Deck 27: Corporate Governance: External Responsibilities

Question 1

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

Answer 1

D

Question 2

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.

Answer 2

D

Question 3

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

Answer 3

B

Question 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

Question 5

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

Question 6

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

Question 7

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.

Question 8

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.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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.

Question 15

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.

Question 16

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.

Question 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

Question 18

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.

Question 19

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.

Question 20

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

Question 21

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.

Question 22

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.

Question 23

Schemes of government regulation resemble traditional criminal law because

A)damage is done through committing a tort rather than through breach of a contract.
B)conviction for an offence is typically punished by imprisonment.
C)it must be proved the accused not only committed the offence,but also was at fault and had mens rea (a guilty mind).
D)they are enforced by the RCMP.
E)they prohibit certain kinds of conduct and punish those who ignore the prohibitions.

Question 24

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.

Question 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

Question 26

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.

Question 27

Offences under such statutes as the Canada Environmental Protection Act are criminal offences.

Question 28

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.

Question 29

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.

Question 30

No knowledge of the law is a good defence to an absolute liability offence.

Question 31

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.

Question 32

Bill and four friends are driving to the movies.The vehicle Bill is driving is travelling 21 km per hour over the speed limit.Terry is one of the passengers in the back seat.He intentionally throws an empty bottle at a pedestrian who is walking on a nearby sidewalk.She is struck with the bottle and injured.The police pull the car over and charge Bill and Terry with separate offences.The classification of the offences with which they are charged,respectively,is as follows

A)strict liability and mens rea.
B)absolute liability and mens rea.
C)strict liability and absolute liability.
D)mens rea and absolute liability.

Question 33

A corporation that is not paying its creditors in a timely fashion is probably insolvent.

Question 34

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.

Question 35

Under the regulatory offence of "strict liability," the standard that must be met for obtaining a conviction is

A)the same as under the regulatory offence of "absolute liability."
B)to let the accused try to avoid liability by proving that she or he was completely unaware of the regulation.
C)to satisfy the court that the breach is of the regulation rather than a statute.
D)where the doing of the prohibited act raises a presumption that an offence has been committed-unless the accused can prove she or he took all reasonable care.
E)to prove the existence of mens rea (a guilty mind).

Question 36

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

Question 37

Offences under the Criminal Code of Canada are both criminal and regulatory in nature.

Question 38

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.

Question 39

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.

Question 40

Corporations are always liable in tort for contracts entered into with third parties.

Question 41

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.

Question 42

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?

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

Marian,Phillis,and Lauren are three directors at A Mart Supplies Ltd.The corporation has $150 000 in assets,including capital and $110 000 in debt.
(1)If the directors passed a resolution redeeming all the preferred shares of the corporation for $50 000,what remedy would unpaid creditors of the corporation have and against whom?
(2)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?

Question 48

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

Question 49

What is meant by the indoor management rule?

Question 50

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?

Question 51

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?

Question 52

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

Question 53

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?

Question 54

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

Question 55

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?

Question 56

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

Question 57

What condition(s)must be met before a corporation may purchase its own shares?

Question 58

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.