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Distance Learning Module Planner

Company Law 1
Course Code: MP–LD3046
Module Leader: Roger Gregory
© University of Wolverhampton 2007

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means,
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Any person who infringes the above in relation to this publication may be liable to criminal prosecution and civil claims
for damages.

Contents
How to Use Your Module Planner 5 Topics Covered by Module 7
Skills to be Developed and Examined 8 Examinations 9
A Brief Guide to Study Skills 10 Introduction to Study Units 13 Reading List 14
Study Unit 1: Introduction to Company Law 16 Study Unit 2: Promoters and Pre-Incorporation Contracts 19
Study Unit 3: Separate Legal Personality 22 Study Unit 4: Memorandum of Association, the Rule in
Turquand’s
Case and Agency Principles 27 Study Unit 5: Articles of Association 31
Study Unit 6: Meetings 35 Study Unit 7: Shares 39
Study Unit 8: Maintenance of Share Capital 43 Study Unit 9: Raising Capital – Offer of Shares to the Public 46
Learning Project 49 Practice Question and Suggested Answer 53
Revision 59 Taking the Examination 63
Module Questionnaire 65

How to Use Your Module Planner


The Module Planner is vital to your studies. It divides the work in each area into Units, and shows you the minimum
number of hours you should spend on each Unit, at the top right hand corner of the first page of each Study Unit, in
order to understand the law involved. You should plan on devoting a minimum of 150 hours to each module you study.
The section headed ‘Essential Reading’ contained in the Reading List and each Study Unit refers you to the materials
with which you are provided: the Textbook, Cases and Materials and Statute Book. The materials listed in the Essential
Reading are sufficient to enable you to complete the course very effectively. The section headed ‘General Reading’
lists other books which, if you wish, you can read to give you other approaches to the law. These books are not
provided but you should be able to purchase them from Hammicks Legal Bookshop, whose address, telephone number
and website details are provided in the General Reading section of the Reading List. They are not essential for you to
be successful on the course, but they may help to give you a different viewpoint of the law involved in this module.
The Module Planner guides you through the course. Work through it logically, and in order, and make sure you
understand one Unit before you move on to the next. At the end of each Unit you will find a set of Self-Study
Questions. Test yourself on these and make sure you understand them before you move onto the next Unit. At the end
of the Study Units you will find the Learning Project. A compulsory question will be set in the examination in Section A
of your paper on all or parts of the material covered by the Learning Project, and this will count for 50 per cent of your
overall grade, so it is essential that you ensure you study and understand all aspects covered by it. The Study Units
which relate to the Learning Project have been indicated to guide you through this material while you study. The
Module Planner is your guide to the topic of English law that it covers. Have it with you as you study and you will make
the most of this opportunity to obtain the best law degree of which you are capable.
With this Module Planner you should have the following materials:

Company Law by John Lowry and Alan Dignam OUP 2006 Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo) If you do not receive this set of materials, please
contact:
Distance Learning Department
Holborn College
Woolwich Road
Charlton
London
SE7 8LN
Tel: +44 (0) 208 317 6000
Fax: +44 (0) 208 317 6003
E-mail: dl@holborncollege.ac.uk
Topics Covered by Module
This module covers the following topics within English law. Introduction to Company Law
Promoters and Pre-Incorporation Contracts Separate Legal Personality
Memorandum of Association, the Rule in Turquand’s Case and Agency Principles
Articles of Association Meetings
Shares Maintenance of Share Capital
Raising Capital – Offer of Shares to the Public

Skills to be Developed and Examined


To be successful in the end of module examination you need to show that you understand and can apply the area(s) of
law you have been studying. You must be able to demonstrate this to the examiners by writing answers which
communicate the points you wish to make accurately and in good English. This is a key part of demonstrating that you
have understood the points of law, the cases and the Acts of Parliament that you have studied. Before you start to
write your answer, identify the issues that are relevant to the question. These must be clearly stated in your short
introductory paragraph(s). When referring to case law and statute law, you then need to explain the relevant legal
principles in the context of the issues you identified in your introductory paragraph(s). Finally, you need to write a
concluding paragraph which brings your points together. Do not write everything you know about an area, or write
answers that take the form of a series of notes. Your answer should be structured in the way described above and be
written in good English. For further guidance on how you will be graded please consult your Award Guide which
contains an explanation of the criteria used to grade your work. It is important that you practice answering questions
and in particular take the opportunity to submit a sample question for marking and feedback. This question is
contained in the Practice Question section of the Module Planner.

Examinations
This module is assessed by one, two hour, unseen written examination. Examinations take place in September,
January, and May of each year. The examination is in two parts: Part A is a compulsory question and counts for 50 per
cent of the total grade, Part B has four questions of which you will be required to answer two only. Each of the
questions in Part B is worth 25 per cent of the total grade.
The compulsory question in Part A is based on those topics which make up the Learning Project. You will find details of
the Learning Project and the topic area covered by it at the end of the Study Units in this Module Planner. You should
read this section carefully to identify those areas of the module covered by the Learning Project. You will, therefore,
know in advance of the examination that there will be a substantial question on the topics covered by the Learning
Project. When you write the examination you should make sure that you devote 50 per cent of the time to the question
in Part A. Your answer to this question should normally be about twice as long as your answer to the two questions in
Part B. The purpose of the Learning Project is to allow you to study a significant part of the syllabus in depth in the
sure knowledge that you will be examined on it. In this way, hard-working students who have studied their materials
thoroughly will be able to write an in-depth answer and have full credit for the work they have done reflected in the
grade awarded. There is no assessed coursework for this module. The total grade for the module is based upon the
unseen written examination. Although you should make sure that you cover the whole syllabus, it is particularly
important that you study those syllabus topics which are covered by the Learning Project thoroughly so that you can
write a complete answer to the compulsory question in Part A and take advantage of the fact that this question is
worth 50 per cent of the grade. The examination is a two-hour examination with an additional 15 minutes reading
time. It is an unseen examination. You will, however, be able to take into the examination an unmarked copy of your
150 Leading Cases, Statute Book and Law Update (this means that you should not write on these materials; you are
only allowed to underline or highlight part of the text). As stated above, you will also know what topics will be covered
by the compulsory question in Part A of the examination, provided you have studied the details of the Learning Project
at page 44 of this Planner.

A Brief Guide to Study Skills


As a distance learning student you will undoubtedly have other demands on your time. It is, therefore, important that
you use your time effectively. The following tips are intended to help you do so.

Time Management
Be realistic.
Work out what time you have available for study; take out time for sleeping, eating, recreation, etc.
Try to plan ahead – do not leave everything to the last minute.
Prioritise – do not do the easiest task first, but the one that really needs to be done first.
Set objectives which are reasonable, and make sure that they are somewhere you see them.
Break large tasks into manageable sub-tasks and set target dates against each sub-task.
Keep a wall planner chart.
Try doing the most difficult things when you feel at your best.
Remember the unexpected always happens, so be flexible – don’t get angry when plans have to change.

Effective Reading
Reading
Read with purpose (what questions have to be answered?). Read selectively – scan and skim – only read in detail
what you need to.
Mentally recite what you have just read. Make notes at appropriate points – bullet points, do not rewrite
the whole book.

Review
Did I answer the questions I wanted to? Do I understand and remember what I read?

Studying
Where? Choose somewhere that is conducive to study. You need: a large table or desk; a suitable
chair; a bookcase; adequate, suitable lighting; adequate ventilation; reasonable temperature
– too cold, you can’t concentrate – too warm, you will go to sleep. Banish distractions –
magazines, radio, telephone, TV.
Decide where you study best, and try to keep to it.

When? When you are alert Not when you are too tired. When it is the best time of day for you – some
people work better at night, others early in the morning.

How? Try studying for 50 minutes, break for 10 minutes, etc. Have all you need available – pens, pencils, dictionary,
PC, etc. Avoid too much physical relaxation or you will go to sleep! Actively study – make
notes, etc. It is difficult to just read for too long; it makes you sleepy and you lose
concentration. Remember to have breaks and do have time for relaxation. Set yourself targets,
and give yourself rewards!

Practice Questions At the end of each unit you will find Sample Questions, and at the end of the Planner is a
Practice Question and Suggested Answer. strongly advised to submit at least one answer to
either a Sample Question or the Practice Question for marking. Unless you do so you will not
gain any insight into your strengths and weaknesses.
Introduction to Study Units
The Study Units deal with the individual topics covered by the module. The module is broken down into Study Units to
enable you to look at each area of law in digestible parts. You must work through each Study Unit in order, ensuring
that you understand the material covered by each Unit before progressing on to the next one. Each Study Unit is
broken down into four major sections. Reading List This indicates what reading you must do (Essential Reading) in
order to cover all of the material set in the Unit. All material listed in the Essential Reading is provided as part of your
study materials.
You can, if you wish, further your knowledge and understanding by completing the General
Reading in each Unit. These materials are not essential for you to complete the course, but you
may find them useful in your study. Such materials are not supplied, and you are responsible for
obtaining copies of the titles listed in the General Reading. Details are given in the Reading List of
suppliers.
Case Law and Statutes
This section directs you to those cases and statutes that you will need to read and understand in
order to complete the Unit. All materials listed here can be found in your Textbook or 150 Leading
Cases.
Self-Study Questions
These are questions designed to set the parameters of the Study Unit and to test your application
of the basic principles.
Sample Questions
These may be essay or problem questions, often taken from past examination papers. You should
attempt your own answers to all of these questions.

Reading List
These are the titles that you will use throughout the course. They are referred to in the reading
section of each Study Unit, to guide you in your learning.
Essential Reading
All materials listed here must be read in order for you to understand the module. These books are
supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
General Reading
These materials are not supplied, and are not essential to pass the
module. You may, however, wish to refer to them to deepen your
understanding of the topics covered by the course. You are responsible
for obtaining your own copies of these titles. If you choose to do so, you
should be able to purchase them by contacting Hammicks Legal
Bookshops at 192 Fleet Street, London EC4A 2NJ; tel: +44 (0)20-7405-
5711 or you can order online at www.hammickslegal.co.uk.
Gower and Davies: the Principles of Modern Company Law
Davies (7th edition 2003) Sweet & Maxwell
Company Law: Mayson, French and Ryan
(new edition every September) Oxford University Press
Cases and Materials in Company Law: Sealy (7th edition 2001) Butterworths
In addition, in each Study Unit you will find a list of cases which should be consulted. Summaries
of these can be found in the 150 Leading Cases; cases marked with an * are referred to in the
Textbook. If you have access to the Internet you may wish to take advantage of the legal materials
available via this source. See your Award Guide for details.
For those students who have never studied the law, certain terminology used may be difficult to
understand at first. As you progress through the course, you will learn a range of new words and
phrases that are frequently used in the study of law. If you encounter any difficulties with the terminology
used, however, you will find it useful to refer to a legal dictionary, which will explain the
meaning of legal words and phrases in plain English. Mozley and Whitley’s Law Dictionary (12th
edition 2001) by Butterworths is very helpful, and can be purchased through Hammicks Legal
Bookshops.
Study Unit 1 Suggested minimum study hours: 10
Topic
Introduction to Company Law
Introduction The Companies Acts provide for three basic types of registered company, a company limited by
guarantee, an unlimited company and a company limited by shares, with two forms of company:
public and private.
Objectives a To consider the nature of a company and compare it with
(i) a partnership (ii) an unincorporated association and (iii) a trust. b To consider what difficulties
are involved in operating an unincorporated association and how these are avoided by a company. c To
consider what formalities must be fulfilled in order to register a company.To consider the impact of EC
Directives on company law.
Essential Reading
These titles have been supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
General Reading
These titles have not been supplied and are not essential reading, but
you may wish to refer to them to further your understanding. Gower and Davies: the Principles of
Modern Company Law, Davies – Relevant Chapter(s)
Case law and statutes
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
R v Registrar of Companies, ex parte Attorney-General [1991] BCLC 476
R v Registrar of Companies, ex parte Bowen [1914] 3 KB 161
R v Registrar of Companies, ex parte More [1931] 2 KB 197
Salomon v Salomon & Co [1897] AC 22
Business Names Act 1985: ss2 and 5
Companies Act 1985: ss25–34 and 117
Company and Business Names Regulations 1981, as amended by SI
1982 No 1653 and SI 1992 No 1196
Limited Liability Partnership Act 2000
Cases marked with an * can be found in your Textbook; all other cases
Self-Study Questions
1 What is meant by limited liability?
2 What are the main differences between a private and a public
company?
3 What advantages and disadvantages are there to incorporation?
4 What conditions or requirements must be satisfied before a company
can be registered as a public company?
5 What is the purpose of (a) the memorandum of association and (b) the
articles of association?
Sample Questions
1 Describe the main features of a registered company. Is the liability of a member to contribute
towards a company always limited in some way?
Can a principle of separate legal personality ever operate to the disadvantage of the members of
the company? Why are companies so important in a modern (western) economy?
(Wolverhampton LLB by Distance Learning Question.)
2 Julian, Wilson and Steed are in business as partners in a carpet retail firm. They are considering
forming a company, limited by shares, in order to promote future expansion of the business.
They seek your advice as to the following:
a the advantages of initially forming a private limited company;
b the formalities and the capital requirements which are necessary to incorporate such a company;
c the extent to which the company’s finances and membership would become public knowledge;
d the practical requirements of inserting a clause which would prevent a member of the company
from selling his shares to an outsider without obtaining the consent of the other members.
(Wolverhampton LLB by Distance Learning, September 1999,
Question 2.)
Study Unit 2 Suggested minimum study hours: 10
Topic
Promoters and Pre-Incorporation Contracts
Introduction
We shall examine the role of individuals who form companies, and their duties and liabilities in respect
of this task.
Objectives
a To consider who will be regarded as a promoter and whether any definition of the term
‘promoter’ is possible or advisable.
b To compare the fiduciary position of a promoter with those of a trustee and an agent.
c To examine s36C(1) CA 1985 and the Court of Appeal decision in Phonogram v Lane.
Essential Reading
These titles have been supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
General Reading
These titles have not been supplied and are not essential reading, but you may wish to refer to
them to further your understanding.
Gower and Davies: the Principles of Modern Company Law, Davies – Relevant Chapter(s)
Case law and statutes
Braymist Ltd v Wise Finance Co Ltd [2002] 2 All ER 333
Cape Breton Co, Re (1885) 29 Ch D 795
Cotronic (UK) Ltd v Dezonie [1991] BCC 200
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
English and Colonial Produce Co Ltd, Re [1906] 2 Ch 435
Gluckstein v Barnes [1900] AC 240
Howard v Patent Ivory Manufacturing Co (1866) 38 Ch D 156
Kelner v Baxter (1866) LR 2 CP 174
Lagunas Nitrate Co v Lagunas Syndicate Ltd [1899] 2 Ch 392
Leeds and Hanley Theatre of Varieties Ltd, Re [1902] 2 Ch 809
Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45
Northumberland Avenue Hotel Co, Re (1886) 33 Ch D 16
Oshkosh B’Gosh Inc v Dan Marbel Inc and Craze (1988) 4 BCC 795
Phonogram v Lane [1981] 3 All ER 182
Rover International Ltd v Canon Films Ltd [1989] 3 All ER 423
Salomon v Salomon & Co [1897] AC 22
Twycross v Grant (1877) 2 CPD 469
Companies Act 1985: ss14 and 36
Insolvency Act 1986: ss131, 132, 133 and 134
Public Offers of Securities Regulations 1995 (SI 1995/1537)
Self-Study Questions
1 What is the nature of the fiduciary duty imposed on promoters?
2 If a promoter makes a secret profit out of the promotion can this be recovered without rescinding
the contract between the company and the promoter?
3 In what ways can a promoter be rewarded for his services? What procedures must be observed
in each case?
4 What remedies are open to a promoter where the company refuses to reward him for his services?
5 Why do promoters make pre-incorporation contracts?
6 Consider the decision in Phonogram v Lane. Is s36 CA 1985 confined to companies already in
existence?
Sample Questions
1 a To what extent has s36 of the Companies Act 1985 solved the problems surrounding pre-incorporation
contracts?
b How may a promoter avoid liability for pre-incorporation contracts?
(Wolverhampton LLB by Distance Learning, September 2000, Question 4.)
2 John is about to take the necessary steps to form a company, John Wilson Ltd, which will produce
and sell shoes. Before the company is incorporated he makes two agreements.
a He agrees orally with Frank to buy ten tons of leather from him, Frank being fully aware that the
company has not yet been formed, but that John intends the leather for the company’s use.
b He enters into a written agreement with Peter to sell him 500 pairs of shoes. John signs the
agreement: ‘John Wilson Ltd (John Wilson)’.
Peter knows nothing else of John’s company.
John can now buy the leather cheaper and no longer wants to buy Frank’s leather. Peter, who is
having difficulties selling the shoes he has bought from other sources, has refused to accept the
shoes.
Advise John.
(Wolverhampton LLB by Distance Learning Question.)
Study Unit 3 Suggested minimum study hours: 10
Topic
Separate Legal Personality
Introduction
A company is a separate legal personality and a veil of incorporation is drawn between the persons
dealing with a company and its members.
Objectives
a To examine the cases where the court has lifted the corporate veil. Is there any principle which
ties these cases together?
b To consider the effect of the rule in Salomon v Salomon in commercial life and its advantages
and disadvantages.
c To compare a company with (a) partnership and (b) an unincorporated association.
d To consider the cases on the criminal liability of a company. When will
a company be held criminally liable, in particular the types of offences it will be capable of committing.
How does ‘alter ego’ affect a company’s criminal liability?
Essential Reading
These titles have been supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
General Reading
These titles have not been supplied and are not essential reading, but you may wish to refer to
them to further your understanding. Gower and Davies: the Principles of Modern Company Law,
Davies –
Relevant Chapter(s)
Case law and statutes
Adams v Cape Industries plc [1991] 1 All ER 929; [1990] 2 WLR 657
Bolton (HL) (Engineering) Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159
Bugle Press Ltd, Re [1961] 1 Ch 270; [1960] 3 All ER 791
Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307
Deutsche Genossenschaftsbank v Burnhope & Others [1995] 1 WLR 1580; [1995] 4 All ER 717
(HL)
DHN Food Distributors v London Borough of Tower Hamlets [1976] 1 WLR 852
Director of Public Prosecutions v Kent and Sussex Contractors Ltd [1944] KB 146
Durham Fancy Goods Ltd v Michael Jackson (Fancy Goods) Ltd [1968]
2 All ER 987
El Ajou v Dolar Land Holdings plc [1994] BCC 143
Gilford Motor Co v Horne [1933] Ch 935
H and Others (Restraint Order: Realisable Property), Re [1996] 2 All
ER 391 (CA)
Jones v Lipman [1962] 1 WLR 832; [1962] 1 All ER 442 (CA)
Lee v Lee’s Air Farming [1961] AC 12
Lennard’s Carrying Co v Asiatic Petroleum Co Ltd [1915] AC 705
Lindholst & Co A/S v Fowler & Another (1988) 4 BCC 776
Macaura v Northern Assurance Co Ltd [1925] AC 619
Meridian Global Funds Management Asia Ltd v Securities
Commission [1995] BCC 942; [1995] 3 All ER 918; [1995] 3 WLR 413 (PC)
Moore v I Bresler Ltd [1944] 2 All ER 515
Multinational Gas and Petrochemical Co v Multinational Gas and
Petrochemical Services Ltd [1983] Ch 258; [1983] 2 All ER 563 (CA)
Ord v Belhaven Pubs Ltd [1998] BCC 607
Penrose v Official Receiver [1996] BCC 311; [1996] 2 All ER 96
Polly Peck International plc (No 3), Re [1996] BCC 486
R v Andrews Weatherfoil Ltd [1972] 1 WLR 118; [1972] 1 All ER 65
R v Gateway Foodmarkets Ltd [1997] 3 All ER 78
R v ICR Haulage Ltd [1944] KB 551
Salomon v Salomon & Co [1897] AC 22
Seaboard Offshore Ltd v Secretary of State for Transport [1994] 2 All ER 99 (HL)
Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116
Supply of Ready Mixed Concrete (No 2), Re [1995] 1 AC 456
Tesco Stores Ltd v Brent London Borough Council [1993] 1 WLR 1037
Tesco Supermarkets Ltd v Nattrass [1972] AC 153; [1971] 2 All ER 127 (HL)
Trustor AB v Smallbone [2001] 2 BCLC 436
Williams and Another v Natural Life Health Foods Ltd [1998] BCC 428; [1998] 2 All ER 577 (HL)
Yukong Line Ltd of Korea v Rendsburg Investments Corp of Liberia,
The Rialto [1998] BCC 870; [1998] 4 All ER 82
Business Names Act 1985
Companies Act 1985: ss14, 22, 23, 24, 348, 349, 406, 458, 630 and 736
Companies (Single Member Private Limited Companies) Regulations 1992
Insolvency Act 1986: ss212–216
Self-Study Questions
1 What is the extent of liability of a member of (a) a company limited by shares; (b) a company limited
by guarantee; (c) an unlimited company;
(d) an unincorporated association; (e) a partnership; (f) an unlimited partnership; and (g) a sole
trader?
2 Who has the right to take or defend legal proceedings in respect of a
cause of action relating to a company?
3 Who owns a company’s assets:
a the shareholders;
b the directors;
c the creditors;
d the company itself?
4 What is the effect of ss213 and 214 IA 1986? How and to what extent
do they cause a lifting of the corporate veil?
5 What is the object of ss348 and 349 CA 1985?
Sample Questions
1 ‘The doctrine laid down in Salomon v Salomon & Co Ltd (1897) has to be watched carefully …
The legislature has shown the way with group accounts and the rest. The courts should follow
suit.’ (Per Lord Denning MR in Littlewoods Mail Order Stores Ltd v CIR.) Discuss.
(Wolverhampton LLB by Distance Learning, January 2001, Question 2.)
2 a ‘In the Albazero [1977] AC 774 … Roskill LJ described it as a fundamental principle of English
law “long established and now unchallengeable by judicial decision … that each company in a
group of companies is a separate legal entity possessed of separate legal rights and liabilities … .’
Discuss.
b Mary and Jacques are both directors and shareholders of Smart Furnishings plc. Jacques is getting
older and wishes to retire soon. Mary is looking forward to Jacques leaving, although she
does have some reservations about running the company on her own. She has always wanted to
change the company’s name to Stylish Homes plc, a name used by a company which she ran,
which was placed into insolvency a few years ago. She did get into trouble with the courts regarding
her running of Stylish Homes plc but she just wants to forget this now. Mary and Jacques have
both ignored warnings from the auditors of Smart Furnishings plc regarding the company’s financial
position.
Advise Mary and Jacques.
(Wolverhampton LLB by Distance Learning Question.)
3 a William carried on a building business as a sole trader until 1996. In 1996 he formed a company
called Buildrite Ltd, became managing director but continued to insure the company’s assets
in his own name, as he had done before the company’s incorporation. Last month the premises of
Buildrite Ltd were damaged by fire. William has claimed under the insurance policy, but the insurance
company refuses to meet his claim.
Advise William. b Buildrite Ltd was taken over by Megabuild plc, and became one of Megabuild
plc’s subsidiary companies. Megabuild plc controlled Buildrite Ltd’s activities and Buildrite Ltd’s
profits were treated as profits of the parent company.
East Mercia Corporation (EMC) wishes to compulsorily acquire land belonging to Buildrite Ltd in
order to build a trading estate. Megabuild has submitted a claim for the value of the land and disturbance,
but EMC has stated that in its opinion any moneys
should be paid to Buildrite Ltd.
Advise Megabuild plc.
c William’s contract with Buildrite Ltd contains a clause which states that in the event of his leaving
the employment of Buildrite he will not solicit their customers for a period of 18 months. He resigns
as managing director and forms a new company Cementine Ltd, which is also in the building and
construction business. He appoints Tom as a sales representative and gives Tom a lot of
Buildrite’s customers. Tom immediately begins soliciting Buildrite’s customers.
Advise Buildrite.
(Wolverhampton LLB by Distance Learning, May 1999, Question 3.)
Study Unit 4 Suggested minimum study hours: 15
Topic
Memorandum of Association, the Rule in Turquand’s Case and Agency
Principles
Introduction
A company’s memorandum is a document which outlines the scope of a company’s powers and
regulates a company’s relationship with the outside world.
Objectives
a To consider the original purpose behind the requirement that the objects of the company should
be stated in the memorandum and how this has been affected by decisions in this century.
b To look at the provisions of the Business Names Act 1985 on business names. What is the purpose
behind these provisions?
c To consider the current legal position regarding the ultra vires doctrine, and the power of company
officers to bind the company in contract.
Essential Reading
These titles have been supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
General Reading
These titles have not been supplied and are not essential reading, but you may wish to refer to
them to further your understanding. Gower and Davies: the Principles of Modern Company Law,
Davies – Relevant Chapter(s)
Case law and statutes
Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653
Bell Houses Ltd v City Wall Properties Ltd [1966] 2 QB 656
Charterbridge Corporation Ltd v Lloyds Bank Ltd [1969] 2 All ER 1185
Cotman v Brougham [1918] AC 514
Evans v Brunner, Mond & Co Ltd [1921] 1 Ch 359
First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] BCC 533
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Halt Garage (1964) Ltd, Re [1982] 3 All ER 1016
Hely-Hutchinson v Brayhead Ltd [1967] 3 All ER 98
Horsley and Weight Ltd, Re [1982] 3 All ER 1045; [1982] 3 WLR 431
International Sales and Agencies Ltd v Marcus [1982] 3 All ER 551
Introductions Ltd, Re [1970] Ch 199
Lee Behrens & Co Ltd, Re [1932] 2 Ch 46
Mahony v East Holyford Mining Co (1875) LR 7 HL 869
Rafsanjan Pistachio Producers Co-operative v S Reiss [1990] BCLC 352
Rolled Steel Products Ltd v British Steel Corporation [1985] 2 WLR
908; [1985] 3 All ER 52 (CA)
Royal British Bank v Turquand (1855) 5 E & B 248
Simmonds v Heffer [1983] BCLC 298
Williams and Another v Natural Life Health Foods Ltd [1998] BCC
428; [1998] 2 All ER 577 (HL)
Business Names Act 1985
Companies Act 1985: ss2, 3, 3A, 4, 25, 26, 27, 28, 30, 31, 35, 35A, 35B,
348, 349, 380, 714 and 719
Note: Insolvency Act 1986: ss187 and 216
Self-Study Questions
1 What is the supposed rationale behind the requirement that a company’s objects be stated in the
memorandum?
2 What is a ‘Bell Houses’ clause?
3 Distinguish between the objects and the powers of a company.
4 Can a company make valid gifts (a) to its members; (b) to its employees; (c) to its customers; (d)
to its competitors, if it has no
express power to make gifts?
5 Can an ultra vires transaction ever be ratified by the company?
Sample Questions
1 New School Ltd is a company which is entirely directed by a board of trustees who are the directors
of the company. Its objects include: a to educate girls; b to give money to girls to enable them
to proceed to higher education; c to do all things the trustees consider desirable. There is an independent
objects clause.
James, Tim and Ron are members of the board of trustees and consequently directors of the company.
Ron, who is responsible for promoting the good name of the school, arranges for the company
to donate £20,000 to research into a cure for lung cancer. Without reference to his fellow
directors he arranges for the company to create a covenant to this effect. The trustees also authorise
a gift to Mary who has been accepted on a course at a finishing school in Switzerland. Tim
and Ron agree with the majority of the directors that boys should be admitted to the school, and
five boys are provisionally accepted as pupils at the school, their parents paying deposits of £500
each. One of the parents decides not to send his son to the school and asks for a return of his deposit.
Advise James who is a member of the company and who objects to the covenant to pay the
£20,000 to the proposed gift to Mary, and to the decision to admit boys. Advise also the parents
who wish to have their deposit returned.
(Wolverhampton LLB by Distance Learning Question.)
2 Sparks, an electrician, instructed his solicitor to incorporate his business as a private company.
Sparks took 70 per cent of the issued share capital and two of his employees, Frank and Stein,
took the remaining 30 per cent of the issued share capital in equal proportions. The company was
registered with the name ‘Bright Sparks Limited’ and had objects which provided that the company
was to carry on a business as electrical suppliers. Sparks, Frank and Stein were named as the
company’s directors.
Prior to the company’s registration, Sparks, writing on notepaper headed ‘Bright Sparks Limited’,
agreed to supply Waterworks Limited with a large quantity of gas ovens. Sparks signed the letter
‘Bright Sparks Ltd, Sam Sparks, Managing Director’.
After the company was registered, Sparks agreed to take a loan on behalf of the company from
Nat East Bank plc, for the sum of £30,000 to be repaid over five years. Sparks did not seek the
approval of his fellow directors when taking out the loan. Sparks wished to use the funds from the
loan for the purpose of purchasing gas ovens. The manager of Nat East Bank plc agreed to the
loan despite the fact that he had not, as required, obtained approval from his head office (a fact
known to Sparks) to authorise the loan.
Six months after taking out the loan, Sparks was informed by the Nat East Bank that the loan was
invalid and that it must be paid back in full. However, Sparks was unable to comply with the bank’s
demand in that he had already purchased the gas ovens (total price £20,000) having spent the
rest of the money on donations to the Raving Monster Looney party, and a local college which
specialised in electronics. At a board meeting of the company, Frank questioned the legality of
the contract with Waterworks Ltd, the bank loan and the donations.
Advise Sparks.
(Wolverhampton LLB by Distance Learning Question.)
3 To what extent has the rigidity of the doctrine of ultra vires been mitigated by statutory intervention,
and by attempts by companies to evade it?
(Wolverhampton LLB by Distance Learning, January 2000, Question 2.)
Study Unit 5 Suggested minimum study hours: 15
Topic
Articles of Association
Introduction
The articles contain the internal regulations for the management of the company’s affairs. They set
out the manner in which a company must conduct its affairs and govern the rights of the members
among themselves.
Objectives
a Consider the purpose of the articles and their general contents.
b What are the special features of the s14 contract?
c Consider the meaning of the phrase ‘bona fide in the interests of the company as a whole’ in the
context of an alteration of the articles.
d What types of evidence are acceptable to the court in establishing that
an alteration is not bona fide in the interests of the company as a whole?
Essential Reading
These titles have been supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
General Reading
These titles have not been supplied and are not essential reading, but
you may wish to refer to them to further your understanding.
Gower and Davies: the Principles of Modern Company Law, Davies –
Relevant Chapter(s)
Case law and statutes
ARTICLES OF ASSOCIATION – GENERAL PRINCIPLES
Beattie v E & F Beattie Ltd [1938] 1 Ch 708
Bratten Seymour Service Co Ltd v Oxborough [1992] BCC 471 (CA)
Clemens v Clemens Bros Ltd [1976] 2 All ER 268
Eley v The Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88
Foss v Harbottle (1843) 2 Hare 461
Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915] 1 Ch 881
New British Iron Co, ex parte Beckwith, Re [1898] 1 Ch 324
North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589
Pender v Lushington (1877) 6 Ch D 70
Quinn & Axtens v Salmon [1909] AC 442
Rayfield v Hands [1960] 1 Ch 1
Scott v Scott [1940] Ch 794
Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9 (CA)
Wood v Odessa Waterworks Co (1889) 42 Ch D 636
ARTICLES OF ASSOCIATION – ALTERATION OF ARTICLES
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656
Andrews v Gas Meter Company Ltd [1897] 1 Ch 361
Brown v British Abrasive Wheel Co [1919] 1 Ch 290
Cane v Jones [1980] 1 WLR 1451; [1981] 1 All ER 533
Clemens v Clemens Bros Ltd [1976] 2 All ER 268
Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland
Herald Newspaper and Printing Co Ltd [1987] Ch 1; [1986] 2 All ER 816
Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd [1920] 2 Ch 124
Eley v The Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88
Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (CA)
Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915] 1 Ch 881
House of Fraser plc v ACGE Investments Ltd and Others [1987] BCLC 478
Northern Counties Securities Ltd v Jackson and Steeple Ltd [1974] 1 WLR 1133; [1974] 2 All ER
625
Northern Engineering Industries plc, Re [1994] BCC 618 (CA)
Punt v Symons & Co Ltd [1903] 2 Ch 506
Quinn & Axtens v Salmon [1909] AC 442
Rights and Issues Investment Trust Ltd v Stylo Shoes Ltd [1964] 3 All ER 628
Russell v Northern Bank Development Corporation Ltd [1992] 1 WLR 588 (HL); [1992] 3 All ER
161 (HL)
Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9 (CA)
Sidebotham v Kershaw, Leese & Co [1920] 1 Ch 154 (CA)
Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701
Companies Act 1985: ss2, 4, 6, 9, 14, 16, 17, 18, 42, 125, 126, 127 and 128
Companies Act 1989: s110(2)
Self-Study Questions
1 Distinguish the memorandum from the articles.
2 Does the s14 contract bind the members and the company?
3 Does the s14 contract bind the members inter se?
4 Can a company alter its objects by an ordinary resolution?
5 What steps can a shareholder take if he wishes to prevent an
alteration to the objects clause becoming effective?
Sample Questions
1 Section 9 of the Companies Act 1985 permits a company to alter or add to its articles by special
resolution. What limitations, if any, does the law place on the exercise of this power?
(Wolverhampton LLB by Distance Learning, September 2000, Question 5.)
2 a In what ways and subject to what limitations may a company alter its articles of association? b
Potter is the managing director of Ceramics Ltd and holds 25 per cent of the company’s shares.
The articles of the company contain a clause appointing him director for life.
The other directors of the company have discovered that Potter has not accounted for money received
on the company’s behalf and is a major shareholder in a company which is directly in competition
with Ceramics Ltd.
The directors seek an alteration of the company’s articles to restrict the managing director’s powers
by requiring him to obtain the board’s approval for major policy decisions. Advise the directors.
(Wolverhampton LLB by Distance Learning, May 1999, Question 4.)
3 Brush Ltd has three directors, Andrew and David who each own 40 per cent of the company’s
issued share capital, while the remaining 20 per cent is owned by Roger.
Andrew and David have discovered that Roger has been carrying on business in direct competition
with Brush Ltd. The articles of association of Brush Ltd have now been altered to include the
following new articles.
‘Any shareholder who competes with the company, may be required to sell his/her shares to a person
nominated by the directors of the company.’
‘Any member who intends to sell his/her shares, or is required to sell his/her shares, shall inform
the directors, who will take the said shares equally between them at a fair value, as determined by
the company’s auditors.’
Following the alteration of the articles, Andrew and David gave notice to Roger requiring him to
sell his shares to Eric, a person nominated by the directors. Roger has refused to do so and states
that he considers the new articles to be unlawful and that he has decided to sell his shares to Elizabeth.
Advise Roger.
(Wolverhampton LLB by Distance Learning, January 2001, Question 4.)
Study Unit 6 Suggested minimum study hours: 10
Topic
Meetings
Introduction
The will of a company’s members is now normally expressed at a general meeting when they may
vote for or against any resolution proposed. The will of the majority of the members usually prevails
and binds every member.
Objectives
a To examine the various ways in which the general meeting can control the activities of directors.
b To consider the position of the individual shareholder at a general meeting. What effective ways
can he make points and control the affairs of the company at the general meeting?
c To contrast the position of the board of directors with that of the ordinary members in calling and
conducting general meetings. What advantages do the directors have in deciding the contents of
the agenda at such meetings?
d To consider the practical implications involved in an ordinary member trying to pass a resolution
to which the directors object.
Essential Reading
These titles have been supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
General Reading
These titles have not been supplied and are not essential reading, but
you may wish to refer to them to further your understanding. Gower and Davies: the Principles of
Modern Company Law, Davies –
Relevant Chapter(s)
Case law and statutes
Baillie v Oriental Telephone Co Ltd [1915] 1 Ch 503
Barron v Potter [1914] 1 Ch 895
British Union for the Abolition of Vivisection, Re [1995] 2 BCLC 1
Bushell v Faith [1970] AC 1099
Cane v Jones [1980] 1 WLR 1451
Debtor, a (No 2021 of 1995), Re [1996] 1 BCLC 538; [1996] 2 All ER 345
Duomatic Ltd, Re [1969] 2 Ch 365
El Sombrero Ltd, Re [1958] 3 All ER 1
Harman & Another v BML Group Ltd [1994] 1 WLR 893 (CA)
Moorgate Mercantile Holdings, Re [1980] 1 WLR 227; [1980] 1 All ER 40
Northern Counties Securities Ltd v Jackson and Steeple Ltd [1974] 1 WLR 1133; [1974] 2 All ER
625
Pedley v Inland Waterways Association Ltd [1977] 1 All ER 209
Read v Astoria Garage (Streatham) Ltd [1952] Ch 637
Ross v Telford (1997) The Times 4 July
Southern Founderies (1926) Ltd v Shirlaw [1940] AC 701
Whitchurch Insurance Consultants Ltd, Re [1994] BCC 51
Companies Act 1985: ss9, 14, 123, 282–285, 291–295, 303, 304 and 371
Company Directors Disqualification Act 1986: ss1–11
Companies (Single Member Private Limited Companies) Regulations 1992
Deregulation (Resolutions of Private Companies) Order 1996 (SI
1996/1471)
Self-Study Questions
1 Distinguish between an ordinary, an extraordinary and a special resolution. What notice is needed
for each and in what circumstances will each be used?
2 Distinguish between an annual and an extraordinary general meeting.
3 What is a proxy?
4 What is a quorum?
5 What is the effect where the requirements of notice are waived by the members of the company?
6 Under what circumstances will the court order that a single person is to constitute a meeting?
Sample Questions
1 ‘In spite of the inclusion of s303 in the Companies Act 1985, it may still be very difficult, if not
impossible, for a company to remove one or more of its directors.’
Do you agree?
(Wolverhampton LLB by Distance Learning Question.)
2 William and Mary are the sole shareholders and directors of Orange Ltd, a company regulated
by Table A articles of association. William holds 70 per cent of the shares, while Mary holds the
remaining 30 per cent.
William dies and leaves his shares to his son John. Mary, who dislikes John, refuses to register
the transfer of the shares. a Can John take any steps to have his name placed on the register of
members? b Assuming that John is successful in registering the shares, he now wishes to put
forward the following resolutions at a general meeting, which he wishes to call as soon as possible:
i that John be appointed a director of the company; ii that Mary be removed from office as a
director of the company. Mary has stated that she will not call the meeting or place these resolutions
on the agenda of any future meetings. Advise John. c Assuming that the above resolutions
have been placed on the agenda of the meeting, Mary then tells John that she has no intention of
attending this meeting or any other meeting that is convened.
Advise John. d Had Mary attended the meeting, but had left before the resolutions were put to the
meeting, can John pass the resolution and remove Mary as a director of the company?
(Wolverhampton LLB by Distance Learning, September 2000, Question 3.)
3 John Smith is a shareholder in Alpha Ltd and is concerned that the company has not held an
annual general meeting for the past two years. Is there any action that can be taken to ensure that
such a meeting is held?
Subsequently a meeting is called for 30 May 2000. Unfortunately the company secretary does not
notice a printer’s error, which states that the meeting is to be held on 30 June. All the shareholders
attend on 30 June 2000.
Are the proceedings valid?
John Smith enters into a contract on 10 May to sell his shares to Jonathan Brown. Although the
transfer has not been completed or registered, the company secretary nevertheless sends notice
of the annual general meeting to Jonathan, rather than to John. Explain the effect (if any) of the
secretary’s action on the proceedings of the annual general meeting.
(Wolverhampton LLB by Distance Learning, May 2000, Question 5.)
Study Unit 7 Suggested minimum study hours: 10
Topic
Shares
This Unit covers material contained in the Learning Project.
Introduction
Share capital is the proprietors’ contribution to, and stake in, the company. We shall consider the
rules and regulations which govern the issuing, purchasing and transfer of company shares.
Objectives
a Read and consider the cases which consider the nature of shares and
debentures. Are there any clear definitions of either?
b Consider the relative advantages and disadvantages of the various types of company security
available to an investor. Do these advantages and disadvantages vary according to the financial
fortunes of the company?
c Consider the provisions of ss263–281 CA 1985 and how these have altered the common law
rules on the payment of dividends.
d Note the different rules now applied to payment of dividends by public and private companies
respectively. Compare and contrast these provisions.
e Consider the purpose of the share certificate in modern company law and (i) the doctrine of estoppel
by share certificate and (ii) the effect of a forged share certificate.
f Look at the decisions on restrictions on the transferability of shares. Are these important today in
the case of (i) public companies or (ii) private companies?
g Consider the procedure for the transfer of shares in the case of publicly quoted companies.
Essential Reading
These titles have been supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
General Reading
These titles have not been supplied and are not essential reading, but you may wish to refer to
them to further your understanding. Gower and Davies: the Principles of Modern Company Law,
Davies –Relevant Chapter(s)
Case law and statute
SHARES – CLASSIFICATION
Birch v Cropper (1889) 14 App Cas 525
Borland’s Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279
Carruth v Imperial Chemical Industries Ltd [1937] AC 707
Chatterley-Whitfield Collieries Ltd, Re [1949] AC 512 (HL)
Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland
Herald Newspaper and Printing Co Ltd [1986] 2 All ER 816
Greenhalgh v Arderne Cinemas [1946] 1 All ER 512
Holder’s Investment Trust Ltd, Re [1971] 1 WLR 583
House of Fraser plc v ACGE Investments Ltd and Others [1987] BCLC 478
Isle of Thanet Electricity Supply Co Ltd, Re [1950] Ch 161
Northern Engineering Industries plc, Re [1994] BCC 618
Oakbank Oil Co v Crum (1882) 8 App Cas 65
Prudential Assurance Co Ltd v Chatterley-Whitfield Collieries Ltd [1949] AC 512
Saltdean Estate Co Ltd, Re [1968] 1 WLR 1844; [1968] 3 All ER 829
Scottish Insurance Corporation Ltd v Wilsons & Clyde Coal Co Ltd [1949] AC 462
Thundercrest Ltd, Re [1994] BCC 857 (Ch D)
White v Bristol Aeroplane Co [1953] Ch 65
Will v United Lankat Plantations Co Ltd [1914] AC 11
Companies Act 1985: ss14, 121, 125, 127, 129, 135, 137 and 140
SHARES – TRANSFER AND TRANSMISSION OF SHARES
Bahia & San Francisco Railway Co, Re (1868) LR 3 QB 584
Balkis Consolidated Co v Tomkinson [1893] AC 396
Bede Steam Shipping Co Ltd, Re [1917] 1 Ch 123
Bloomenthal v Ford [1897] QB 156
Hackney Pavilion Ltd, Re [1924] Ch 276
Royal Bank of Scotland plc v Sandstone Properties Ltd [1998] 2 BCLC 429
Ruben v Great Fingall Consolidated [1906] AC 439
Sheffield Corporation v Barclay [1905] AC 392
Smith and Fawcett Ltd, Re [1942] 1 Ch 304
Swaledale Cleaners Ltd, Re [1968] 1 WLR 1710; [1968] 3 All ER 619
Companies Act 1985: ss22, 129, 182–189, 263–281 and 352–362
SHARES – DIVIDENDS
Ammonia Soda Co Ltd v Chamberlain [1918] 1 Ch 266
Dimbula Valley (Ceylon) Tea Company Ltd v Laurie [1961] Ch 353
Exchange Banking Company, Flitcroft’s Case, Re (1882) 21 Ch D 519
Foster v New Trinidad Lake Asphalt Company Ltd [1901] 1 Ch 208
Lee v Neuchatel Asphalte Co (1889) 41 Ch D 1
Wood v Odessa Waterworks Co (1889) 42 Ch D 636
Self-Study Questions
1 What is a share? Does a shareholder have any interest in the company’s property?
2 What is a preference share and how does it differ from an ordinary share?
3 Are preferential dividends cumulative? Would the absence of such a provision in the memorandum
or articles be significant?
4 What is a redeemable preference share?
5 Is a share certificate a document of title or mere evidence of title?
6 Is there any difference in the effect of (a) a forged transfer and (b) a forged share certificate?
Sample Questions
1 a Distinguish between the issue of shares at a discount and the issue
of shares at a premium.
b The directors of Jumbo plc wish to know whether the company may:
i loan money to John, who has been co-opted to the company’s
board of directors, to purchase qualification shares in the company;
ii loan money to its employees to enable them to purchase shares
in the company’s employee share scheme;
iii loan money to its employees and directors to enable them to purchase the company’s shares.
Advise the directors.
c Outline the procedures when a shareholder in a private company wishes to:
i transfer part of his fully paid shareholding in the company to a third party;
ii transfer all of his fully paid shareholding in the company to a third party.
(Wolverhampton LLB by Distance Learning, January 2001, Question 1.)
2 a Distinguish between the transfer and transmission of shares. b Georgina is considering an investment
in Transcendo plc, whose ordinary and preference shares are quoted on the Stock Exchange.
Advise her as to the possible advantages or disadvantages in purchasing either of these types of
shares.
c Maintenance of a company’s share capital is one of the fundamental principles of company law.
Explain how the provisions of the Companies Act 1985 helps to achieve this objective in respect
of:
i reduction of capital (s135);
ii serious loss of capital (s142).
(Wolverhampton LLB by Distance Learning, May 2001, Question 1.)
Study Unit 8 Suggested minimum study hours: 10
Topic
Maintenance of Share Capital
This Unit covers material contained in the Learning Project.
Introduction
It is essential for a company to maintain its share capital for the benefit of the company, its members
and its creditors.
Objectives
a To consider the rationale behind the rule that a company must not issue shares at a discount
and how this has been weakened, if at all.
Look at the provisions of ss99–116 CA 1985 and their effect on this principle.
b To examine the principles which have evolved to ensure that a company’s capital is maintained.
Consider the weaknesses in these principles and the effect of ss142–149 CA 1985.
c To consider the provisions of ss151–158 CA 1985. Are the exceptions to the general principles
in s151 clear?
Essential Reading
These titles have been supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
General Reading
These titles have not been supplied and are not essential reading, but
you may wish to refer to them to further your understanding.
Gower and Davies: the Principles of Modern Company Law, Davies –
Relevant Chapter(s)
Case law and statutes
Acatos and Hutcheson v Watson [1995] 1 BCLC 218
Arab Bank plc v Mercantile Holdings Ltd and Another [1993] BCC 816
Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393
Bradford Investments Ltd (No 2), Re [1991] BCC 379
Brady v Brady [1989] AC 755
Heald v O’Connor [1971] 1 WLR 497
Henry Head and Company Limited v Ropner Holdings Limited [1952] Ch 124
Holder’s Investment Trust Ltd, Re [1971] 1 WLR 583
Ooregum Gold Mining Company of India v Roper [1892] AC 125
Park Business Interiors Ltd v Park [1990] BCC 914
Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555
Wragg Ltd, Re [1897] 1 Ch 796
Companies Act 1985: ss 80, 84, 85, 99–116, 130–134 and 142–162
Financial Services and Markets Act 2000: s75(1)
Self-Study Questions
1 Distinguish between share capital, loan capital, capital reserve, reserve capital, uncalled capital
and capital redemption reserve fund.
2 What is the difference between uncalled capital and reserve capital?
3 Can a public company issue shares in consideration of work to be done or services to be performed?
4 Can a subscriber to the memorandum pay for his shares in kind?
5 If a company issued its shares originally at £1 each, their nominal value, but they are now worth
£5, must it issue further shares at £5 each or only £1?
Sample Questions
1 ‘The rules governing use by a company of its capital are strict and effective.’
Discuss.
(Wolverhampton LLB by Distance Learning Question.)
2 Twit and Stooge, the directors and shareholders in Plantations plc, hold 150,000 of the 250,000
£1 shares in the company. In 1990 the company was in financial difficulty and their bankers refused
to help.
Hook and Crook heard of their problems but were only prepared to help if they could purchase
shares in the company. Consequently, Hook and Crook were allotted the remaining 100,000
shares. Hook supplied the company with raw materials and it was agreed that the £50,000 £1
shares he received would be paid for as follows:
a as to £10,000 by way of set-off against the value of raw materials already supplied;
b as to £20,000 by the company immediately purchasing raw materials to that value from Hook;
c the remaining £20,000 to be borrowed from Cash Ltd, a subsidiary
of Plantations plc, to pay for the shares, Hook repaying it within 12 months.
It was further agreed that the company would buy all its raw
materials from Hook over the next five years as part of this package.
Crook loaned the company £150,000 also on the understanding that he
obtained 50,000 £1 shares; of the money he advanced it was understood that £40,000 would be
repaid to him immediately and regarded as payment for the shares. The company recently went
into liquidation.
Advise the liquidator.
(Wolverhampton LLB by Distance Learning Question.)
3 Explain and evaluate the law restricting the power of companies to assist people who wish to
purchase that company’s shares.
(Wolverhampton LLB by Distance Learning Question.)
Study Unit 9 Suggested minimum study hours: 10
Topic
Raising Capital – Offer of Shares to the Public
Introduction
Various regulations are essential to ensure that the market for shares is regulated.
Objectives
a To consider the procedures and regulations which must be observed in making public issues of
shares.
b To examine the remedies which are available to a shareholder who has
purchased shares on the strength of misleading listing particulars or prospectus.
c To examine the regulatory mechanisms provided for by the Financial Services and Markets Act
2000.
Essential Reading
These titles have been supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
General Reading
These titles have not been supplied and are not essential reading, but
you may wish to refer to them to further your understanding.
Gower and Davies: the Principles of Modern Company Law, Davies –
Relevant Chapter(s)
Case law and statutes
Al-Nakib Investments (Jersey) Ltd v Longcroft [1990] 1 WLR 1390
Andrews v Mockford [1896] 1 QB 372
Caparo Industries plc v Dickman [1990] 2 WLR 358
Derry v Peek (1889) 14 App Cas 337
Hedley, Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317
Peek v Gurney (1873) 6 HL 377 (HL)
Possfund Custodian Trustee Ltd v Diamond [1996] 2 BCLC 665; [1996] 2 All ER 774
R v Feld [1999] 1 Cr App R(S) 1
R v Kylsant [1932] 1 KB 442
Smith New Court Securities Ltd v Citibank NA [1996] 3 WLR 1051
Companies Act 1989: s131
Financial Services and Markets Act 2000
Misrepresentation Act 1967: ss1 and 2
Theft Act 1968: s19
Self-Study Questions
1 What are the regulations governing the public issue of securities?
2 What are ‘the listing particulars’? What must be specified therein?
3 What sanctions are provided by the Act against those who are responsible for false or misleading
particulars (both civil and criminal)?
4 When is a prospectus used? What must it contain?
5 Who can avail of the remedies provided by the Act?
Sample Questions
1 Jo owns a catering business which supplies sandwiches to hungry company executives. The
business has been a huge success and she decides to apply for a Stock Exchange listing for a
company called Royal Bite plc and shares are issued to the public. Together with her friend Harry,
who is an expert on healthy eating, she issued listing particulars in which the prospects for the
company are described as ‘wonderful’. The listing particulars contain a paragraph by Harry praising
the ingredients used in the food as particularly healthy. Two weeks after the successful flotation
of the company, the Minister of Health condemns one of the ingredients used by Jo in her
sandwiches
as likely to cause brain damage. Harry had known of some research which had reached this conclusion,
but he did not believe it. Jo had not known of this research until the day before the
Minister’s statement, on which day she sold all her shares in Royal Bite plc. The shares lost 60
pence in value on the day of the Minister’s statement. Angela had bought 200 shares on the
launch of the company; Michael bought 200 shares on the Stock Exchange, just before the
Minister’s statement.
Advise all the parties of their rights and liabilities.
(Wolverhampton LLB by Distance Learning Question.)
2 Cedric and Isabel work in a tourist office. For a long time they thought about forming a limited
company to commence business as travel agents. They both had substantial financial resources
and last week found ideal premises from which they could trade.
Advise them:
a on the procedures necessary to incorporate a public limited company; b as to any capital requirements
which they must meet before the company can be incorporated as a public limited
company; c as to whether they can use the name Thomas Cook (Windsor) plc Travel Agents; d as
to any further procedures which must be satisfied before the company can commence trading.
(Wolverhampton LLB by Distance Learning, May 1999, Question 2.)
Learning Project Suggested minimum study hours: 50
In common with all the modules that form part of the LLB by Distance Learning programme this
module involves a Learning Project. Undergraduate students at the University of Wolverhampton
are required to demonstrate that they are capable of independent research before they can be
recommended for the award of a degree. For distance learning students this is assessed by reference
to the Learning Project you undertake in respect of each module. It requires you to pay specific
attention to a list of defined reading. Commonly covering a range of cases and statutes you
are required to demonstrate your mastery of the area(s) of law concerned by undertaking a compulsory
question as part of the end of module examination. This will commonly take the form of an
extended legal problem and require you to demonstrate not only that you understand the areas of
law concerned but are able to apply them clearly and without error. It could also take the form of
an essay question requiring you to demonstrate an ability to comment on linked areas of law. Particular
attention will be paid to the accuracy with which you cite the law and the arguments of
those responsible for its development. You will also be expected to demonstrate that you understand,
and have not been confused by, the ambiguities and contradictions that exist in the undergraduate
study of the law.
This question, which will change with each examination paper, will account for 50 per cent of the
overall grade and require you to devote one hour of the two-hour examination period to it. Please
note that for each examination you are allowed 15 minutes’ reading time on top of the two hours
you have to write your answers. You may also take into the examination the relevant Cases and
Materials and Statute Book. Please note that these may not contain any additional notes or markings.
Learning Project for Company Law 1: Shares and Maintenance of Share Capital
Essential Reading
These titles have been supplied as part of your study materials.
Company Law by John Lowry and Alan Dignam OUP 2006
Statutes on Company Law 2007-2008
Cases and Materials on Company Law (Andrew Hicks and S Goo)
Guidance notes
This Learning Project is covered by Units 7 and 8 in your Module Planner. In carrying out your
reading and research you should have special regard to the following key points.
• Types and classes of share capital.
• Increase, alteration and reduction of capital.
• Variation of class rights.
• Issue of shares.
• Transfer and transmission of shares.
Case law and statutes
Please refer to the materials listed in Study Units 7 and 8.
Sample Questions
1 a Distinguish between the issue of shares at a premium and the
issue of shares at a discount.
b Inka plc has a fully authorised share capital of £200,000 divided
into 150,000 ordinary £1 shares and 50,000 £1 6 per cent non
participating preference shares. The preference shares have a
right to preferential payment of capital in a winding-up.
The directors wish to increase the authorised share capital to
£300,000 and make a new issue of 75,000 ordinary shares and
25,000 preference shares on the same terms as the existing shares.
i What procedures must be followed to increase the share capital
and for the allotment of the new share issue?
ii John already owns 10,000 ordinary shares and Henry owns 5,000 preference shares. What
rights (if any) do they have in
respect of the new share issue?
c The new shares were subsequently issued. There were no profits
available for distribution in the year ended 30 June 1999 but there
were £80,000 profits available for distribution in the year ended 30
June 2000.
i How should these profits be distributed between the various
classes of shareholders?
ii Would your answer differ if the preference shares were non
cumulative?
d What provisions are found in the Companies Act 1985 in respect of
the payment by the directors of a dividend out of a company’s
capital?
(Wolverhampton LLB by Distance Learning, September 2000, Question 1.)
2 a What procedures must be followed by a company if it wishes to:
i reduce its capital; and
ii issue shares at a premium.
b Albert has been invited to join the board of directors of Primo Ltd. The company’s articles of association
require each director to hold 2,000 qualification shares. As Albert does not have the
money to purchase the shares, the company is willing to loan him the money.
i What procedures should be followed to effect the loan?
ii What action (if any) may be taken against the company by a shareholder who disapproves of the
loan?
c Simon (who cannot now be traced) stole Bertrand’s share certificate for 500 shares in Primo Ltd.
Simon then sold the shares to Charles and forged Bertrand’s name on the share transfer form.
Charles duly sent the share certificate and share transfer form to Primo Ltd. The company secretary
of Primo Ltd duly wrote to Bertrand asking him whether he had any objection to the transfer to
Charles being effected. Bertrand did not bother to reply to this
letter.
Charles subsequently sold the shares to Dawn in whose name the shares are now registered.
Advise Bertrand:
i as to his entitlement to the shares;
ii as to where any loss occasioned by the events must fall.
(Wolverhampton LLB by Distance Learning, September 2001, Question 1.)
Practice Question and Suggested
Answer
The following test is designed for practice only and does NOT count as
part of the assessment regime. A Suggested Solution is, however,
offered in the following section. Students are advised not to consult
this solution until they have completed the test. It is expected that you
will return your answer to the College for marking and feedback.
Unless you undertake such work you will not gain an insight into your
academic strengths and weaknesses before you attempt the
examination.
Before attempting your answer, please ensure that you understand
the assessment criteria explained in the Award Guide, and the
guidance contained in the section of the Module Planner headed ‘Skills
to be Developed and Examined’.
Question
Barnaby and Alexon are presently carrying on business in partnership. They are thinking about
incorporating but are not sure about the different options which are available. They also need to
know what documentation is involved and what the quickest method of incorporation is. They
would like to use the name ‘Big Company’ and also need to know in general whether there are any
restrictions on the choice and use of a company name.
Barnaby is to be issued with 100 £1 ordinary shares issued at nominal value and 500 ‘A’ preference
shares to be issued at a premium of 50p per share. He would like to know what his maximum
liability would be in the event of the company entering insolvent liquidation. Alexon was
recently involved in the management of another company called Starlight Limited. Whilst she was
in the process of forming this company she sold some assets to the company at an inflated price
and also entered into contracts on behalf of the proposed company, which the board of Starlight
has since refused to adopt. Alexon believes that as she was never appointed as a director of this
company that there should be no problem. She is also angry that the board has refused to pay her
company’s formation expenses. Advise Barnaby and Alexon.
(WolverhamptonLLB by Distance Learning, May 2001, Question 2.)
Suggested Answer to Practice Question
NB: Do not consult this solution until you have completed the test.
Outline Answer
• Various types of companies and other types of business organisations.
• Necessary documentation delivered to Registrar – memorandum, articles, statement of directors
and secretaries, statutorydeclaration.
• Index of names.
• Various statutory restrictions on names.
• Common law restriction – tort of passing off.
• Maximum liability as shareholder – nominal value of shares.
• Alexon – sale of assets by promoter.
• Personal liability for prior incorporation contracts.
• No claim for company’s formation expenses.
Answer
Note: this answer is based on one written by a distance learning student covering the question set
as part of an examination.
There are a number of forms of business, one being the partnership
they currently have, where the company has no legal personality and
the two partners are liable for debts. There is a limit of 20 partners in
a partnership, with the exception of professional organisations.
There is a limited partnership, where two partners must be liable,
and the others have limited liability, again with no legal personality.
There is a sole trader, who can carry on business as he wishes, but
with full liability.
There is an unincorporated association, whose members (not more
than 20) have full liability.
The Limited Liability Partnership Act 2000 was introduced, which will allow limited liability partnerships
(LLPs) to be formed in 2001. This allows all the partners to have limited liability, and the
partnership has legal personality, although two partners are general associates, who deal with all
administration. Then there is the distinction between a private or public company. A public company
has a minimum of £50,000 capital reserves and takes a while to get incorporated. A private
company can be unlimited, allowing secrecy of accounts, or limited (Ltd) either by guarantee (a
certain limit will be stated as maximum liability) or by shares. If Barnaby is issued with 100 £1 ordinary
shares at nominal value and 500 ‘A’ preference shares at a premium of 50p, then the maximum
liability would be the value of the shares he owns, plus any premium. If the shares are fully
paid, he will be liable to pay nothing extra. If the shares are partly paid (ie 25 per cent of the value
plus the premium) he would be liable for the amount not yet paid. The documents required to set
up a company are elaborated in s10 CA 1985. These are the memorandum, stating the objects of
the company, the name of the company and the registered office (s2). It must also include the
number of shares and to whom they are issued. A copy of the company articles must be sent to
the Registrar, as well as a statement as to the first Director and Secretary of the company, Form
10 and Form 12. The quickest method of incorporation would be to form a private company limited
by shares. Restrictions on a company name are covered by s26 CA 1985. Briefly, the name must
not include the words Ltd or plc, except at the end, if it is a limited, or public limited, company. The
name must not be the same as an existing company, and it must not constitute a criminal offence
or be offensive.
Alexon appears to have been a promoter of Starlight, and as such, when she sold assets to Starlight
at an inflated price, these were secret profits. Whilst secret profits can be made, they must be
disclosed to all members of the company, perhaps by way of a prospectus, otherwise the profits
can be claimed back from Alexon: see Gluckstein v Barnes (1900). Alexon entered into contracts
on behalf of Starlight, and whether she is a Director or not, she will be liable. Formation expenses
are between her and the company. The company cannot enter into a contract, because it does not
exist, and a further contract, ratified, could only be done under deed. Normally a promoter will also
be a Director and this problem would not arise. The only other course would be to look at
Starlight’s articles, to see if anything is there that would assist Alexon.
Marker’s comment on Student Answer
A well written, competent answer which deserved an Upper Second award. Additional detail regarding
the name of the company would have enhanced the answer.
Revision
What to revise
Consider carefully what you have been told about the format of the examination. How many questions
will you be required to answer in what length of time? Work out how long you are likely to
have to write an answer to any one question.
Look at past exam papers. A sample can be accessed via the School of Legal Studies website
www.wlv.ac.uk/sls. They may help you to identify the questions which are most likely to appear on
your exam; and on which you can concentrate your revision. This is known as question spotting
and, although this is not advisable, it may sometimes be necessary. If you have to do this, you
should revise two additional topics just in case: the question on one of the topics on which you
have concentrated most may be phrased in such a way that you are not certain how to answer it.
It is, however, safer to deal with every topic in the module so that you are prepared for all questions.
By looking at past exam papers you may also be able to determine whether certain topics tend to
be examined by way of problem scenarios or general discussion questions. Structure your revision
to accommodate the different approaches those two different types of question require.
Look closely at the topics covered by the module. Those topics which have been given the greatest
emphasis are a good bet to appear in the exam.
The question in the Learning Project is compulsory so make sure that your revision is thorough on
the topic, or topics, it covers.
Planning your revision
The best method of revision is to revise continuously throughout your study of a module, but
whether you revise continuously or prefer the last minute approach, try to relax on the day before
an exam. To do well you need to be both physically and mentally fit.
Well before the exam period make yourself a revision calendar. Make sure that the revision period
you plan is long enough to cover all of the modules you have studied, and gives you regular
breaks away from your studies. You need to start your revision at least two weeks before the examination
period. It is not wise to plan to revise for more than an hour at a time without a short
break. You should build in some days in which you put revision aside altogether and do something
which will take your mind off the upcoming exam period.
Don’t just divide the revision period equally between topics. Make a realistic appraisal of which
topic(s) you are weakest in and plan to give them the most time. In deciding how much time to
give each topic you should also take into account how much the exam counts towards your overall
mark. In other words, plan your revision to do best on exams which will give you the most benefit
in terms of your overall results.
Do not concentrate all your revision of any one topic in a solid block. You will find that your concentration
will be better if you rotate your revision from topic to topic.
Plan your revision of any one topic in stages. The first stage is to acquire a knowledge of the topic.
This involves re-reading your notes and whatever is necessary in your books. The second stage is
to break that knowledge down into easily remembered key components. The third stage is to hone
your ability to identify issues and relate them to those key components. This is best accomplished
by writing answers to past exam questions.
How to revise
If you have any general problems with your studying, don’t just sit there hoping it will come right in
the end; contact the Module Leader or the College.
There are a number of stages in the revision process. First you have to ensure that you have an
adequate knowledge of the topics. This is a matter of re-reading notes and filling in gaps by reading
relevant sections of your Textbook or other materials until you have reached the point where
you understand the material being dealt with.
While you are reviewing your notes and other study materials, you should be identifying and marking
key points which you can return to when you start to make your revision notes.
Remember: revision can only be effective if it is based on a previously acquired basic knowledge
and understanding of the topics.
The second stage of revision is to create a set of revision notes.
These will be aimed at (1) setting out key points and (2) relating these to each other in such a way
that they form a coherent picture of a particular topic (3) identifying key cases and/or statutory provisions
which you need to know details of.
There are numerous ways of structuring revision notes. Which you choose will be a matter of personal
preference. The basic aims, however, are to create a set of notes which you can review
quickly many times; and one from which you can retain a vivid mental image so that you will be
easily able to recall them in the examination.
Therefore your revision notes should be made up of key words and phrases. Each entry in the
notes should represent a condensation of information about the topic at hand. Strike a balance
between brevity and comprehensiveness. Some concepts may be too complicated to remember
without a detailed note. Others readily lend themselves to summing up in a phrase of even a word
or two. A rule of thumb is to confine all the revision notes on one topic to one page or less of A4
paper.
Using different colours for different topics, or writing the notes so that they create a distinctive pattern
on the page, is a way of creating a vivid mental image of your notes. During the exam you
may be able to recall the particular information you need by calling up a ‘picture’ of the information.
A stepped outline or a spider diagram are two of the ways you can create a pattern which will
help you to recall information by focussing on the image and the way it was written down. Spider
diagrams are especially useful for creating an image of the way ideas or rules link together.
Your friends may think you have become very eccentric but it is a good idea to stroll about your
room reciting out loud the contents of a page of revision notes. This, after all, is how actors learn
their lines before a performance, and you are doing the same thing when you set out to learn your
revision notes before an exam.
You may be tempted to shortcut the process of building up a set of your own revision notes by
buying one of the many revision guides which are available. These can be extremely useful to give
you a very condensed overview of a topic, but remember this: what makes for exam success is
displaying to the examiner your own knowledge of the topic. The only way to create your own
knowledge of the topic is to create your own set of revision notes using all those other sources
The third stage of revision is self-testing. Pick a question from a past exam – and this is where
having made a considered choice about which topics to revise is essential – and write an answer
to it under ‘exam conditions’: ie taking the length of time you would be given to do the question in
the exam. Then go back over your revision notes on that topic and see what you have left out,
what you did wrong and what you put in that was not really relevant to the question asked.
You may want to return to your original notes from lectures and reading and have another look at
that material. After half an hour or more break, pick another question on the same topic and write
an answer to it. Go through the same review process again. Repeat the whole process once or
twice more. The advantages of doing this will soon become apparent. You will identify weaknesses
in your knowledge and/or understanding. You will see how some components of an answer to a
question on a particular topic will re-appear over and over again no matter how the question is
worded, and you will have written those bits down often enough that you will not have to spend
time in the exam trying to work out how to phrase that part of your answer.
The benefit of self-testing is enormously enhanced if you do it as part of a group. Three or four of
you working together will amongst you have a very comprehensive knowledge of any topic. What
you are weak on, you can pick up from one of the others and vice versa. There is also the psychological
boost which comes from working as part of a team. You will find that some of the things
you thought it was important to write about completely eluded other members of the group. Also,
you will not have seen some important point which they did. Discussing all of your answers together
will help you to craft a complete answer to all of the aspects of the question. If you are not in
contact with fellow distance learning students, ask members of your family or friends to test you.
As well as helping you, this will give them a valuable insight into how much your studies
mean to you and the hard work involved.
Taking the Examination
Hints for Answering Questions
The very first thing you must do is to read the whole question. If the question is a problem:
DO
Ask yourself:
• Why am I being asked to advise this person?
• What has gone wrong?
• What are the areas of law involved?
If the question is an essay:
DO
Ask yourself:
• What area of law does the essay cover?
• Which part of that area of law is the essay asking me to discuss?
• Which points do I have to focus on in answering the question?
DO NOT, IN EITHER TYPE OF QUESTION
• Start writing before you have read the whole question.
• Identify one area of law and write all you know about that area without putting it into the context
of the question.
The next step is to write an outline plan of your answer. In this plan, you should identify the main
points in the problem. If you do not want the plan to be taken into account in your answer, then
cross it through and your examiner will ignore it. When you are writing your answer, follow your
plan. This will help you avoid discussing areas of law which are not relevant to the question. It will
also help you ensure that you cover all the points raised in the question and do so in a
logical, reasoned way. After you have read the question and written your outline plan you should
re-read the question and then attempt the answer.
WRITING THE ANSWER
In writing your answer, start at the beginning and work through to the end. Make sure that you
deal with each issue raised and that you apply the law to the relevant points. Reach a conclusion
at the end. Do not start with your conclusion as you may find, part of the way through your answer,
that you realise your original conclusion was wrong and you will have to start again.
Always give authorities for your answers. These authorities will be statutes and/or cases.
DO
• Address the issues from the start of your answer.
• Start at the beginning and work through to the end.
• Reach a conclusion at the end.
• Relate your answer to specific points in the question.
• Give authority for every point of law you make.
• Write clearly and in good English.
• Time your answers.
DO NOT
• Write all you know about the area before you start actually answering the question; you will only
have to write it out again in dealing with the specific points in the question.
• Reach a conclusion at the beginning.
• Move away from the structure of your outline plan.
• Give unsupported statements of law.
• Spend so long answering one question that you do not have enough time to answer the rest.
• Write in note form (unless you have spent too much time on your previous answers and are left
with insufficient time to write a full answer).
• Copy large amounts of material from the books you are allowed to take into the examination.
Make sure that you put all quotations in quotation marks otherwise you may be thought to have
been cheating.
Module Questionnaire
Company Law 1
The School of Legal Studies and Holborn College attach great importance to your views. We
would, therefore, be grateful, if now that you have finished studying this module, you would answer
the following questions and return them to the address give below. Your answers will be considered
by the distance learning teaching team and used in updating teaching materials.
1 What two things did you find most useful about the materials you were provided with for this
module?
________________________________________________________________
_____________________________________________________
2 What two things did you find least helpful about the materials you were provided with for this
module?
________________________________________________________________
_________________________________________
3 Please identify any typographical errors you encountered in using this planner (please make reference
to appropriate page numbers).
________________________________________________________________
___________________________
Return to:
External Programmes Administrator
School of Legal Studies
University of Wolverhampton
Arthur Storer Building
Molineux Street
Wolverhampton
WV1 1SB
United Kingdom
You may if you wish e-mail your answers to in4655@wlv.ac.uk