Company Law Exam with Answers

Topics: Corporation, Security interest, Floating charge Pages: 5 (1896 words) Published: July 11, 2013
QUESTION 1 a. Define a promoter of a company. Explain and illustrate with decided cases his legal position in relation to a company. Though the certificate of incorporation is conclusive for purposes of incorporation, using decided cases, outline circumstances under which it could be withdrawn.(10marks) ANSWER Definition; A promoter is one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary step to accomplish that purpose - A promoter is not an agent of the company he promotes, as it does not exist yet. At common law, he cannot be an agent of a non-existent principle. - A promoter is not a trustee of the company in formation as it does not exist yet. - The English courts have held that he stands in a fiduciary relationship to the company he promotes. Erlanger v New Sombrero Phosphate Co. Ltd. Lord Cairns stated, “they stand in my opinion in a fiduciary position they have in their hands the molding and creation of a company” - Exceptions to the rule in Salomon v Salomon constitute what is called “lifting of the veil” of incorporation. The decision in Salomon v Salomon established that when a registered company is incorporated it becomes a legal person distinct and separate from its members and managers. As a general rule the law does not go behind the veil to the individual members. However, in exceptional circumstances the law ignores the separate legal personality of the company in favor of the realities behind its face. a. Reduction of number of members b. Non-publication/Mis-description of a company’s name – in Penrose v Martyr c. Group accounts d. Investigating e. Investigating of company’s affairs f. Investigation of company’s membership g. Take over bids h. Fraudulent trading

b. Discuss the doctrine of ultra vires with regard to the objects of a company and state the effect of an ultra vires transaction. (5mks) - The doctrine of ultra vires is a legal rule that was articulated by the house of Lords in the case of Ashbury Railway Carriage and Iron Co. Ltd. v Riche to the effect that, where a contract made by a company is beyond the objects of the company as written in the company’s Memorandum of Association, it is beyond the powers of the company to make the contract. - Such a contract is void, illegal and unenforceable. QUESTION 2 a. Describe the nature of floating charge. How does it differ from a fixed charge? When does a floating charge become fixed? (8mks). ANSWER - Floating charge is a charge that covers over all the assets of a company. It is a particular type of security, available only to companies. It is an equitable charge on (usually) all the company's assets both present and future, on terms that the company may deal with the assets in the ordinary course of business. Very occasionally the charge is over just a class of the company's assets, such as its stock. - A fixed charge is a charge or mortgage secured on particular property, e.g. land and buildings, a ship, piece of machinery, shares, intellectual property such as copyrights, patents, trade marks, etc

- Both floating and fixed charges are used to secure borrowing by a company. Such borrowing is often done under the terms of a debenture issued by the company. Charges on a company's assets must be registered at Companies House and may also need to be registered in some other way, e.g. a charge on land and buildings must also be registered at the Land Registry. - On crystallization of a floating charge, it becomes a fixed charge. The company can continue to use the assets and can buy and sell them in the ordinary course of business. It

can thus trade with its stock and sell and replace plant and machinery, etc. without needing fresh consent from the mortgagee. The charge is said to float over the assets charged, rather than fixing on any of them specifically. This continues until the charge 'crystallizes', which occurs when the debenture specifies. This will include any failure...
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