Company Law Sample Mark Scheme

ICSA Qualifying Programme
Company Law
Sample mark scheme 2019
© ICSA 2019 Page 1 of 17

Section A
Question Answer Mark
number
1 B – Creation of a floating charge

Total (1)

number
2 Yes – directors can decline to register a share transfer, but only where:
 they are granted this power in the articles (1); and
 they provide reasons within 2 months (s.771). (1)
Reward correct responses even where s.771 is not cited.

Accept “where the shares are certificated and a proper instrument of transfer
is not received by the company”
Accept “if the agreement to transfer shares is tainted by illegality”
Accept “if the transferee does not have the capacity to hold shares”
Total (2)

number
3 A person has information as an insider if, and only if:

 they know that it is inside information (1) and
 they know that they have it, from an inside source (1).
Reward other valid responses
Total (2)

number
4 False – only quoted companies are required to prepare a directors’

remuneration report.
Total (1)

number
5 The steps are:

 Pass a special resolution (1).
 Deliver form RR01 (plus accompanying documents) to Companies House
(1).
 Comply with the minimum capital requirement (1).
Accept “Complete form RR01”
Accept “File form RR01”
Reward other valid responses.
Total (3)

number
6 Up to 5 marks from the following:

Any member of the company may inspect the register free of charge (1) and
anyone else may inspect it on payment of a fee (1).
Inspection requests should state the reason for the inspection. If this is not
included it should be sought by the company (1).
The company must either comply with the request or seek permission from
the Court to refuse it (1). Permission to refuse inspection will only be given
where the request is not made for a proper purpose (1). If the Court agrees
the request is not for a proper purpose it will make an order directing the
company to refuse it (1).
Total (5)

number
7 Award up to 5 marks from the following:

 The petition for winding up is a remedy of last resort (1).
 It will generally not be approved where an alternative remedy is
available (1).
 The definition of “just and equitable” is very wide, giving the Court
wide discretion (1).
 Examples of situations where winding up has been deemed
appropriate include where the company is set up for a fraudulent
purpose (1), where the company is deadlocked (1) or where its
objects become impossible (1).
 The key importance of s.122(1)(g) is to companies which are quasi-
partnerships (see e.g. Ebrahimi v Westbourne Galleries) (1).
Answers need not make reference to all the examples above.
Total (5)

number
8 Award up to 6 marks from the following:

A disqualification order is a court order (1) which provides that for a specified
period (1) the disqualified person must not:
 be a director of a company (1) or be involved in any way with the
formation, promotion or management of a company (1), unless they
have the permission of the court (1)
 act as a receiver of the company’s property (1), unless they have the
permission of the court
 act as a company secretary (1)
 act as an insolvency practitioner (1)
Total (6)

Section B
Question Indicative content
number
9 Answers should evaluate the validity of Alina and Mary’s actions and so should primarily focus
25 marks on the validity of the issue and allotment of shares, the potential breaches by the directors’ of
their duties and the unlawful payment of the dividend.
Answers could include the following content:
Allotment of shares
 Swan is a private limited company with only one class of share so the directors will have the
authority to allot shares, subject to any restriction in the articles (s.550 Companies Act 2006).
 However, the issue of new shares will dilute the holdings of the existing members (in fact this
is the reason for the issue), so any new shares should first be offered to the existing
members in proportion to their existing shareholding in accordance with the rules on pre-
emption rights set out in s.561.
 It appears that the pre-emption provisions have been breached, so although the allotment is
valid, Alina and Mary will be liable to compensate any shareholders who have lost out.
Directors’ duties
 Alina and Mary have a duty to exercise their powers only for the purposes for which they
were conferred (s.171(b)).
 If they have exercised the power to allot shares for the purpose of diluting Shaun’s
shareholding and preventing him from voting them out of office, this amounts to a breach of
the s.171(b) duty.
 Where directors act for multiple purposes, the duty can still be breached if the dominant
purpose was an improper one.
 Mary may be in breach of the duties in s.173 (independent judgement) and s.174 (duty to
exercise reasonable care, skill and diligence) by going along with the proposal to pay a
dividend without question.
 Alina and Mary are also likely in breach of the general duty in s.172. The duty requires
directors to act in good faith to promote the success of the company for the benefit of its
members as a whole. Answers may query whether the good faith duty has been discharged.
If the allotment was made for a purpose other than to promote the success of the company,
this may also amount to a breach. Section 172(1) also requires directors to have regard to
the interests of various stakeholders, the long term consequences of decisions and the
company’s reputation for high standards of business conduct. Arguably these aspects of the
duty have also been breached.
Payment of dividend
 The Model Articles permit dividends to be paid following a recommendation by the board and
a declaration by the company made by an ordinary resolution. There is no evidence on the
facts of a board meeting having taken place. Alina, Mary and Timothy have enough shares
between them to pass an ordinary resolution declaring the dividend, but if the proper
procedure has not been followed, the process for declaration does not comply with Model
Articles.

 The key issue is that dividends may only be paid out of profits available for the purpose
(s.830), which are defined as are the company’s accumulated, realised profits, less its
accumulated realised losses.
 As Swan has no distributable reserves, it appears that the dividend has been paid out of
capital.
 Because the distribution is unlawful, Alina and Mary will be personally liable to repay the
money distributed to Swan Ltd (Re Exchange Banking Co,Flitcroft’s Case). The members
can also be liable if they knew, or had reasonable grounds for believing, that the dividend
was made unlawfully (CA 2006, s 847).
Level Mark Descriptor

0 No rewardable material.
Level 1 (Fail) 1-12  The answer may attempt to explain the definitions of key terms such as
allotment of shares, directors’ duties and dividends, but these are likely to
be unclear and not explained in full.
 The answer demonstrates limited understanding of the legal issues arising.
This is communicated in a basic way with simple or generalised
statements.
 Points made are superficial and not directly linked to the scenario in the
question.
 There is little application of relevant knowledge and understanding to the
scenario
 The answer includes limited critical analysis of the facts
 Any analysis is not used to make a judgement/draw conclusions and is not
supported by examples or sources.
Level 2 (Pass) 13-16  The answer includes the definitions of key terms such as allotment of
shares, directors’ duties and dividends.
 The answer demonstrates understanding of the legal issues arising and
expresses ideas with clarity.
 Points made are relevant and linked to the scenario in the question.
 There is application of relevant knowledge and understanding to the
scenario
 The answer includes analysis of the facts.
 Analysis is used to make a good judgement/draw conclusions, supported
by examples.
Level 3 17-25  The answer includes a clear definition of key terms such as allotment of
(Merit/distinction) shares, directors’ duties and dividends.
 The answer demonstrates a deeper understanding of the legal issues
arising and these are communicated in a logical writing structure.
 A range of points made are relevant and linked to the scenario in the
question.
 There is a good application of relevant knowledge and understanding to the
scenario
 The answer includes good analysis of the facts.
 Analysis is used to make a clear judgement/draw conclusions and supports
this with examples.

number
10 (a) The first part of the answer should briefly explain the meaning of corporate personality and then
10 marks discuss when the veil of incorporation has been lifted at common law, with reference to relevant
cases. Answers in both parts should not be penalised for being overly descriptive; an answer which
is largely descriptive or narrative may still achieve a pass grade under the criteria below. In order to
merit higher marks, there should be an attempt at evaluation, critique or analysis of the case law.
Corporate personality
 Corporate personality refers to the fact that in law, a company has a legal personality
separate from that of its founders and members. As such it has many of the same rights and
attributes as natural persons. A company can own property, enter into contracts, borrow
money, employ staff, sue and be sued in its own right.
 The significance of the company’s separate legal personality is explored in Salomon v
Salomon [1897]. The House of Lords judgment in that case strongly upholds the clear
separation between the company and its personnel, re-stating that directors and members
are not liable for the debts of the company beyond their original capital contribution. Thus,
corporate personality (also called the corporate veil) can be used to shield the company’s
personnel from liabilities incurred by the company.
 Trading via a corporation with a separate legal personality is appealing because it protects
the company’s directors from acquiring legal responsibility for the company’s debts and
other liabilities. However, it is also open to abuse. The courts therefore have the power to
disregard corporate personality at common law (also called lifting the veil of corporate
personality). Historically howeverthey have been reluctant to dismantle corporations which
have been properly set up in accordance with the law.
Development of the rules on piercing the veil
Instances where the corporate veil has been pierced include the following.
 The company is being used as a vehicle to effect a fraud, or as a façade or sham as in Gilford
Motor Home Co v Horne [1933].
 Where an agency relationship existed between a parent company and its subsidiary such as
Smith Stone and Knight Ltd v Birmingham Corporation [1939].

Level 1 (Fail) 1-4  The answer may attempt to explain the definitions of corporate personality
and disregarding corporate personality/piercing the veil, but these are likely
to be unclear and not explained in full.
statements.

 There is little application of relevant knowledge and understanding which is
not supported by an evaluative statement
 The answer includes limited critical analysis of the issues surrounding
corporate personality
 Any analysis is not used to make a judgement/draw conclusions and is not
supported by relevant examples or sources.
Level 2 (Pass) 5-6  The answer includes the definitions of key terms such as corporate
personality and disregarding corporate personality/piercing the veil.
 There is application of relevant knowledge and understanding but
supported by a limited evaluative statement
 The answer includes critical analysis of the issues surrounding corporate
personality
 The analysis is used to make a judgement/draw conclusions.
Level 3 7-10  The answer includes a clear and accurate definition of key terms such as
(Merit/distinction) corporate personality and disregarding corporate personality/piercing the
veil.
 The answer demonstrates a good understanding of the legal issues arising
and these are communicated in a logical writing structure.
 There is a good or exellent application of relevant knowledge and
understanding supported by an evaluative statement.
 The answer includes good or excellent analysis of the issues.
 The analysis is used to make a clear judgement/draw conclusions and
supports this with examples or primary sources.

number
10 (b) A narrative/descriptive answer should receive a pass mark provided it is accurate and complete.
15 marks Higher marks (Level 3) should be awarded where there is an attempt at analysis, critique or
evaluation.
The judgment in Prest
 The leading current authority on piercing the veil is that of the Supreme Court in Petrodel
Resources Ltd v Prest [2013]. The case concerns the distribution of assets in a divorce
settlement and as the court found that the assets concerned were held on trust for the
claimant spouse, there was no need for the court to pierce the corporate veil in this case.
 However the judgment does contain clear guidelines (albeit obiter) on when a company’s
corporate personality may be disregarded. The guidelines are very restrictive. Lord
Sumption explains that the only instance when the courts can disregard a company’s
corporate personality is where the ‘evasion principle’ applies. This is where “a person is
under an existing legal obligation or liability or subject to an existing legal restriction which
he deliberately evades or whose enforcement he deliberately frustrates by interposing a
company under his control”. He also explains that piercing the veil is a remedy of last resort
and should not be used unless no other means exists to reach the required outcome.
 Although the Justices in Prest were not unanimous in their views on disregarding corporate
personality, subsequent decisions such as that in Wood v Baker [2015] indicate that the
restrictive approach endorsed by Lord Sumption is likely to be followed in the future.

Level 1 (Fail) 1-7  The answer may attempt to explain the judgment, but this is likely to be
unclear and inaccurate.
statements.
 There is little application of relevant knowledge and understanding and the
answer is largely descriptive.
 The answer includes limited critical analysis of the issues surrounding
corporate personality.
 Any analysis is not used to draw conclusions and is not supported by
relevant examples or sources.
Level 2 (Pass) 8-9  The answer includes a sufficient explanation of the judgment.
 There is application of relevant knowledge and understanding.

 The answer includes critical analysis of the issues surrounding corporate
personality.
 The analysis is used to draw conclusions and examples given.
Level 3 10-15  The answer includes a clear, accurate and comprehensive explanation of
(Merit/Distinction) the judgment
 There is a good application of relevant knowledge and understanding
supported by an evaluative statement.
 The answer includes good critical analysis of the issues.
 The analysis is used to draw conclusions and supports this with examples
or primary sources.

number
11 (a) In order to bring a successful claim, Mercy must first establish that James has breached one or
17 marks more of his duties as a director. Directors owe their duties to the company, so she must then satisfy
the statutory tests to gain permission to bring a derivative claim on the company’s behalf. Answers
should deal briefly with directors duties before turning to concentrate on the statutory process for
bringing a claim.
Directors’ duties
There are several potential breaches of duty here.

 s.171 – James has breached this duty by acting outside his powers and/or using his powers
for improper purposes.
 s.175 – James has breached the duty to avoid conflicts of interest. This duty is applied very
strictly. This is clear from the caselaw (e.g. Bhullar v Bhullar).
 Conflicts of interest may be authorised, but on the facts, the other director was unaware of
the transaction; if the conflict had been disclosed, the board would have the option of
authorising it which would absolve James.
 s.172 – James is not acting in good faith, and is in breach of the general duty to promote the
success of the company for the benefit of the members as a whole.
The derivative claim
 The statutory derivative claim is available under the Companies Act 2006. The claim does
not overrule the rule in Foss v Harbottle but it does allow shareholders to bring a claim on
the company’s behalf, subject to the strict criteria set out in s.260.
 The grounds for a claim are set out in s.260(3). A claim may only be brought where there is
negligence, default, breach of duty or breach of trust by a director. Applying this to the facts,
there are several breaches here which could potentially justify a claim.
 Under s.261(1), Mercy can apply for permission to bring a claim if she can demonstrate that
there is a prima facie case. As she is a member and has prima facie evidence of breaches
of duty by James, she is likely to satisfy this test.
 The court must refuse permission to proceed with the claim if any of the conditions in
s.263(2) are satisfied, namely if a hypothetical director acting in accordance with s.172
would not seek to continue it, or that the act complained of has been authorised by the
company. On the facts the claim appears to be in the company’s best interests.
 Finally the court has discretion to refuse to allow the claim to continue under s.263(3) and
(4). The Act directs the court to consider certain specific factors (e.g. cost and likelihood of
recovering compensation) and also to have regard to the views of the members. Here, the
views of Michael will be relevant – if he agrees the claim should go ahead, this will make the
court more likely to grant permission.
 In general, the courts have been reluctant to grant permission for derivative claims to
proceed – see cases such as Franbar Holdings v Patel and Mission Capita v Sinclair.

Level 1 (Fail) 1-8  The answer may attempt to define the derivative claim, but this may be
unclear and not explained in full.
 The answer demonstrates limited understanding of the relevant process.
statements.
 There is little application of relevant knowledge and understanding.
Level 2 (Pass) 9-10  The answer includes sufficient definition of the derivative claim.
 The answer demonstrates understanding of the relevant process and
Level 3 11-17  The answer includes a clear definition of the derivative claim including
(Merit/Distinciton) reference to primary sources.
 The answer demonstrates a good understanding of the relevant process
and this is communicated in a logical writing structure.
 There is a good application of relevant knowledge and understanding.

number
11(b) The question requires discussion of what ratification is and whether it is applicable here, and if so,
8 marks the likely consequences.
Ratification
 Ratification means approval or authorisation of an action taken by a director. Ratification

takes place after the unauthorised act has been completed.
 Members can usually ratify an act in breach of duty by a director via a resolution of the
company. James owns 60% of the company’s shares, which in theory means he could pass
an ordinary resolution alone. However, see bullet point 5 below.
 The effect of ratification is usually to absolve the director from a breach of duty in respect of
the ratified act.
 In respect of the derivative claim, the Court must refuse permission to continue a claim
where the act or omission which is the basis of the claim has been authorised by the
company (s.263(2)). If James’s actions were to be ratified then the effect would be to bring
the derivative claim to an end.
 However, although many breaches of duty are capable of ratification, s.239 prevents
shareholders voting on a resolution to ratify their own actions as directors, so James could
not vote to ratify his own acts. Michael and Mercy own 30% and 10% of the company’s
shares, so if James cannot vote then Michael has more than 50% of the remaining voting
shares. However, it is unlikely on the facts that Michael or Mercy would agree with James’s
actions.
 In addition, dishonest acts can not generally be ratified (Goldtrail Travel Ltd v Aydin). The
transfer to Avocado could also give rise to criminal liability.
 Therefore, applying this to the facts, James’s breaches of duty are not capable of ratification
and the derivative claim will be unaffected.

Level 1 (Fail) 1-3  The answer may attempt to define ratification, but this is likely to be unclear
and not explained in full.
 The answer demonstrates little or no understanding of the legal issues
arising. This is communicated in a basic way with simple or generalised
statements.
question.
 There is little application of relevant knowledge and understanding.
Level 2 (Pass) 4-5  The answer includes the definition of ratification.
 Points made are relevant and linked to the scenario in the question.

Level 3 6-8  The answer includes a clear definition of ratification including reference to
(Merit/Distinciton) primary sources.
question.
 There is a good application of relevant knowledge and understanding.

number
12 The question requires candidates to discuss the course of action the liquidator will take. Answers
25 marks should therefore begin by explaining the role of the liquidator, which is to collect the assets of the
company, convert them into cash and use the resulting funds to pay the company’s debts.
Fenella must then distribute any remaning assets to those entitled to them in a statutorily
prescribed order.
Fenella must consider how to ensure she has increased the pool of assets as far as possible,
and then decide how to distribute them.
Collecting assets
 Fenella will start by collecting all the company’s cash and non-cash assets including
plant and machinery, vehicles, stock etc.
 She should also look to see whether she can increase the size of the asset pool by
requiring anyone to make a contribution to the company’s assets.
 Directors may be required to repay any assets wrongly distributed prior to the liquidation.
 In this case answers should consider wrongful trading and the creation of a preference.
Wrongful trading
 Wrongful trading occurs where the company has gone into insolvent liquidation, and at
some time before the commencement of the winding up, a director knew or ought to
have known that there was no reasonable prospect of avoiding insolvent liquidation
(s.214 IA 1986).
 The fact that the company continued to trade whilst technically insolvent does not
automatically mean that wrongful trading has occurred; the question is whether the
directors knew there was no reasonably prospect of avoiding insolvent liquidation.
 On the facts, the auditor’s advice in January 2018 appears to indicate that they ought to
have known liquidation was inevitable.
 If Desi and Ethan have engaged in wrongful trading, they can be required to make a
contributrion to the company’s assets as the court thinks proper.
Creation of a preference
 A preference is created where a company does or allows something to be done which

has the effect of putting a creditor, surety or guarantor in a better position which, in the
event of an insolvent liquidation, they would otherwise have been in (s.239 IA 1986).
 Where the creditor is a connected person (such as a director), preferences will be
unlawful if created up to 2 years prior to the liquidation.
 The repayment of the loan to Ethan therefore appears to be a preference.
 Fenella can apply to the court for an order restoring the company to the position it would
have been in had the preference not been made (e.g. compelling Ethan to repay the
£10,000).

Distribution of assets
Answers should explain the order of distribution, as follows

 Liquidation expenses, £5,000, are repaid first.
 Preferential creditors are repaid next. The unpaid wages are preferential debts, but note
that only the first £800 per employee will be classed as preferential. The remainder will
rank as unsecured debt.
 Unsecured creditors are then repaid. This will include the balance of the £50,000 owed
to the employees as well as any trading debts e.g. amounts owed to suppliers. Answers
should note that the unpaid tax bill of £25,000 ranks as an unsecured debt. If there are
not sufficient assets to pay all unsecured debtors in full then the pari passu rule applies
which means the funds are shared so that all will receive an equal proportion of the
money owed to them.
 Finally if there are any assets left, they may be distributed to the members. However,
given that the company’s assets were £70,000 and its debts exceed this (see below)
amount, it is unlikely that the members will receive anything at all, even if the preference
is repaid.
 £5000 in liquidation expenses
£50,000 in wages (£800 per head ranking as preferential)
£25,000 in tax
= £80,000 in liabilities plus any additional trading debts not specifically mentioned
 Therefore even if the £10,000 preference is recovered there will be insufficient assets to
return anything to the members.

Level 1 (Fail) 1-12  A few legal issues are identified but are not directly linked to the scenario
and are accompanied by little detail.
 The answer demonstrates little or no understanding of the insolvency
regime. This is communicated in a basic way with simple or generalised
statements.
question
 Any analysis is not used to make a judgement and is not supported by
examples
Level 2 (Pass) 13-16  Legal issues are identified which are relevant to the scenario and described
in detail.
 The answer demonstrates understanding of the insolvency regime and
 Points made are relevant and linked to the scenario in the question
 The analysis is used to make a judgement and is supported by examples.
Level 3 17-25  A range of legal issues are clearly identified, the majority of which are linked
(Merit/Distinction) to the scenario and described in some detail.
 The answer demonstrates a good understanding of insolvency regime and
is communicated in a logical writing structure with supporting examples.

question
 The analysis is used to make a clear judgement and supports this with
examples

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ICSA Qualifying Programme

© ICSA 2019 Page 1 of 17

1 B – Creation of a floating charge

Question Answer Mark

Reward correct responses even where s.771 is not cited.

Question Answer Mark

3 A person has information as an insider if, and only if:

Question Answer Mark

4 False – only quoted companies are required to prepare a directors’

© ICSA 2019 Page 2 of 17

5 The steps are:

Question Answer Mark

6 Up to 5 marks from the following:

Question Answer Mark

7 Award up to 5 marks from the following:

© ICSA 2019 Page 3 of 17

8 Award up to 6 marks from the following:

© ICSA 2019 Page 4 of 17

Answers could include the following content:

© ICSA 2019 Page 5 of 17

Level Mark Descriptor

© ICSA 2019 Page 6 of 17

Answers could include the following content:

Development of the rules on piercing the veil

Level Mark Descriptor

© ICSA 2019 Page 7 of 17

© ICSA 2019 Page 8 of 17

Answers could include the following content:

The judgment in Prest

Level Mark Descriptor

© ICSA 2019 Page 9 of 17

© ICSA 2019 Page 10 of 17

Answers could include the following content:

There are several potential breaches of duty here.

The derivative claim

© ICSA 2019 Page 11 of 17

© ICSA 2019 Page 12 of 17

Answers could include the following content:

 Ratification means approval or authorisation of an action taken by a director. Ratification

Level Mark Descriptor

© ICSA 2019 Page 13 of 17

© ICSA 2019 Page 14 of 17

Answers could include the following content:

 A preference is created where a company does or allows something to be done which

© ICSA 2019 Page 15 of 17

Answers should explain the order of distribution, as follows

Level Mark Descriptor

© ICSA 2019 Page 16 of 17

© ICSA 2019 Page 17 of 17

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