LA3021 May ZA

LLB
BSc DEGREES WITH LAW
GradDip COMMERCIAL LAW

Company law

Thursday 2 May 2024

You have FOUR HOURS AND 15 MINUTES in which to write your answers.

You must answer FOUR of the following EIGHT questions, including at least
ONE from PART ONE and at least TWO from PART TWO.

You must answer all parts of a question unless otherwise stated.

© University of London 2024

Page 1 of 6
PART ONE

1. ‘There is no requirement for UK companies to appoint any non-executive

directors, and for good reason. Such directors cannot make any positive
contribution to how well a company is run.’

Discuss.

2. Does the “unfair prejudice” regime, found in sections 994 and 996
Companies Act 2006, require reform and, if so, how?

3. ‘Veil piercing has never been an effective way of preventing the abuse
of the limited company. Other areas of company law, such as the
disqualification of directors, or the capital maintenance rules, are much
better ways of preventing such abuse.’

Discuss.

4. ‘One of the great strengths of UK company law is that it ensures that the
interests of shareholders always take priority over the interests of other
stakeholders.’

Discuss.

Page 2 of 6
PART TWO

5. Helga is a builder. She currently runs her business as a sole trader. Her
business has been expanding considerably over recent years, and she
has now decided to incorporate it and run it through a limited liability
company. She has instructed her lawyer to form a company, to be called
Mybuild Ltd.

Helga’s mother, Gloria, is willing to provide some of the capital the

company will need. However, Gloria is unsure whether she should
become a shareholder in Mybuild, or instead make a loan to Mybuild.
Her primary concern is to minimise the risks in her investment.

Two days before Mybuild is incorporated, Helga enters into a contract

with Larry, a landlord, to rent some new premises. She signs the
contract “on behalf of Mybuild Ltd”, having explained to Larry that she is
no longer going to be personally liable for any business contracts.

(a) Explain the advantages and disadvantages for Helga in operating her
business through a limited liability company.

(b) Discuss whether Gloria would be better becoming a shareholder in,

or lending to, Mybuild.

(c) Would Helga face any personal liability to Larry in respect of the
rental contract?

Page 3 of 6
6. Subsid Ltd is a wholly owned subsidiary of Parent plc. Subsid makes
explosives. It has two directors who were both appointed by Parent.
The directors of both Subsid and Parent are aware that Subsid’s safety
standards are very poor, and that Subsid is not following the “group
safety guidelines” that Parent has sent to all its subsidiaries. Despite
this, Parent states on its website, and in much of its marketing material,
that it ensures the highest safety standards are followed by all its
subsidiary companies. In 2023, a large explosion occurred at Subsid’s
factory, badly injuring many workers.

Subsid’s directors know that Subsid is in financial difficulties and may be

unable to pay any compensation that is due to those injured by the
explosion. They have been asked by Parent’s directors to “restructure”
Subsid. This would involve transferring Subsid’s remaining assets to
Parent for much less than their true value in order to put those assets
beyond the reach of Subsid’s creditors.

(a) Advise the directors of Parent whether Parent will be liable to

compensate those injured by the explosion at Subsid’s factory.

(b) Advise the directors of Subsid of the legal consequences of their

transferring Subsid’s assets to Parent.

Page 4 of 6
7. Gravity Ltd has three directors, Ai, Bo and Chen. Esther owns 51% of
the company’s shares. Esther resigned as a director some years ago
but still often tells the directors what decisions they should take. Chen
has not attended any board meetings for over two years.

In July 2023, Gravity purchased another business for £500,000. Esther,

who is a chartered accountant, told the directors that Gravity should
make this purchase. Esther did so having quickly looked at the
business’s accounts to determine its value. A more careful reading of
the accounts would have revealed that the business was worth only
£400,000.

In August 2023, Bo arranged for her house to be renovated by

Renovation Ltd. Renovation carries out a lot of work for Gravity and this
work generates most of Renovation’s profits. Renovation charged Bo a
substantially discounted price for the renovation work to her house.

In September 2023, the directors decided that Gravity would replace all
its petrol-vehicles with electric ones at a cost of £200,000. Although they
knew this change would adversely affect Gravity’s profits, the directors
took this decision because they thought it was the ethically responsible
decision to take.

The cars were purchased from Ecovehicles Ltd, a company wholly

owned by Francis, the spouse of Ai. It now appears that Gravity could
have purchased the same vehicles from another supplier for £50,000
less.

Gravity has recently appointed a number of new directors. The new

directors wish to know whether any action could be taken by Gravity in
relation to the above events.

Advise them.

Page 5 of 6
8. Farmers Ltd was formed in 2015 by Alice. The company owns two
organic farms. Initially, Alice owned all the company’s shares, and was
its only director. Now, Alice owns only 10% of the company’s shares
and she is no longer a director. However, Regulation 54 of Farmers’
articles provides that any transaction exceeding £200,000 must be
approved by Alice.

In April 2024, Farmers’ directors decide to sell one of the company’s two
farms to Machohomes plc, a house-building company, for £2 million.
Alice objects strongly. Despite that, the directors enter into a contract to
sell the farm to Machohomes. Immediately thereafter, Farmers’
directors call a shareholders’ meeting, which narrowly votes to ratify any
breach of duty by the directors. Those directors who own shares in
Farmers attend that meeting and vote in favour of the ratification. The
sale of the farm to Machohomes is due to be completed in two months-
time.

Advise Alice:

(a) if she can take any steps to enforce Regulation 54 in the company’s
articles and prevent the sale of the farm; and

(b) assuming that she cannot take any steps to prevent the sale of the
farm, if she can bring a derivative claim against the directors for
failing to follow the company’s constitution, and whether she will be
likely to be given permission to continue such a claim.

END OF PAPER

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