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ULAW - LAW OF ORGANISATIONS QUESTIONS AND ANSWERS WITH SOLUTIONS 2024
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ULAW - LAW OF ORGANISATIONS QUESTIONS AND ANSWERS WITH SOLUTIONS 2024
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ULAW - LAW OF ORGANISATIONS QUESTIONS ANDANSWERS WITH SOLUTIONS 2024
Two years ago, Aadi had set up in business as a sole trader. He invested all of his savings of £10,000 in th
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e business. Recently the business has struggled financially, and a major supplier is owed £18,000. Aadi re
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alises that he will have to sell the business and calculates that if all of its assets were sold, they would re
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alise £8,000. Aadi himself owns a car worth £5,000. He owns a flat which, if sold, will raise £50,000 once
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the mortgage is paid off. He has no other substantial assets. The business has no other debts.
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Which of the following statements best reflects the position of the supplier in relation to the debt?
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1. The supplier would only be able to recover £8,000, which is the amount that would be realised from t
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he sale of the assets of the business.
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2. The supplier would be able to recover £10,000, as Aadi would be personally liable for the amount that
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he originally invested in the business.
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3. The suppl - ANSWER D -
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UThat is correct. A sole trader has unlimited liability for the debts of the business. If the business fails and
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Ucannot pay the full amount of the debt, as here, he will have to meet the debts with his own property, i
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ncluding his home. If he cannot do so he may be declared bankrupt. Here, Aadi seems to have enough as
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sets and can therefore pay the full amount of the debt. Note that the facts state that Aadi has used all of
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Uhis savings for the business and it appears that his only assets are the car and the flat.
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This makes A-C wrong.
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Assume for the purposes of this question that Aadi set up the business in partnership with Liam. Each of
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them invested their savings (£5,000 each) in the business. Acting within his authority, Liam entered into
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a major supply contract, but following some difficult times, the business has been unable to pay the deb
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t, and the supplier is owed £18,000. The partners realise that the assets of the business will have to be s
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old. Again, the sale would realise £8,000. Aadi has substantial personal assets, including a house and a c
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ar. Liam has no substantial assets of his own. The firm has no other debts.
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Which of the following statements best reflects the position of the supplier in relation to the debt?
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1. The supplier would only be able to recover £4,000 from Aadi personally, as this is the amount of his sh
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are of the business.
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2. The supplier would be able to recover £5,000 from Aadi, as although he is personally liable -
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UANSWER The correct answer is C. Partners have unlimited liability and are jointly (and severally) liable fo
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r the debts of the business. This means that a creditor can choose to sue any or all of the partners, so he
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,Ucould sue either Aadi or Liam for the whole amount of the debt. On the facts, Liam has no funds, so the
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re would not be much point pursuing him, but the supplier could sue Aadi, who has 'substantial assets' f
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or the full £18,000.
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As the business appears to have failed and does not have enough money to pay the debt, Aadi will have
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to pay the balance from the sale of his own property, including his home. This makes A and B wrong. D is
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Uwrong as partners are jointly and severally liable, regardless of who concluded the contract.
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Assume for the purposes of this question that Aadi, Liam and Jess set up a private limited company. Aadi
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was issued with 10,000 shares and Liam was issued with 5,000 shares. Aadi paid for his shares in full (£1
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0,000) but Liam only paid £2,500, agreeing to pay the balance of £2,500 in two years' time. Aadi and Lia
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m are the directors of the company together with Jess, who is not a shareholder.
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Acting within her authority, Jess entered into a major supply contract, which has turned out to be a very
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poor deal and following some difficult times, the company has been unable to pay the supplier, who is o
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wed £18,000. The directors realise that the business will have to be sold. Again, the sale would realise £8
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,000. Both Aadi and Jess have substantial personal assets, including in both cases, a house and a car. Lia
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m has no substantial assets of his own. The company has no other debts.
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Which of the following statements best -
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UANSWER The correct answer is B. As a company is a separate and distinct legal personality, it is liable for
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Uits own debts. The shareholders are only liable up to the amount that they have agreed to invest in the
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company. Only if the shareholder has not paid the full amount that he has agreed to invest, i.e. some of
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the amount of the shares remains unpaid, can a shareholder be asked to contribute but only up to the u
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npaid amount on the shares. Liam can therefore be asked to contribute a further £2,500 which will be p
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aid to the company and which could go towards paying the debt, but the supplier cannot directly recove
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r the £2,500 from Liam This makes B correct and A wrong.
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This is regardless of whether or not they own a majority of the shares and/or have control of the compa
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ny (see Salomon v A Salomon & Co Ltd) . If the company fails, as here, the shares become worthless. If a
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shareholder has paid in full for his shares, then he cannot be asked to pay any more, so D is wrong.
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A company has contractual capacity in its own right, so it is irrelevant that Jess concluded the contract. T
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he contract is between the supplier and the company -
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Ua director who has entered into a poor deal will not be personally liable either to the creditor or the sha
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reholders, so C is wrong. U U U U
,Assume for the purposes of this question that Aadi set up a private limited company on his own three ye
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ars ago. Aadi was issued with 10,000 shares, which he paid for in full. Aadi is the sole shareholder and di
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rector of the company. U U U
Recently the company has struggled financially. It has an overdraft of £20,000. When the company agree
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d the overdraft facility with the bank two years ago, the bank asked for a personal guarantee from Aadi f
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or the amount of the overdraft. Aadi signed a written guarantee agreement with the bank, agreeing to b
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e personally liable for all amounts owed to the bank in the event that the company fails to pay. The com
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pany is insolvent and has no assets with which to pay its creditors .
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Is the following statement TRUE or FALSE?
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As Aadi is a shareholder in the company, he will not be liable for the £20,000 owed to the bank.
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1. True U
2. False - ANSWER B -
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UFalse. Generally, it is the company, as a separate legal entity which is responsible for its own debts. The
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shareholders are protected by the concept of limited liability. In addition, the directors, although they ac
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t as the agents of the company in entering into contracts, e.g. as here, an overdraft agreement, are not p
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ersonally responsible for those debts. U U U U
If you have ever rented a property, you may be familiar with guarantees, in that your landlord might hav
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e asked your parents to guarantee that they would pay your rent if you fail to do so. In a corporate conte
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xt, (particularly with smaller companies, where the directors are usually the shareholders), banks and ot
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her financial institutions will often ask for a personal guarantee from a director.
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The concept of separate legal personality has not been ignored -
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it is still the company that is liable for the debt, but Aadi has agreed to pay up under a separate agreem
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ent if the company defaults. The rule effectively has been circumvented.
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Question 1 U
Which one of the following law firms is an unincorporated business entity?
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1. The City firm, Slaughter and May.
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2. The City firm, Linklaters LLP
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, 3. The Leeds based firm, Clarion Solicitors Limited
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4. The national group of solicitors' firms, Gateley plc
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5. The Cambridgeshire based firm, Copleys Solictitors LLP - ANSWER A -
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Slaughter and May is not a separate legal entity. It is a partnership, an unincorporated business entity. Y
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ou will note that size is not relevant. Slaughter and May is an international firm with over 100 partners a
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nd has never been incorporated as either a limited liability partnership or a company.
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The other options are wrong. These all refer to separate legal entities, or 'legal persons', which you can t
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ell from their names: Linklaters LLP is a limited liability partnership, Clarion Solicitors Limited is a private
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limited company, and Gateley plc is a public limited company. The comparatively small Cambridgeshire fi
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rm, Copleys Solicitors LLP, with only four members, has been incorporated as a limited liability partnershi
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p.
[Note that here we have referred generically to 'law firms' and 'firm'. s.4 of the Partnership Act 1890 pro
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vides that the persons who have entered into business in partnership are collectively called a 'firm' (The
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word 'firm' describes in the singular what is, in fact, the partners in the plural.). The partners of Slaughte
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r and May can therefore be described as a 'firm'. The others are not technically 'firms' in the strict legal s
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ense but will often be described as such.]
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Which of the following statements best explains the concept of limited liability?
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1. A validly incorporated company has its own separate legal personality.
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2. A validly incorporated company is not liable for its own debts.
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3. The shareholders of a validly incorporated company will be liable for the debts of the business but onl
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y to the extent of their investment in the company.
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4. The directors of a validly incorporated company will not be liable for the debts of the company.
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5. A creditor of a validly incorporated company can choose to sue any or all of the shareholders of the co
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mpany. - U
UANSWER C. An incorporated business has its own separate legal personality. As a separate legal person,
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an incorporated business is responsible for its own debts. If the company fails, the members lose the mo
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ney which they have invested in the company, but no more. However, limited liability does not mean tha
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t shareholders never have to pay anything -
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Uthey are still liable up to the amount which they have agreed to invest in the company. This is known as
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limited liability. (Added to notes)
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Option A is wrong. Legal personality is not the same as limited liability -
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limited liability is a consequence of separate legal personality.
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