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CPA
Intermediate Leval
Company Law May 2018
Suggested Solutions

Company Law
Revision Kit

QUESTION 1(a)

Q (i). Explain the meaning of the term "articles of association" (2 marks).
(ii). Describe four effects of registration of the articles of association of a company. (4 marks).
(iii). Outline the provisions of the Companies Act which govern the alteration of the articles ol' association of' a company, (4 marks)
A

Solution


(i). Meaning of article of association.
a document that establishes the rules for a company's activities and explains the company's purpose. The document outlines how actions inside the business are to be completed, such as the process for appointing directors and the processing of financial data.

(ii). Effects of registration of articles of a company.
1. They are binding between members because they specify how and when members must notify one another of their desire to transfer shares.

2. It binds the company and its members - Members have the authority to restrain the company from violating the requirements of the articles.

3. It binds the members and the Company - The company has the authority to prevent members from violating contract provisions.

(iii). Provisions governing alteration of articles of association
1. The alteration must not be inconsistent with the provision of companies Act.

2. Make certain that any such change does not increase the liability of any member who became a member prior to the change to contribute to the company's share capital or otherwise pay money to it.

3. The alteration must be approved by a special resolution.

4. It must not exceed the conditions contained in the M.O.A.

5. It must not amend the provisions of the company if it remains private.

6. Hold the General Meeting and pass the special resolution.

7. Ensure that any such change does not include the company's expulsion of a member.

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QUESTION 1(b)

Q Advise Ben Sikujua.(10 marks)
A

Solution


(1). Dividends are paid from profits, and having a charge does not prohibit the borrower from receiving them.

(2). It remains dormant until the charged understanding is a going concern or unless the person in favor of the charge intervenes.

(3). A charge is attached to the charged person in varied conditions that occur from time to time.

(4). Dividends bear interest against the organization, not the lender.

(5). It frees the company to deal with the property in the normal course of business.

(6). Dividends are distributed in cash or by check to registered holders.

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QUESTION 2a(i)

Q Outline four circumstances under which a floating charge will crystallise.(4 marks)
A

Solution


Circumstances under which a floating charge will crystallize.

(a) When a company's operations are terminated.

(b) Failure to pay the principle or interest when due and payable, the charge takes steps to enforce the security.

(c) Upon the initiation of legal action against the corporation.

(d) When the company goes into liquidation.

(e) When the appointment of a receiver by a debenture holder.

(f) commencement of winding up

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QUESTION 2a(ii)

Q ( ii ). Explain four contents of a trust deed.
A

Solution


Trust deed

Is a voluntary agreement reached between you and the persons to whom you owe money (often known as your creditors). You agree to pay a set amount of money toward your obligations on a regular basis, and the remainder of your debts will be written off after a set period of time.

Contents of a trust deed.

(i). The company's guarantee to pay the debenture holders their agreed-upon instalments and interest.

(ii). The particulars of the parties involved.

(iii). The property charged to cover off the debt.

(iv). The events that cause the security to become enforceable.

(v). Meetings of the debenture holders.

(vi). A commitment by the corporation to insure and maintain the charged property in excellent condition.

(vii). Appointment of the receiver.

(viii). A provision that allows the trustees to assume ownership of the property charged if the corporation defaults.

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QUESTION 2(b)

Q Discuss whether Kuzi Limited, Jane Uza and Sahara Limited are entitled to any legal against john Mbao for recovery of' profit. (8 marks)
A

Solution


1. Kuzi Ltd - Will recover the profit because John Mbao is a company director and a non-executive director, and so he is obligated by the responsibility to :
➫ Act bonafide.
➫ Avoid Conflict of interest.
➫ To exhibit highest degree of care, skills and due diligence.
➫ Disclose a secret profit.

2. Jane Uza - He will be held accountable for insider dealings in which he takes advantage of the organization information that is not available to the public and exploits those who are unaware.

3. Sahara Ltd - There is no lawsuit against John Mbao because, according to common law, nobody (third party) who deals with any official of the company is required to trust that he is carrying out the duties and obligations of the firm.
Thus, it's not their duty to ascertain whether they are acting ultra vires or not

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QUESTION 3a(i)

Q Highlight four books of account that a company is required to maintain. (4 marks)
A

Solution


Books of account that a company is required to maintain.

(a) Ledger - The term ledger refers to the book that holds all of the accounts (personal, real, and nominal) in one location.

(b) General Ledger - Records all financial transactions of the business . (c) Cash Book - Cash Book acts as both a cash and a bank account, and balances are recorded immediately into the trial balance .

(d) Sales Book - keeps track of credit sales of goods

(e) Debtor Ledger - It provides details of the sales on credit made to customers.

(f) Creditor ledger - A record of all of the purchases made in credit from Creditors.

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QUESTION 3a(ii)

Q (ii) Outline four purposes of a profit and loss account of a company. ( 4 marks)
A

Solution


Purposes of a profit and loss account of a company.

(a) It shows profit or loss of the company.

(b) Details of all monies spent and received.

(c) To present the true and fair view of the net income of the company for the financial year.

(d) To protect the interests of creditors and shareholders by demonstrating the company's financial performance.

(e) Basis for calculating corporation tax

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QUESTION 3(b)

Q Summarisc eight offences that could be committed by foreign companies and their officers. (8 marks)
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Solution


Offences that could be committed by foreign companies and their officers.

(1). If it ceases to have a place of business in Kenya without notifying the registrar.

(2). Failure to publish the name and other details of the company as required.

(3). Failure to register the instrument treating charges and their particulars.

(4). Failure to file returns as required by the foreign company's Act to the registrar for registration.

(5). Failure to serve a notification to all members of the company as required by the Act.

(6). Failure to prepare books of the account and group account as required by the foreign company Act.

(7). If it does business in Kenya but is not registered.

(8). Failure to prepare the foreign company's prospectus in accordance with the rules specified in it.

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QUESTION 3(c)

Q Highlight two types of foreign companies that might be required to deliver the profit and loss account and balance sheet to the registrar of companies in your country. (4 marks)
A

Solution


Types of foreign companies required to deliver profit and loss account and balance sheet to the registrar.

1. A foreign company incorporated in Kenya.

2. A foreign company with a branch registered in Kenya

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QUESTION 4(a)

Q (i). Reverse merger. (2 marks).

( ii).Amalgamation. (2 marks)
A

Solution


1. Reverse merger - is the purchase of a public firm by a private company in order for the private company to avoid the lengthy and complex process of going public. The transaction necessitates a rearrangement of the purchasing company's capitalization.

2. Amalgamation - is the merger of two or more businesses to form a new entity. A new corporation is founded to combine both companies' assets and liabilities.

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QUESTION 4(b)

Q Discuss four advantages of a reverse merger over the initial public offer (IPO)
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Solution


Advantages of a reverse merge over initial public offer(IPO).

(1). This form of merger has no negative consequences for the company's competition.

(2). The private firm becomes a public company at a lower cost and is listed on the exchange without an initial public offering (IPO).

(3). Because it is not dependent on market conditions, it gives businesses more certainty.

(4). It helps in saving taxes of private companies.

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QUESTION 4(c)

Q (i). Duties towards the company.
(ii).Duties towards the general public.
A

Solution


(i). Duties towards the company.
1. He serves as the company's watchdog, detecting errors and fraud.

2. He is obligated to demonstrate reasonable care skills and caution, i.e. to be competent, careful, and cautious.

3. It is his responsibility to carry out his duties with an open mind and not with a predetermined judgment of dishonesty.

4. Assure himself that the company's securities exist and are safe.

5. He has a duty to take stock of the company.

6. He is obligated to be truthful to the company.

(ii). Duties towards the general public.
1. Obligation to reveal material mistatement of the books of accounts to the general public.

2. Obligation to express an opinion based on facts and findings, whether qualified or unqualified.

3. The obligation to provide professional opinion to the general public when asked to do so.

4. The duty to ascertain the true and fair view of the company's affairs.

5. Obligation to provide auditors' reports

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QUESTION 5(a)

Q Advise Philip Shaka on the legality of the proposed offer by Big Show Ltd. ( 10 marks)
A

Solution


The legality of the proposed offer by Big Show Ltd is that:

1. The consideration for shares must be monetary or monetary value.

2. Dividend should not be paid out of capital rather profit.

3. A corporation must be solvent and profitable in order to pay dividends.

4. A corporation may not buy its own shares or be a member of its own.

5. A corporation may not issue a large number of shares for non-cash consideration.

6. If a corporation provides financial aid in violation of the law, the company and each officer in default face a fine of not more than Ksh.20,000.

7. It is illegal for a corporation to finance the purchase or subscription of its own stock.

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QUESTION 5b(i)

Q Describe three ways through which a person might become a member of a company. (6 marks)
A

Solution


Ways of becoming a member of the company.

1. By subscription to the memorandum - The subscription to the MOA are deemed to have decided to become members of the company, and their names are inserted into the register of members upon registration.

2. Transfers - This is the acquisition of stock from a willing seller. When the transferee's name is recorded into the register, he becomes a member.

3. Allotment - is the acquisition of shares from the corporation. The allottee is accepted as a member.

4. Transmission by death - The shares of a deceased member pass to the personal representative who becomes a member when his name is inserted into the register of members.

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QUESTION 5b(ii)

Q Elaborate the process of effecting changes to the register of members. (4 marks)
A

Solution


The process of effecting changes to the register of members.

1. A company must pass a special resolution.

2. A written approval must be presented to the registrar.

3. The registrar must be notified within 14 days.

4. The registrar enters the new name in the register in the place of the former name.

5. The registrar issues a certificate of change

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QUESTION 6(a)

Q Suggest four possible reasons why directors might want to remove a company secretary.(8 marks)
A

Solution


Possible reasons why directors might want to remove a company secretary.

1. Failure to publish the company's name as required by Act.

2. Making secret profit without disclosure.

3. Failure to perform his duties in accordance with the Act.

4. Failure to register charges.

5. Failure to act in good faith.

6. Destruction or falsification of the company's books with the goal to defraud.

7. Failure to make the annual returns.

8. Failure to countersign documents containing the organization seal

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QUESTION 6b(i)

Q (b) In the context of company meetings:
(i) Outline six contents to be recorded in the minutes of a director's meeting. (6 marks)
A

Solution


Content in the minutes of a director's meeting.

1. Appointment of managing director.

2. Appointment of company secretary.

3. Interim dividend payment.

4. Company borrowings fund.

5. Dividend recommendations.

6. Total number of shares to be allotted, divided into fully and partially paid up shares.

7. Statutory report

8. Particulars of material contract.

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QUESTION 6b(ii)

Q Every company must hold an annual general meeting in each year. Explain three purposes the annual general meeting (AGM). (6 marks)
A

Solution


Purposes of annual general meeting (AGM).

1. Election of directors - Mostly first directors of the company.

2. Ratification of the director's actions - The shareholders approve and ratify (or not) the board of directors' decisions taken the previous year. This frequently includes the distribution of a dividend.

3. Declaration of dividends - The dividend to be declared is the dividend recommended by the directors.

4. Appointment of auditors - Auditors are hired to investigate and determine the true and fair state of the company's affairs.

5. Approve the annual returns - The annual reports prepared by the secretary must be approved by the members.

6. Approving the secretary's final accounts and, if the holding company, the consolidated accounts of the holding company and its subsidiaries.

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QUESTION 7a(i)

Q Discuss five offences that might be committed by the liquidator before and during liquidation. ( 10 marks)
A

Solution


Offences that might be committed by the liquidator;

Before liquidation.
1. Conveyance delivery of commodities relating to company property by or on behalf of the company within 6 months of the beginning of the winding up order.

2. Accepting mortgage on behalf of the company voluntarily.

3. Fraudulent preference.

4. Preferring a creditor over another.

5. Fraudulent preference of company charges.

During liquidation
1. Applying the company's asset in ultra vires or illegal transactions

2. Selling company property at undervalue.

3. Making erroneous payments to promoters and directors.

4. Payment of dividend out of capital.

5. Profiting in secret.

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QUESTION 7a(ii)

Q Describe three circumstances under which a person who has ceased to be a liquidator is released from their obligations with respect to a voluntarily liquidated company. (6 marks)
A

Solution


Ways of releasing a person who has ceased to be a liquidator.

When the liquidator has collected all the property of the company and he has.

1. Distributed a final dividend if any.
2. Adjusted their contribution rights.
3. Made a final return to contribution.

They must petition the court to get him released or discharged. The court will then compel him to prepare a report on his account, and the court will decide whether or not to release him based on the report on his account.

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QUESTION 7(b)

Q Explain to them two differences between companies and partnerships. (4 marks)
A

Solution


Differences between company and partnership.
Basis Company Partnership
Formation A company undergoes elaborate procedure for its existence Registration for partnerships not necessary
Legal personality Has legal personality and distinct from its members Has no legal personality
Management Managed by board of directors Managed by partners (members)
Transfer of shares Shares are freely transferable Cannot transfer shares without consent of the members


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