Chapter 8 Multiple choice questions

1. What is the 'reflective loss' principle?

Where a director's conduct causes loss to a creditor, and that loss is reflective of the loss suffered by the members, then the creditor cannot recover that loss.

A shareholder can only claim for a loss they sustained if that loss is reflective of a loss suffered by the company.

A reduction in the share value or a distribution to shareholders, which is merely the result of loss suffered by the company due to the defendant's conduct, is not generally recoverable.

A director cannot claim for a loss sustained due to a member's conduct, unless that loss is reflective of a loss sustained by the company.

2. What is the 'proper claimant' principle?

Where a company is acting within its powers, the courts will not interfere in matters of internal management unless the company itself commences proceedings.

If a procedural irregularity is committed, a member cannot commence proceedings if the irregularity can be ratified by a simple majority of the members.

Only the company can commence proceedings for wrongs committed against it.

Members can only enforce the rights of the company if they have acted in a proper, just and reasonable manner.

3. What is the difference between a derivative action and a derivative claim?

The term 'derivative action' refers to causes of action vested in a member personally, whereas 'derivative claims' relate to causes of action vested in the company.

The term derivative action referred to a member's ability under the common law to enforce a right belonging to the company, whereas the germ 'derivative claim' refers to the member's ability to commence proceedings under the Companies Act 2006 for wrongs done to the company.

The term 'derivative action' refers to claims brought by the company for wrongs done to the members, whereas a 'derivative claim' is a claim brought by a member for wrongs done to the company.

A derivative action could not be brought in cases of negligence, whereas a derivative claim can be brought in cases involving negligence.

4. Which ONE of the following is outside the scope of the statutory derivative claim?

Where a majority shareholder commits an act of negligence against the company.

Where a director breaches a general duty.

Where a director commits an act of default.

Where a member is involved in a breach of trust committed by a director.

5. Which ONE of the following statements is true?

In order to continue a derivative claim, the company will need to obtain permission from the court.

The court may refuse to allow a derivative claim to continue if the cause of action arises from an act or omission that has yet to occur, and the act or omission has been authorized by the company.

The claimant will not need to obtain permission from the court if he can establish a prima facie case.

The court must refuse permission to continue a derivative claim if a person acting so as to promote the success of the company for the benefit of its members would not seek to continue the claim.

6. Ross is a member of TechnoCorp plc. The directors of TechnoCorp breach their general duty to act for a proper purpose and, as a result, the profits of TechnoCorp are drastically reduced. As a result, the dividend paid to the members is significantly reduced. Can Ross commence a derivative claim?

Yes

No

7. In order to obtain a remedy under s 994 of the Companies Act 2006, s a member must show that the conduct complained of was unfair or prejudicial. True or false?

True

False

8. Which ONE of the following is unlikely to constitute unfairly prejudicial conduct?

The payment of excessive remuneration.

Mismanagement.

The improper transfer of assets.

Preventing the members from obtaining the best price for their shares.

Non-payment of dividends.

Exclusion from the management of a quasi-partnership company.

9. Which ONE of the following is unlikely to result in the company being wound up on just and equitable grounds?

Where the directors engage in negligence.

Where the company is fraudulently promoted.

Where the company is deadlocked.

Where the company cannot fulfil the purpose for which it was set up.

Where the directors display a lack of probity.

10. The courts have identified a number of characteristics to help identify whether or not a company is a quasi-partnership. Which ONE of the following is not such a characteristic?

The company will be an association formed on the basis of mutual trust and confidence.

The shares of the company will not be freely marketable.

All the shares of the company will be owned by the company's directors.

There will be an agreement that some, or all, of the shareholders will be involved in management.

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