's instructions before acting
2. B The principal must ratify the agent's action, with full knowledge of the facts, within a reasonable time
3. C There must be a written agreement between the principal and the agent that covers emergencies
4. D The agent must be paid a commission or other reward for taking action on the principal's behalf

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Answer: A. Agency of necessity is created by operation of law. It usually arises where a person is already in control of another's property and an emergency requires action. The usual requirements are:

- a genuine emergency making action necessary (for example, perishable goods that will be lost unless sold);
- it is impossible or impracticable to obtain the principal's instructions;
- the agent acts in good faith in the interests of the principal, and reasonably.

It does not depend on ratification, on any written agreement or on the agent being paid. With modern communications it is rarely established, because the principal can usually be contacted.

Question 5

Teodor holds all of the shares in Rillton Co and is its sole director. Rillton Co owns a warehouse, which Teodor insured against fire in his own name and at his own expense. The warehouse has been destroyed by fire. Can Teodor claim on the insurance policy?

1. A Yes, because as the only shareholder and director Teodor is in substance the owner of all the property of Rillton Co
2. B Yes, because Teodor paid the premiums personally, and the insurer accepted the risk knowing who owned the warehouse
3. C No, because only a director other than the sole shareholder may insure the company's property on its behalf
4. D No, because the warehouse belongs to Rillton Co, a separate legal person, and Teodor as a shareholder has no insurable interest in it

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Answer: D. Once incorporated, a company is a separate legal person, distinct from its members (Salomon v Salomon & Co Ltd). One consequence is that the company owns its property. A shareholder, even one who holds every share, owns only his shares, not the company's assets. In Macaura v Northern Assurance Co (1925), a sole shareholder who insured the company's timber in his own name could not recover when it was destroyed, because he had no insurable interest in it. Teodor is in the same position: Rillton Co should have insured the warehouse in its own name.

Question 6

Ferrow Co was registered as a private company limited by shares without delivering any articles of association of its own to the registrar. Which statement describes the company's articles?

1. A The relevant model articles apply to the company as its articles, as if it had adopted them
2. B The company cannot be registered until its members have delivered articles of their own
3. C The company has no articles, so all matters must be decided by the members in general meeting
4. D The articles of the company that the members choose as their model will apply until changed

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Answer: A. A company's articles of association are its main constitutional document, forming a contract between the company and its members. The law prescribes model articles for different types of company. If a company limited by shares is registered without articles of its own, or with articles that do not exclude or modify the model articles, the relevant model articles apply to it as if they had been registered. A company may later alter its articles by special resolution.