You are on page 1of 16

ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions

ACCA
Paper F4
Corporate and Business Law
(United Kingdom)
Final Mock
Commentary, Marking scheme and
Suggested solutions

2 ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions
Commentary
Tutor guidance on improving performance on the exam paper
Questions 1 7 (Target 6/10 per question)
All seven questions are straightforward but require a fairly detailed knowledge of small areas of the
syllabus. The questions are taken from the whole syllabus and candidates who are selective in their
revision will find it difficult to score highly.
Questions 8 10 (Target 6/10 per question)
All three questions involved application of legal knowledge. It is important to:
(i) Identify the key issues
(ii) State the relevant law, backed up where possible by cases and statute
(iii) Apply the law stated to the facts of the question
(iv) Conclude.
It is important to practise writing out more difficult questions such as these in full.
ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions 3
1 Legislation
Marking scheme

Marks

One mark for each relevant point below
Statutory instrument / government depts 2
Bye-laws / local government 2
Rules of court 1
Prof regs / ACCA or any other example 2
Order in council Privy council 2
Maximum
6


Affirmative resolution 1
40 day rule 1
Scrutiny committee 1
Ultra vires 1
Human Rights Act 98 1
Maximum
4

Question Total
10

Suggested solution
(a) Many statutes (Acts of Parliament) give powers to a designated person or body to make
subordinate legislation under the statute, known as delegated legislation. Often of a very detailed
nature, delegated legislation can take a variety of forms.
Statutory instruments: ministers exercise their powers as given to them by statute by
issuing detailed rules in statutory instruments, the most common form of delegated
legislation. Examples are regulations issued under the Equality Act 2006 that make it
unlawful to discriminate on the grounds of sexual orientation in the provision of goods,
services and facilities, education, the disposal and management of premises, and the
exercise of public functions.
Bye-laws: local authorities such as county and metropolitan councils may be given powers
under statute to make bye-laws relating to the local area or population, regarding for
instance householders responsibilities for waste recycling.
Rules of court: the judiciary may be given powers by statute to make rules regarding
judicial and court procedures.
Professional regulations: the making of rules relating to certain occupations such as the
law may be delegated to relevant authorised bodies, such as the Law Society.
Orders in Council: as an emergency measure the Executive (the Government) may
circumvent the need to make laws via Parliament (the legislature) and instead issue laws
via a committee called the Privy Council. Orders in Council are only seen in cases of
national emergency.
(b) Because delegated legislation is not open to the same degree of scrutiny from Parliament as main
statutes, processes for Parliament to exercise some control via over it have been developed as
follows.
Some statutory instruments can only take effect once they have received affirmative
resolution from Parliament.
Most statutory instruments must be laid before Parliament for 40 days before they can take
effect, during which time they may be subject to a degree of scrutiny.
4 ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions
Scrutiny Committees in both chambers of Parliament examine statutory instruments from a
technical standpoint, and may raise technical objections as necessary. They may not,
however, object to the instruments nature or content.
Statutory instruments may be challenged in the courts, either on the basis that Parliament
exceeded its authority to delegate the particular issues in question, or on the basis that the
legislation under which the statutory instrument was created was made without due
compliance with correct procedure.
Unlike primary legislation, delegated legislation may be struck out by the courts if it does
not comply with the Human Rights Act.
2 Acceptance
Marking scheme

Marks

One mark for each relevant point below

Offer must be open 1
Unqualified agreement / Neale v Merrett 2
May be in any form unless specified 1
Not by silence / Felthouse v Bindley 2
Some positive act or deed / Carlill v Carbolic 2
Postal rules / Adams v Lindsell 2
Conditions of postal rules 1
Exclusion of postal rules / Household Fire v Grant 2
Postal rules do not apply to revocation / Byrne v Van Tienhoven 2

Question Total (max)
10

Suggested solution
A contract is an agreement supported by consideration made with the intention to be legally binding.
An offer is an expression of willingness to be bound on specific terms.
The offer must be open and still available if it is to be accepted. If the offer has expired or been
terminated by rejection or effective revocation, acceptance is no longer possible.
Acceptance must be an unqualified agreement to the offer. If the offeree seeks to introduce different or
additional terms into the contract by means of a purported acceptance he is rejecting the original offer,
which therefore lapses and he is making a counter offer which the original offeror may accept or refuse:
Neale v Merrett.
Acceptance may be in any form unless the offeror has stipulated that a valid acceptance must be in a
particular form, such as a letter of acceptance, and that nothing else will suffice.
Although the offeror may call for acceptance in any way, such as a written acceptance or acceptance by
conduct, he may not create a contract by stipulating that if the offeree does nothing his inactivity will be
treated as acceptance: Felthouse v Bindley. Acceptance is essentially a positive act of some kind.
As a general rule acceptance does not take effect until it is communicated to the offeror either by the
offeree or by an agent on his behalf.
There are two exceptions to the general rule that acceptance is effective only when communicated to the
offeror.
ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions 5
(1) The offeror may by the terms of the offer indicate that some act of acceptance suffices even
though it is not made known to him: Carlill v Carbolic Smokeball Co. In other words the offeror
may waive the need for actual communication.
(2) The offeror may indicate that he intends the post to be used for receipt of the acceptance by letter.
He may do this either by expressly calling for acceptance by letter (Adams v Lindsell) or by
communicating his offer by letter with the implication that a letter of acceptance is expected. In
such cases the postal rule applies. This rule states that acceptance is deemed to be
communicated at the moment of posting. Consequently, it is possible for there to be
communication of acceptance without actual receipt.
Given the potential unfairness of this rule it does not automatically apply. The conditions for the
rule to apply are as follows.
(i) The letter must be properly stamped, addressed and put into the course of the post,
(ii) The postal rule must not have been excluded. In the case of Household Fire Insurance
Company v Grant the words 'by notice in writing' were held to be sufficient to exclude the
rule.
It should be noted that this principle applies only to letters of acceptance. A revocation or rejection of offer
by letter is effective only when delivered: Byrne v Van Tienhoven.
3 Liquidation
Marking scheme

Marks


(a) Description of what liquidation means

1


Effects of liquidation

1
2


(b) Distinction between voluntary and compulsory liquidation

1


Common features of members and creditors voluntary liquidations

1

Max

2

Each relevant point for members voluntary procedure:



Members start process

1


Co solvent

1


Members choice of liquidator

1


Max

3

Each relevant point for creditors voluntary procedure:


Creditors start process

1

Co insolvent
1

Creditors choice of liquidator
1

Liquidation committee formed
1

Max

3




Question total

10
Suggested solution
(a) Liquidation (or winding up) of a company mean that the company as a separate legal entity is
dissolved and its affairs are brought to an end. Assets are sold and liabilities are settled; anything
left over is returned to the shareholders. Preference shareholders are usually entitled to a
preferred but defined share of the surplus; ordinary shareholders, though last on the list, get fair
shares of the remainder, which may be substantial. Once the liquidation procedure has been
completed the company no longer exists.
6 ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions
When the liquidation procedures commence share trading must cease, company documents such
as invoices must state that the company is in liquidation, and the directors power to manage the
company ceases.
(b) Liquidation may be by means of a members voluntary liquidation, or by means of a creditors
voluntary liquidation when the company is insolvent. It may also be a compulsory liquidation.
A voluntary liquidation of either kind is one where the members vote to dissolve the company, by
means of an ordinary resolution (when a period stated in the memorandum as being the duration
of the company has expired) or a special resolution (when it is a members voluntary procedure).
In a members liquidation the members simply decide that they want the company to cease,
usually so they can take their share of the assets. The directors must make a statutory declaration
that the company is solvent, which is delivered to and registered by the Registrar. (If there is no
statutory declaration then the liquidation proceeds as a creditors one.) The members appoint a
liquidator who takes control of the assets. The liquidator must report regularly to meetings of
members and account for his or her transactions. After the final meeting where the liquidator lays
final accounts, a copy is sent to the Registrar who dissolves the company three months later and
removes its name from the register.
In a creditors liquidation the company is insolvent, so the creditors with outstanding debts have a
substantial stake in the outcome of the procedure and therefore in its conduct. At a meeting of
members a liquidator and a liquidation committee (comprising five members) must be appointed.
There is then a creditors meeting chaired by one of the directors. If they appoint a different
liquidator then their choice prevails. They also appoint five members of the liquidation committee.
Once the liquidator is appointed the process is the same as for a members voluntary liquidation,
except that the liquidator reports to the liquidation committee rather than to the members meeting.
4 Authority of Agents
Marking scheme

Marks

General understanding of importance of authority

2

Express

2

Implied

2

Apparent /
Freeman & Lockyer v BPP
3

Necessity

2

Question total (max)

10

Suggested solution
Although express authority is the most straightforward example of an agent's authority there are other
circumstances where an agent can have authority to bind his principal in contract. Provided the agent has
authority a contract will be binding on the principal.
Authority can be actual authority (whether express or implied) or apparent authority. In addition, there can
be authority created by operation of law, most significantly by agency of necessity.
Express authority
This will occur when a principal gives an agent explicit authority to enter into a particular contract, for
example by written documentation.
ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions 7
Implied authority
Implied authority can arise in a number of ways.
(i) Where the contract made is incidental to the main contract.
(ii) Where in a particular market or business it is customary for an agent to have authority.
(iii) Where by reason of his position it is usual for an agent to have authority.
Apparent authority
Apparent authority is that which the principal represents to other parties he has given to his agent. Actual
implied authority and apparent authority normally co-exist together; however, it is possible for there to be
no actual authority and for apparent authority to still exist. Where a third party relies upon apparent
authority he is in effect arguing that as the principal has held out the agent as having authority he is now
estopped from denying it per Freeman & Lockyer v BPP. The third party must however have acted in
good faith.
Agency of necessity
The principle of agency of necessity applies when a principal entrusts his goods to the possession of his
agent for some particular purpose and whilst the agent has possession of the goods some emergency
arises in which action must be taken to protect the goods.
The emergency must require immediate action in circumstances where it is impossible to communicate
with the principal to receive his instruction in time. If these conditions are satisfied, the principal is bound
by any contract made by the agent on his behalf to protect his interests; an agency of necessity has
arisen.
5 Company registration
Marking scheme

Marks


1 mark for each document to be sent for formation:


Memorandum

1


Application for registration

1


Statement of capital + up to 3 marks for details provided

4


Statement of proposed officers

1


Statement of compliance

1


Trading certificate for plc + up to 3 marks for details provided

4


Question total (max)

10

Suggested solution
The following documents must be prepared for delivery to the Companies Registry (with payment of the
registration fee).
(a) Memorandum of association must be delivered along with an application for registration, Section 9
documents and a statement of compliance
(b) Application for registration must state the companys name, whether its registered office is located
in England or Wales, whether members liability is to be limited and if the company is to be public
or private.
If the company is to have a share capital a statement of capital and initial shareholders must be
provided along with a copy of the articles (if not supplied the model articles will be adopted)
(c) Statement of capital and initial shareholding must state:
1 total no of shares to be taken on formation by the subscribers to the memorandum of
association
8 ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions
2 the aggregate nominal value of those shares
3 for each class of share the total number and aggregate nominal value of those shares
4 the number and nominal value of shares with respect to each subscriber to the
memorandum
5 the amount paid up or unpaid on each share
(d) Statement of proposed officers detailing the particulars of the first directors and any persons who
are to be the first secretary if applicable
(e) Statement of compliance a document signed to say that the requirements of the Co Act have been
complied with.
(f) Additional requirements for public companies include the need to obtain a trading certificate. In
order to do so the following are required:
1 a minimum authorised share capital of 50,000 at least of quarter of which must be paid
up
2 details of the companys preliminary expenses
3 details of any amounts pad or to be paid to a promoter
6 Company names
Marking scheme

Marks


(a) 1 mark for each rule restricting use of company name:

Must have limited at the end only 1
Not the same as an existing company 1
Restrictions over offensive names, criminal acts, names needing permission 3
Power of registrar to force a change of name 1
Tort of passing off + case reference 2
Max 5


(b) 1 mark for each relevant point raised



Fiduciary duty
1

Duty to disclose transactions 1
Disclosure of any profits made to new buyer of the Co New Sombrero
Phosphate Co
2
Consequences for promoter of any breaches 1
Max 5

Question total
10

Suggested solution
(a) Company name
It is assumed that a private company limited by shares is being formed. The name may not
include the word 'limited' anywhere but as the last word of the name, i.e. the name must end with
the word 'limited'.
A company may not be registered with a name which is the same as that of another existing
company. There are also prohibitions or restrictions on the use of a name deemed to be offensive
or to constitute a criminal offence, or likely to give the impression that the company is connected
with the central government or a local authority. There is a list of words which may only be
included in a company name with official sanction.
ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions 9
Within a year of registration of a company with its chosen name the Registrar may require it to
change its name if he considers, usually as a result of protest by another company, that the
registered name is too similar to another. It is also open to another person, who need not be a
company, to bring a civil action against the company for the tort of passing off, i.e. conveying the
impression that the company is the claimant in order to appropriate his business goodwill; the
usual remedy in a successful passing off action is an injunction to restrain the company from the
use of its name for business purposes.
(b) A promoter owes a fiduciary duty to the company which he forms. The effect of that duty is that
the promoter must disclose to the directors of the company or to its shareholders any interest
which he may have in any transaction which he undertakes in forming the company.
If the promoter sells property to the company he must disclose that he is the seller. If he elects to
disclose this fact to the board of directors rather than to the shareholders the board must consist
of directors independent of the promoter. If by reason of the sale he obtains a profit he must also
disclose that profit. In addition, a promoter must not be negligent, i.e. he must exercise reasonable
skill and care. If the promoter makes adequate disclosure he is usually entitled to retain any profit
he may make. If, however, he fails to make proper disclosure the company may avoid, i.e.
terminate the contract and return the property to him and recover the price paid per Erlanger v
New Sombrero Phosphate Co. The company cannot usually both retain the property and require
the promoter to account for an undisclosed profit but in exceptional circumstances, e.g. where
there has been fraud or breach of other duties such as those of an agent, it may do so.
7 Insider dealing
Marking scheme

Marks


For each relevant point 1 mark
Describe the offence in outline 1
CJA 93 1
Define insider who this extends to 2
Define inside information types of security affected 2
Define dealing range of activities covered 2
Defences available:
No expectation of profit/avoiding loss 1
Market maker acting in good faith 1
Would have dealt anyway 1
Thought info was publicly available 1
Maximum sentences 1

Question total (max)
10

Suggested solution
The law attempts to prevent people in the know from making a profit or avoiding a loss in buying or
selling shares or other securities on the back of their inside knowledge and at the expense of open
dealings in the market. Significant inside knowledge of a takeover, an oil strike or a massive fall in
profits will affect the share price when it becomes known, so it is not right that insiders should benefit
from dealing in advance of the knowledge becoming generally known.
In the context of the Criminal Justice Act 1993 there are three ways in which an insider dealing offence
can take place.
Dealing in securities while in possession of inside information as an insider, the securities being
price-affected by the information.
10 ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions
An individual, in possession of information as an insider, encouraging another person to deal in
the price-affected securities, knowing or having reasonable cause to believe that dealing would
take place.
Disclosing information as an insider to another person otherwise than in the proper performance
of the functions of his or her employment, office or profession.
Dealing means acquiring or disposing of, or agreeing to acquire or dispose of, relevant securities
whether directly or through an agent or nominee or person acting according to direction.
Inside information is price-sensitive information relating to a particular issuer of securities that are price-
affected, and not to securities generally. If it were made public, it would have a significant effect on the
securitys price. It must be specific or precise.
A person has information as an insider if it is inside information and they know it to be inside information,
and they have it (and know they have it) from an inside source. They will have it by virtue of being a
director, employee or shareholder of the issuer of securities, or through access because of employment,
office or profession (such as a management consultant, auditor or accountant), or from a person who falls
into one of these categories.
Regarding the offences of dealing and encouraging others to deal, an accused person may put forward
the defences that:
They did not expect there to be a profit or avoidance of a loss
They had reasonable grounds to believe that the information in question had been disclosed
widely enough to ensure that those taking part in the dealing would not be prejudiced by having
the information
They would have done what they did even if they had not had the information, for example
because the securities had to be sold to pay a pressing debt
Regarding the offence of disclosing information, an accused person may put forward the defence that
They did not expect any person to deal, or that
Although dealing was expected, making a profit or avoiding a loss were not expected
8 Employment law
Marking scheme

Marks

One mark for each relevant rule explained max of 7

Implied duty to obey employers instructions
1
Duty of employer per HASAWA 74 1
Consequences of employers breach of H&S 1
Define summary dismissal 1
Define wrongful dismissal 1
Define unfair dismissal 1
Fair reasons for dismissal 1 each to a max of 3 3
Remedies for unfair dismissal 3
Max 7

Apply to Idris:
Hellfirm breached contract re: H&S 1
Idris has ground for automatic unfair dismissal 1
Idris can claim wrongful and/or unfair dismissal 1
Max 3

Question total
10

ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions 11
Suggested solution
The issue in this case is whether Idriss dismissal is wrongful and/or unfair, what action he should take
and what remedies may be available to him.
The relevant law relating to Idriss case is stated as follows.
An employee owes a fundamental duty of faithful service to their employer. An implied duty is to obey the
employers instructions, unless they require an unlawful act or exposure to personal danger, or are
instructions that are outside the employees contract.
As there is an overriding duty of mutual trust and confidence between employee and employer the latter
owes the former a duty at common law, and under the Health and Safety at Work Act 1974, to take care
of employees health and safety. Breach of the legal duty may entitle one party to treat the employment
contract as discharged by breach.
An employment contract may be terminated by notice in line with the contracts terms, or in line with the
statutory minimum. This means that for an employee who has been continuously employed for more than
two years, at least one weeks notice per year of employment should be given.
Summary dismissal occurs where the employer dismisses the employee without notice. If this is done
where the employee has committed a serious breach of contract the employer incurs no liability. If there is
no serious breach then summary dismissal constitutes breach of contract so under common law the
employee may claim a remedy for wrongful dismissal. The claimant must prove that they were dismissed
in breach of contract and that they have suffered loss as a result. They may as a result be entitled to
damages for loss of earnings during the rightful notice period.
A dismissal cannot be wrongful if it was justified, for example because the employee wilfully disobeyed a
lawful order in a way that amounts to a wilful and serious defiance of authority. Other justifications include
misconduct, dishonesty, incompetence or neglect, gross negligence, immorality and drunkenness.
When claiming damages for loss of earnings for wrongful dismissal, the claimant must show that they
took steps to mitigate their loss of earnings, be seeking other employment, for instance.
Every employee who qualifies to claim is entitled not to be unfairly dismissed under statute (s94
Employment Rights Act).
Persons employed to work outside the UK do not have this right, nor do employees dismissed while
taking unofficial strike or other industrial action.
To claim a remedy for breach of the right not to be unfairly dismissed, the employee must show that: they
have been continuously employed for at least one year (two years for those employed after April 2012);
they have been dismissed; they have been unfairly dismissed.
The reason for dismissal must therefore be taken into account. Potentially fair reasons include: lack of
capability or qualifications; the employees conduct; redundancy; legal prohibition on employment; some
other substantial reason. Reasons which are automatically fair include taking part in unofficial industrial
action, and being a threat to national security. Reasons which are automatically unfair include the fact
that the employee was taking steps to avert danger to health and safety at work.
In order to help establish what was the reason for dismissal the employer may be required to give the
employee a written statement of the reason for dismissal.
Remedies for unfair dismissal can include reinstatement, re-engagement and compensation.
Applying the law to Idris, it is evident that Hellfirm Ltd breached his contract of employment by ordering
him to breach health and safety rules, and also by terminating his contract by summary dismissal ie with
less than four weeks' notice. Idris refusal to obey instructions was not a breach of his employment
contract since the instruction was unlawful.
Idris dismissal was for an automatically unfair reason, since his action meant that he was taking steps to
avert danger to health and safety at work.
12 ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions
In conclusion:
Idris should seek a written statement from Hellfirm Ltd of the reasons for his dismissal.
Idris should lodge a claim for wrongful dismissal on the grounds of summary dismissal and breach of
contract by the employer relating to health and safety. Idris may seek damages for notice not given, but
should make sure that he seeks to mitigate his loss as much as possible.
Idris should also lodge a claim for unfair dismissal on the grounds of an automatically unfair reason. He
may seek reinstatement for re-engagement, or he may seek compensation: a basic award and a
compensatory award.
9 Auditor's liability
Marking scheme
Marks

1 mark for each point of law explained max 7

Shareholders liability for unpaid calls

1

Explain the meaning of tort
1
Duty of care must be owed Donoghue v Stevenson
2
Breach of duty
1
Causation Barnett v Chelsea
2
Remoteness Wagon Mound
2
No duty to potential investors Caparo
2
Max
7


Clarissa has to pay 4,000 on unpaid calls
1
Brimful owe a duty of care to shareholders as a body
1
Brimful owe no duty to Clarissa as a potential investor when accounts were published
1
Max
3


Question total
10

Suggested solution
The issues in this question are whether Brimful & Co has any liability to Clarissa for negligence, and
whether Clarissa has any liability to the creditors of Abaca plc.
In relation to Brimful & Co, the tort of negligence is causing loss to another person by a failure to take
reasonable care when there is a duty to take reasonable care. Every person owes a duty of care to his
neighbour, that is a person who is likely to be closely and directly affected by an act (Donoghue v
Stevenson ). For a duty of care to exist, there must be proximity between the parties, the harm must have
been reasonably foreseeable, and considering the circumstances it must be fair, just and reasonable to
impose a duty of care (Caparo Industries plc v Dickman).
Where there is a duty of care, for negligence to be proved there must be a breach of that duty, which will
be construed where the standard of reasonable care in the circumstances is not met. In the case of
professions such as auditing, person who hold themselves out to possess a particular skill should be
judged on what a reasonable person possessing the same skill would do in the situation, rather than that
of the reasonable man alone. Professions are able to set their own standards of care for their members
to meet and therefore members should be judged against those standards rather than those laid down by
the court.
If reasonable care has not been taken and the duty of care is thereby breached, it must still be proved
that the other party suffered actual damage or loss as a consequence of the negligent partys actions.
The claimant must therefore prove that but for the defendants actions they would not have suffered
damage or loss. If they would have suffered it whatever action was taken by the defendant then they may
ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions 13
not claim for that harm (Barnett v Chelsea and Kensington HMC ). They also may not claim in respect of
damage that arises from a cause that is too remote from the actions of the defendant, or that could not
have been foreseeable at the time by the defendant (The Wagon Mound ).
In relation to professional negligence, the Caparo decision highlighted that there is a distinction between
giving advice or an opinion in the knowledge that a particular person was contemplating a transaction and
would rely on the information in deciding whether or not to proceed with it (that is, there is a special
relationship), and preparing a statement for general circulation, which could foreseeably be relied upon by
unknown persons for a variety of different purposes. As a result of making this distinction, the Caparo
case has meant that a public companys auditors owe no duty of care to the public at large who rely on
the audit opinion when deciding to invest.
In relation to Clarissa, a companys share capital is divided into shares which have a face value or
nominal value. Shares may be issued at a premium to their face value, but they may not be issued at a
discount. They may, however, be issued partly paid, which means that there is an amount outstanding to
be paid by the shareholder to the company should they be required to do so. Once the shareholder has
paid the full nominal value of the shares, plus the whole of any premium, the company has no further call
on their assets; the shareholders liability for the unpaid debts of the company is limited to the amount
unpaid, if any, on their shares.
When a company enters compulsory liquidation on the grounds that it is unable to pays its debts as they
fall due it is technically insolvent. Its liquidator, on behalf of the creditors, is entitled to seek a contribution
to the companys assets from any shareholder with unpaid share capital.
Applying these rules to the facts of the case, it is evident that Brimful and Co can defend any claim for
negligence against it by Clarissa on the grounds that it owed her no duty of care as a potential investor
when it issued its clean audit opinion, even though it later transpired that the financial statements on
which the opinion was expressed were inaccurate.
It is also evident that as a holder of partly paid shares Clarissa is liable to pay Abaca plcs liquidator the
amount that is unpaid on her shares, that is 20,000 (1.00 80p) = 4,000.
10 Debentures
Marking scheme

Marks

One mark for each relevant point:

Floating charge over class of assets 1
Floating charge crystallising events 1
Fixed charges rank first upon creation 1
Fixed charge holders control charged assets 1
Effect of negative pledge clauses 1
Max 4

Must be registered within 21 days 1
Date of charge effective from creation date if registered within time limits 1
If charge not registered on time charge effective at courts discretion only 1
Max 2

Prince Bank first 1
Usha second, frank third 1
Max 2
Stops subsequent fixed charges taking priority 1
Must inform subsequent charge holders of NPCs existence 1
Max 2
Question total
10

14 ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions
Suggested solution
(a) Borrowing by a company may be secured by means of a charge, which is an encumbrance on the
companys property giving the holder of the charge, the lender, certain rights over the property.
Companies have the advantage over other forms of business in that they can offer two forms of
security to the lender: fixed charges (over specific company assets such as a building or a
machine at the moment the charge is created; these can also be offered by sole traders and
partnerships) or floating charges (over all the assets of the company, including working capital
items such as inventory and receivables).
A fixed charge gives the lender the right of enforcement against that asset if the company defaults
on payment of interest and/or capital. This means that the lender can sell the asset to meet the
debt owed. If the company goes into liquidation, debts secured by a fixed charge over specific
assets rank first in priority for payment.
An asset which is subject to a fixed charge may not be sold by the company without the charge-
holders consent. Either the debt is repaid, which releases the charge and so frees the asset to be
sold, or the asset is sold to the purchaser still subject to a charge.
A fixed charge gives the lender rights in the event that interest or capital are unpaid: depending on
the terms of the charge deed, this may be to take possession of an asset, to sell the asset, or to
appoint a receiver of it, provided the company is not in administration.
A floating charge is a charge on a class of assets of a company, present and future, which is
changing from time to time in the ordinary course of the companys business. Until the holders
enforce the charge the company may carry on business and deal with the assets charged, as the
charge does not attach to the assets until such time as it crystallises.
If the company breaks the terms of the charge deed, say by failing to pay interest or capital, or
going into liquidation, the charge crystallises into a fixed charge on the assets held at the point of
crystallisation. The charge-holder then has similar rights to the holders of a fixed charge as above.
A receiver appointed under a floating charge is called an administrative receiver.
(b) If a company has more than one charge, and/or more than one type of charge, the rule is that
fixed charges have priority over floating charges, and within each category they rank in order of
creation.
All charges must be registered with the Registrar of Companies within 21 days of their creation;
failure in this respect makes the charge ineffective against any liquidator of the company, that is
the debt is effectively unsecured in a liquidation, although it may still be enforced against the
company itself. All charges must also be registered in the companys register of charges; failure in
this is an offence but does not invalidate the charge.
(c) The fixed charge to Prince Bank plc takes precedence over either of the floating charges, even
though it was registered after Franks floating charge. Of the two floating charges, Usha's ranks
before Franks since it was created before his and was correctly registered within 21 days of
creation. Thus Prince Bank plc will rank for payment before Usha, who ranks before Frank.
(d) A lender who takes a floating charge may include a negative pledge clause in the charge deed,
which protects them against a subsequent lender being given a fixed charge that ranks in priority.
However, this is ineffective against a subsequent fixed charge holder unless the latter has actual
notice of the prohibition.
ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions 15
16 ACF4(ENG)EFM(J)14 MOCK 1 Suggested solutions

































BPP House, Aldine Place, London W12 8AA
Tel: 0845 0751 100 (for orders within the UK)
Tel: +44 (0)20 8740 2211
Fax: +44 (0)20 8740 1184
www.bpp.com/learningmedia