Law Final (CH 14, 17, 21-29)

Why should a director or officer of a corporation ensure that a contract is signed in such a way as to make it clear that it is being signed on behalf of the corporation?

A corporation is a legal entity, and in matters of contract, it can only sign a contract through those officers, directors, or employees who are authorized by the corporation to do so. However, situations have occurred where in the place for signature, the director, officer, or employee has simply signed the contract relying on the fact that the contract is between the corporation and another party, but without reference to the name of the corporation or the fact that it is being signed by the corporation's authorized representative. The result is that where a problem occurs, often the question becomes whether the contract was signed on behalf of the corporation or whether the director, officer, or employee was signing it in his or her personal capacity, and if the latter, incurring personal liability under it. To avoid this situation, the person signing for the corporation should ensure that it is clear that he or she is signing on behalf of the corporation only. Diff: 3 Type: ES Topic: The Structure of the Modern Business Corporation Skill: Applied 60

How is it that security devices mislead innocent third parties?

A debtor left in possession of goods may appear to own assets that it in fact does not own. A third party may innocently buy goods that are encumbered by security interests. Or a purchaser may simply be unaware of the risks associated with known security interests. Diff: 2 Type: ES Topic: Effect of Security Interests on Purchasers Skill: Applied 50

What is a fraudulent preference? Give an example of a fraudulent preference.

A fraudulent preference is a payment of money or transfer of property that is made to one creditor with the view to giving that creditor a preference over other creditors. For example, if Jack, who happens to be insolvent, has a number of credit cards, including Amex, Visa, and MasterCard, he cannot choose to pay the Amex and not pay the other cards. This would be preferring the Amex card over the other cards. Diff: 2 Type: ES Topic: Administration of a bankrupt's Affairs Skill: Recall/Applied 57

Explain how a proxy is used.

A proxy is the assignment of voting rights to any shareholder who will be present at a shareholder meeting. Any shareholder of voting shares who cannot attend the shareholder meeting can give her or his votes by proxy to any other shareholder who will be attending the meeting. Diff: 1 Type: ES Topic: Shareholders Skill: Recall/Applied 58

Which is more preferable: a simple shareholder agreement or a unanimous shareholder agreement? Why?

A simple shareholders agreement need not be between all of the common shareholders, and even if it is, it must be restricted to the roles of the parties as shareholders. A unanimous shareholder agreement must be between all the common shareholders and need not be restricted to the role of the parties as shareholders. Further provisions in such an agreement usually supersede the provisions of provincial and federal legislation, permitting the powers of the directors to be restricted in whole or part. Thus, a unanimous shareholder agreement would be more preferable to have. Diff: 2 Type: ES Topic: Shareholder Agreements Skill: Applied 51

What is a "vulture fund"? What role can a vulture fund play in helping creditors who are involved in bankruptcy proceedings?

A vulture fund involves investors who are prepared to purchase debt from creditors at a discount. Risk of non-payment is thus transferred from the creditor to the investors. This can provide a market in which creditors, particularly smaller creditors, can settle claims more quickly than would be the case if they had to wait for bankruptcy proceedings to take their course. Diff: 1 Type: ES Topic: Other Methods of Liquidation and Reorganization Skill: Applied 54

John, Susan, and Terence retain a lawyer to incorporate a company that they expect will be taken public in the future. What basic information should the lawyer give to them concerning the incorporating documents?

All companies are initially incorporated as private companies. It is only after following the appropriate steps set out in securities legislation that a private company can be taken public. If "going public" is expected, then the original incorporating documents, including the articles of incorporation and by-laws, should comply with the higher standards of corporate governance. Diff: 3 Type: ES Topic: Strategies to Manage the Legal Risks Skill: Recall/Applied 56

How serious is Canada about taking steps to reduce greenhouse emissions?

Although Canada ratified the Kyoto Protocol in 2001 and agreed to reduce such emissions substantially by 2012, the fact is that participation in the Protocol is voluntary only. Further, in May 2006, Canada's environment minister advised that Canada would not meet this 2012 target, suggesting that Canada was not really committed to the Protocol. Then, in 2011, Canada withdrew from the protocol, suggesting it is not as serious as it should be about reducing harmful greenhouse emissions. Diff: 1 Type: ES Topic: Liability for Environmental Offences Skill: Applied 47

A trustee in bankruptcy has the same general duties as does a normal trustee. Explain.

Apart from her or his duties and obligations under the Act, like a normal trustee, a trustee in bankruptcy has a duty to act in the best interests of the bankrupt, to distribute the estate fairly and at the best price, and to protect it. Further, she or he owes a duty of good faith to the bankrupt. Diff: 2 Type: ES Topic: Administration of a Bankrupt's Affairs Skill: Applied 47

What is meant by the indoor management rule?

Corporations enter into contracts with third parties. One issue that arises is whether such contracts are authorized and whether all the necessary things that need to be undertaken for the contract to be effective have been done. Because of the difficulty that a third party faces in making inquiries into the internal workings of a corporation to determine whether the proper procedures have been followed, the courts have held that in the absence of notice of an irregularity, an outsider who deals with a corporation is entitled to assume that the corporation's internal procedures have been followed. This principle is known as the indoor management rule. Diff: 1 Type: ES Topic: Civil Liability of Corporations Skill: Applied

Explain the concepts of debt and equity capital.

Corporations when they are established need to raise money. There are two ways in which this is done, namely, by borrowing from lenders and by issuing shares. Money raised by borrowing from lenders is referred to as debt capital and money raised by the issuance of shares is referred to as equity capital. Diff: 2 Type: ES Topic: The Structure of the Modern Business Corporation Skill: Applied

Leaving aside certain mandatory requirements for federal corporations, what is the main consideration in deciding whether to incorporate federally or provincially?

Generally speaking, the main consideration is whether the business activity to be carried on is national in scope or restricted to a specific province or territory. Diff: 2 Type: ES Topic: Methods of Incorporation Skill: Recall/Applied 47

Bo Red operated Bo's Appliance, a retail appliance business, from premises he was leasing. He sold his complete inventory to a competitor, Mom's Appliance Warehouse Inc., for $100 000. He then carried on business from the premises devoted solely to selling compact discs, records, and DVDs. This business operation was greatly diminished from the previous appliance operation. The creditors of Bo in relation to the appliance business are unpaid and just now discover, two months after the sale to Mom's Appliance, that Bo is no longer in the appliance business. What remedies, if any, do Bo's Appliance's creditors have?

The appliance creditors can bring an action against Mom's Appliance under the provisions of the Bulk Sales Act. Bo's Appliance did not comply with the provisions of the Act to ensure that creditors were paid in relation to the bulk sale of the appliances. The sale is voidable and Bo's Appliance becomes liable to the appliance creditors. The appliance creditors could also commence an ordinary debt action against Bo; however, their best recourse is an action against Mom's Appliance Warehouse in respect to the bulk sale. Diff: 2 Type: ES Topic: Other Statutory Protection of Creditors Skill: Applied 60

Charles Brown, a fisherman, gave security to a bank under section 427 of the Bank Act in order to finance the purchase of a fishing boat from Triumph Ship Builders Ltd. The bank duly registered the standard form of notice with the Bank of Canada in relation to the fishing boat. A year later, Charles sold the fishing boat to Sea Traders Inc., who were marine mercantile agents. Sea Traders were unaware of the bank's section 427 security and made no attempt at searching for encumbrances against the fishing boat. Sea Traders in the normal course of business sold the fishing boat to Harold Walker, a bona fide purchaser for value. Charles left the country permanently after his sale to Sea Traders. Discuss the bank's position against each of Sea Traders, Charles Brown, and Harold Walker.

The bank should be successful in an action against Sea Traders Inc. for conversion. If Sea Traders had searched it would have found the bank's security registered. The bank would not be likely to succeed against Harold Walker, a bona fide purchaser for value. Harold had dealt with a mercantile agent and through trade custom and common law obtained a good title for value, free and clear of all adverse claims. Of course, the bank also has a claim against Charles if he can be found and extradited back to Canada. Diff: 2 Type: ES Topic: Security for Bank Loans Skill: Recall

The "charter" is an unsuitable instrument for reflecting special arrangements and side agreements between shareholders. Explain.

The charter is an incorporating document filed with the state. It can only be altered by a special resolution, requiring the approval of a two-thirds majority of the shareholders and the filing of the amended charter. To gain flexibility, these documents should be kept as short as possible. Diff: 2 Type: ES Topic: Methods of Incorporation Skill: Applied 53

Ward Bond was the sole director of Able Contractors and Hauling Ltd. The corporation entered into a contract to dig up and remove a below-ground storage tank that contained a residue of pesticides. The corporation dug up the tank and placed it on a flatbed truck for transportation to an approved disposal facility. While the tank was being transported, it started to rain. The driver called Ward to ask what he should do, because he had no tarpaulin to cover the tank. Ward knew that a tarpaulin would be useful but the cost would be several thousand dollars ,so Ward instructed the driver to park the truck until the rain had stopped. The driver did so in a restaurant parking lot and the rain washed out the pesticide residue from the tank. It leaked onto the parking lot below the truck. The driver noticed this and called Ward to find out what to do and Ward told him to leave immediately and go to the disposal facility. The pesticide residue was ultimately discovered and led to a clean-up at a cost of $35 000. What potential liability is there as a result of this situation? Who do you think will be liable, and what is the nature of their liability?

The corporation has civil liability, which could result in its being successfully sued for damages of $35 000 caused to the restaurant. The corporation may also be liable for criminal prosecution if they have breached some statutory provisions. The penalty would be a fine in all likelihood. Ward could have personal liability in this case. As he has not met the "due diligence" test and, in fact, actively promoted the commission of an offence, he could be liable for a criminal prosecution, which might result in his being jailed. Diff: 2 Type: ES Topic: Liability for Environmental Offences Skill: Applied 59

Explain how directors and senior officers can be held liable when the corporation commits a criminal offence.

The courts have found the actions of directors and senior officers to be those of the corporation itself both with regard to the actual committing of the acts and the required guilty or negligent mind. Diff: 2 Type: ES Topic: Criminal Liability of Directors and Officers Skill: Recall/Applied 52

What conditions must be satisfied by the seller of unpaid goods in order to repossess them from a bankrupt business?

The creditor must demand the return within 30 days of delivery, and the goods must still be in the possession of the purchaser. The goods must also be identifiable and must be in the same condition as when they were sold. Diff: 2 Type: ES Topic: Administration of a Bankrupt's Affairs Skill: Applied 53

The Delphi Corp. owns 60 percent of Lynden Sand & Gravel Inc. Delphi, with its voting power, elected all three directors on Lynden's board. Then the board decided to sell one of Lynden's gravel reserves to Delphi at only half its value. As a minority shareholder in the Lynden corporation, how have you been affected by this transaction?

The directors of Lynden have been in breach of their duty to act in good faith and in the interests of their corporation. The corporation has been injured because the value of its assets has been reduced, but the loss falls entirely on its minority shareholders since the majority shareholder, Delphi Corp., gains more as the purchaser (100 percent

For consumer goods, how much value to a creditor is the right of repossession?

The fear of repossession by the consumer provides an incentive to perform on the contract and avoid the sanction. When the right is actually exercised, however, the realizable value to the creditor is usually quite disappointing. There would be value in having prior claim to asset over other parties, especially over creditors in bankruptcy. Diff: 2 Type: ES Topic: Methods of Securing Credit Skill: Applied 47

Explain the general purpose of securities legislation in Canada. How are these purposes achieved?

The general purpose of securities legislation in Canada is to prevent fraudulent practices and require full disclosure to prospective buyers of shares and certain other securities offered to the public. It achieves its purpose by punishing those engaged in fraudulent practices and practices prohibited by statute. Securities regulation is a provincial matter, and the enforcing bodies exercise further controls by requiring registration and licensing of certain persons who deal in securities. The main way that securities legislation achieves its purpose of full disclosure before the issuance of securities is by requiring that a prospectus be filed and approved before distribution of shares takes place. There are penalties for issuing a false or misleading prospectus, and a prospectus is a contract of the utmost good faith. Diff: 2 Type: ES Topic: Protection of Investors Skill: Recall/Applied 57

I.M. Construction Ltd. decided to profit from the real estate boom and build a small retail and office building on land that it owns. Before the building is complete I.M. Construction Limited becomes insolvent. The property is subject to a mortgage that is not fully advanced and to many builders' liens. There have been inquiries from a number of parties who would be interested in renting space in the building. The real estate market is still booming. What practical advice do you have for the mortgage company and the lien holders?

The lien holders should attempt to reach an agreement with the bank to arrange for the bank to advance the balance of the mortgage to permit the completion of the building. Thereafter, they should attempt to sell the building. If a suitable buyer can be found, the lien holders will be paid in full, assuming the purchase price is sufficient to cover same. A variation on this is to lease space to the parties who have expressed interest in renting and then to sell the building. This may be more attractive to certain purchasers because the building will be generating some revenue and the purchaser has only to find tenants for the remaining space. Diff: 2 Type: ES Topic: Builders' Liens Skill: Applied

What is the object of bulk sales legislation?

The object of bulk sales legislation is to protect the creditors of a person making a bulk sale. The legislation proceeds on the premise that the creditors are entitled to the assets of the debtor's business as security for the amounts owing to them. Diff: 1 Type: ES Topic: Other Statutory Protection of Creditors Skill: Applied 55

Mary, Martha, Marge, and Alice incorporate a private corporation for the purpose of wholesaling sports equipment. Each owns an equal number of shares. Their incorporating documents neither specify what business the corporation is in nor restrict the type of business the corporation can operate. Martha, Mary, and Marge are the three directors and officers of the corporation, while Alice is being frozen out of the company's decision making. She has never been elected as a director, has never had a position in the management, and has not had any of her resolutions passed at the annual shareholder's meeting. Also, the corporation seemed to have abandoned its original purpose and gone into a different business—one that doesn't interest Alice. Explain to Alice the "oppression remedy" and its advantages over two other kinds of remedy.

The oppression remedy is being widely adopted across Canada. It provides far greater flexibility than the alternatives, such as a derivative action or a "just and equitable" winding up. Where the complainant has been treated unfairly or oppressively, the court will, in the oppression remedy, give any order it considers just and appropriate to the situation. The most common judgment is to require the majority shareholders to buy out the minority interest at a fair price. This might be the best resolution for Alice, since it would free up her investment to pursue an interest more to her liking. Diff: 2 Type: ES Topic: The Protection of Minority Shareholders Skill: Applied 64

In respect to a statute-barred debt, under what circumstances is there a presumption of a new promise to pay the whole indebtedness?

The presumption of a new promise to pay arises from the mere fact of making a part payment without other evidence to contradict the presumption. Diff: 1 Type: ES Topic: Limitations Statutes Skill: Recall/Applied 56

Why do you think that provincial legislators have enacted personal property security legislation?

The primary driving force of our economy is commerce, and PPSA legislation recognizes this, attempting to ensure that financial institutions and other lenders are well protected. The failure to provide such protection could lead to the collapse of those institutions and, in turn, the economy. Diff: 2 Type: ES Topic: Personal Property Security Legislation Skill: Applied 54

Explain why most corporations issue pre-emptive rights on their new issues of stock when pre-emptive rights are generally not recognized by courts in Canada.

The principle that shareholders should be able to maintain their share of ownership in the face of a new stock issued is well recognized in the business world. Therefore, pre-emptive rights are many times included in the charter or by-laws of a corporation. Alternately, pre-emptive rights may be voluntarily recognized by the directors when there is a new issue of stock. Then there is the situation where without pre-emptive rights, the courts may disallow the issue. This is a situation where, instead of the purpose of the new issue being to raise capital, the purpose is to affect voting control. If this can be demonstrated, the courts will restrain the corporation from making the issue, or it may subsequently declare the issue void. Besides, you're more apt to keep your current stockholders happy with pre-emptive rights. Diff: 2 Type: ES Topic: Shareholders Skill: Applied 63

In trying to protect corporate creditors, what is the solvency test?

The solvency test requires that the directors of a corporation become personally liable for any deficiency resulting from the payment of dividends when the firm is insolvent, that is, unable to meet its debts as they fall due, or where the realizable value of its assets has become less than its total liabilities. Diff: 2 Type: ES Topic: Protection of Creditors Skill: Recall/Applied 49

Notwithstanding legislation designed to impose duties on directors, why do you think that large corporations get away with breaches of duties and even fraud at the level of the directors and controlling shareholders, if any?

These companies normally have associated companies owned or controlled by the principal shareholder, enabling the funneling of money between the two without any apparent impact on the value of shares of the minority shareholders. In such cases, the principal or controlling shareholder controls the directors, who act in concert with the controlling shareholder to take steps internally to cover up what is being done, such as devising accounting methods that hide fraudulent or improper activities and cannot be detected without a forensic audit. It is only when the minority shareholders sustain heavy losses or information about the improper conduct is leaked to them that the extent of the improper activities by the parties responsible is discovered. Diff: 3 Type: ES Topic: Duties of Directors and Officers Skill: Applied 49

Why has provincial and federal legislation removed the requirement of mens rea for regulatory offences?

This burden is extremely difficult to meet, and in order to better regulate such matters as health, safety, and the environment, it makes more sense to let the evidence raise presumptions of guilt, which can only be rebutted by the due diligence defence. Diff: 2 Type: ES Topic: Liability Arising from Business Responsibilities Skill: Applied 44

Explain why the insolvency and maintenance of capital tests are important when it comes to corporations.

This is because with corporations, unlike with other business forms, a creditor's rights are limited to the assets held by a corporation and these tests are a legislative attempt to force corporations to have enough assets available to satisfy their creditors and to ensure that those assets are not depleted by issuing dividends or through redemption and repurchase of shares. Diff: 2 Type: ES Topic: Protection of Creditors Skill: Recall/Applied 46

Sometimes a lease agreement can be construed as a security agreement rather than a true lease. Why is this distinction important for the lessor to determine?

This is important because if the contract is construed to be a security agreement, it should be registered. If it needs to be registered and is not, then other creditors may have claim to the asset(s

Explain what is meant by the term "financing leases."

This term refers to leases that serve as a type of security device. The effect of such financing leases is much the same as if the lessor company lent the lessee the money to buy the asset and the lessee then undertook to repay the borrowed money in regular installments. Diff: 2 Type: ES Topic: Methods of Securing Credit Skill: Recall 46

Mario Black has, along with two others, formed a corporation to market specialized computer software. Each partner initially purchased ten common shares at $10 a piece, giving the corporation $300 in capital. The company requires an additional $25 000 to operate. Describe three different ways the corporation could acquire that $25 000 and give a brief reason why you would recommend or not recommend each of the ways.

Three ways of raising $25 000 would include: (1

Where a bank gives a loan, taking back and perfecting security under section 147 of the Bank Act, why is registration under provincial personal property security legislation a prudent practice?

To ensure that there is no conflict with creditors properly secured under provincial legislation and to ensure that the bank will always have priority over the claims of other secured creditors. Diff: 2 Type: ES Topic: Security for Bank Loans Skill: Applied 44

What is the doctrine of ultra vires in corporate law and what is its current effect across Canada?

Ultra vires means "beyond the powers of a corporation," that is, an attempt by a corporation to do an act outside its capacity as defined in its charter. The doctrine has been abolished by the federal Canada Business Corporations Act. Diff: 1 Type: ES Topic: The Nature of a Corporation Skill: Recall 49

must be met before a corporation may purchase its own shares?

Under the CBCA, a corporation may redeem or purchase its own shares for a number of specified reasons, subject to satisfying both parts of the solvency test. Diff: 2 Type: ES Topic: Protection of Investors Skill: Recall/Applied 50

Regarding ratification of pre-incorporation contracts, how has the CBCA resolved the problem presented by common law?

Under the CBCA, a corporation ratifies a pre-incorporation contract simply by taking any action or conduct signifying its intention to be bound—provided the adoption and ratification takes place reasonably promptly after the corporation comes into existence. Diff: 1 Type: ES Topic: Civil Liability of Corporations Skill: Recall 48

What is the difference between the business of a corporation and the affairs of a corporation?

Under the Canadian Business Corporations Act, the "affairs" are the internal arrangements among those responsible for running a corporation and its main beneficiaries—the shareholders. The "business" is the external relations between a corporation and those who deal with it as a business enterprise—its customers, suppliers, and employees—as well as relations with government regulators and society as a whole. Diff: 1 Type: ES Topic: What Is Corporate Governance? Skill: Recall 53

Can a shareholder agreement protect a minority shareholder from oppressive acts of the majority shareholders and, if so, how?

While a shareholder agreement, if properly tailored, can deal with any matter which the parties to it want dealt with, there is no such thing as absolute protection for a minority shareholder. Rather, provisions setting out mechanisms to be used in a situation of oppression can be inserted in the agreement. Two such provisions are as follows: First, those that can be employed at any time for the purchase of the shares of the minority shareholder by the majority shareholders, and vice versa. Second, mandatory arbitration provisions dealing with matters that are oppressive in nature can also be put in the shareholder agreement to be used whenever the question of oppression of a minority shareholder arises. Diff: 1 Type: ES Topic: Shareholder Agreements Skill: Applied 50

To what extent does building lien legislation really protect subcontractors, workers, and suppliers of goods, and who really benefits?

While building lien legislation makes it mandatory that an owner/builder or general contractor hold back from 10 to 20 percent of the contract price to protect those involved in a construction project, the holdbacks are rarely sufficient to reimburse those for whom they are held for the goods or services installed on or supplied to the project. Further, court proceedings under such legislation are lengthy and the amount recovered is often decreased substantially by the litigation costs. Small businesses, contractors, and suppliers require a steady cash flow and often owners/builders and general contractors use the threat of non-payment or of building lien procedure and litigation as a means to bargain down the contract price with such subcontractors, workers, and suppliers, allowing the owners/builders and general contractors to pocket the difference. Diff: 3 Type: ES Topic: Builders' Liens Skill: Applied 58

Explain why legislation is necessary in areas of law other than contracts or torts to regulate the conduct of corporations and those who run them.

While the theory of the corporation as a natural person permits common law to regulate corporations in matters of contract and torts, this theory breaks down when attempting to determine who within a corporation may be responsible for a breach of criminal or regulatory matters. For this reason, it makes more sense to legislate rules relating to the conduct of those individuals within a corporation without whom the corporation could not function. Diff: 2 Type: ES Topic: Protection of the Public Interest Skill: Applied 45

In what way could a consignment contract be an indirect type of credit? Use an example to explain.

Wholesale distributors or manufacturers ship merchandise to retailers on consignment. By the terms of the consignment contract, the merchandise remains the property of the wholesale distributor or manufacturer. The retailer agrees to become the insurer of the goods to the amount of their wholesale price and, as agent of the consignor for the purpose of selling the goods, to be accountable for all money received on the sale of the merchandise up to its wholesale price. Thus the consignor provides financing in the form of goods rather than money and, by the terms of the consignment contract, the consignee "owes" the consigned merchandise (to the value of its wholesale price

Mandy had her securities licence suspended by the securities commission, yet she continues to buy and sell stock as an investment dealer. Mandy certainly a. has committed a criminal offence. b. will have all her stock trades cancelled and/or reversed. c. will be barred for life from working in the securities industry in Canada. d. must go up before the discipline committee of the securities commission. e. will face private discipline by the investment house where she is an agent.

a Diff: 1 Type: MC Topic: Protection of Investors Skill: Recall 24

Which of the following is NOT included in the categories of persons to whom a bank may loan money under the Bank Act? a. doctors b. farmers c. fishermen d. manufacturers e. aquaculturalists

a Diff: 1 Type: MC Topic: Security for Bank Loans Skill: Recall 30

Regarding financial rights, shareholders have a right to a. receive dividends when declared by the corporation. b. dividends when the corporation makes a profit. c. some discrimination in the payment of dividends. d. dividends paid in the order of preferences assigned to classes of shareholders—starting with the common shareholders. e. capital appreciation as a result of retained earnings.

a Diff: 1 Type: MC Topic: Shareholders Skill: Recall 28

John and George wish to incorporate their manufacturing business and intend to manufacture and sell their products throughout Canada. In such a case, they should consider incorporating a. a federal company. b. an international company. c. a professional corporation. d. a private provincial company. e. none of the above

a Diff: 1 Type: MC Topic: Types of Business Corporation Skill: Recall/Applied 10

An assignment in bankruptcy is a procedure under which a person voluntarily declares bankruptcy. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 1 Type: TF Topic: The Bankruptcy and Insolvency Act Skill: Recall 43

A professional corporation is a special type of corporation that may be established by members of a profession. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 1 Type: TF Topic: Types of Business Corporations Skill: Recall/Applied 42

A private corporation is one that is not permitted to offer its shares to the public. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 1 Type: TF Topic: Types of Business Corporations Skill: Recall/Applied 43

Use the fact situation in Q2 to answer the related question that follows. Given the bankruptcy of General Widgets, the payment to the company's largest supplier is probably a. a fraudulent preference only. b. a reviewable transaction only. c. both a reviewable transaction and a fraudulent preference. d. a fraudulent transfer only. e. a fraudulent assignment only.

a Diff: 2 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Applied 6

Brianna, a framing contractor, has a duly registered builders' lien on the property owned by Bowing Development. This lien gives Brianna the right to a. bring an action and obtain a court order appointing a trustee. b. commence a legal action within 90 days against the general contractor. c. place a claim on the owner's business assets. d. obtain 15 percent of the statutory holdback. e. personally take possession of the property in order to realize her claim.

a Diff: 2 Type: MC Topic: Builders' Liens Skill: Applied 30

Martin is a newly elected director of the Alliance Corporation. After being told of what would be expected of him, he is not sure he wants the position. However, upon investigating, he finds out that the only thing he will be liable for is a. employee wages if the corporation becomes insolvent. b. to attend all regularly scheduled board of director meetings. c. to exercise a high standard of care, diligence, and skill. d. to act with the professional standards of a director. e. to study items on the agenda before each director's meeting.

a Diff: 2 Type: MC Topic: Duties of Directors and Officers Skill: Applied 20

Use the fact situation in Q5 to answer the related question that follows. In the fact situation above, assume that instead of being told about the franchises at the barbecue, Edmund told this to Jane during a meeting with her in her office at the company. In this case, the result of the lawsuit would most likely be a. that Jane is deemed to have bought the franchises as an agent of the company which now owns them. b. that Jane must pay damages to the company. c. that Jane must resign as a director of the company. d. that Jane must assign the franchises which she bought to the company. e. none of the above

a Diff: 2 Type: MC Topic: Duties of Directors and Officers Skill: Applied 9

Phillip, who has a loan on his car at the bank, has placed his car on consignment at the local used car lot. His law professor tells Phillip that consignments can amount to a secured type of credit. If this is true, who is the creditor? a. the consignor b. nobody, because in this case, the professor is wrong c. the next purchaser of the car d. the consignee e. the bank

a Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Applied 16

B, a car dealership, sells A a car on terms that provide that A will have possession of the car for a period of three years, during which A will make monthly payments; however, ownership in the car remains with the dealership until A makes the last payment. In this case, A and the dealership have effected a. a conditional sale. b. a consignment. c. a chattel lease. d. a chattel mortgage. e. a floating charge.

a Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Applied 2

What is the difference between a chattel mortgage and a conditional sale contract? a. In a conditional sale contract the security is the property sold, whereas a chattel mortgage can have as security any chattels. b. A chattel mortgage must be registered to affect third parties, whereas a conditional sale agreement does not need to be registered to affect third parties. c. If there is default under a conditional sale contract, the seller can seize the goods and sue the buyer for any deficiency, whereas under a chattel mortgage the chattel mortgagee can only seize the goods. d. A conditional sale is a personal obligation of the buyer, whereas a chattel mortgage does not bind the chattel mortgagor personally. e. none of the above

a Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Recall 20

used as collateral can be sold? a. chattel mortgage b. pledge c. real estate mortgage d. stock-in-trade e. floating charges

a Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Recall 21

Use this fact situation to answer the related questions that follow. A purchases a video business from B, who takes back a chattel mortgage on the inventory, which is composed of DVDs. The chattel mortgage states that it covers after-acquired property. B then registers this mortgage under the provincial PPSA. A few months later, A needs to purchase more DVDs and goes to his bank to borrow the money for the purchase. In turn, the bank takes a chattel mortgage for the amount of its loan, registers its chattel mortgage, and gives A the money. A then buys the DVDs. In this case, under PPSA legislation, the bank has a. a purchase money security interest. b. a guarantee. c. a chattel mortgage. d. a promissory note. e. a bill of exchange.

a Diff: 2 Type: MC Topic: Personal Property Security Legislation Skill: Applied 9

A and B carry on business as a general partnership, which recently went bankrupt. In the event that the partnership assets are insufficient to pay off the creditors of the partnership, a. both A's and B's personal assets will be seized. b. neither A's nor B's personal assets will be seized. c. only B's personal assets will be seized. d. only A's personal assets will be seized. e. none of the above

a Diff: 2 Type: MC Topic: Protection of Creditors Skill: Applied 5

Use the fact situation in Q13 to answer the related question that follows. Assume that A and B have a unanimous shareholder agreement, which provides that for the time being the accountant of the corporation shall have the deciding vote in the event of a deadlock between the shareholders. If the accountant votes with A against B, a. B is bound by the vote. b. B can bring a derivative action. c. B can use the oppression remedy. d. B can move to wind up the company. e. B must sell his shares to A.

a Diff: 2 Type: MC Topic: Shareholder Agreements Skill: Applied 15

The only "document of record" the company need NOT allow access to by the shareholders is a. minute books of board of directors' meetings. b. a copy of the company charter. c. a register of directors. d. a register of all transfers of shares. e. a copy of all special resolutions.

a Diff: 2 Type: MC Topic: Shareholders Skill: Recall/Applied 29

Use the fact situation in Q2 to answer the related question that follows. Assume that by March 2009, the company's business was starting to recover, but the company was still insolvent. In this case, instead of voluntarily assigning itself into bankruptcy, General Widgets could have a. made a commercial proposal. b. commenced winding-up proceedings. c. made a consumer proposal. d. obtained a receiving order. e. all of the above

a Diff: 2 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Applied 11

Mike's business is not doing too well and he is contemplating bankruptcy unless things change soon. As he currently deals with his creditors, the guiding principle should be that a. creditors of the same class should be treated equally. b. preferences should not include family or friends. c. all transactions within three months preceding bankruptcy are indefensible. d. transfers of property such as the sale of inventory will be invalidated. e. bankruptcy is an avenue of last resort and should be avoided at all cost.

a Diff: 2 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Applied 23

Albert is employed by a large company that manufactures aluminum siding. The company allows Albert to use its truck for deliveries and also for his personal use. The truck has the name of the company on it. One evening after the company has closed for business, Albert causes an accident while driving the truck and damages the car of a third party. In this situation, a. Albert is personally responsible for the damages of the third party and the company has no liability. b. the company alone is vicariously liable to the third party for the damages. c. both Albert and the company are liable for the third party's damages. d. Albert alone as an employee of the company is responsible for the third party's damages. e. none of the above

a Diff: 2 Type: MC Topic: The Nature of a Corporation Skill: Applied 8

Use the fact situation in Q11 to answer the related question that follows. The most likely result of the recourse taken by Mary will be that a. the court will order that Mary's shares be valued and then purchased by the remaining shareholders. b. the court will order Mary and all of her benefits and positions reinstated. c. the court will find that the other three directors have breached their obligation to act in the best interests of the company. d. the court will order the other three out of the company. e. the court will order the company to pay Mary damages.

a Diff: 2 Type: MC Topic: The Protection of Minority Shareholders Skill: Applied 13

Where an insolvent person transfers land which he owns to his spouse at one-third of its fair market value within 12 months of his bankruptcy, his spouse may be required to pay the difference gained to the trustee in bankruptcy. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: Administration of a Bankrupt's Affairs Skill: Applied 38

Where, just before declaring bankruptcy, a person transfers title of real property to his children telling them that he wants to protect the property from bankruptcy, the transfer is a fraudulent conveyance or transfer. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: Administration of a Bankrupt's Affairs Skill: Applied 39

A builder's lien is available only to creditors who participate directly as workers, or who supply material for use directly in the construction work. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: Builders' Liens Skill: Applied 42

A director or officer of a public trading company who uses private information about the company to purchase shares of the company to make a profit is an insider trader. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: Duties of Directors and Officers Skill: Recall/Applied 43

A corporation that is not paying its creditors in a timely fashion is probably insolvent. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: Protection of Creditors Skill: Applied 41

The failure of a company to ensure that its employees are well trained for the job they do and to ensure that their workplace is safe is an offence under occupational health and safety legislation. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: Protection of Employees Skill: Recall/Applied 37

Secondary market liability occurs when someone who owns shares in a company sells them in circumstances where information released about the state of the company is false and not yet corrected. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: Protection of Investors Skill: Recall/Applied 38

One of the rights of a lending bank in the event a borrower defaults is the right to sell the security without notice to the borrower. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: Security for Bank Loans Skill: Recall/Applied 39

A shareholder who is not a director can operate a business that competes with the business of the company in which she or he is a shareholder. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: Shareholders Skill: Applied 40

An unsecured creditor is no different from a creditor who fails to register a security interest under provincial PPSA legislation. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: The Meaning of "Security" Skill: Recall/Applied 38

A corporation can sue and be sued in its own name. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: The Nature of a Corporation Skill: Recall/Applied 35

When we speak of lifting the corporate veil, we are referring to the ability of a court to recognize a proper case where the corporation has been set up simply as a means of protecting its incorporators from liability for acts of fraud or breach of duty. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: The Nature of a Corporation Skill: Recall/Applied 37

Generally speaking, the common shares of a minority shareholder will be ordered to be purchased at fair market value by the remaining shareholders who have been found guilty of oppressing him or her. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 2 Type: TF Topic: The Protection of Minority Shareholders Skill: Recall/Applied 42

When a director has a duty to acquire property for the corporation and instead acquires it for herself, she has a. intercepted an opportunity belonging to the corporation and has committed a breach of duty. b. an obligation to immediately disclose the acquisition of the property to the shareholders. c. no obligation to disclose and has not committed any breach of duty. d. breached her obligation not to compete with the corporation.

a Diff: 3 Type: MC Topic: Interception of Corporate Opportunity Skill: Recall/Applied 36

Megacorp Ltd. is a large private Ontario construction company in which Albert, John, and Michael are the shareholders and George, Mary, and Sam are the directors. Recently, Albert and John started up a building supplies business, which now has a contract to provide building supplies to Megacorp Ltd. However, Michael objects to this. In this situation, a. Michael is not correct in objecting because Albert and John have no fiduciary duty to Megacorp Ltd. b. Michael is correct in objecting because Albert and John are shareholders in Megacorp Ltd. c. Michael is correct in objecting because Albert and John have a fiduciary duty to Megacorp Ltd. d. Michael is not correct in objecting because Albert and John have a duty of good faith to Megacorp Ltd. e. none of the above

a Diff: 3 Type: MC Topic: The Nature of a Corporation Skill: Applied 4

Originally, courts did not consider insider trading as harmful to the corporation and so it did not consider it a breach of the fiduciary duty owed to the corporation. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 3 Type: TF Topic: Insider Trading Skill: Recall 47

When it is unlawful to declare dividends because of a deficiency in the capital fund and yet the shareholders want a quick pay-out, then a. Revenue Canada can issue "not withstanding" tax credits. b. the corporation needs to earn enough profits to restore the deficiency. c. shareholders can lend money to the corporation and receive interest payments in return. d. the corporation can re-capitalize at a lower amount. e. wages can be paid to officers instead of dividends.

b Diff: 1 Type: MC Topic: Protection of Creditors Skill: Applied 22

Which of the following is NOT a form of security for bank loans? a. chattel mortgage b. assignment of office furniture c. assignment of book debts d. guarantee of a third party e. mortgage of real estate

b Diff: 1 Type: MC Topic: Security for Bank Loans Skill: Recall 31

In a distributing public company, auditors are appointed by a. the directors. b. the shareholders. c. the Securities Commission. d. the audit committee of the board of directors. e. the treasurer.

b Diff: 1 Type: MC Topic: Shareholders Skill: Recall 18

Danny is thinking of bankruptcy for his business, but so far he has not made an assignment, nor is the business subject to a receiving order. Yet, because Danny meets all the requirements of bankruptcy, the Bankruptcy and Insolvency Act refers to Danny as a. a candidate for bankruptcy. b. an insolvent person. c. an applicant for bankruptcy. d. being bankrupt. e. a consumer debtor.

b Diff: 1 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Applied 15

In a bankruptcy proceeding, the creditors can, if they wish, appoint a. any number of inspectors. b. a substitute trustee. c. the court of jurisdiction. d. an official judicial observer. e. the official receiver in bankruptcy.

b Diff: 1 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Recall 16

Jumping Jellyfish Corporation is a Canadian business that is indebted to a number of persons and entities. On January 2, 2003, the accountant of Jumping Jellyfish examines the books and makes the determination that the current debts of the corporation total $2 million, and the assets and cash total only $200 000. The accountant concludes that the corporation will be unable to pay its debts as they become due. The corporation is a. insolvent and bankrupt. b. insolvent. c. a trustee. d. a receiver. e. bankrupt.

b Diff: 1 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Recall/Applied 2

The Steamboat Co. is Charlie's sole creditor. He owes them $6500 from his sign painting business. In order to obtain a receiving order, Steamboat must a. comply with all formalities required by the federal Bank Act. b. make sure the debtor has committed an act of bankruptcy within the previous six months. c. file a petition with the court in the creditor's judicial district. d. provide the court with the name of the appointed trustee. e. prove the facts alleged by any other petitioning creditor.

b Diff: 1 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Recall/Applied 20

Which of the following will NOT end the existence of a corporation? a. a dissolution order by the court b. the death of all shareholders in a single accident c. a resolution of the shareholders d. a failure to pay the annual corporation franchise fee e. a failure to comply with statutory regulations

b Diff: 1 Type: MC Topic: The Nature of a Corporation Skill: Recall 13

The CEO of a corporation is a. chosen from the board of directors. b. appointed or hired by the board of directors. c. hired by the president. d. in charge of the board meetings. e. elected by the shareholders.

b Diff: 1 Type: MC Topic: The Structure of the Modern Business Corporation Skill: Recall 17

Use this fact situation to answer the related questions that follow. Mary and Joan are dentists who practise dentistry in Ontario as Mary and Joan PC. A year after incorporation, one of Mary's patients suffers injuries as a result of Mary's negligence. In this case, who is liable for the patient's injuries? a. Mary and the corporation only b. Mary alone c. the corporation alone d. Mary, Joan, and the corporation e. Mary and Joan only

b Diff: 1 Type: MC Topic: Types of Business Corporation Skill: Applied 6

Which of the following is NOT a distinguishing feature of closely held corporations? a. The number of share holders is restricted. b. The directors of the company are prohibited from holding more than 60 percent of the outstanding shares. c. The number of required shareholders can be as small as one. d. Any invitation to the public to buy shares is prohibited. e. The right to transfer shares must be restricted in some manner.

b Diff: 1 Type: MC Topic: Types of Business Corporations Skill: Applied 26

All creditors are considered to be equal in bankruptcy law. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 1 Type: TF Topic: Administration of a Bankrupt's Affairs Skill: Recall/Applied 35

A secured creditor does not have to prove its debt before its debt ranks as a claim against the bankrupt's estate. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 1 Type: TF Topic: Administration of a Bankrupt's Affairs Skill: Recall/Applied 41

Corporations are always liable in tort for contracts entered into with third parties. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 1 Type: TF Topic: Civil Liability of Corporations Skill: Recall/Applied 39

When a corporation is liquidated, the first group of persons to be paid are the preferred creditors. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 1 Type: TF Topic: Corporate Securities Skill: Recall/Applied 39

Directors are appointed by the officers of the corporation. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 1 Type: TF Topic: Directors Skill: Recall/Applied 38

An acceleration clause permits a chattel mortgagor to pay off the mortgage more quickly. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 1 Type: TF Topic: Methods of Securing Credit Skill: Recall 40

If a corporation is profitable, directors must declare a dividend to holders of common shares according to their proportionate shareholding. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 1 Type: TF Topic: Shareholders Skill: Recall 45

The Bankruptcy and Insolvency Act distinguishes between three classes of debtors. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 1 Type: TF Topic: The Bankruptcy and Insolvency Act Skill: Recall 45

The ultra vires doctrine applies in most provinces in Canada. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 1 Type: TF Topic: The Nature of a Corporation Skill: Applied 45

Under the Bankruptcy and Insolvency Act, the claims of unpaid employees against the assets of a bankrupt employer rank in priority a. ahead of unsecured creditors. b. partly as preferred creditors. c. pro rata with secured creditors. d. partly ahead of secured creditors. e. none of the above

b Diff: 2 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Recall 21

Each of the following parties has a right to file a builders' lien EXCEPT the one that a. is an architect and has prepared plans for the building. b. sells tools or machinery to the contractor. c. delivers goods directly to the contractor's premises and can prove that the goods were used in the construction. d. rents equipment for use on the contract site. e. delivers goods directly to the building site.

b Diff: 2 Type: MC Topic: Builders' Liens Skill: Recall/Applied 29

Use the fact situation in Q5 to answer the related question that follows. Now assume that the supplier delivered supplies to Edward's company totalling $50 000.00 and that the company is overdue in its payment for the supplies. In this situation, the supplier can sue a. Edward only. b. the company only. c. Edward and the company. d. Edward, the company, and its president. e. all of the above

b Diff: 2 Type: MC Topic: Civil Liability of Corporations Skill: Applied 10

John is employed by a large private company that manufactures top-quality bicycles. John's duties are to test the bicycles after they have been assembled. During one such test the brakes on the bicycle being tested fail, causing John to lose control and scrape the side of George's brand new car. In this case, George can sue a. the company only. b. both John and the company. c. John, the company, and the employee who assembled the bike John was testing. d. John only. e. John, the company, and the employee who made the brakes on the bicycle being tested.

b Diff: 2 Type: MC Topic: Civil Liability of Corporations Skill: Applied 11

Use the fact situation in Q5 to answer the related question that follows. Assume that before Edward entered into the contract with the supplier, the president of Edward's company invited Edward to a lunch with the supplier and after a few drinks stated that Edward was also in charge of company sales. Also assume that later in the day and back at his office, the president reminded Edward that he had nothing to do with sales for the company. In this case, a. there is no contract between Edward, the supplier, and Edward's company; it is provisional only. b. there is a contract between Edward and the supplier only. c. there is no contract between Edward's company and the supplier. d. there is a contract between Edward, the supplier, and Edward's company. e. there is a contract between Edward's company and the supplier.

b Diff: 2 Type: MC Topic: Civil Liability of Corporations Skill: Applied 9

Elvin inherited 1000 shares of 7 percent preferred. She has been assured by her broker that the company is in sound financial health even though it did not pay any dividends this year. Elvin should next find out whether a. this preferred stock qualifies for the dividend tax credit. b. rights are cumulative. c. there is any collateral for these shares. d. rights are participating. e. the preferred stock is included under the registered class rights.

b Diff: 2 Type: MC Topic: Corporate Securities Skill: Applied 29

Use the fact situation in Q12 to answer the related question that follows. Assume that John went to a local newspaper and told it about the results of the tests on the company's new line of cars and the newspaper published the story. Also assume that the company finds out that John was the one who gave the story to the newspaper and summarily fires John. In this case the company has committed the offence of a. criminal negligence causing bodily harm. b. whistle-blowing retaliation. c. distributing false statements. d. criminal fraud. e. all of the above

b Diff: 2 Type: MC Topic: Criminal Liability of Corporations Skill: Applied 16

Six years ago, Michael incorporated his small business in Alberta. Now, in order to do business in Ontario, Michael must a. resubmit papers to Alberta. b. register with the Ontario government. c. re-register as a federal corporation. d. realize that the CBCA is not suitable for small business. e. form a corporation federally or with the Province of Ontario.

b Diff: 2 Type: MC Topic: Methods of Incorporation Skill: Applied 23

In the articles of incorporation jurisdictions, the concept of authorized capital has been abolished. Now, what's important is a. whether a new issue can be sold to current owners. b. the total number of shares issued and consideration received for each of those shares. c. whether there is a par value or a no par value on the shares sold. d. whether the distinction can be maintained between the preferred and the common shares. e. the difference between issued capital and paid-up capital.

b Diff: 2 Type: MC Topic: Methods of Incorporation Skill: Applied 28

The Hendersons have purchased their new riding lawnmower on a conditional sale contract. They have just been notified that the contract was assigned to a finance company. The Hendersons may now a. have the protection of a holder in due course as guaranteed by the Bills of Exchange Act. b. expect to have the same defences they had against the retailer. c. have to sue for their rights under the contract. d. be subject to all the personal defences that the seller has against the conditional buyer. e. have the benefits of a cut-out clause.

b Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Applied 19

Use the fact situation in Q2 to answer the related question that follows. In this situation, if B takes back a chattel mortgage on the inventory, title to the inventory a. remains with A. b. is immediately transferred to A and retransferred to B. c. remains with B until A has made the first payment. d. remains with B until B gives notice to A to transfer title to B. e. remains with B until A makes the last payment.

b Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Applied 4

In spite of the fact that a corporation does not meet the solvency test, it can a. buy back shares. b. pay wages to employees. c. pay dividends. d. make loans to directors. e. none of the above

b Diff: 2 Type: MC Topic: Protection of Creditors Skill: Recall 19

Can the chartered banks require security for loans outside section 427 of the federal Bank Act? a. Yes they can, namely, guarantees by third party. b. No, they can only require security for those types of security listed in the Act. c. Yes, they can, namely, pledge of shares and bonds. d. Yes, they can, namely, assignment of book debts. e. Yes, they can, namely, warehouse receipts and order bills of lading.

b Diff: 2 Type: MC Topic: Security for Bank Loans Skill: Recall 27

to her creditors. They have accepted it by a two-thirds vote. The next step is for the trustee to a. schedule a hearing in the Bankruptcy Court. b. apply to the court to have the proposal declared binding upon all the creditors. c. get the approval of the receiver in bankruptcy. d. determine if the agreement is prejudiced against general creditors. e. file the document with the Superintendent of Bankruptcy.

b Diff: 2 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Recall 18

Jim incorporated his small business so that he would obtain limited liability on company indebtedness. But when he applied for a bank loan, the bank insisted that he give a personal guarantee for the loan made to the corporation. Has the incorporating of the business helped Jim as far as limiting his business liability? a. No, it has not, since all venders and creditors will be more leery about extending credit. b. Yes, it has, because it might help in other types of liability, such as product liability. c. No, it has not, because bankers become more cautious when they see individuals incorporate just to avoid personal liability. d. No, it has not, because personal guarantees are required either way. e. Yes, it has, because the bank has more confidence in issuing his company the loan.

b Diff: 2 Type: MC Topic: The Nature of a Corporation Skill: Applied 15

John, who has a reputation for dishonesty, recently incorporated an investment company to protect himself from liability for his dishonest activities. John makes himself an employee of the company and fraudulently misrepresents an investment to a new customer who invests a large sum of money, which John pockets. A few days later the company goes bankrupt. In this situation, the investor a. can sue John for breach of fiduciary duty. b. can move to have the court pierce the corporate veil and sue John directly for fraud. c. can sue both the company and John. d. can sue only the company. e. none of the above

b Diff: 2 Type: MC Topic: The Nature of a Corporation Skill: Applied 9

Charles, a minority shareholder in a large private provincial company, has just learned that the controlling shareholder together with the directors of the company intend to sell a large portion of the property owned by the corporation at a price less than its fair market value. If Charles wants to stop this, he will a. seek the oppression remedy. b. launch a derivative action. c. bring an appraisal remedy. d. seek an order to wind up the company. e. all of the above

b Diff: 2 Type: MC Topic: The Protection of Minority Shareholders Skill: Applied 11

Use this fact situation to answer the related questions that follow. George, John, Edward, and Mary each own 25 percent of the common shares of a private company that they incorporated five years ago. At that time, they decided that they did not need a shareholders' agreement. Now there has been a falling out between them and the three men have used their majority vote to take away Mary's salary, terminate her employment with the company, and remove her as a director and officer of the company. In this case, Mary has recourse to a. a derivative action. b. an oppression remedy. c. the appraisal remedy. d. winding up the company. e. all of the above

b Diff: 2 Type: MC Topic: The Protection of Minority Shareholders Skill: Applied 12

When a debtor makes an assignment is bankruptcy, the court will discharge the person from obligations to creditors. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Administration of a Bankrupt's Affairs Skill: Recall 44

The RRSPs of a bankrupt are exempt from seizure. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Administration of a Bankrupt's Affairs Skill: Recall/Applied 36

On a bankruptcy, preferred creditors rank in priority before secured creditors. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Administration of a Bankrupt's Affairs Skill: Recall/Applied 40

To escape personal liability, when a party enters into a pre-incorporation contract, it is enough for that party to simply state on the written contract that he or she is entering into the contract on behalf of a company to be incorporated. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Civil Liability of Corporations Skill: Recall/Applied 40

There is no practical difference between the rights of a shareholder and those of the holder of a debenture. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Corporate Securities Skill: Applied 38

When a corporation issues more than one class of shares, the specific rights of each class do not have to be set out in the constitution. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Corporate Securities Skill: Recall/Applied 40

Offences under the Criminal Code of Canada are both criminal and regulatory in nature. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Criminal Liability of Corporations Skill: Recall/Applied 36

A director who fails to act in the best interests of a company is liable in damages to the shareholders. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Duties of Directors and Officers Skill: Applied 39

A director who refuses to disclose his interest in another company at a directors meeting where the purchase of the other business is being voted on has committed a breach of trust. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Duties of Directors and Officers Skill: Applied 44

Jack is a director of Metallica, a construction corporation. During the course of his work as director of the corporation, Jack learns that the government is about to ask for tenders for the construction of a highway. If Jack resigns from his position as director and then sets up a new corporation that successfully bids for the government contract, he will not be in breach of his duty as a director. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Duties of Directors and Officers Skill: Applied 46

Offences under such statutes as the Canada Environmental Protection Act are criminal offences. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Liability Arising from Business Responsibilities Skill: Applied 35

No knowledge of the law is a good defence to an absolute liability offence. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Liability Arising from Business Responsibilities Skill: Recall/Applied 42

At common law, a bona fide purchaser for value without notice acquires ownership in goods from a seller who appears to own them, but does not. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Methods of Securing Credit Skill: Applied 35

A mortgage on land gives the mortgagee security in the land in priority over other secured interests registered under provincial PPSA legislation. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Personal Property Security Legislation Skill: Applied 34

A prudent creditor who has entered into a chattel mortgage will always conduct a search of title in the local land titles office. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Personal Property Security Legislation Skill: Applied 36

A properly registered security interest is generally effective against all third parties. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Personal Property Security Legislation Skill: Applied 41

Banks that have perfected security for loans as required by the Bank Act always have priority over any other form of security registered under provincial PPSA legislation. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: Security for Bank Loans Skill: Applied 37

The by-laws of a corporation are always appended to the articles of incorporation. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: The Constitution of a Corporations Skill: Recall/Applied 44

Edith is the only shareholder and director of Edie Inc., a corporation incorporated by Edie two years ago. Edie is also the president of Edie Inc. Edie Inc. has no employees and no assets. Edie will be personally liable to creditors of Edie Inc. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: The Nature of a Corporation Skill: Applied 41

In both theory and reality, a corporation always protects the liability of its shareholders. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: The Nature of a Corporation Skill: Recall/Applied 34

A shareholder who is being pushed out of a company by the other shareholders because they hold a majority of common shares can always use the remedy of a derivative action. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 2 Type: TF Topic: The Protection of Minority Shareholders Skill: Applied 41

The characteristics of corporations presents special problems for criminal liability in part because a. it is often impossible to determine which individual is exercising control. b. a corporation cannot be imprisoned. c. the corporate veil cannot be pierced. d. a corporation is not subject to fines. e. a corporation cannot be dissolved.

b Diff: 3 Type: MC Topic: Criminal Liability of Corporations Skill: Applied 33

Use the fact situation in Q1 to answer the related question that follows. In this situation, assuming the company is an Ontario company, the best argument of A, B, and C in their defence of the lawsuit under both federal and Ontario legislation is that a. on behalf of the shareholders of the company, they exercised reasonable diligence in assessing the value of Gladstone Inc. b. the shareholders have no cause of action against them as any duty is owed to the company only. c. they committed no breach of fiduciary duty to Multi Corp Ltd. d. they committed no breach of fiduciary duty to the shareholders of Multi Corp Ltd. e. on behalf of the company, they exercised reasonable diligence in assessing the value of Gladstone Inc.

b Diff: 3 Type: MC Topic: Duties of Directors and Officers Skill: Applied 3

Use the fact situation in Q1 to answer the related question that follows. Assume that at the time A, B, and C were making their decision, C also had an interest in Gladstone Inc., which he did not disclose to A and B, but that C chose not to take part in the vote. Also assume that when Multi Corp went bankrupt, a receiver was appointed, who sued A, B, and C on behalf of the company. In this case, the receiver will a. succeed against A and B, regardless of whether they were diligent and used the established degree of care. b. not succeed against A, B, and C because when A and B voted, they were diligent and used the established degree of care. c. not succeed against A, B, and C because there was no breach of fiduciary duty to Multi Corp Ltd. d. succeed against C for failure to disclose his interest in Gladstone Inc. e. succeed against A, B, and C because directors are jointly and severally liable.

b Diff: 3 Type: MC Topic: Duties of Directors and Officers Skill: Applied 5

Canadian courts have consistently held that a majority shareholder owes __________ to act for the welfare of the corporation. a. fiduciary duties b. no positive duty c. a duty of loyalty d. a non-compete duty e. a positive duty

b Diff: 3 Type: MC Topic: Duties of Shareholders Skill: Recall 35

Susie owns a small tool and die company. She has hired an occupational health and safety expert to assess the workplace on a monthly basis in order to identify potential dangers that could injure her employees. The expert reports back to her every month. Part of the reason Susie incurs the costs of hiring this expert is a. To avoid any civil action brought by an injured worker. b. To prove that she took all reasonable steps in the circumstances should she ever be charged with an occupational health and safety offence after the injury of a worker. c. To prevent an attempt by any party to "pierce the veil" of the corporation and seek damages against her personally. d. To provide her with the basis to raise a "reasonable doubt" should she be charged with any regulatory offence. e. To avoid a conflict of interest.

b Diff: 3 Type: MC Topic: Liability Arising from Business Responsibilities Skill: Applied 3

In rare circumstances, courts are prepared to disregard the separate existence of a corporation and "lift the veil" to impose liabilities on those who control it. Which of the following is NOT one of the conditions that must be met for the court to impose liability on an individual? a. The individual must control the corporation. b. The individual must be a shareholder of the corporation. c. The individual exercises the control of the corporation to commit a fraud, a wrong, or a breach of duty. d. The misconduct must be the cause of the plaintiff's injury.

b Diff: 3 Type: MC Topic: Lifting the Corporate Veil Skill: Recall/Applied 32

a trust deed.

b Diff: 3 Type: MC Topic: Personal Property Security Legislation Skill: Applied 12

Junior is interested in buying one of his neighbour's motor vehicles. They have agreed upon a price and Junior intends to ask his father for a small loan to assist in funding the purchase. Prior to completing the sale, it would also be wise for Junior to a. register the agreement of purchase and sale under the PPSA. b. conduct a PPSA search to determine whether or not any security interests have been registered. c. conduct a sheriff search to determine if there are any outstanding judgments against his neighbour. d. put title to the vehicle in his father's name. e. conduct a title search of his neighbour's property.

b Diff: 3 Type: MC Topic: Strategies to Manage the Legal Risks Skill: Applied 32

Bill and Ted decide to set up a small company to invest in real estate. Before incorporating they find a prime piece of real estate that is suitable for investment purposes. They want to buy the property through a limited company but have not as yet incorporated. They attend at a lawyer's office for purposes of filing articles of incorporation. The lawyer asks them what name they plan to use for the corporation. Bill immediately says "Bill and Ted's Excellent Investments Inc.". The lawyer advises them that she will need some time to have the name approved through the appropriate government office. Bill tells the lawyer there is no time to wait for the name approval. In these circumstances Bill and Ted can a. Tell the real estate agent to "hold off" for a couple of days until the name is approved. b. Use a "number name" where the registry simply assigns a number to the new corporation and worry about the name change later. c. Opt to form a partnership instead. d. File a "request to delay name of corporation form" at the time of filing the articles of incorporation. e. Hire a new lawyer.

b Diff: 3 Type: MC Topic: The Constitution of a Corporation Skill: Applied 25

An unpaid seller who repossesses goods from a bankrupt and then sells them, can still make a claim for any deficiency in respect of those goods. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 3 Type: TF Topic: Administration of a Bankrupt's Affairs Skill: Applied 37

The principle that a corporation has an existence separate from its shareholders is absolute and there are no exceptions. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 3 Type: TF Topic: The Nature of a Corporation Skill: Applied 36

Joseph is director of Marttel Inc. The company is thinking about buying some land in which Joseph is part owner. At the board of directors meeting where this is discussed and voted on, Joseph should a. reveal, discuss, and vote on the matter since this is his fiduciary duty. b. explain fully of his interests in the land, then vote his conscience. c. abstain from voting on the matter since this is a potential conflict of interests. d. be silent and refrain from voting on this matter. e. graciously be absent from the meeting.

c Diff: 1 Type: MC Topic: Duties of Directors and Officers Skill: Recall/Applied 22

Sometimes almost all the directors of a company have interests in a contract. They should a. present the contract to the management for a decision. b. vote as a total board of directors. c. present the contract to a general meeting of shareholders for their ratification after full disclosure has been made. d. gather the remaining independent directors and form a quorum. e. vote as a corporate committee of the whole.

c Diff: 1 Type: MC Topic: Duties of Directors and Officers Skill: Recall/Applied 23

A director will be criminally liable where she or he a. uses corporate information to make personal profit. b. acts as corporate agent to the determent of the corporation. c. gets involved with insider trading. d. intercepts a corporate opportunity. e. directly competes with the corporation in her or his own business.

c Diff: 1 Type: MC Topic: Duties of Directors and Officers Skill: Recall/Applied 24

Until the nineteenth century, all corporations were created by a. crown document. b. royal soliloquy. c. charter. d. deed. e. grant.

c Diff: 1 Type: MC Topic: Methods of Incorporation Skill: Recall 21

What are pre-emptive rights? a. rights to buy as many shares as are available b. rights to send in a proxy statement for any meeting c. rights to retain one's proportionate holdings in a firm d. rights to vote out any director without cause e. rights to vote cumulatively or in blocks

c Diff: 1 Type: MC Topic: Shareholders Skill: Recall 26

Where security devices are agreed to in advance as terms in the contract, they are often called a. non-consensual security interests. b. collateral security. c. consensual security interests. d. the pledge of assets. e. the creditor back-up system.

c Diff: 1 Type: MC Topic: The Meaning of "Security" Skill: Recall 13

Regarding corporations, which statement follows the principle of limited liability? a. a director who drives dangerously and causes an accident while on company business b. shareholders of a small, private company provide security or personal guarantees on loans made to their company c. a corporation is liable for its own debts d. the trustee in bankruptcy requires shareholders to repay corporate property received prior to bankruptcy e. a dividend is paid to a shareholder although the corporation make no profits—the shareholder is liable for the corporation's debt to the extent of the dividend

c Diff: 1 Type: MC Topic: The Nature of a Corporation Skill: Applied 19

In comparison with a partnership, which of the following is NOT considered to be an advantage of the corporate form of business? a. limited liability b. continuous existence c. duty of good faith d. transfer of ownership e. professional management

c Diff: 1 Type: MC Topic: The Nature of a Corporation Skill: Recall 12

The classic case that established the existence of the corporation as a separate legal entity is a. Hart versus Hart, 1868. b. The Partners' Cases, a series of small cases in 1903. c. Salomon's Case, 1897. d. The Forms and Processes Case, 1902. e. all of the above

c Diff: 1 Type: MC Topic: The Nature of a Corporation Skill: Recall 18

Use the fact situation in Q2 to answer the related question that follows. Assume that the company was located in Ontario. In order to recover the assets of General Widgets that George transferred to the new company, the trustee in bankruptcy would a. ask the court to review the transaction. b. ask the court to set aside the transaction as being a settlement. c. ask the court to set aside the transaction as being a fraudulent conveyance. d. ask the court to nullify the transaction as being a fraudulent preference. e. none of the above

c Diff: 2 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Applied 10

You are a duly licensed and appointed trustee to handle the Markin Brothers bankruptcy. You have taken possession of both personal and business assets of Sam and Joe Markin. You have retrieved all the books and documents relating to their affairs. You also have the authority to do each of the following EXCEPT a. borrow further money for the business by pledging any remaining unsecured assets. b. negotiate with creditors to take specific assets in lieu of a money settlement. c. dismiss any unqualified inspectors. d. take over the management of the business. e. employ a lawyer, who will be paid out of bankruptcy funds.

c Diff: 2 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Applied 22

Use the fact situation in Q2 to answer the related question that follows. In order to recover the amount of George's shareholders loan, the trustee in bankruptcy of General Widgets will a. sue George for damages for breach of duty of care. b. sue George for breach of fiduciary duty. c. apply to the court to have the transaction nullified. d. apply to the court to enquire whether it is a reviewable transaction. e. all of the above

c Diff: 2 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Applied 8

Use the fact situation in Q9 to answer the related question that follows. Assume that in the contract there was a term that provided that Albert would no longer be bound by the contract. In this case, the retail store will most likely a. sue Albert's old business. b. sue Albert and the new company. c. sue the new company only. d. sue Albert only. e. none of the above

c Diff: 2 Type: MC Topic: Civil Liability of Corporations Skill: Applied 14

Several years back, while Tommy was still in school, he mowed the lawn of widow Jerome's large estate. Since she could not pay Tommy in cash, she gave him 100 bearer bonds of the Delray Corp. Tommy believes he will be able to cash in on these bonds because he a. does not need to obtain endorsement since Mrs. Jerome is now deceased. b. only suspects they were obtained fraudulently. c. is an innocent holder for value. d. is not subject to any real defence, such as forgery. e. has no idea of how the law works.

c Diff: 2 Type: MC Topic: Corporate Securities Skill: Applied 30

Bond and share certificates in bearer form are considered to be negotiable instruments. The holder of such instruments, if acquired honestly, is said to have acquired them a. for value. b. without notice of defect. c. in good faith. d. under apparent ownership. e. truthfully.

c Diff: 2 Type: MC Topic: Corporate Securities Skill: Applied 31

Hazel was deliberately cheated by a clerk at the Hamilton Bay Corp. Can the corporation be found guilty of a criminal offence? a. Yes, it can, since there is obviously a "directing mind" in this act. b. Yes, it can, since the clerk was an employee working at her job at the time. c. No, it cannot, because she was a low-level employee. d. Yes, it can, because there is vicarious liability to the corporation. e. No, it cannot, since corporations cannot be criminally found guilty.

c Diff: 2 Type: MC Topic: Criminal Liability of Corporations Skill: Applied 28

Use the fact situation in Q5 to answer the related question that follows. In the fact situation above, a. the company will not succeed against Jane because Jane committed no breach of duty of care. b. the company will succeed against Jane for damages for breach of duty of care. c. the company will not succeed against Jane because Jane received the information not in her capacity as director of the company. d. the company will succeed against Jane for damages for improper receipt of corporate information. e. the company will succeed against Jane for damages for breach of fiduciary duty.

c Diff: 2 Type: MC Topic: Duties of Directors and Officers Skill: Applied 7

Use the fact situation in Q5 to answer the related question that follows. In the fact situation above, assume that instead of being told about the franchises at the barbecue, Edmund told this to Jane during a meeting with her in her office at the company. In this case, the lawsuit a. would succeed because Jane was acting in her capacity as director of the company. b. would not succeed because Jane was not acting in her capacity as a director of the company. c. would not succeed because it was a friendly meeting. d. would succeed because Jane was unjustly enriched at the expense of the company. e. would not succeed because Jane had used due diligence.

c Diff: 2 Type: MC Topic: Duties of Directors and Officers Skill: Applied 8

When dealing with security interest, the failure of a creditor to register a. will result in a legal offence, which invalidates the creditor's interests. b. would always be quite foolish. c. may be a matter of too much trouble and expense. d. will risk that the debtor can prevail in a lawsuit. e. allows the provisions in the Sale of Goods Act to govern where there is an innocent third party.

c Diff: 2 Type: MC Topic: Effect of Security Interests on Purchasers Skill: Applied 26

When it comes to damage of the environment, any person who actually commits an offence is personally liable a. provided he or she was not acting within the scope of his authorized activities. b. if there was no direct participation in the offence. c. even if a senior officer ordered him to perform. d. provided he or she had no knowledge of the offence. e. provided he or she had no significant role in controlling what happened.

c Diff: 2 Type: MC Topic: Liability for Environmental Offences Skill: Recall/Applied 29

For five years, Maxine had been regularly receiving the same bill for $850 from Credit Landscaping. She didn't think she should pay it because they botched up the landscaping around her house. However, now, after these five years, she sends them a $425 cheque with a note saying, "Take this—it's all you're going to get." This move by Maxine will a. start the time all over again on the statue of limitations. b. get herself out of the liability. c. have no effect on the limitation time period. d. immediately give rise to a legal action. e. spur Credit Landscaping to turn the balance owed over to a collection agency.

c Diff: 2 Type: MC Topic: Limitations Statutes Skill: Applied 31

Regarding the remedies of a conditional seller, she or he a. retains a lien on the title to the chattel. b. has the right to possession of the chattel so long as the terms of the conditional sale agreement are being met. c. loses ownership of the chattel as soon as the buyer makes his or her final payment. d. takes title away from the buyer when he or she defaults. e. is entitled to use force in recovering goods by self help.

c Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Applied 17

A decides to purchase B's office, which consists of an industrial condominium unit and inventory and equipment. However, A only has enough money for the deposit and B agrees to help him. In this case, to help A finance the purchase, a. a mortgage/charge on the condominium unit and a chattel mortgage on the inventory and equipment. b. B will give A a mortgage/charge on both the condominium unit and the inventory and equipment. c. B will enter into a conditional sales agreement with A. d. B will give a chattel mortgage on the condominium unit and a mortgage/charge on the inventory and equipment. e. a mortgage/charge on the condominium unit and a floating charge on the inventory and equipment.

c Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Applied 5

If an owner sells you goods that have been pledged as security for a loan, the claim against those goods is known as a. a contract pledge. b. a secured transaction. c. security interest. d. creditor interests. e. collateral.

c Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Recall 23

Use the fact situation in Q8 to answer the related question that follows. Also in this case, as between B and the bank, a. neither B's security interest nor the bank's have priority over the other. b. the bank has no security. c. the bank's security interest has priority over B's. d. B's security interest has priority over the bank's security interest. e. none of the above

c Diff: 2 Type: MC Topic: Personal Property Security Legislation Skill: Applied 10

In Canada, the jurisdiction over the securities industry is a. divided between federal and provincial governments. b. with the federal Parliament. c. substantially within provincial jurisdiction. d. with the federal Securities and Exchange Commission. e. with each of Canada's four stock exchanges.

c Diff: 2 Type: MC Topic: Protection of Investors Skill: Applied 23

to his creditors. He wanted a reduction and extension of time for the payment of his debts. A formal meeting was not requested by any of the creditors. Now the administrator must a. run a public notice in the newspaper. b. get approval of the proposal from the court. c. notify and file the document with all creditors. d. provide counselling to the debtor. e. see that all the provisions meet Division I rules.

c Diff: 2 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Recall/Applied 19

Each of the following may create consensual security interests EXCEPT a. guarantees. b. leases. c. liens. d. consignments. e. accounts receivable.

c Diff: 2 Type: MC Topic: The Meaning of "Security" Skill: Applied 15

Jacob is a minority shareholder in a closely held corporation. Recently he was dismissed from his marketing management position, and now the board of directors is stopping him from transferring his stock to a cousin. He has a. lost his rights as a minority stock holder. b. been locked in. c. been locked in and frozen out. d. legal claims against the board of directors. e. been frozen out.

c Diff: 2 Type: MC Topic: The Protection of Minority Shareholders Skill: Recall/Applied 25

Use this fact situation to answer the related questions that follow. A enters into a conditional sales agreement with B, a truck dealership, for the purchase of a truck that B has ordered from the manufacturer but will not receive for another month, during which time A must make his first payment. In this case, under PPSA legislation, attachment occurs a. if B delivers the truck to A before the agreement is signed. b. when A makes his first payment. c. on the signing of the agreement and delivery of the truck to A. d. when B takes possession of the truck from the manufacturer. e. immediately on the signing of the agreement.

c Diff: 3 Type: MC Topic: Personal Property Security Legislation Skill: Applied 7

Use this fact situation to answer the related questions that follow. A and B are the shareholders of a private Ontario company and each holds 50 percent of the issued common shares. There is no shareholder agreement. At a general meeting, A and B, who have had a falling out, cannot agree on anything, from the business of the company in the next year to the election of the directors and appointment of the officers. In this situation, a. B must sell his shares to A. b. A must sell his shares to B. c. the company is effectively locked or deadlocked as to its operation. d. the company will simply continue as it had before the meeting. e. they will go to court and have the court decide the matter.

c Diff: 3 Type: MC Topic: Shareholders Skill: Applied 14

Businesses are often required to extend credit as a means of increasing sales. Before granting credit, businesses are encouraged to take any of the following steps EXCEPT a. take advantage of the available public records of credit history, proposals, and bankruptcies. b. search both the corporate name of the debtor and its directors and officers to determine if the company is merely a fresh start after a bankrupt business. c. not request personal guarantees of the principals because the company's agreement to pay will always suffice. d. take security in the goods provided. e. set up a control system to monitor lien periods for building supplies and limitation periods.

c Diff: 3 Type: MC Topic: Strategies to Manage the Legal Risks Skill: Recall/Applied 33

Albert is the principal shareholder of a large investment company and holds 45 percent of its common shares, which are valued at $500 000.00. Recently, Albert's company invested heavily in a gold mining company, which fraudulently represented finding and owning a new gold deposit in northern Canada. Albert's company lost a substantial amount of money, with the result that the value of Albert's common shares dropped to $25 000.00. Albert now launches a lawsuit against the gold mining company for the loss in value of his shares. In this case, a. Albert will be entitled to a quantum meruit claim against the gold mining company. b. Albert will recover his loss because his cause of action is in fraud or deceit. c. Albert will not recover his loss because he has no claim for damages for a wrong done to his company. d. Albert will recover his loss because the court will lift the corporate veil of the gold mining company. e. Albert will recover his loss because the court will force the gold mining company to insure his shares.

c Diff: 3 Type: MC Topic: The Nature of a Corporation Skill: Applied 11

A proceeding brought by one or more shareholders in the name of the corporation in respect of a wrong done to the corporation is referred to as a. an oppression action. b. a winding-up action. c. a derivative action. d. an appraisal action. e. a negligence action.

c Diff: 3 Type: MC Topic: The Protection of Minority Shareholders Skill: Recall 33

Restrictions on share transfers are common and can take almost any form. Such restrictions must be set out in the corporation's constitution and must be noted on the share certificate, otherwise a. the shares are not transferable. b. the shares have no value. c. the restrictions are not binding on a purchaser who has no notice of them. d. a preemptive right is created. e. any transfer will be ultra vires.

c Diff: 3 Type: MC Topic: The Transfer of Corporate Securities Skill: Recall/Applied 33

In bankruptcy proceedings, the term "settlements" refers to a. the amount each creditor is willing to settle for to satisfy its claim. b. the end results in the bankruptcy proceedings. c. the negotiations between classes of creditors. d. gifts of property made by the debtor before becoming bankrupt. e. complying with each provision in the Bankruptcy and Insolvency Act.

d Diff: 1 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Recall 24

Which of the following best describes the appraisal remedy? a. the right of the court to grant relief to shareholders who are victims of oppressively unfair actions b. the right of an auditor to have access to all the corporation's information c. the right of a minority shareholder to apply to the court for a liquidation order d. the right of a dissenting shareholder to have his or her shares bought out by the corporation e. the right of shareholders to appoint an auditor

d Diff: 1 Type: MC Topic: The Protection of Minority Shareholders Skill: Recall 30

Which of the following is NOT a duty of the directors of corporations? a. to adopt by-laws governing the business b. to issue shares c. to call meetings of shareholders d. to take care of the day-to-day business of the corporation e. to declare dividends

d Diff: 1 Type: MC Topic: The Structure of the Modern Business Corporation Skill: Recall 19

Use the fact situation in Q2 to answer the related question that follows. In light of the bankruptcy of General Widgets, the payment of George's shareholders loan is probably a. a reviewable transaction only. b. both a reviewable transaction and a fraudulent transfer. c. a fraudulent assignment only. d. a fraudulent preference only. e. a fraudulent transfer only.

d Diff: 2 Type: MC Topic: Builders' Liens Skill: Applied 5

Use this fact situation to answer the related questions that follow. Edward is employed by a large furniture manufacturing company to purchase supplies and regularly deals with the company's largest supplier. Yesterday, Edward entered into a contract with that supplier to sell it some of his company's furniture. In this situation, a. there is a contract between Edward, the supplier, and Edward's company. b. there is a contract between Edward and the supplier only. c. there is no contract between Edward, the supplier, and Edward's company. d. there is no contract between Edward's company and the supplier. e. there is a contract between Edward's company and the supplier.

d Diff: 2 Type: MC Topic: Civil Liability of Corporations Skill: Applied 8

Use this fact situation to answer the related questions that follow. A, B, and C are directors of Multi Corp Ltd., a private provincial corporation that is presently negotiating the purchase of another company, Gladstone Inc., whose business should compliment the business of Multi Corp Ltd. Based on a report arising from a review of the books, records, and financial statement of Gladstone Inc. by Multi Corp's accountants, A, B, and C have every reason to believe that the acquisition of Gladstone Inc. will benefit Multi Corp Ltd. and increase its yearly profits substantially. As a result, A, B, and C vote to go ahead with the purchase by Multi Corp Ltd. of Gladstone Inc. However, after the purchase, it is found that the books and records of Gladstone Inc. had been fraudulently manipulated and that it was really in poor financial health. When this information is discovered, the value of Multi Corp Ltd.'s shares falls dramatically and Multi Corp Ltd. is forced into bankruptcy. Needless to say, the shareholders of Multi Corp Ltd. blame A, B, and C for their losses and commence an action against them for damages equal to the lost value of their shares. In this case, the shareholders will likely argue that A, B, and C a. did not act in the best interests of Multi Corp Ltd. b. breached their fiduciary duty to Multi Corp Ltd. c. did not act in the best interests of the shareholders of Multi Corp. Ltd. d. breached their duty of care, diligence, and skill to Multi Corp Ltd. e. breached their duty of care, diligence and skill to the shareholders of Multi Corp Ltd.

d Diff: 2 Type: MC Topic: Duties of Directors and Officers Skill: Applied 2

Use the fact situation in Q1 to answer the related question that follows. In this situation, assuming that Multi Corp Ltd. brought the lawsuit, at common law, the best argument that A, B, and C would have is that a. they have not breached the duty of good faith owed to the shareholders of Multi Corp Ltd. b. they have not committed a breach of fiduciary duty owed to Multi Corp Ltd. c. they have not committed a breach of fiduciary duty owed to the shareholders of Multi Corp Ltd. d. the business judgment rule applies and they are not liable. e. the due diligence rules do not apply at common law.

d Diff: 2 Type: MC Topic: Duties of Directors and Officers Skill: Applied 4

Use this fact situation to answer the related questions that follow. Jane is the director of a private national company and has a number of friends who are the directors or officers of other large private national companies. One weekend, Jane and her family are invited to a barbecue at the home of Jane's good friend Edmund, who casually tells Jane as her friend that his company is about to sell a number of franchises and that anyone can pick them up relatively cheap. In the situation above, if Jane decides to buy one or more of the franchises and the company finds out what she has done and sues her, it will probably argue that a. Jane breached her duty of care owed to the company. b. Jane breached her duty of good faith owed to the company. c. Jane had an undisclosed interest in Edmund's corporation. d. Jane came into the information in her capacity as a director of the company. e. none of the above

d Diff: 2 Type: MC Topic: Duties of Directors and Officers Skill: Applied 6

Sonny bought a computer from The Bad Guys on a conditional sales contract. Two months later Sonny sold the computer to Fred without mentioning it was not paid for. Can The Bad Guys recover the computer from Fred? a. No, they cannot, provided Fred is an innocent third party. b. No, they cannot, since this is a consumer transaction where title is guaranteed. c. Yes, they can, but it would be easier for them to get the money from Sonny. d. Yes, they can, if the security device is properly registered with the province. e. Yes, they can directly from Fred, or they can force Sonny to retrieve the computer.

d Diff: 2 Type: MC Topic: Effect of Security Interests on Purchasers Skill: Applied 25

Use this fact situation to answer the related questions that follow. A is buying a video business including the inventory of DVDs, which is valued at half the worth of the business, but A only has half the purchase price, so B agrees to help A out. In this case, to help A buy the business, B will a. take back a floating charge over the inventory. b. take a chattel lease over the inventory for the balance of the purchase price. c. take back a mortgage/charge on the inventory. d. take back a chattel mortgage on the inventory. e. none of the above

d Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Applied 3

A purchases a chattel from B under a conditional sales agreement. A few days later and unknown to B, A sells the chattel to C, who believes A is the owner. At common law, B a. cannot do anything. b. can only sue C for the value of the chattel. c. can only sue A for breach of the agreement. d. can retake possession of the chattel from C. e. none of the above

d Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Applied 6

A bill of sale can be used as an instrument of credit. Which document is the bill of sale most like when it is used as an instrument of credit? a. a consignment agreement b. an assignment c. a negotiable instrument d. a chattel mortgage e. a pledge

d Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Recall/Applied 22

A, a manufacturer, enters into a conditional sales agreement with B, a retail seller of goods, under which A supplies 100 amplifiers to B. The manufacturer registers the agreement under provincial PPSA legislation. B now sells one amplifier to C and a few days later defaults on the conditional sales agreement. In this case, the manufacturer a. can both sue C for the value of the amplifier and retake possession of it from C. b. can only retake possession of the amplifier from C. c. can only sue C for the value of the amplifier. d. can only look to B and its security agreement. e. none of the above

d Diff: 2 Type: MC Topic: Personal Property Security Legislation Skill: Applied 11

Use the fact situation in Q6 to answer the related question that follows. Also in this case, B's security interest is perfected a. immediately on B getting possession of the truck from the manufacturer. b. when the truck is delivered to A. c. immediately in signing the agreement. d. immediately on registration by B of a financing statement. e. all of the above

d Diff: 2 Type: MC Topic: Personal Property Security Legislation Skill: Applied 8

Several years back Dean Pigeon with two friends invested $300 000 equity capital into a new corporation. As it turns out, they have more capital in the business than they can profitably use. Will the CBCA allow them to take out the excess capital? a. Yes, it will, provided the corporation can satisfy the court that the capital is truly unutilized. b. Yes, it will, provided the corporation has no creditors. c. No, it will not, since the excess is not accumulated retained earnings. d. Yes, it will, as long as the corporation can satisfy both parts of the solvency test. e. No, it will not, because a "capital fund" is not available to shareholders.

d Diff: 2 Type: MC Topic: Protection of Creditors Skill: Applied 21

Walter and Gordon are the shareholders of a small private Ontario company, which recently went bankrupt due to the world wide recession, owing $100 000.00 to its creditors. Unfortunately the company's assets are only $50 000.00. In this case, the amount available to satisfy the creditors of the company will be a. $50 000.00 plus Gordon's assets only. b. $50 000.00 plus Walter's assets only. c. $50 000.00 plus the assets of both Walter and Gordon. d. $50 000.00 only. e. none of the above

d Diff: 2 Type: MC Topic: Protection of Creditors Skill: Applied 6

Which of the following is NOT a statutory safeguard when considering disclosure? a. the financial statement b. appointment of inspector c. documents of record d. pre-emptive rights e. record of insider trading

d Diff: 2 Type: MC Topic: Shareholders Skill: Applied 27

Use this fact situation to answer the related questions that follow. General Widgets is a large provincial manufacturing company that has been in business for a number of years, but when the economic recession began in 2008, the company found itself experiencing a lack of sales, which affected its ability to pay its suppliers. George is the principal shareholder of the company and has an outstanding shareholders loan of $100 000.00. Between January 2008 and February 2008, the company was managing to pay its creditors, although slowly, and its assets were sufficient to satisfy its indebtedness, but by the end of January 2008 its assets have shrunk well below its debt load. In March 2008, George ensures that the company repays his shareholders loan. Thereafter, in December 2008, the company actively decides to pay only its major creditor, a supplier with whom George is good friends. Also in December 2008, seeing that General Widgets is sinking deeper and deeper into debt, George decides to incorporate a new company into which he transfers $300 000.00 of General Widgets' assets. On March 1, 2009, General Widgets makes a voluntary assignment in bankruptcy. In this case, the fact that between January and February 2008 the company was just managing to pay its creditors probably means that a. the company is bankrupt. b. the company is insolvent. c. the company is borderline insolvent. d. the company is solvent. e. none of the above

d Diff: 2 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Applied 3

over a period of time. e. to reorganize its business and straighten out its affairs.

d Diff: 2 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Recall 17

A and B incorporate a trucking company in which, of the 100 issued common shares, A holds 45 shares and B holds the rest. The company has a fleet of trucks valued at $200 000. In this case, the fleet of trucks is owned by a. A alone. b. B alone. c. A, B, and the company. d. the company alone. e. both A and B.

d Diff: 2 Type: MC Topic: The Nature of a Corporation Skill: Applied 3

of a corporation can be required by a court in order to rescue a a. bankrupt shareholder. b. CEO who has reached an impasse with the board of directors. c. director who has been unjustly dismissed. d. locked-in shareholder. e. minority shareholder from a buyout by others.

d Diff: 2 Type: MC Topic: The Protection of Minority Shareholders Skill: Recall/Applied 31

Use the fact situation in Q2 to answer the related question that follows. Assume that the bank is a secured creditor of General Widgets and that its security is greater than the amount that the company owes to the bank, which enforces its security. In such a case, a. the bank cannot enforce its security, but it will share rateably with the other secured creditors. b. the bank cannot enforce its security during the bankruptcy of the company. c. the bank can retain the full amount recovered under its security. d. the bank must repay the trustee in bankruptcy any excess recovered over the amount of the debt owed it. e. none of the above

d Diff: 3 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Applied 12

The Criminal Code of Canada contains some offences that are applicable to corporate conduct. With respect to whistle-blower retaliation, it is an offence to a. threaten a whistle-blower or potential whistle-blower. b. discipline a whistle-blower or potential whistle-blower. c. demote a whistle-blower or potential whistle-blower. d. request a statement from a whistle-blower or potential whistle-blower. e. fire a whistle-blower or potential whistle-blower.

d Diff: 3 Type: MC Topic: Criminal Liability of Corporations Skill: Recall 32

In most Canadian jurisdictions, a plaintiff must start court proceedings within a two-year period. Limitation periods are justified on any of the following grounds EXCEPT that a. a person who fails to pursue a claim leaves the other party in a state of uncertainty that ought not to continue permanently. b. as time passes, it becomes more difficult to produce the evidence concerning the facts of the case. c. memories fade over time. d. any unreasonable delay provides defendants with an opportunity to hide assets or become judgment proof.

d Diff: 3 Type: MC Topic: Limitations Statutes Skill: Recall/Applied 32

As far as claims against the property of a bankrupted debtor go, the trustee pays the general creditors in priority to which of the following? a. secured creditors b. preferred creditors c. super priority claims d. deferred creditors

d Diff: 3 Type: MC Topic: Payment of Claims Skill: Recall 34

There are a number of statutes that contain protections for the benefit of employees. Which of the following pieces of legislation does not contain any provisions with respect to protection of employees? a. occupational health and safety legislation b. human rights legislation c. employment standards legislation d. sale of goods legislation e. workplace safety legislation

d Diff: 3 Type: MC Topic: Protection of Employees Skill: Recall 34

Milton ordered a fancy telescope from a catalogue, using his bank credit card. When it arrived it seemed quite different from the telescope of the catalogue description. Neither the catalogue company nor the manufacturer would take the telescope back. Milton now wants the chartered bank that issued the credit card to reverse the charges. Does Milton have a legal claim against the bank? a. Yes, the federal Bank Act requires chartered banks to be advocates for consumers in respect to credit card purchases. b. No, Milton must pursue remedies through the Better Business Bureau. c. Yes, they are the assignee of the seller. d. No, the bank is a lender to Milton and not an assignee of contracts from sellers. e. Yes, he has, but who can afford to sue a chartered bank?

d Diff: 3 Type: MC Topic: Security for Bank Loans Skill: Applied 28

In order to avoid an environmental accident, a business should take all of the following steps EXCEPT a. review current practices to learn whether any of their activities create a concern about health, safety, or breach of environmental regulations. b. keep up-to-date with current technology and best practices adopted across their industry. c. take every reasonable precaution to meet the latest standards. d. directors should not try to educate themselves about the business's activities and risks but rather hire knowledgeable individuals who can deal with potential environmental problems.

d Diff: 3 Type: MC Topic: Strategies to Manage the Legal Risks Skill: Recall 31

To ensure the accuracy of financial statements, business corporation legislation provides for the appointment of an independent ____________ by the shareholders. a. accountant b. chief financial officer c. ombudsperson d. auditor e. chartered accountant

d Diff: 3 Type: MC Topic: The Shareholders Right to Information Skill: Recall 34

Which of the following is included in the articles of incorporation? a. any restrictions on the business that may be carried on other provisions that the incorporators choose to include b. if there are two or more classes of shares, the rights and restrictions attached to each c. any restrictions on the transfer of shares d. name of the corporation e. all of the above

e Diff: 1 Type: MC Topic: Methods of Incorporation Skill: Applied 22

A bulk sale, as defined by provincial statutes, is a sale a. of all goods in process and semi-finished inventories. b. governed by the federal Bulk Sales Act. c. of such a large portion of the assets that the business will cease to operate. d. whose purpose is to deprive creditors of their equitable share in the assets of the company. e. of essentially all the stock-in-trade, fixtures, and chattels of a business.

e Diff: 1 Type: MC Topic: Other Statutory Protection of Creditors Skill: Recall 28

Directors may become personally liable to the corporation for deficiencies if, when they pay out dividends, the corporation cannot meet a. a shortage of working capital. b. the test of bankruptcy. c. a scheduled bond redemption. d. current corporate indebtedness. e. the solvency test.

e Diff: 1 Type: MC Topic: Protection of Creditors Skill: Applied 20

Self-liquidating financing is usually the best form of financing for a. doctors. b. students. c. teachers. d. lawyers. e. farmers.

e Diff: 1 Type: MC Topic: Security for Bank Loans Skill: Applied 29

The Superintendent of Bankruptcy has the power to a. investigate where a bankruptcy offence may have been committed. b. issue directives to trustees or receivers. c. intervene in any bankruptcy court proceeding. d. suspend or cancel a trustee's license. e. all of the above

e Diff: 1 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Recall 14

Associated corporations constitute a statutory limitation on the concept of separate corporate identities. In the legal sense, what is an associated corporation? a. corporations that have interlocking directorates b. corporations producing the same product type, such as Coca Cola and Pepsi or Apple and IBM c. corporations that buy and sell to each other d. corporations that sell to the same market e. where one corporation controls another or where two or more corporations are controlled by the same person

e Diff: 1 Type: MC Topic: The Nature of a Corporation Skill: Recall 20

The doctrine of ultra vires, as applied to corporations, has now been abolished throughout Canada. This means that Canadian corporations a. do not have the capacity and all the rights, powers, and privileges of a natural person. b. can only act through the authority vested in their agents. c. cannot be held to contracts entered into that are outside of their charter. d. cannot act beyond their constitutional powers. e. have broadened powers and capacity to contract.

e Diff: 1 Type: MC Topic: The Nature of a Corporation Skill: Recall/Applied 16

Directors owe duties to a. the public. b. creditors of the corporation. c. the shareholders. d. the corporation. e. all of the above

e Diff: 2 Type: MC Topic: Duties of Directors and Officers Skill: Recall/Applied 21

Jack and Reba purchased some furniture on a conditional sale contract. This couple carries no insurance on their household goods. The furniture is stolen one Sunday afternoon. Who will most likely take the loss? a. the thieves, since this is a liability claim and they are to blame b. the merchant, since they still hold title and have insurance covering their insurable interests c. the state, since this is a criminal case d. the bailee, since this is a bailment for value on the sale of goods e. this couple, because the conditional sale contract gives them strict liability

e Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Applied 14

Some provinces have provided relief to conditional buyers by a. making the buyer liable for any deficiency after resale of the goods. b. not allowing any allowing equity position to accumulate with progression of payments. c. knowing the resale of chattels to be "value destructive," requiring the conditional seller to turn over any surplus realized. d. allowing the use of the acceleration clause. e. giving recovery rights when debt is paid within a given period of time.

e Diff: 2 Type: MC Topic: Methods of Securing Credit Skill: Applied 18

John and George are the shareholders of a private provincial company, which has capital assets of $250 000.00. Lately, due to the recession, the company has not been doing well financially, but it is going to issue dividends of $50 000.00 each to John and George. A few days later the company declares bankruptcy. In this case the creditors of the company a. can recover the value of the dividends from John and George as shareholders. b. can look to the assets of the company. c. can recover the value of the dividends from John and George as directors. d. can look to the assets of the company and receive the value of the dividends issued to John and George. e. all of the above

e Diff: 2 Type: MC Topic: Protection of Creditors Skill: Applied 7

Claude will be a minority shareholder in a new corporation. All interested parties are now in a meeting to draft the incorporating documents. To protect his rights as a minority shareholder, Claude wants certain provisions included in a well-drafted shareholder's agreement. Which of the following provisions is unnecessary and won't be included in such an agreement? a. the right to participate in management b. the unanimous approval of all shareholders c. the right to a fair price for her share interest d. the right to employment e. for the agreement to be included inside the charter

e Diff: 2 Type: MC Topic: Shareholder Agreements Skill: Applied 32

Regarding bankruptcy, public policy would be primarily concerned with a. making it easy and inexpensive to apply for bankruptcy. b. the punishment of honest debtors who after bankruptcy simply re-engage in the same questionable business activities. c. placing some limits on who can use bankruptcy proceedings. d. forcing reputable creditors to accept an arrangement designed to save a debt-ridden company. e. keeping economic initiative alive.

e Diff: 2 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Applied 13

Jack, who recently retired, wants to invest in a new upstart local company, The Turmoil Corp. As part of the deal for investing in The Turmoil Corp., the company has agreed to give Jack "...some sort of maintenance or security job for as long as he feels able." This agreement would best be placed a. in the charter. b. under seal, since it lacks consideration. c. in writing, since it falls under the Statute of Frauds. d. in the by-laws, since it will need changing. e. in a separate side agreement, so as to avoid clutter and confusion.

e Diff: 2 Type: MC Topic: The Constitution of a Corporation Skill: Applied 24

A, B, and C are three lawyers who want to start a construction business. Each has enough capital to invest in the business to avoid borrowing money from the bank, and all of them want to limit their liability as much as possible while having a role in the management and operation of the business. In this case, they can protect themselves by a. setting up a limited partnership. b. setting up a joint venture. c. setting up a partnership. d. setting up a limited liability partnership. e. incorporating a company.

e Diff: 2 Type: MC Topic: The Nature of a Corporation Skill: Applied 2

John and Peter wish to incorporate their grocery business as Happy Groceries Ltd. To do so, among other things, they must a. decide on the by-laws of the corporation. b. complete articles of incorporation. c. obtain a certificate of incorporation. d. conduct a name search. e. all of the above

e Diff: 2 Type: MC Topic: The Nature of a Corporation Skill: Applied 5

A shareholder who engages in a conflict of interest with a corporation in which the shareholder holds shares must a. pay damages to the corporation. b. disgorge any profit the shareholder makes through the conflict of interest. c. sell the shareholders shares to the corporation. d. get the consent of the corporation in which the shareholders holds shares. e. none of the above

e Diff: 2 Type: MC Topic: The Nature of a Corporation Skill: Recall 14

corporation. c. only if the parent corporation owns more than 50 percent of the shares in the subsidiary corporation. d. only if the parent corporation owns 100 percent of the shares in the subsidiary corporation. e. none of the above

e Diff: 2 Type: MC Topic: The Nature of a Corporation Skill: Recall/Applied 17

Use the fact situation in Q2 to answer the related question that follows. Given the bankruptcy of General Widgets, the incorporation of the new company by George is a. a fraudulent assignment. b. a reviewable transaction. c. a fraudulent preference. d. a fraudulent transfer. e. none of the above

e Diff: 3 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Applied 7

Use the fact situation in Q9 to answer the related question that follows. Assume that in the week after the contract was entered into, Albert's new company told the retail store that it was adopting the contract made with Albert. In this case, in bringing a lawsuit, the retail store will consider that a. since the company adopted the contract, Albert might well be relieved of liability to the retail store. b. there is no express term in the contract relieving Albert of liability under the contract. c. this does not appear to be a proper case where liability can be apportioned. d. the company adopted the contract. e. all of the above

e Diff: 3 Type: MC Topic: Civil Liability of Corporations Skill: Applied 13

Use this fact situation to answer the related questions that follow. John is an engineer in a large, public car manufacturing company that recently released a new line of cars in which the gasoline tanks were installed just in front of the rear bumper. John was aware that tests of the new cars indicated that in a high-speed rear-end collision the gas tanks would explode. John sent a memo to his supervisor about this and the supervisor forwarded the memo to upper management, including the directors and the CEO of the company, who had a study done to determine how may claims the company was likely to have against it resulting from this defect and comparing it to the cost of recalling all of the new cars and fixing the defect. The study concluded that the cost of paying the claims would be substantially less than the cost of recalling all of the cars and fixing them. As a result, the CEO with the board of directors decided not to fix the defect. In the first year of sales of the new line of cars, there were 12 occasions where occupants of the car were seriously injured by exploding gas tanks in rear-end collisions. In this case, in theory and based on current law, most likely a. the upper management of the company, including the directors and CEO, will be exposed to criminal liability. b. the upper management of the company, including the directors and CEO, will be exposed to liability in tort. c. the company will be found criminally liable for criminal negligence causing bodily harm. d. the company will be found civilly responsible in tort. e. all of the above

e Diff: 3 Type: MC Topic: Criminal Liability of Corporations. Skill: Applied 15

Sometimes conditional sale contracts exist between the manufacturer and the retailer. How does the consumer know she or he is getting clear title to the goods purchased? a. In this case the Mercantile Agency Rule would be suspended. b. Because if she didn't, it would fly in the face of consumer expectations. c. She doesn't know for sure, that's wherein the problem lies. d. The federal Personal Property Security Act guarantees it to consumers. e. By provincial statute—buyer acquires good title if the goods are resold in the ordinary course of business.

e Diff: 3 Type: MC Topic: Effect of Security Interests on Purchasers Skill: Applied 24

Use this fact situation to answer the related questions that follow. George is a director in a large federally incorporated national pulp and paper mill that often uses bleach and other chemicals to make its paper white. Recently, the bleach and other chemicals have been flowing into the river right beside the mill, polluting it and killing the fish and wildlife in it. George supervises the machines that are used to remove harmful contaminants from the chemicals before they are permitted to flow into the river, and realizes that they are not working properly. He immediately tells his supervisor, who makes a request for repairs to the company's director, Robert, who is responsible for all environmental matters. In turn, Robert sends a report to the full board of directors and CEO about the problem with the machines and the pollution it is causing. The board and CEO agree to implement measures immediately to repair the machines and clean up the river, and take corresponding action. In this case, under the Canada Environmental Protection Act, a. the board of directors and CEO can defend themselves using the due diligence argument. b. the CEO is presumed to have committed an offence under the Act. c. the board of directors are presumed to have committed an offence under the act. d. the company has committed an offence under the Act. e. all of the above

e Diff: 3 Type: MC Topic: Liability for Environmental Offences Skill: Applied 17

Use the fact situation in Q14 to answer the related question that follows. Assume that when Robert advises the board of directors and CEO of the problems, they instruct him to forget about the matter and try to find a way to cover the whole thing up. In this case, a. the board of directors has committed an offence under the Act. b. the CEO has committed an offence under the Act. c. the due diligence defence will not help the board or the CEO. d. the company has committed an offence under the Act. e. all of the above

e Diff: 3 Type: MC Topic: Liability for Environmental Offences Skill: Applied 18

Use the fact situation in Q13 to answer the related question that follows. Assume that A and B have a unanimous shareholder agreement, which provides that at any time, a shareholder can serve a notice on the other shareholder to buy the other's shares for fair market value. If A and B could not resolve their impasse, then a. B could serve this notice on A. b. A could serve this notice on B. c. if B served this notice on A first, A would have to sell his shares in the company to B at fair market value, d. if A served the notice on B first, B would have to sell his shares in the company to A for fair market value. e. all of the above

e Diff: 3 Type: MC Topic: Shareholder Agreements Skill: Applied 16

John, the controlling shareholder of a large national company, elected Allan, Edward, and Mary as its directors. John has just heard of a venture that may or may not be beneficial to the company, but using his power as controlling shareholder, wants to go ahead with it and tells the three directors to approve it, which they do. It then turns out that the venture does more harm than good to the company. In this case, a. John owes no fiduciary duty to the corporation. b. John owes no duty to account to the corporation. c. John owes no duty to the corporation. d. John owes no duty of care to the corporation. e. all of the above

e Diff: 3 Type: MC Topic: Shareholders Skill: Applied 10

Use the fact situation in Q2 to answer the related question that follows. Also in this case, the date on which it can be argued that the company is insolvent is a. January 2008. b. March 1, 2009 c. February 2008. d. March 2008. e. the end of January 2008.

e Diff: 3 Type: MC Topic: The Bankruptcy and Insolvency Act Skill: Applied 4

Use the fact situation in Q5 to answer the related question that follows. Assume that at the time of Mary's negligence, the company has failed to pay one of its suppliers of dental products. In this case, the supplier can sue a. Mary, Joan, and the corporation. b. Mary and Joan alone. c. Mary and the corporation. d. Mary alone. e. all of the above

e Diff: 3 Type: MC Topic: Types of Business Corporation Skill: Applied 7

If Phillis and Lauren voted in favour of a directors' resolution approving the corporation's purchase of artwork from an unknown artist for $60 000 for resale purposes and it turned out that the work was unsaleable and was ultimately disposed of for less than $10 000, what remedy would unpaid creditors have and against whom?

(1

When is an undischarged bankrupt liable to a fine or imprisonment?

A bankrupt is liable to both imprisonment or to a substantial fine if he or she fails to perform any duties under the Bankruptcy and Insolvency Act. Examples would be failing to submit him- or herself for examination by the official receiver to explain his or her conduct; making a fraudulent disposition of his or her property before or after bankruptcy; giving untruthful answers to questions put to him or her during an examination; destroying, concealing, or falsifying books or documents; or obtaining any credit or property by false representations before or after bankruptcy. Diff: 2 Type: ES Topic: Administration of a bankrupt's Affairs Skill: Recall 59

What is the difference between a bankrupt person and an insolvent person?

A bankrupt person is a person against whom a receiving order has been made or who has made an authorized assignment. An insolvent person is a person who, though not bankrupt, meets the qualifications. For instance, he or she is unable to meet obligations as they become due, his or her property has a realizable value insufficient to pay all obligations, or he or she has ceased paying his or her current obligations in the ordinary course of business as they generally become due. Diff: 2 Type: ES Topic: The Bankruptcy and Insolvency Act Skill: Recall/Applied 50

What is a bulk sale?

A bulk sale is a sale of all or substantially all of the assets of a business. Diff: 1 Type: ES Topic: Other Statutory Protection of Creditors Skill: Recall 46

Under the Bankruptcy and Insolvency Act, what is a commercial proposal?

A commercial proposal is an offer made by the debtor to his or her creditors providing for the orderly repayment of his or her debts (or at least some part of his or her debts

Explain the difference between the rights of a shareholder and a bondholder.

A corporation can borrow money by issuing bonds to a lender, and the lender becomes a creditor of the corporation. Interest paid to bondholders is a debt of the corporation and, in contrast to dividends, need not be paid out of profits. Bonds stipulate a fixed rate of return and must be redeemed at their maturity date. Bondholders have security in the assets of the corporation and will rank ahead of general creditors as regards repayment of debt. They do not share in the growth or profitability of the corporation. Shareholders are owners, not creditors, of the corporation. They have no right to a dividend, and dividends can be paid only if the corporation is profitable. The value of each shareholder's interest fluctuates with the fortunes of the corporation. Diff: 2 Type: ES Topic: Corporate Securities Skill: Recall

When may a secured creditor choose not to register its security interest?

A creditor whose business is selling relatively low-value goods to many different customers may not find it worthwhile to trace goods wrongfully disposed of by a debtor and will usually save itself the trouble and cost of registering its security interest. Diff: 2 Type: ES Topic: Personal Property Security Legislation Skill: Recall/Applied 42

What capacity and powers does a corporation have in the eyes of the law?

According to the federal Canada Business Corporations Act (CBCA

Explain the general distinction between the capital of a corporation and indebtedness of a corporation. Who owns the capital of the corporation?

Capital of a corporation is also known as equity and is owned by the shareholders of the corporation. A company's capital is an asset that, as a general rule, does not have to be repaid, but indebtedness is a liability that must be repaid by the company whether it's making money or not. An example of a person holding indebtedness of a corporation would be a debenture bondholder. Another example would be any mortgagee. Diff: 2 Type: ES Topic: Corporate Capital Skill: Applied 59

What duties do directors owe to shareholders of the corporation?

Directors owe no general duty to the shareholders of the corporation, because their duties are owed almost entirely to the corporation itself. However, they do need to call meetings, provide financial statements, keep records, and the like. Diff: 1 Type: ES Topic: Duties of Directors and Officers Skill: Recall/Applied 55

? Explain.

Even though the CBCA is especially suitable for large businesses that carry on their activities nation-wide (or world-wide

In addition to the licensing and prospectus provisions, the legislation has introduced further controls on the securities industry. Give a couple of examples.

Examples might include: (1

Use this fact situation to answer the related questions that follow. After the Enron scandal and the collapse of the high-tech stock market, recommendations were made to attempt to protect the public against a recurrence of the same sort of situation. However, only a few of these were implemented. Explain why.

Executive compensation schemes link performance to the profitability of the company, rather than to stability or corporate social responsibility. Bonuses are often in the form of stock options whose values rise with the price of corporate shares. This situation reinforces bottom line decision making with a view to short-term profit and may even encourage inflated financial reporting. Diff: 2 Type: ES Topic: Protection of Investors Skill: Recall 54

Alvin Smith bought a car from XYZ Autos Inc., a car dealership, for the price of $15 000. Alvin paid $5000 cash and entered into a conditional sales contract to finance the remaining $10 000. Alvin had obtained the $5000 from his bank and executed a chattel mortgage for $9000 in favour of his bank. This represented $5000 for the deposit and $4000 in existing indebtedness. After Alvin obtained the car, he provided the bank with a description and its serial number. The bank completed the chattel mortgage with this information and registered a financing statement under the prevailing personal property security legislation. XYZ Autos Inc. similarly registered a financing statement, but did this three days later than the bank. Alvin subsequently defaulted under both securities. Which of the creditors has priority to the car, and why?

Here the Personal Properties Security Act (PPSA

Qualco Lumber Ltd. owned a timber license over 50 000 hectares of forest in British Columbia. The British Columbia government notified Qualco that it intends to cancel this valuable license. A director of Qualco immediately upon hearing of the cancellation sells all his shares. When would that director be liable for insider trading and when would he not?

If a director has information that comes to him or her in his or her capacity as a director and which is of a confidential nature and will likely affect the value of the shares, the use of that information is insider trading. If the director uses information widely available to the public, the selling of shares is probably not insider trading. Diff: 2 Type: ES Topic: Duties of Directors and Officers Skill: Applied 57

Explain what it means for a director to give the corporation the right of first refusal. Give an example.

If it appears in a particular circumstance that the director has acquired or could obtain something of potential interest and value to the corporation, this director needs to first offer it to the corporation before retaining it for him- or herself. For example, a valuable mining claim where the corporation is a mining company. Diff: 2 Type: ES Topic: Duties of Directors and Officers Skill: Applied 56

In a private corporation without a shareholders agreement, why would it be necessary to restrict the transfer of shares by first requiring the consent of the board of directors?

In most private corporations, the incorporators are also the directors and the shareholders. In the event of a falling out between the shareholders, such a provision is necessary to ensure that shares are not sold to a new party who cannot get along with the existing shareholders and also to ensure that the proper value is given and received for the shares. Diff: 2 Type: ES Topic: Corporate Securities Skill: Applied 48

The manufacturer or wholesale distributor retains title to the merchandise while the retailer obtains possession of the merchandise.

In statement (1

In a small private provincial company where the shareholders are also the directors and officers, does corporate governance really matter?

In such companies little thought is given by the shareholders to the concept of corporate governance, and so long as the shareholders get along, this appears to remain the case. However, it should be remembered that even here, they should be mindful of the duties imposed by legislation on directors. Diff: 2 Type: ES Topic: What Is Corporate Governance? Skill: Applied 48

Use the fact situation in Q1 to answer the related question that follows. Based on the Enron situation, if some form of liability should flow down to the accountants of such corporations, what about the lawyers for such corporations, who not only have a duty to advise against many of the acts committed by such corporations, but who also act for such corporations on transactions that deplete corporate assets when they cannot help but know that the corporation is insolvent or close to insolvency?

It is difficult to believe that lawyers acting on transactions for such corporations do not know that the effect of such transactions is to deplete corporate assets. One might expect that lawyers have a continuing duty to advise directors, officers, and CEOs about the legality of their actions or those of the corporation. And in a real sense they are parties to those acts. Thus, a good argument can be made that lawyers should be held accountable to the public and exposed to liability when engaging in such activities in which they cause harm of loss to the public. However, like with accountants, government legislation seems to exclude them. Diff: 3 Type: ES Topic: Protection of Investors Skill: Applied 56

Why is it important for a creditor who intends to give a loan taking chattels as security to first do a PPSA search?

It is important in order to ensure that the creditor will have proper security in the chattels in priority to other creditors and also to ensure that there is sufficient value in the chattels to cover the loan, since a registered security interest in the same chattel may have been given to another creditor. Diff: 2 Type: ES Topic: Personal Property Security Legislation Skill: Applied 43

As you have seen in previous chapters, these days it is common in sophisticated contracts to have provisions requiring mandatory mediation or binding arbitration to resolve disputes arising between the parties. As between the majority and minority shareholders of a corporation, who do you think would favour one form of dispute resolution over the other?

Mandatory mediation serves to help the parties to try to resolve a dispute, but is not binding on the parties and leaves access to the courts as a final alternative, while binding arbitration will, subject to an error in jurisdiction, determine the dispute once and for all. Thus, a majority shareholder is more likely to want a mandatory mediation provision in a shareholders agreement, so that if he or she does not like the result he or she still has recourse to the courts through litigation. From a bargaining perspective, the sometimes-staggering costs of litigation can act as a deterrent to minority shareholders involved in such a dispute, giving the majority shareholder an edge in the dispute and often forcing the minority shareholders to settle on terms favourable to the majority shareholder. Conversely, minority shareholders will want a binding arbitration provision in a shareholders agreement to resolve disputes, because even if they lose, the costs are far less than the uncertainty of mediation followed by litigation, and the matter can be determined quickly. Diff: 3 Type: ES Topic: Shareholder Agreements Skill: Applied 59

Milton Brown is a business consultant who obtained confidential information about a publicly traded corporation which, if made public, would cause the stock to rise dramatically. Milton formed a private corporation with himself as the sole shareholder and director and had that corporation purchase stock in the publicly traded corporation. When the news that Milton was already aware of became public, the price of the publicly traded shares increased dramatically and the corporation Milton had formed sold its shareholdings at a substantial profit. Milton is subsequently charged with insider trading, that is, using confidential information for his own personal gain. His defence is that the gain was made by his corporation and not by himself and that his corporation is a separate legal entity. Will Milton's defense be successful? Give the legal basis for your answer.

Milton would likely be unsuccessful in his plea because the court would lift the corporate veil. The corporation is a mere sham created to shield Milton from potential prosecution for his breach of fiduciary duty and breach of statutory provisions regarding insider trading. When a corporation is a sham, the court will disregard it to allow the prosecution of the person committing the illegal act. Diff: 2 Type: ES Topic: The Nature of a Corporation Skill: Applied 60

There is no practical difference between a limited liability partnership and a professional corporation. Explain.

Neither the partners of a limited liability partnership nor the shareholders of a professional corporation are liable for the negligent acts or omissions of another partner or shareholder; however, they remain responsible for the debts and liabilities of the partnership or corporation. Diff: 2 Type: ES Topic: Types of Business Corporation Skill: Applied 46

Does a bank have a right of lien against property left in its safekeeping by one of its borrowers?

No, a bank does not have a lien against property left with the bank for safekeeping, such as property left in a safety deposit box. Diff: 2 Type: ES Topic: Security for Bank Loans Skill: Recall/Applied 52

What is "perfection" of a secured interest under personal property security legislation? Why is "perfection" relevant to the rights of a secured lender?

Perfection of a secured interest can occur either when the lender takes possession of the security or when the lender files a financing statement in the registry. The lender establishes its priority, and its rights against third parties such as purchasers, from the time it perfects its security. Diff: 2 Type: ES Topic: Personal Property Security Legislation Skill: Recall/Applied 48

Explain the concept of the preferred shareholder.

Preferred shareholders have the right to receive dividends before any are given to the common stockholders. So if the common stockholders are to get dividends for the period, the preferred stockholders must get their stipulated percentage first. In some corporations, any back deficiencies to the preferred stockholders must be made up before common shareholders get current dividends. Diff: 2 Type: ES Topic: Corporate Capital Skill: Applied 54

At present, and largely due to the Enron debacle and the events of the world-wide recession of 2008, there is a trend toward a greater consideration of ethics in corporate business. Will this continue?

Public awareness is heightened by such events. However, as time goes by and business returns to normal, there is a greater likelihood that the profit motive will return and that the events that gave rise to that heightened awareness will be forgotten, regardless of how much legislation is passed. Diff: 2 Type: ES Topic: Protection of the Public Interest Skill: Recall/Applied 43

Robert Badger operated a hardware business as a sole proprietorship and owed $200 000 to creditors. On June 1, 1998, he transferred $20 000 of inventory to Smith Supplies Inc. to pay in full the indebtedness he owed that company. At the time he was not paying his debts as they became due. Instead he paid some money towards accounts when pressed, or he negotiated with them to give him more time to pay. On July 15, he transferred a truck used in the business for one dollar to his cousin. On July 2h, a creditor obtained a default judgment and the sheriff seized goods on July 28 in relation to that judgment. The goods were later sold in a judicial sale. On July 29, he purchased on credit $15 000 worth of new inventory. On August 14, a creditor petitioned him into bankruptcy. List each incident where there is an act of bankruptcy. Discuss Robert's situation in relation to the provisions of the Bankruptcy and Insolvency Act.

Robert Badger has committed the following acts of bankruptcy: (1

Florence has $100 000 to invest. She decides to invest in the common shares of a well-known blue chip company. As part owner, how would she expect to participate in the company and to benefit from her investment?

She would have very little influence as part owner of the company. She is entitled to vote (one vote for each share owned

Use the fact situation in Q1 to answer the related question that follows. Based on the Enron situation, a question arises as to how inflated financial reporting occurs. To better understand this, consider that large public corporations retain top-tier accounting firms who are well aware of established standards for proper completion of financial statements and reports. If this is the case, and the accountants for such corporations inflate financial statements and reports, should not these accountants also be held liable for misleading the public?

Since accountants are familiar with the finances of such companies and their financial health, and since they know the established accounting procedures to be followed, a good argument can be made that when they inflate financial statements or reports, they are just as responsible for the consequences as are the directors and CEOs. However, for some reason, government legislation seems to exclude them. Diff: 3 Type: ES Topic: Protection of Investors Skill: Applied 55

The attribute of negotiability of bond and share certificates has increased the problem of forged and stolen certificates. Explain.

Since an innocent holder for value can obtain good title to a stolen certificate, looser practice has developed in accepting these certificates. From this, it has also become easier to pass off forged (and therefore worthless

In what circumstances is the appointment of the auditor of the corporation unnecessary?

Such an appointment is unnecessary in a private corporation where the shareholders have agreed unanimously to dispense with an auditor. Diff: 2 Type: ES Topic: Shareholders Skill: Recall 52

What standard of care and skill is usually imposed by the court on an accused corporation and its directors when the activities of the corporation were carried on negligently?

The "due diligence in carrying out their duties test" will apply, but this test has an ever-changing standard as technology changes and it also may be affected by the knowledge and expertise of the individuals involved. Diff: 1 Type: ES Topic: Criminal Liability of Directors and Officers Skill: Recall 53

In Ontario, on a sale of assets, what normal searches should the buyer conduct?

The buyer should conduct a bankruptcy search of the seller, a PPSA search of the seller, an executions search of the seller, and a bulk sales search. Diff: 2 Type: ES Topic: Other Statutory Protection of Creditors Skill: Applied 49

What advantage does a secured creditor have over an unsecured creditor when they both are forced to collect an overdue account?

The secured creditor need not invoke the rather lengthy judicial machinery required to obtain an execution order, but can proceed on its own to enforce its rights over the security. Diff: 2 Type: ES Topic: The Meaning of "Security" Skill: Recall/Applied 45

Have the numerous changes to corporate legislation, which impose more and more duties on directors of corporations, changed the concept of limited liability for shareholders of small privately held companies who are often also the directors and officers, so as to act as a possible deterrent to incorporation as the best method of limiting liability?

This is not an easy question to answer. There is no doubt that legislative changes that impose more and more duties on directors may well have an effect on small privately held corporations, increasing the potential for liability of their shareholders who are also the directors or officers. However, thus far, small privately held corporations have not been the subject of scrutiny to the same degree that has recently characterized large private corporations or public corporations. Moreover, in such companies, it is rare to find breaches of duty, because the shareholders have much closer control. The result would seem to be that, together with the income tax advantages that such corporations enjoy, there is no real deterrent, and the limited liability enjoyed by their shareholders continues even where they are directors or officers, although this may change if and when such corporations begin to be scrutinized more closely. Diff: 3 Type: ES Topic: Duties of Directors and Officers Skill: Applied 61

seriously prejudice the position of general creditors and prospective general creditors?

This is where book debts (such as accounts receivable

What does it mean to pierce the corporate veil? When can this be done?

This is where the courts have been prepared to disregard the separate existence of a corporation to see what lies beyond it, usually to show that the corporation and the one who owns it are one and the same. This might occur when there appears to be "fraud, a wrong, or a breach of duty." Diff: 2 Type: ES Topic: The Nature of a Corporation Skill: Applied 50

Regarding bankruptcy, what does it mean not to be dealing at "arm's length" with another party? When might this occur?

This refers to transactions where a creditor's rights may be jeopardized by the debtor entering into a contract with a relative, a friend, or a corporation in which she or he has a major interest. The debtor may have bought or sold property at something other than the fair market value in order to benefit her- or himself at the expense of the creditor. Diff: 1 Type: ES Topic: Administration of a Bankrupt's Affairs Skill: Recall/Applied 52

Although the theory is that a private corporation provides the best protection from liability for its incorporators, why is this not always the case in practice?

Usually, in order to capitalize the company, the incorporators may be required to borrow money from a financial institution and will have to enter into a loan agreement personally and together with the company for the sum borrowed and/or provide a guarantee for that sum. The same may apply to a company that is active but requires capitalization. Further, shareholders or directors may be required to co-sign or guarantee contracts entered into by the company. In such cases, although the shareholders are protected from liability for many of the acts or omissions of the company, they incur personal liability should the company default on its loans or on a particular contract. Diff: 3 Type: ES Topic: The Nature of a Corporation Skill: Applied 57

Provincial legislation regarding fraudulent transfers goes further than the Bankruptcy and Insolvency Act. Explain.

While the federal Act applies only to a bankrupt's transfer of property within a certain amount of time before the date of the bankruptcy, provincial fraudulent conveyances/transfers legislation is not conditional on bankruptcy and permits any creditor recourse against a debtor who transfers property with the intention of defeating not just that creditor, but all of his or her creditors. It is a means of ensuring that the debtor's assets remain available to satisfy his or her creditors. Diff: 3 Type: ES Topic: Administration of a Bankrupt's Affairs Skill: Applied 48

Dan is a director of a corporation, and without disclosing his conflict of interest, he entered into a contract to supply the corporation with widgets. The contract was made in the name of his mother so that the corporation would not know that Dan was involved. Pat is a minority shareholder in the corporation, has found out about the conflict, and intends to bring a derivative action against Dan. Explain what a derivative action is. Why is a derivative action appropriate in the circumstances? What must Pat show in order to bring a derivative action? What remedy might a court award?

With a derivative action, a minority shareholder can bring an action on behalf of the corporation. A derivative action is appropriate in these circumstances because Pat is complaining about breach of a duty that is owed to the corporation, not to her personally. Any remedy would be paid to the corporation, not to her. To bring a derivative action, Pat would have to show that the directors refuse to bring the action themselves, that she is acting in good faith, and that it appears to be in the best interests of the corporation that the action be brought. The court could force Dan to disgorge any profit arising out of the conflict of interest. Diff: 2 Type: ES Topic: The Protection of Minority Shareholders Skill: Applied 54

The court might refuse a debtor's discharge by bankruptcy for any of the following reasons EXCEPT that a. the debtor caused the bankruptcy by living off of funds taken from the business. b. the debtor neglected to keep proper books. c. the debtor failed to satisfactorily account for losses or deficiencies in assets. d. three months preceding bankruptcy the debtor gave an undue preference to a creditor. e. the debtor's assets proved insufficient to pay the unsecured creditors more than fifty cents on the dollar.

a Diff: 1 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Applied 27

Luzzos Corp. is a closely held corporation where "The right to transfer shares needs to be restricted in some manner." This is most likely to be done by a. required consent of the board of directors. b. placing the restriction outside the corporate charter. c. giving the right of first refusal to the existing shareholders. d. placing the restriction in a by-law. e. giving a large shareholder the right of veto.

a Diff: 1 Type: MC Topic: Corporate Securities Skill: Applied 27

Pat is one of 16 owners of Camstick Ltd. This corporation has been fined $30 000 for polluting the town's water supply. Pat is on the board and now finds himself charged and being convicted on the same matter. The judge finds that Pat personally knew and did nothing about the polluting. Not only that, but he has no remorse concerning the incident. The judge is now giving him, under the Environmental Protection Act, the maximum prison term of a. 12 months. b. 10 years plus $50 000. c. 90 days. d. 5 years plus $10 000. e. 3 years plus $5 000.

a Diff: 1 Type: MC Topic: Liability for Environmental Offences Skill: Recall/Applied 30

Self-liquidating financing is usually the best form of financing for farmers. a. True Correct: Correct b. False Incorrect: Incorrect

a Diff: 1 Type: TF Topic: Security for Bank Loans Skill: Applied 33

A parks his car in a no-parking zone and A gets a ticket. In this case, A has committed a. an absolute liability offence. b. a mens rea offence c. a criminal offence. d. no offence. e. a strict liability offence.

a Diff: 2 Type: MC Topic: Liability Arising from Business Responsibilities Skill: Applied 2

Use the fact situation in Q2 to answer the related question that follows. In light of the history of the company prior to its bankruptcy, in determining whether the payment made to the largest supplier is a fraudulent preference, the court will also consider a. that this supplier knew that the company was in poor financial condition. b. that the payment of this supplier was made within 12 months preceding the bankruptcy of General Widgets. c. that the payment of this supplier was made at the time the company was insolvent. d. that this supplier was George's friend. e. all of the above

a Diff: 3 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Applied 9

Not listed above.

a Diff: 3 Type: MC Topic: Liability Arising from Business Responsibilities Skill: Applied 4

Directors are responsible for the day-to-day operation of a company's business. a. True Incorrect: Incorrect b. False Correct: Correct

b Diff: 1 Type: TF Topic: Directors Skill: Recall/Applied 37

Of the preferred creditors, the highest priority of claim is a. up to $2000 arrears in wages per employee. b. up to three months of rent due to the landlord. c. expenses and fees of the trustee in bankruptcy. d. up to two years of municipal taxes. e. the amount required by government to be deducted from employees' salaries.

c Diff: 1 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Recall 26

.

d Diff: 1 Type: MC Topic: Liability Arising from Business Responsibilities Skill: Applied 26

In the context of bankruptcy proceedings, liquidating dividends are a. proceeds from the sale of assets over and above the security claims. b. funds distributed to shareholders when a corporation is in bankruptcy. c. the distributed funds that are over and above the stated book value. d. unexpected returns from assets that were unaccounted for in the books. e. payments made to creditors from time to time as realization of the debtor's assets permits.

e Diff: 1 Type: MC Topic: Administration of a Bankrupt's Affairs Skill: Recall 25

. d. they are enforced by the RCMP. e. they prohibit certain kinds of conduct and punish those who ignore the prohibitions.

e Diff: 1 Type: MC Topic: Criminal Liability of Corporations. Skill: Applied 25

Under criminal law, corporations are subject to be punished. Punishment can take place by a. heavy fines on the corporation itself. b. imprisonment of the directors. c. finding the "directing mind" behind the offence and fining and/or imprisoning this person. d. dissolving the corporation. e. all of the above

e Diff: 1 Type: MC Topic: Criminal Liability of Corporations. Skill: Applied 27

Use this fact situation to answer the related questions that follow. Albert, who is a sole proprietor who wants to expand his present business, which makes and supplies plastic containers, has decided to incorporate his business to limit his liability. Yesterday, Albert signed the articles of incorporation at the office of his lawyer, just before he had a business meeting with a large retail store. During that meeting Albert agreed to manufacture and supply 20 000 plastic containers to the retail store. Thinking that his new company would be incorporated shortly, Albert decided to sign the contract on behalf of a corporation to be incorporated. A couple of days later Albert's lawyer told Albert that his new company had been incorporated. A month went by during which the retail store found that the containers were defective, and since there was no warrantee on them, the store spent $15 000.00 to repair them. In this case, in bringing a lawsuit, the store will consider a. that Albert's assets can be seized to satisfy a judgment. b. that liability will rest with Albert and not his new company. c. that Albert's new company has not adopted the contract. d. that Albert signed the contract on behalf of a company to be incorporated. e. all of the above

e Diff: 3 Type: MC Topic: Civil Liability of Corporations Skill: Applied 12