Company law questions often test whether you can separate a legal principle from its application to a company’s facts. The topics below cover recurring areas: separate personality, contracts, authority, directors’ duties, shareholder remedies, distributions and groups of companies.
Company law differs between jurisdictions. These questions use broadly taught common-law principles, but statutes and remedies vary. If you are preparing for a particular course or qualification, check its syllabus and the relevant legislation or official guidance. A practice set built from a candidate’s Company Law board in MySummaries might begin like this:
1. Separate legal personality
This tests whether you distinguish the company’s legal identity from the people who own or manage it.
Mira owns all the shares in Northstar Ltd and is its only director. Northstar Ltd enters a contract in its own name, then fails to pay a supplier. There is no guarantee, fraud or other special basis for personal liability. Who is ordinarily liable for the company’s debt?
Northstar Ltd is ordinarily liable because incorporation gives it a legal personality distinct from its members. The strongest distractor is option 1: control or sole ownership alone does not make a shareholder liable for company debts. Exceptions depend on the governing law and facts.
The key is to start with the company’s separate personality, then look for facts that could justify an exception. Do not treat ownership, control and liability as interchangeable.
2. A contract made before incorporation
This tests who is party to a contract signed on behalf of a company that does not yet exist.
Before Atlas Ltd is incorporated, Ravi signs a supply contract ‘for and on behalf of Atlas Ltd (to be formed)’. The supplier agrees. After incorporation, Atlas Ltd uses the supplied goods, but no new contract is signed and the supplier does not release Ravi. Under the conventional common-law approach, which is the best answer?
A company that did not exist at the time of contracting generally cannot be the original contracting principal or ratify that contract at common law. The strongest distractor is option 1: later use of the goods does not, by itself, amount to common-law ratification by the not-yet-existing company. Statutory rules may alter the result.
In an exam answer, identify the date of incorporation and the contract’s wording before stating the likely liability. Then check whether the applicable statute changes the common-law position.
3. Authority to bind the company
This tests apparent authority and the importance of who made the representation that an agent had authority.
A company’s board has repeatedly allowed its operations director to negotiate and sign ordinary supply contracts. The company’s conduct has led a supplier reasonably to believe that the director can sign a contract of that kind. The director signs another ordinary supply contract, although the board privately gave the director a lower internal spending limit. The supplier knows nothing about that limit. What is the strongest conclusion?
The company’s conduct may represent that the director has authority for contracts of this kind, and the supplier has relied on that appearance. The strongest distractor is option 3: a job title alone does not confer unlimited authority. The result depends on the facts and the applicable rules on authority.
Separate actual authority, which comes from the company’s internal arrangements, from apparent authority, which concerns what the company represented to the third party. A hidden limit does not automatically answer the external liability question.
4. Share issues and proper purpose
This tests whether directors use a power for its proper purpose, even if they believe their decision benefits the company.
A board has power to issue new shares to raise finance. A takeover proposal is pending. The directors issue a large block of shares to a friendly investor, not to raise needed capital but chiefly to dilute the voting power of shareholders likely to support the bidder. What is the best analysis?
A power to issue shares for raising capital should not be used chiefly to manipulate voting control. The strongest distractor is option 1: having the power does not mean every use of it is proper. The remedy and consequences depend on the governing law and the transaction’s circumstances.
Identify both the power and the purpose for which it was used. A complete answer explains why the purpose matters; saying only that directors acted in the company’s interests may miss the point.
5. A director’s personal interest
This tests the difference between honest conduct and compliance with duties concerning conflicts.
A director takes part in board discussions about a contract between the company and a business the director owns. The contract appears commercially reasonable, and the director says they acted honestly. What should the analysis focus on?
A director’s interest can trigger disclosure, authorisation or other conflict rules even if the deal appears fair and the director acted honestly. The strongest distractor is option 0: honesty alone does not necessarily satisfy those requirements. The precise procedure varies by jurisdiction and company constitution.
In a problem question, state the nature of the interest, the director’s involvement, and what disclosure or approval was required. Do not assume that commercial fairness cures a procedural breach.
6. A claim for loss suffered by the company
This tests whether the claim belongs to the company and when a shareholder may seek permission to bring it.
A director allegedly diverts a valuable company opportunity to a privately owned business. The company loses money. A shareholder wants to bring a claim against the director on the company’s behalf, but the board refuses to sue. Which route is most relevant in a system that provides for it?
The alleged loss is the company’s, so the company is the proper claimant in principle. A derivative procedure may let a shareholder pursue the company’s claim, subject to statutory or procedural controls. The strongest distractor is option 0: a shareholder cannot ordinarily recover the company’s loss as a personal loss merely because the share value fell.
Ask who suffered the immediate loss before choosing a remedy. If it is the company, explain why the company has not brought the claim and identify any permission stage required by the relevant law.
7. Unfair treatment of a minority shareholder
This tests the difference between a company wrong and conduct that may support a personal statutory remedy.
In a small company, the majority shareholders remove a minority shareholder from management contrary to the parties’ established understanding, while continuing to use company funds for their own benefit. The minority shareholder wants a remedy directed at the unfair conduct. Where the relevant statute provides for it, which remedy is most closely associated with this situation?
A statutory minority remedy for unfairly prejudicial or comparable conduct may be relevant, particularly where the complaint concerns the treatment of the member and the relief sought can address it. The strongest distractor is option 1: a derivative claim is directed to a wrong done to the company, not automatically every complaint by a shareholder. The statutory test and available orders vary.
Separate the member’s complaint from any loss suffered by the company. State the remedy’s legal basis and the order sought; do not assume that every jurisdiction uses the same name or test.
8. Distributions to shareholders
This tests the distinction between cash in the bank and profits legally available for distribution.
A company has substantial cash, but its latest accounts show accumulated losses and no distributable profits under the applicable rules. The directors propose to declare an ordinary dividend solely because the company can pay it immediately. Under a conventional capital-maintenance approach, what is the strongest answer?
Cash and distributable profits are different questions. Under a conventional capital-maintenance regime, a distribution must meet the applicable statutory test; liquidity alone is not enough. The strongest distractor is option 0. The relevant accounting basis and permitted distributions must be checked in the jurisdiction concerned.
In a written answer, identify the financial test required by the relevant rules rather than relying only on solvency or available cash. Check the statutory definition of distributable profits for the jurisdiction you are studying.
9. Creditors as insolvency approaches
This tests how directors’ duties may be affected when a company is in financial distress.
A company is approaching insolvency. The directors consider transferring its only valuable asset to a connected company for substantially less than its value, leaving ordinary creditors with little prospect of payment. Which statement is the best starting point?
Financial distress can bring creditor interests into the directors’ decision-making and may engage insolvency or transaction-avoidance rules. The strongest distractor is option 0: shareholder interests do not always remain the only relevant consideration as insolvency approaches. The trigger, duty and remedy are jurisdiction-specific.
Do not state one universal trigger for when creditor interests become relevant. Identify the financial condition, the proposed transaction and the governing statutory or common-law rule, then explain the risk to creditors.
10. Parent and subsidiary companies
This tests whether a group relationship alone makes a parent liable for a subsidiary’s obligations.
Orion plc owns all the shares in Delta Ltd. Delta Ltd enters a contract in its own name and breaches it. Orion plc did not guarantee the contract, did not itself contract with the claimant, and no additional basis for liability is established. What is the ordinary starting point?
A subsidiary is ordinarily a separate legal person, so it is the starting point for liability on its own contract. The strongest distractor is option 0: complete ownership does not, by itself, make the parent liable. A guarantee, agency, statute or other recognised basis may change the analysis.
For group-company problems, begin with the entity that made the contract or incurred the obligation. Then test any pleaded basis for parent liability rather than treating the group as one legal person.
Practise turning a choice into a written answer
Multiple-choice questions can expose a mistaken rule, but written answers also need a clear application to the facts. Practise stating the issue, rule, application and likely conclusion in that order. This sample shows a platform review of a short response about a share issue; it is not an official examination mark scheme.
The directors of a company issue shares chiefly to dilute the voting power of shareholders who support a takeover bid. Advise whether the issue may be challenged.
3/4The directors have power to issue shares, but they must use that power for a proper purpose. They appear to have issued the shares to affect voting control rather than to raise capital. A shareholder may challenge the decision.
The answer identifies the proper-purpose issue and applies it to the stated motive. It would be stronger if it explained that the existence of the power does not validate an improper use, and qualified the remedy by reference to the applicable law and facts.
Missed
−Explain why the purpose of the power matters, not just the directors’ general duty
−Avoid implying that the same challenger or remedy is available in every jurisdiction
Model answerThe directors have a power to issue shares, but that power must be exercised for a proper purpose. If the chief purpose was to dilute voting power and frustrate the takeover, rather than to raise capital, the issue may be open to challenge. The fact that the directors believed the outcome beneficial does not by itself answer the proper-purpose question. The challenger, procedure and remedy depend on the governing statute and the company’s circumstances.
That is a MySummaries paper, filled with company law material. Yours is written from your own notes. Start free
After reviewing an answer, revise the missed point into a one-sentence rule and apply it to a new set of facts. That tests whether you understood the principle rather than memorised the wording of the example.
Review recurring weak areas
Keep a record of which legal distinction caused each error: for example, company loss versus member loss, actual versus apparent authority, or cash versus distributable profits. A dashboard can make repeated weak topics visible:
The percentages and frequencies above show a sample learner’s progress, not the difficulty or frequency of topics in a particular examination. Use your own syllabus and past feedback to decide what to revise next.
A mistake repeated twice should become a specific retrieval prompt, not a vague reminder to “revise directors’ duties”. For example:
You lost this mark twice: a shareholder claims for a loss suffered by the company. Who is the proper claimant, and what procedure may let the shareholder pursue the company’s claim?
How MySummaries helps
Build a Company Law board from your own notes, then use it to generate practice questions, review marked written answers and turn repeated errors into revision prompts. Check each generated rule against your course materials and the law of your jurisdiction. Open MySummaries.