SQE1 Business Law and Practice

Business Law and Practice · Pre-incorporation contracts

Priya Nair is setting up a restaurant business. On 3 March she signs a five-year lease of premises with the landlord. She signs it "for and on behalf of Spice Route Ltd". The company is not yet incorporated. It is incorporated on 20 March and starts trading from the premises. In June the company stops paying rent. The landlord wants to recover the arrears. The lease contains nothing about who is liable if the company does not exist. Who is liable on the lease?

1. Spice Route Ltd alone, because it began trading from the premises and so adopted the lease.
2. Nobody, because a contract cannot be made with a company that does not yet exist.
3. Spice Route Ltd alone, once its directors ratify the lease after incorporation.
4. Priya, but only if she intended at the time to be personally bound by the lease.
5. Priya is personally liable, because the lease takes effect as a contract made with her.

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Answer: E. Section 51(1) CA 2006 provides that a contract purportedly made by or on behalf of a company before it is formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company. That person is personally liable. Priya signed before incorporation, and the lease has no clause excluding her liability, so she is liable. The company cannot ratify the lease (Kelner v Baxter). It would only become liable if the parties agreed a novation, which creates a new contract. The tempting answer is that the company is liable because it took the benefit of the lease. Trading from the premises does not by itself transfer the contract to the company.

Companies Act 2006, s 51; Kelner v Baxter (1866) LR 2 CP 174

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Business Law and Practice · Removal of directors

Hollis Packaging Ltd is a private company with 100 ordinary shares. Neil holds 30, Asha holds 30 and Greg holds 40. Neil, Asha and Greg are the three directors. Neil and Asha are unhappy with Greg's conduct and want to remove him as a director. The articles are the Model Articles and say nothing special about removal or weighted votes. Greg will oppose removal. Which of the following is the correct way to remove him?

1. Neil and Asha pass a special resolution, as removal alters the constitution of the company.
2. Neil and Asha pass a written resolution, which avoids the need to hold a meeting.
3. Neil and Asha pass an ordinary resolution at a general meeting called on special notice, and Greg may make representations.
4. Neil and Asha pass a board resolution, as they form a majority of the directors.
5. Neil and Asha pass an ordinary resolution on 14 days' notice, as for any general meeting.

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Answer: C. Section 168(1) CA 2006 lets a company remove a director by ordinary resolution at a meeting, despite anything in the articles or any agreement. Section 312 requires special notice, which means the company must receive notice of the resolution at least 28 days before the meeting. Section 169 lets the director make written representations and speak at the meeting. Neil and Asha hold 60% of the votes, which is enough for an ordinary resolution. The tempting answer is a written resolution, because it looks quicker. Section 288(2) excludes it for removing a director, so the meeting route is compulsory.

Companies Act 2006, s 168; Companies Act 2006, s 169; Companies Act 2006, s 312; Companies Act 2006, s 288(2)

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Business Law and Practice · Directors' duties: substantial property transactions

Brindle Foods Ltd has net assets of £500,000 according to its latest accounts. The sole shareholder other than Karim is his sister, Samira. Karim is a director. He proposes to buy a delivery van from the company for £90,000. The company has no other directors' contracts needing approval. The van is a non-cash asset. Karim says the sale needs no approval from the shareholders because the price is below £100,000. Is Karim correct?

1. Yes, because the requisite value is £100,000 and the price is lower than that figure.
2. No, because £90,000 exceeds 10% of the company's net assets and £5,000, so the shareholders must approve.
3. Yes, because approval is needed only where the director is buying from a listed company.
4. No, but the approval needed is a resolution of the board without Karim voting.
5. Yes, because a sale to a director is permitted if he declares his interest under s 177.

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Answer: B. Section 190 CA 2006 requires prior approval by members of a substantial property transaction between a company and a director. Section 191 says a non-cash asset is substantial if its value exceeds £100,000, or exceeds 10% of the company's asset value and is more than £5,000. Net assets are £500,000, so 10% is £50,000. The van is worth £90,000, which is above £50,000 and above £5,000. The transaction is substantial. Karim has looked only at the £100,000 limb. A s 177 declaration of interest is also needed, but it does not remove the need for member approval.

Companies Act 2006, s 190; Companies Act 2006, s 191; Companies Act 2006, s 177

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Business Law and Practice · Shareholder resolutions

Orchard Lane Ltd has 100 ordinary shares, each with one vote. Dev holds 40, Eleni holds 35 and Frank holds 25. Dev and Eleni want to amend the articles to add a right of pre-emption on share transfers. Frank opposes the change. A general meeting is properly called, all three attend and a poll is taken. Dev and Eleni vote in favour, Frank votes against. Nothing in the articles entrenches the relevant provisions. What is the result?

1. The resolution is passed, because a special resolution needs a majority of not less than 75% and Dev and Eleni hold exactly 75%.
2. The resolution fails, because a special resolution needs a majority of more than 75%.
3. The resolution is passed, because an ordinary resolution of more than 50% is enough to amend the articles.
4. The resolution fails, because Frank's 25% allows him to block any change to the articles.
5. The resolution fails, because amending the articles needs the consent of every member.

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Answer: A. Section 21 CA 2006 allows a company to amend its articles by special resolution. Section 283 defines a special resolution as one passed by a majority of not less than 75% of votes cast. Dev and Eleni hold 75 of the 100 votes cast on the poll, so the threshold is met exactly. The tempting answer is that the vote fails because the majority must be over 75%. The statute says not less than 75%, so exactly 75% passes. Frank would need more than 25% of the votes cast to block the resolution.

Companies Act 2006, s 21; Companies Act 2006, s 283

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Business Law and Practice · Company meetings: short notice

Tavistock Paints Ltd is a private company. Its 200 ordinary shares are held equally by ten members, 20 shares each. A general meeting is urgently needed to pass an ordinary resolution approving a loan to a director. The directors send notice of a meeting to be held in 5 days. Nine members agree to the short notice in writing. The tenth member does not respond. The articles say nothing on short notice. Is the meeting validly called?

1. No, because every member must agree before a general meeting can be held on short notice.
2. No, because a general meeting of a private company always needs at least 14 days' notice.
3. Yes, because ordinary resolutions can be passed on any notice that the directors consider reasonable.
4. Yes, because a majority in number of the members, holding at least 90% in nominal value of the voting shares, have agreed.
5. No, because the agreement must come from members holding at least 95% in nominal value.

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Answer: D. Section 307(1) CA 2006 requires 14 days' notice for a general meeting of a private company. Under s 307(4) to (6), a meeting may be called on shorter notice if it is agreed by a majority in number of the members having a right to attend and vote, who together hold at least 90% in nominal value of the voting shares. The articles may raise the figure to no more than 95%, but these articles are silent. Nine of ten members is a majority in number, and their 180 shares are exactly 90% of the 200 shares. The meeting is valid. The tempting answer is that all members must agree. That rule does not apply to a general meeting of a private company.

Companies Act 2006, s 307

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Business Law and Practice · Directors' duties: conflicts of interest

Lena is a director of Greenway Cleaning Ltd. At a client dinner, she hears that a nearby depot is for sale at a bargain price. Greenway cannot afford it and the board has no interest in expanding. Lena buys the depot personally and leases it to a competitor. She did not tell the board. Greenway's articles do not authorise conflicts. The other directors learn of this a year later. Which statement best describes Lena's position?

1. She breached no duty, because Greenway could not have afforded the depot and so lost nothing.
2. She breached s 172 only, because the duty to promote success is the only relevant duty.
3. She breached s 175, because she exploited an opportunity she learned of as a director, whether or not the company could have taken it.
4. She breached s 177 only, because she did not declare an interest in a proposed transaction with the company.
5. She breached no duty, because the opportunity came to her at a social event and not at work.

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Answer: C. Section 175(1) CA 2006 requires a director to avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or may conflict, with the company's interests. Section 175(2) applies in particular to the exploitation of property, information or opportunity, and it is irrelevant whether the company could take advantage of it. Lena used an opportunity she learned of through her role and took it for herself without authorisation from the board (s 175(4)(b)). The tempting answer is that there was no loss because Greenway could not afford the depot. That is the very argument s 175(2) rejects. She may have to account for any profit.

Companies Act 2006, s 175; Companies Act 2006, s 177

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Business Law and Practice · Registration of charges

Marlow Engineering Ltd granted a fixed charge over its freehold factory to Northern Bank plc on 1 June to secure a £400,000 loan. The charge was not delivered to the registrar of companies for registration. In October, Marlow went into creditors' voluntary liquidation. The liquidator asks whether the bank can enforce the charge. What is the effect of the failure to register the charge?

1. The charge remains valid against the liquidator, but the bank loses its right to interest.
2. The whole loan agreement is void, so the bank must return all sums it received under it.
3. The charge is valid, because registration at HM Land Registry on the title is enough.
4. The charge is void against the liquidator and creditors, but the loan remains repayable immediately as an unsecured debt.
5. The charge is void only against other secured creditors, and the liquidator must recognise it.

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Answer: D. A company that creates a charge must deliver the charge instrument for registration to the registrar within 21 days beginning with the day after creation (s 859A). Under s 859H(3), if it does not, the charge is void against a liquidator, an administrator and a creditor of the company. The debt is not extinguished, and the money secured becomes immediately payable (s 859H(4)). The bank therefore ranks as an unsecured creditor. The tempting answer is that registration at Land Registry is enough. A company charge over land must be registered at both Companies House and Land Registry.

Companies Act 2006, s 859A; Companies Act 2006, s 859H

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Business Law and Practice · Fixed and floating charges

Corbett Retail Ltd gives Westshire Bank a debenture. It is expressed to create a "fixed charge" over all present and future book debts. The company must pay the proceeds of collected debts into its account with the bank. The company is, in practice, free to withdraw money from that account and use it to pay suppliers in the ordinary course of business. The bank never asks for any withdrawal to be approved. What is the likely legal nature of the charge over the book debts?

1. A fixed charge, because the debenture describes it as fixed and the parties' label binds the court.
2. A fixed charge, because book debts are a specific class of asset that can be identified.
3. A fixed charge, because the company must pay proceeds into an account held with the bank.
4. Neither charge, because a charge over future assets cannot validly be created at all.
5. A floating charge, because the company has freedom to use the proceeds without the bank's control.

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Answer: E. The court decides whether a charge is fixed or floating by the rights the parties actually gave the chargee, not by the label (Re Spectrum Plus Ltd [2005] UKHL 41). A fixed charge over book debts needs real control by the chargee over both the debts and their proceeds. Here the company can withdraw and spend the proceeds in the ordinary course, which is the hallmark of a floating charge. The tempting answer is that the debenture says "fixed". The label does not decide the matter. The difference is important in insolvency, because a floating charge ranks behind preferential creditors and the prescribed part.

Re Spectrum Plus Ltd [2005] UKHL 41; Insolvency Act 1986, s 175; Insolvency Act 1986, s 176A

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Business Law and Practice · Minority shareholder remedies

Aisha owns 30% of the shares in Brightwater Joinery Ltd, a small company she founded with two friends. All three were directors and shared profits equally as salary, under an understanding that all would take part in management. The other two now hold 70%. They have removed Aisha as a director and stopped paying her any money. Aisha does not want the company wound up. She wants to be paid a fair price for her shares and to leave. Which remedy is best suited to her aim?

1. A derivative claim for a wrong done to the company, with any damages paid to her personally.
2. A petition for unfair prejudice, asking the court to order her co-owners to buy her shares.
3. A claim that the other directors breached s 172, so that she can recover her lost salary directly.
4. A statutory demand against the company for her unpaid share of profits.
5. A petition to wind up the company by the court on the ground that it is unable to pay its debts.

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Answer: B. Section 994 CA 2006 allows a member to petition where the company's affairs are being conducted in a manner unfairly prejudicial to the members' interests. In a quasi-partnership, exclusion from management breaks the understanding on which the company was founded (O'Neill v Phillips; Ebrahimi v Westbourne Galleries). Under s 996 the court can make any order it thinks fit, including an order that the other shareholders buy her shares. This matches Aisha's wish to leave at a fair price without a winding-up. The tempting alternative is a derivative claim. That claim is for wrongs to the company, and Aisha is complaining about her own treatment.

Companies Act 2006, s 994; Companies Act 2006, s 996; O'Neill v Phillips [1999] 1 WLR 1092

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Business Law and Practice · Authority of directors

Quillon Print Ltd's articles say that the directors may not enter contracts worth more than £50,000 without shareholder approval. The board resolves to buy £120,000 of supplies from Harbour Paper Ltd and authorises the managing director, Joel, to sign the contract. No shareholder approval is sought. Harbour Paper does not know of the limit and has not looked at the articles. The company later refuses to pay. Is Quillon Print bound by the contract?

1. Yes, because in favour of a person dealing in good faith the directors' power to bind the company is free of constitutional limits.
2. No, because the contract exceeds the limit in the articles and so the directors had no power to make it.
3. No, because Harbour Paper was bound to read the articles at Companies House and so had notice of the limit.
4. Yes, but only if the shareholders later ratify the contract by special resolution.
5. Yes, but only if Harbour Paper can prove that it acted in good faith throughout.

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Answer: A. Section 40(1) CA 2006 provides that, in favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is free of any limitation under the company's constitution. Under s 40(2)(b), the person is not bound to enquire about such limits, is presumed to have acted in good faith unless the contrary is proved, and is not in bad faith merely because it knows an act is beyond the directors' powers. The board authorised Joel, so the only defect is the limit in the articles, and s 40 removes it in Harbour Paper's favour. The directors may be liable to the company. The tempting answer is that the limit in the articles defeats the contract. Section 40 reverses that result.

Companies Act 2006, s 40

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Business Law and Practice · Partnership: definition

Sam Okafor runs a bakery. Tom Bell lends him £30,000 under a written loan agreement signed by both men. The agreement says Sam will repay the capital over five years and pay Tom interest equal to 10% of the bakery's annual net profit. Tom takes no part in running the bakery and has no say in its decisions. A supplier, owed £6,000 by the bakery, claims that Tom is a partner and is liable for the debt. Is the supplier likely to succeed?

1. Yes, because receiving a share of the profits is conclusive evidence that a partnership exists.
2. No, because a signed written loan with profit-linked interest does not by itself make the lender a partner.
3. Yes, because Tom has advanced capital to the business, which makes him a partner in it.
4. No, but only because Tom has no right to take part in management of the bakery.
5. Yes, because interest linked to profits means that Tom carries on business in common with Sam.

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Answer: B. Section 1 Partnership Act 1890 defines partnership as the relation between persons carrying on a business in common with a view to profit. Section 2(3) says that receiving a share of profits is prima facie evidence of partnership, but not if it is received in certain cases. Under s 2(3)(d), a loan where the interest varies with profits does not by itself make the lender a partner, provided the contract is in writing and signed by or on behalf of all the parties. That is the case here. Tom also has no management role. The tempting answer is that any profit share proves a partnership. The Act expressly excludes this lender.

Partnership Act 1890, s 1; Partnership Act 1890, s 2(3)

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Business Law and Practice · Partnership: authority and liability for debts

Ravi, Sunita and Liam run a catering partnership with no written partnership agreement. They privately agreed that no partner should order more than £10,000 of stock without consulting the others. Ravi orders £25,000 of stock from Fresh Fields Ltd in the firm's name, in the usual way for the firm's business. Fresh Fields does not know of the limit. The firm cannot pay. Which statement is correct?

1. The firm is not bound, because Ravi exceeded the limit that the partners had agreed between themselves.
2. The firm is bound, but only Ravi is personally liable, because he placed the order.
3. The firm is bound by the order, and each partner is personally liable for the debt jointly with the others.
4. The firm is bound only if Sunita and Liam later ratify Ravi's order.
5. The firm is bound, but liability is limited to the partnership property and not to the partners' own assets.

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Answer: C. Under s 5 Partnership Act 1890, each partner is an agent of the firm and his acts in the usual course of the firm's business bind the firm. Section 8 says that a restriction on a partner's authority does not bind a person who deals with the firm without notice of it. Fresh Fields did not know of the £10,000 limit, so the order binds the firm. Under s 9, every partner is liable jointly with the others for the firm's debts. Ravi, Sunita and Liam can therefore be pursued personally. The tempting answer relies on the private limit. That limit has effect only between the partners.

Partnership Act 1890, s 5; Partnership Act 1890, s 8; Partnership Act 1890, s 9

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Business Law and Practice · Partnership: liability in tort

Maya and Daniel are partners in a delivery firm. While making deliveries for the firm, Daniel negligently reverses the firm's van into a pedestrian, Mr Hughes, causing serious injury. Mr Hughes obtains judgment for damages. Daniel has no assets. Maya has a large house. Mr Hughes wants to know whether he can enforce the judgment against Maya. What is the position?

1. The firm is liable for Daniel's wrongful act, and the partners are jointly and severally liable, so Maya can be pursued.
2. Maya is not liable, because only the partner who committed the tort is personally liable for it.
3. Maya is liable only up to the value of the partnership assets, not her own property.
4. Maya is liable only if she knew about and approved of Daniel's driving at the time.
5. Maya is liable only for half of the damages, as each partner is responsible for an equal share.

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Answer: A. Section 10 Partnership Act 1890 makes the firm liable for loss or injury caused by the wrongful act or omission of a partner acting in the ordinary course of the firm's business. Section 12 makes every partner liable jointly with co-partners and also severally for everything for which the firm becomes liable under s 10. Daniel was making deliveries, so he acted in the ordinary course of business. Mr Hughes can enforce the whole judgment against Maya, who may seek a contribution from Daniel. The tempting answer is that only the negligent partner is liable. The Act gives the injured person a wider route.

Partnership Act 1890, s 10; Partnership Act 1890, s 12

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Business Law and Practice · Partnership: default rules on profit sharing

Hana and Joe start a landscaping partnership. They have no partnership agreement. Hana contributes £80,000 as capital and Joe contributes £20,000. Hana is a retired investor who plays no part in day-to-day work. Joe works full time in the business. In the first year, the firm makes a net profit of £50,000. They disagree on how to split it. Under the default rules in the Partnership Act 1890, how is the profit shared?

1. In proportion to capital, so Hana receives £40,000 and Joe receives £10,000.
2. Joe receives a reasonable salary for his work first, and the remainder is split equally.
3. Hana receives interest of 5% on her capital first, and the remainder is split equally.
4. Equally, so each receives £25,000, and Joe has no right to a salary for his work.
5. The profit is split in proportion to the time each partner puts in, so Joe receives all of it.

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Answer: D. Section 24 Partnership Act 1890 sets rules that apply unless the partners agree otherwise. Under s 24(1), all partners share equally in capital and profits and contribute equally to losses, whatever their capital contributions. Under s 24(6), no partner is entitled to remuneration for acting in the partnership business. Hana and Joe have no agreement, so the profit is divided equally. Joe cannot claim a salary. The tempting answer is a split in proportion to capital. That would be sensible commercially, but the default rule ignores capital, so the partners should have agreed terms in writing.

Partnership Act 1890, s 24(1); Partnership Act 1890, s 24(6)

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Business Law and Practice · Dissolution of a partnership

Three architects, Olu, Petra and Quentin, have run a partnership for six years. They have no written partnership agreement. Petra dies suddenly. Olu and Quentin wish to carry on the practice under the same name. Nothing was ever agreed about what would happen on a partner's death. What is the legal effect of Petra's death on the partnership?

1. The partnership continues unchanged, and Petra's estate becomes a partner in her place.
2. The partnership continues unchanged, because Olu and Quentin hold a majority of the partners.
3. The partnership is dissolved only if the court makes an order on application by Olu or Quentin.
4. The partnership is dissolved only after Olu and Quentin give three months' notice to Petra's executors.
5. The partnership is dissolved automatically as between all the partners, and Olu and Quentin must agree a new arrangement to continue.

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Answer: E. Section 33(1) Partnership Act 1890 provides that, subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner. The partners made no agreement about death, so the default rule applies. Olu and Quentin can continue only by agreeing to form a new partnership, with a settlement of Petra's share with her estate. The tempting answer is that the firm simply carries on. That happens only if the partnership agreement provides for continuation, which is why such clauses are standard.

Partnership Act 1890, s 33(1)

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Business Law and Practice · Retirement of a partner: liability

Mina retired from the Kestrel Interiors partnership on 31 March. She told her fellow partners but did not notify anyone else, and no notice was placed in the London Gazette. Stone Supplies Ltd had dealt with the firm for years, always with Mina named as a partner, and did not know she had left. On 15 May, Stone Supplies sold £8,000 of goods to the firm on credit. The firm cannot pay. Is Mina liable to Stone Supplies for this debt?

1. No, because a partner is never liable for debts incurred after the date she retired.
2. No, because retirement ends liability as soon as the other partners are told of it.
3. Yes, but only because the firm was formally dissolved when she retired.
4. Yes, but only if Stone Supplies can prove that it relied on her creditworthiness for this order.
5. Yes, because Stone Supplies had dealt with the firm before and had no notice of her retirement.

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Answer: E. Under s 36(1) Partnership Act 1890, a person dealing with a firm is entitled to treat all apparent members of the old firm as still being members until he has notice of a change. A retired partner remains liable for debts to customers who knew her as a partner and have not been told she left. Mina told only her fellow partners, so Stone Supplies, a previous customer, can still treat her as a partner. A Gazette notice would protect her against new customers who had not dealt with the firm (s 36(2)), but not against existing customers who have no actual notice. Mina should have written to existing customers.

Partnership Act 1890, s 36; Partnership Act 1890, s 17(2)

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Business Law and Practice · Limited liability partnerships: authority of members

Ashgrove Surveyors LLP has four members. The LLP agreement says no member may sign any contract worth more than £20,000 on behalf of the LLP without the written consent of the other members. One member, Zara, signs a £60,000 contract with Delmar IT Ltd for new systems, without consent. Delmar IT knows Zara is a member but has never seen the LLP agreement. The LLP refuses to pay. Is the LLP bound by the contract?

1. No, because the LLP agreement removed Zara's authority and that restriction binds everyone.
2. Yes, because every member is an agent of the LLP, and Delmar IT did not know that Zara lacked authority.
3. No, because the LLP is a body corporate and can only act through a resolution of its members.
4. Yes, but Zara alone is liable to pay Delmar IT, as an LLP member who acted without consent.
5. No, because Delmar IT had a duty to inspect the LLP agreement before it entered a large contract.

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Answer: B. An LLP is a body corporate with legal personality separate from its members (LLPA 2000 s 1(2)). Under s 6(1), each member is the agent of the LLP. Section 6(2) says the LLP is not bound by a member's act if the member has no authority and the other party either knows that, or does not know or believe him to be a member. Delmar IT knew Zara was a member but did not know about the limit, so the LLP is bound. Zara may face internal consequences under the LLP agreement. The tempting answer is that the internal limit protects the LLP. It would do so only against a party with knowledge.

Limited Liability Partnerships Act 2000, s 1(2); Limited Liability Partnerships Act 2000, s 6

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Business Law and Practice · Limited partnerships

Nova Ventures LP is a limited partnership registered under the Limited Partnerships Act 1907. It is not a private fund limited partnership. Its general partner is a company. Hana is a limited partner who contributed £50,000. For the last six months Hana has worked in the business every day, directing staff and deciding which suppliers to use. During that period the general partner orders £200,000 of stock. The LP cannot pay the supplier. What is Hana's position on this debt?

1. She is liable for the debt as though she were a general partner, as she took part in the management of the business.
2. She is liable only up to the £50,000 she contributed, because that is the limit of a limited partner's liability.
3. She is not liable at all, because only the general partner can ever be liable for the LP's debts.
4. She is liable only if the supplier can prove that it knew she was a limited partner.
5. She is liable as a general partner for all the LP's debts, including those incurred before she took part in management.

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Answer: A. A limited partner's liability is normally limited to the amount contributed. But s 6(1) Limited Partnerships Act 1907 provides that a limited partner who takes part in the management of the partnership business is liable for all debts and obligations of the firm incurred while they so take part, as though they were a general partner. Directing staff and choosing suppliers is management, and the debt was incurred during that period. Hana is therefore liable for it in full. The tempting answer is the £50,000 cap. That cap protects only a passive investor. Private fund limited partnerships have a separate statutory list of permitted activities, which is why the stem excludes them.

Limited Partnerships Act 1907, s 6(1)

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Business Law and Practice · Professional conduct: conflicts when forming a company

Three friends, Greta, Femi and Lucas, ask you to act for all of them in setting up Triple Peak Ltd and in drafting a shareholders' agreement. They have not agreed how the equity will be split. Greta wants 50% as she is providing most of the funding. Femi and Lucas each want 33% and say Greta's demand is unfair. They ask you to "sort it out" for the three of them, and say they trust you. Which course complies with the SRA Code of Conduct for Solicitors?

1. Act for all three, provided each signs a written consent, since informed consent removes the conflict.
2. Act for all three, because they are friends with a shared aim of starting the business.
3. Decline to act for all three on the disputed terms, because there is no clear common purpose and strong consensus.
4. Act for Greta alone, and tell the others that you will also protect their interests as a courtesy.
5. Act for all three, and decide the split yourself, as a neutral adviser all three trust.

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Answer: C. Para 6.2 of the SRA Code of Conduct for Solicitors prohibits acting where there is a conflict, or significant risk of one, between two or more clients in the same or a related matter. The exceptions apply only where the clients have a substantially common interest, or are competing for the same objective, and informed consent is given in writing, with safeguards, and acting is reasonable. A substantially common interest needs a clear common purpose and a strong consensus on how to achieve it. The clients disagree about the equity split, so there is no strong consensus. Informed consent alone does not cure the conflict. Principle 7 requires you to act in each client's best interests.

SRA Code of Conduct for Solicitors, para 6.2; SRA Principles 2019, Principle 7

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Business Law and Practice · Professional conduct: not misleading others

You act for Cobalt Tools Ltd on the sale of its business. The buyer's solicitor sends enquiries, including: "Is the company, to your client's knowledge, involved in any litigation, threatened or pending?" Your client tells you to answer "no". You know from the file that a former employee has issued a claim form against the company, served last month. The client says the claim is weak and will not affect the price. What should you do?

1. Give the reply as instructed, because you are bound to follow a client's instructions on what to disclose.
2. Answer "no" but add the words "to the best of the client's knowledge", to reduce your own exposure.
3. Leave the question unanswered and send the rest of the replies, hoping the buyer will not notice.
4. Refuse to give the "no" reply, advise the client to disclose the claim, and cease acting if the client refuses.
5. Tell the buyer's solicitor yourself about the claim, without telling your client first.

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Answer: D. Para 1.4 of the SRA Code of Conduct for Solicitors says you must not mislead or attempt to mislead your clients, the court or others, by your own acts or omissions or by being complicit in the acts or omissions of others, including your client. You know of the claim, so a reply of "no" would be false. Your duty of confidentiality (para 6.3) stops you from revealing the claim yourself without the client's consent. The proper course is to explain this to the client, advise disclosure, and cease acting if the client will not agree. The tempting answer is to follow the client's instructions. A client cannot instruct you to mislead the other side.

SRA Code of Conduct for Solicitors, para 1.4; SRA Code of Conduct for Solicitors, para 6.3; SRA Principles 2019, Principle 5; SRA Principles 2019, Principle 4

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