Law of Business Organisations Quiz
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Questions and Answers

What distinguishes a sole trader from a partnership?

  • A partnership does not require agreement among its members.
  • A sole trader is owned and operated by an individual. (correct)
  • A sole trader operates under a partnership agreement.
  • A partnership has a corporate personality recognized by law.

What is the main statute governing partnerships?

  • Partnership Act 1890 (correct)
  • Companies Act 2006
  • Trade Partnership Act 1985
  • Business Laws Act 1970

How can a partnership be created?

  • Only through a written agreement.
  • By express or implied agreement of the partners. (correct)
  • Automatically when two people conduct business together.
  • Through an application with the state government.

Which of the following statements about partners in a partnership is TRUE?

<p>All partners must share management unless stated otherwise. (D)</p> Signup and view all the answers

What is a key characteristic of a company?

<p>It is operated by a board of directors. (C)</p> Signup and view all the answers

What does S.1 of the Partnership Act 1890 describe?

<p>The relationship in a partnership. (A)</p> Signup and view all the answers

Which of the following is NOT included in a typical partnership agreement?

<p>Individual salaries for partners (C)</p> Signup and view all the answers

What is the implication of partnership being not separate from its members?

<p>Partners are personally liable for the firm's debts. (D)</p> Signup and view all the answers

What happens to a partnership upon the death of a member?

<p>It dissolves. (B)</p> Signup and view all the answers

Which of the following statements is true regarding company shares compared to partnership holdings?

<p>Company shares transfer requires collaboration based on the articles of association. (A), Partnership holdings require the consent of all partners for transfer. (B)</p> Signup and view all the answers

What does limited liability imply for members of a limited company?

<p>Members only pay up to their unpaid shares or guaranteed amounts. (C)</p> Signup and view all the answers

What distinguishes holding companies from subsidiaries?

<p>Holding companies own more than 50% equity share capital in subsidiaries. (A)</p> Signup and view all the answers

Which type of company is formed through a royal charter?

<p>Chartered Company (C)</p> Signup and view all the answers

What is a key feature of an unlimited company?

<p>Members are liable to pay company debts directly. (B)</p> Signup and view all the answers

How do partners in a partnership differ from members of a company in terms of agency?

<p>Partners act as agents of the partnership and can bind it. (C)</p> Signup and view all the answers

Which type of company is specifically incorporated through legislation?

<p>Statutory Company (D)</p> Signup and view all the answers

What is the primary legal characteristic of a partnership regarding the actions of its partners?

<p>Each partner acts as an individual agent of the partnership. (D)</p> Signup and view all the answers

Which of the following statements about partnership liability is correct?

<p>At least one general partner must assume unlimited liability for debts. (A)</p> Signup and view all the answers

What distinguishes a company from a partnership?

<p>A company has a separate legal personality, while a partnership does not. (B)</p> Signup and view all the answers

What is the role of incorporation in setting up a company?

<p>It refers to the meeting where first directors are appointed. (D)</p> Signup and view all the answers

Which directive is associated with the abolition of the ultra vires rule?

<p>First Directive (C)</p> Signup and view all the answers

What does perpetual succession mean in the context of a company?

<p>The company continues to exist despite changes in membership. (C)</p> Signup and view all the answers

What is meant by 'off the shelf' companies?

<p>Ready-made companies that can be purchased for immediate use. (C)</p> Signup and view all the answers

What legal consequence does a company have by having a separate legal personality?

<p>It can sue or be sued in its own name. (A)</p> Signup and view all the answers

What is a primary characteristic of a private company regarding capital raising?

<p>It can only raise capital from founders and individual introductions. (D)</p> Signup and view all the answers

What fundamental principle of Company Law is established in Salomon v Salomon & Co Ltd?

<p>A company has a separate legal identity from its owners. (C)</p> Signup and view all the answers

In Foss v Harbottle, who is recognized as the proper plaintiff in actions concerning company property?

<p>The company itself. (B)</p> Signup and view all the answers

What does the term 'lifting the veil of incorporation' refer to?

<p>Examining the true nature of the company and its activities. (D)</p> Signup and view all the answers

Which case demonstrated that liabilities are borne by the company and not its individual members?

<p>Macaura v N Assurance Ltd (C)</p> Signup and view all the answers

What is typically targeted by statutory intervention in Company Law?

<p>Directors of the company for malpractice. (A)</p> Signup and view all the answers

What common misconception does the Salomon principle address regarding company liability?

<p>Companies and their shareholders are the same entity. (B)</p> Signup and view all the answers

Which of these cases exemplifies the application of the Salomon principle in modern law?

<p>Barings Plc v Coopers &amp; Lybrand (B)</p> Signup and view all the answers

Under what condition may a surviving member of a company become personally liable for debts incurred?

<p>If the company conducts business for more than six months with fewer than two members (A)</p> Signup and view all the answers

What kind of liability does a company officer incur if they misrepresent the company on official documents?

<p>They are personally liable for any losses unless the company agrees to cover them (D)</p> Signup and view all the answers

What distinguishes wrongful trading from fraudulent trading?

<p>Wrongful trading involves knowing the company cannot pay its debts; fraudulent trading involves deceitful intent (A)</p> Signup and view all the answers

Which article of the Insolvency (NI) Order 1989 relates to fraudulent trading?

<p>Art. 177 (B)</p> Signup and view all the answers

What is the primary purpose of lifting the corporate veil in specific cases?

<p>To ensure that creditors can recover debts incurred by the company (A)</p> Signup and view all the answers

What principle do the courts uphold regarding a company's legal status?

<p>The company is considered a separate legal entity from its members and management (B)</p> Signup and view all the answers

In what scenario do courts exhibit a more pronounced effect than statutory measures regarding corporate veil dislodgment?

<p>In instances of fraud or fraudulent intentions in company formation (B)</p> Signup and view all the answers

Which factors contribute to a judicial determination to lift a company's corporate veil?

<p>Fraudulent motives behind the incorporation and misrepresentation (C)</p> Signup and view all the answers

What was the primary reason the court lifted the veil in Jones v Lipman?

<p>To prevent the party from escaping a legal obligation. (C)</p> Signup and view all the answers

In the case of Gilford Motor Co Ltd v Horne, what did the court perceive the company to be?

<p>A facade to disguise actual intentions. (A)</p> Signup and view all the answers

What conclusion did the courts reach regarding the use of corporate structures in Adams?

<p>It can be a legitimate means for a holding company to diminish liability. (C)</p> Signup and view all the answers

How did the lower courts reason in the Salomon case regarding limited liability?

<p>Desiring limited liability does not imply fraudulent intent. (A)</p> Signup and view all the answers

What notably guides courts when determining the status of a group of companies without statutory principles?

<p>The Smith Stone &amp; Knight guidelines. (A)</p> Signup and view all the answers

What was the court's perspective on a company's use of its corporate entity to manipulate legal obligations?

<p>It can be viewed as a legitimate business practice. (D)</p> Signup and view all the answers

In terms of lifting the veil, what principle did the courts observe in the context of fraudulent schemes in Salomon?

<p>Fraud must be clearly evidenced for the veil to be lifted. (D)</p> Signup and view all the answers

What is a potential consequence when the veil is lifted from a corporate entity?

<p>Innocent shareholders may be held liable. (D)</p> Signup and view all the answers

Flashcards

Sole Trader

A business owned and operated by one person.

Partnership

A business owned and operated by multiple partners under a partnership agreement, with a view to profit.

Partnership agreement

A document outlining terms like commencement, duration, capital, profit sharing, and dissolution of a partnership.

Partnership Act 1890

The main law governing partnerships in the United Kingdom.

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Corporate Personality

The legal concept that a company is treated as a separate legal entity from its owners.

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Company

A commercial enterprise with a separate legal personality; owned by shareholders and operated by management according to a constitution and company law.

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Partnership Liability

Partners are individually responsible for the partnership's obligations, acting as agents for the firm.

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Partnership Dissolution

The ending of a partnership, with terms outlined within the agreement between the partners.

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Company Formation

Companies are created by incorporation and registration under specific legislation (e.g., Companies Act 2006).

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Company Incorporation

The first meeting of company subscribers where directors are appointed and the company seal is established.

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Company Registration

The legal process where a newly incorporated company is officially recognized under company law.

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"Off-the-Shelf" Companies

Pre-incorporated companies available for purchase, streamlining the establishment process.

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Company vs. Partnership

Companies have a separate legal identity and perpetual existence; partnerships do not.

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Separate Legal Personality

A company exists independently from its owners (shareholders).

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Perpetual Succession

A company continues to exist even if owners change.

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Private Company

A company that can only raise capital from founders and those they introduce individually. They cannot advertise for investors.

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Legal Personality of a Company

A company is considered a separate legal entity, meaning it is recognized as an independent person in law, distinct from its owners.

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Salomon v Salomon & Co Ltd

Established the principle of separate legal personality. A company is a distinct legal entity even if one person owns most of its shares.

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Consequences of Legal Personality

All rights and liabilities of a company belong to the company itself, not to its individual members.

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Foss v Harbottle

The company should be the plaintiff in legal actions related to company property or interests.

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Minority Protection

Rules designed to protect minority shareholders from being exploited by the majority.

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Lifting the Veil of Incorporation

In some cases, courts can disregard the separate legal personality of a company to prevent it from being used to avoid legal obligations.

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Statutory Intervention

Laws that penalize company directors for malpractice, even if the company itself is separate.

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Partnership vs. Company Liability

Partners are personally liable for partnership debts, while company members' liability is limited to their investment or guarantee.

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Company Share Transferability

Company shares can be transferred freely according to company rules, but partners need all other partners' consent to transfer their partnership ownership.

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Company Agent Authority

Company members do not have automatic authority to bind the company, unlike partners in a partnership. Partners have implied authority to act on the partnership's behalf.

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Limited Liability

In the case of a company's liquidation, shareholders' liability for company debts is restricted to the amount they haven't paid for their shares or their guarantee for the company.

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Incorporation Methods

Companies can be incorporated by royal charter, legislation, or registration under specific acts (e.g., Building Societies Act).

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Holding/Subsidiary Companies

A holding company owns a controlling stake (more than 50%) of a subsidiary company.

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Companies vs Partnerships

A company is a separate legal entity from its owners (shareholders), while a partnership is not distinct from its members. This impacts liability, transferability of ownership, and agency.

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Multinational Company

A company conducting business in multiple countries.

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Corporate Veil

The legal principle separating a company's liability from its owners' personal liability. It protects shareholders from personal responsibility for company debts.

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Dislodged Corporate Veil

Circumstances where the court ignores the company's separate legal personality and holds its owners personally liable for its debts.

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When is corporate veil dislodged?

Examples include:
• Company with less than 2 members for over 6 months
• Misrepresentation of the company by an officer
• Fraudulent or wrongful trading

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Fraudulent Trading

When a company director deliberately obtains money knowing the company cannot repay its debts.

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Wrongful Trading

When company directors continue operations despite knowing there's no reasonable chance of avoiding liquidation and failing to minimize losses for creditors.

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Judicial Intervention

Courts can dislodge the corporate veil in situations not explicitly covered by law, often based on principles of fairness and preventing fraud.

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Fraudulent Incorporation

When a company is set up with the sole purpose of avoiding existing obligations or committing fraud.

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Case Law Exceptions

Judicial decisions creating exceptions to the corporate veil principle are more impactful than statutory ones because they establish new precedents.

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Piercing the Corporate Veil

A legal doctrine where a court ignores the separate legal personality of a company, holding its shareholders or directors personally liable for its debts or obligations.

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Gilford Motor Co Ltd v Horne

Case demonstrating the lifting of the corporate veil when a company was used as a sham to avoid contractual obligations.

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Jones v Lipman

Court used the veil-piercing doctrine to prevent a defendant from using a newly formed company to avoid a court order.

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Adams v Cape Industries Plc

Decision allowing manipulation of group structure for liability avoidance, highlighting the potential for corporate misuse.

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Smith Stone & Knight Ltd v Birmingham Corporation

Guidelines for determining if a group of companies should be treated as a single entity, based on factors like central management and control.

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Group Structures for Liability Avoidance

Companies can use complex group structures with subsidiaries to legally minimize their liability, but this practice can be controversial.

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Study Notes

The Law of Business Organisations and Corporate Personality

  • Three types of business: sole trader, partnership, and company
  • Sole trader: business owned and operated by one individual
  • Partnership: business owned and operated by partners, governed by a partnership agreement
  • Partnership Act 1890: defines a partnership as a relationship where persons carry on business in common, with a view to profit.
    • Partnership agreement: essential for outlining partnership terms (e.g., commencement date, duration, partner responsibilities, profit sharing, liabilities of dissolution, etc)
  • Partnership is not separate from its members: partners own the firm's property, rights, and liabilities
  • Partners cannot transfer their stakes without all partners' consent
  • All partners have the right to manage the firm, unless the agreement specifies otherwise (S.24 of Partnership Act 1890)
  • Partnerships are bound by actions of any partner (S.5 of Partnership Act 1890)
  • Partnership liability for debts is usually unlimited unless stated otherwise in the agreement.
  • There is at least one general partner accountable to creditors.

Companies

  • Companies are commercial enterprises recognized by law, owned by shareholders, and operated by management
  • Companies are subject to various legislative provisions (e.g., Companies (NI) Order 1986, Business Names (NI) Order 1986, Criminal Justice Act 1993, Companies Consolidation (Consequential Provisions) (NI) Order 1986, Insolvency (NI) Order 1989, etc.).
  • Companies Act 2006: governs the creation and administration of companies
    • Incorporation: first meeting of members to form a company's structure (first appointment of directors and seal)
    • Registration: company legal recognition, a procedure to formally create the company under company law.
    • Companies can be registered "off the shelf": companies ready made available for purchase by new businesses.

Distinguishing Company and Partnership

  • Companies are legally separate from their members
  • A company's personality is separate from its members: it can sue and be sued, and can continue on the death of a member
  • Shares in a company are readily transferable.
  • Company members are not individually liable (i.e., limited liability) for the company's debts, unless the company is not a limited by guarantee type. If companies debts exceed the capital paid by members in a company limited by shares, the firm's liability is limited to the amount unpaid on the shares or the amount they have guaranteed.
  • Partnerships have no legal personality separate from their members; partnerships end upon the death of a partner.
  • Limited liability companies: members' personal liability in the event of liquidation is limited to amounts not already paid on shares.

Types of Company

  • Chartered companies: created not through registration but through royal charter.
  • Statutory companies: created by legislation.
  • Companies by registration: e.g., building societies.

Limited Liability Companies

  • Limited liability: limits members’ liability for debts to the amounts contributed (or guaranteed).
  • Limited by shares: members' liability is limited to the amount unpaid on their shares.
  • Limited by guarantee: liability is restricted to a guaranteed sum.

Public and Private Companies

  • Public companies must have at least £50,000 authorized capital
  • Private companies can have more or less than this
  • Public companies can raise capital more easily from the public, but their accounts are more rigorously policed compared to private companies.

Lifting the Veil of Incorporation

  • Statutory intervention: company law aimed at individual directors in malpractice cases.
  • Judicial intervention: lifting the veil of incorporation due to fraud or improper use of legal personality.
  • Cases: Salomon v Salomon & Co Ltd, Macaura v N Assurance, Gilford Motor Co Ltd v Horne, Jones v Lipman.

Groups of Companies

  • Companies that are closely linked usually have some common parent/holding company entity.

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Week 1 Handout - LAW559 Company Law PDF

Description

Test your knowledge on the different types of business organisations, including sole traders, partnerships, and companies. Dive into the specifics of the Partnership Act 1890 and crucial terms like partnership agreements and partner liabilities. This quiz will assess your understanding of business law concepts and principles.

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