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CPA
Intermediate Leval
Company Law May 2019
Suggested Solutions

Company Law
Revision Kit

QUESTION 1a

Q Advise Alex on the validity of the proposed alterations to the articles. (10 marks)
A

Solution


Every company has a statutory power to alter its article provided that a company has passed a special resolution.

The validity of the proposed alteration is that:

1. A special resolution of members in a general meeting is required to approve an article alteration.
2. It must not go beyond the restrictions outlined in the company's memorandum.
3. It cannot conflict with the court order issued in accordance with the Act protecting minorities.
4. The alteration must not conflict with an Act requirement.
5. It must not conflict with the rights of members who disagree.
6. Without their express consent, it cannot expand their responsibility or force them to purchase more shares.

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QUESTION 1b(i)

Q State four exceptions to the rule that a company should not issue shares at a discount. (4 marks)
A

Solution


Circumstances for issues of shares at a discount include:

1. The shares must be a part of a class that the corporation has already issued.

2. The maximum rate of discount must be stated in the resolution.

3. The matter needs to be approved by a regular resolution of members in a general assembly.

4. The matter must be approved by the court or formally submitted for the court's approval.

5. At least one year must have passed from the date on which the company had the right to start its activity.

6. The company's prospectus must include information about the discount.

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QUESTION 1b(ii)

Q (ii) Explain three roles of the court in the reduction of a company's capital. (6 marks)
A

Solution


Role of the court in reduction of a company's capital.

1. Protection of creditors.

Only if the court is certain that the creditors have given their assent, received security, and have been paid off would it permit a reduction in capital.

2. Protection of members.

Although while the majority of the company's members might not require legal protection, the minority, who might disagree with a resolution to lower the capital, might. This is especially true if the majority acted in a way that was oppressive to the minority.

3. Protection of the general public.

A company may decide to make a capital reduction decision without providing appropriate information to the public. The courts can intervene by requiring companies to provide all the information necessary to ensure the protection of the public interests.

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QUESTION 2a(i)

Q Advise Joanne on eight advantages of sole proprietorships over the other forms of business structures. (8 marks)
A

Solution


Advantages of sole proprietorship over other forms of business ventures.

1. Easy to form because of few legal requirement that are needed.

2. Capital required is small in relation to other forms of business like limited company.

3. The company is very adaptable; the owner is free to alter the company as he sees fit.

4. Decision making is quick due to self consultation.

5. If the company becomes successful, one enjoys the profit on their own.

6. Due to its solitary ownership, the venture can maintain a higher level of confidentiality.

7. No filling of annual return and publication of financial records

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QUESTION 2a(ii)

Q (ii) Distinguish between a "corporation sole" and "corporation aggregate."
A

Solution


A corporation sole

This is a legally created position which, unlike the incumbent, can only be held by one person at a time and is replaced by another person afterwards. The office is a body corporate with perpetual succession, the ability to enter into contracts, sue or be sued and own property, e.g. office of the Permanent Secretary to the Treasury, office of the Public Trustee

A corporation aggregate

It is a legal person constituted for legal purposes by two or more persons whose members consist of at least two persons. It has independent legal existence, the ability to enter into contracts, sue or be sued, and perpetual succession, like private and public companies.

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QUESTION 2b(i)

Q Outline four remedies of debenture holders if the company defaults.
A

Solution


Remedies of debenture holder if the company defaults.

1. Right to sue debenture holder's action - In the event of default, the creditor has the right to sue the company for the amount, including interest.

2. Appointment of receiver - Debenture holders can appoint receivers to take back the securities and manage them to facilitate the payment of amounts due.

3. Foreclosure/Foreclosing order - This is a court decision preventing a company from buying back its shares. This deprives the company of an equitable right to redeem and guarantee vesting to holders who can sell at will.

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QUESTION 2b(ii)

Q (ii) Summarise three differences between "debentures" and "shares".
A

Solution


Differences between "debentures" and "shares" .

Debentures
1. This is a unit of a loan, and the investors who possess it are the company's creditors.
2. Attracts an interest.

3. Confer a prior claim.

4. Do not confer voting rights.

5. Attract a fixed rate of returns.

6. Are generally secured.

7. Interest is independent of profit .

8. Companies are obliged to pay interest.

9. Debentures are generally redeemable.

Shares

1.Owners of this capital unit are considered members of the company.

2. Earn a dividend.

3. Rank after creditors.

4. Confer voting rights.

5. Generally dividend varies with profitability.

6. Have no security.

7. Interest is dependent of profit.

8. There is no obligation to pay dividend.

9. Shares are generally irredeemable

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QUESTION 3a(i)

Q (i) Highlight four documents which are required to accompany the application for registration of a foreign company. (4 marks)
A

Solution


Documents required by a foreign company to apply for registration.

1. A certified copy of the company's charter, statute, memorandum, articles, or any other document that makes up its constitution. If the instrument is not in English, a translation is required.

2. List of directors and secretary of the company and their particulars.

3. Shareholders and share structure

4. A statement of all existing charges created by the company.

5. The full address of the registered or principal office of the company

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QUESTION 3a(ii)

Q (ii) With reference to foreign companies, explain three changes that require a 30 days notice before effecting. (6 marks)
A

Solution


Changes that require a 30 day notice before effecting.

1. Charter, structure or memorandum or article of association

2. The address of the registered or principal office of a foreign company.

3. The director or secretary of a foreign company and their particulars. .

4. The name and postal address of the person authorized to accept services on behalf of a foreign company.

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QUESTION 3b(i)

Q Outline five particulars that might be stated in an application for registration of a company. (5 marks)
A

Solution


Particulars that might be started in application for registration of a company.

1. The companies name.

2. Declaration of compliance.

3. The article of association.

4. Particulars of directors and secretary.

5. Memorandum of association.

6. List of persons who have consented to be directors.

7. Consent to act as directors

8. Statement of nominal capital.

9. Notice of situation of registered office

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QUESTION 3b(ii)

Q (ii) Describe the prescribed format of the articles of association. (5 marks)
A

Solution


Format for articles of association.

➢ It must be in English language.

➢ It must be printed.

➢ It must be divided into paragraphs which are numbered consequently.

➢ It must be dated.

➢ It must be signed by each subscriber of the memorandum of association

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QUESTION 4a(i)

Q Summarise the criteria used for the appointment of an eligible natural person or firm as a statutory auditor. (2 marks)
A

Solution


Criteria used for appointment of an eligible auditor.

1. A person must be registered as an accountant practicing either independently or as a partner in a firm in order to be eligible for appointment.

2. He must be a member of a professional body specified in the accountant's act

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QUESTION 4a(ii)

Q (ii) Describe four individuals who may not act as statutory auditors of an auditee company.
A

Solution


Individuals who may not act as statutory auditor of an auditee company.

1. One who is not a member of a professional body specified by the accountant act.

2. A declared bankrupt person.

3. persons of unsound mind.

4. Has not received registrar authorization as someone with comparable credentials gained in commonwealth states.

5. Has not practiced auditing in Kenya.

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QUESTION 4a(iii)

Q (iii) Outline four rights of an auditor of a company in relation to meetings.
A

Solution


Rights of auditors.

1. Right to notice.

2. Right to attend Annual General Meeting (AGM).

3. Right to be heard or speak.

4. Right to defend himself

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QUESTION 4b(i)

Q Outline four particulars which might have been contained in Gipange Limited's former register of members. (8 marks)
A

Solution


Particulars which might have contained in Gipange limited former register members.

1. Name of the member.

2. Date on which each member was entered in the register of members.

3. Postal address of the members.

4. Number of shares held.

5. The number of stock held

6. Date of cessation of membership.

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QUESTION 4b(ii)

Q Indicate two contents of Gipange Limited's current register of members. (2 marks)
A

Solution


Content of Gipange limited current register of members.

1. Date on which each person was entered in the register of members.

2. Date on which each person ceased to be a member

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QUESTION 5a

Q (i) Define the term "post merger re-organistion' (2 marks).
(ii) Discuss four types of post merger re-organisation. (8 marks)
A

Solution


(i). Post-merger re-organization

It is the time frame that begins when a contract closes but might linger for a few months. It is the phase of an acquisition when the buyer fully takes over the target company's operations.

(ii). Types of post-merger re-organization.

1. Symbiosis

Occurs only in certain areas to help achieve the objectives of a merger or acquisition.

2. Holding

This is when the acquiring company retains ownership of the target company, but they are not integrated with each other.

3. Preservation

the target company is preserved that is leaving the target company autonomous.

4. Absorption

The acquiring company fully absorbs the target company including all processes, organizations, and procedures.

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QUESTION 5b(i)

Q (i) Outline four circumstances in which a valid meeting might be constituted by one person. (4 marks)
A

Solution


Circumstances in which a valid meeting might be constituted by one person.

➦ Unless in rare circumstances, one person cannot both constitute a meeting and a quorum. In the case of Sharp v. Dawes, these are the exceptions to the rule:

1. Directors meeting

If a private corporation has only one director, that director shall constitute a meeting of directors for the purpose of exercising the powers conferred on the board of directors by the article.

2. Creditors meeting

During the liquidation process, if only one creditor proves its claims in accordance with the law, the creditor will call a meeting of creditors for the liquidation.

3. Class meeting

The capital of a company is divided into different classes of shares, such as ordinary shares, and if all the shares of a particular class are held by one member, that member constitutes the assembly of shareholders of this category.

4. Adjourned meeting

This is a continuation of a previous meeting, the adjourned meeting is validly constituted by a member present in person or by proxy.

5. AGM Summoned by or in accordance with the registrar's direction

In the event that a business fails to have an AGM as required, the registrar may petition for or order the calling of an AGM.Atleast one member must be present, either in person or by proxy, for the meeting to be validly called.

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QUESTION 5b(ii)

Q (ii) Describe three means through which written resolutions might be circulated to eligible members. (6 marks)
A

Solution


Means through which written resolution might be circulated to eligible members.

1. Registered postal address.

2. Personally.

3. Print media e.g News paper

4. Electronically e.g email, website

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QUESTION 6a(i)

Q (i) Discuss three propositions of care, skill and diligence as enumerated in Re City Equitable Fire Insurance Company Ltd. (6 marks)
A

Solution


Preparations of care, skills and diligence as enumerator in Re City Equitable Five Insurance Company Ltd.

The judge formulated the following principles, rules or standards expected of a director. They include:

1. Directors must demonstrate a higher level of competence than could reasonably be expected from someone with their knowledge and experience.

2. Directors are required to keep an eye on the affairs of the company.

3. In the absence of doubt, the directors are entitled to presume that the officers of the company discharge their duties honestly. That if he is entitled to rely on the information provided by trusted employees of the company.

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QUESTION 6a(ii)

Q (ii) Highlight four statutory duties of a director according to the Companies Act. (4 marks)
A

Solution


Statutory duties of a director according to companies act.

1. Duty to act bonafide.

Directors are required to act in the best interests of the firm and in good faith. They must act honestly when using the authority that has been given to them.

2. Exercise powers for the proper purpose

Directors are required to use the powers granted to them for the specific reason for which they were granted.

3. Duty to exercise unfavoured discretions

Directors are expected to approach corporate matters with an open mind, so decisions should be made after careful consideration.

4. Duty to avoid conflict of interest

Directors have a duty to steer clear of conflicts of interest as fiduciaries. A director shall not, without the company's consent, position his or her interests in a situation where they will conflict with those of the firm.

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QUESTION 6b(i)

Q Specify three categories of members who might apply to the court for appointment of company inspectors to investigate the affairs of the company. (3 marks)
A

Solution


Categories of members who might apply to the court for appointment of a company inspector to investigate the affairs of the company.

1. The Attorney General.

2. The members.

3. The Company

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QUESTION 6b(ii)

Q (ii) Enumerate seven requirements for group financial statements. (7 marks)
A

Solution


Requirements for group financial statement.

1. At the end of the financial year, the directors of the holdings company might lay group accounts before A.G.M of the holding company.

2. The financial year of its subsidiary shall concede with the company's own financial year.

3. Group accounts must present a true and fair picture of the company's and its subsidiaries' profit and loss.

4. They should safeguard the interest of the creditors, investors and shareholders.

5. They should explain in details the companies' transactions.

6. At least two directors must sign the statement of financial position on the board's behalf.

7. They must be annexed by the auditor's report and director's report.

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QUESTION 7a(i)

Q Describe eight particulars of secretaries that are required to be contained in the company's register of secretaries. (8 marks)
A

Solution


Particulars of the secretaries contained in company's register of secretaries.

➦ If the secretary of a public company is a natural person, the company shall ensure that its register of secretaries contain the following particulars.

➢The name and any former name of the secretary.

➢The address of the secretary.

➦ If the secretary of a public company is a company or a firm the company shall ensure that its register of secretaries contains the following particulars

➢The name of the company.

➢The registered or principal office of the company or firm.

➢The legal form of the company or firm and the law by which it is governed.

➢In case of a company or a firm that is incorporated register in which it is recorded and its registration number in the register.

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QUESTION 7a(ii)

Q (ii) State two grounds for disqualification from being registered as a company secretary. (2 marks)
A

Solution


Grounds for disqualification from being registered as a company secretary.

1. If one has been convicted by a court of competent jurisdiction of an offence fraud or dishonesty.

2. If one is undischarged bankrupt.

3. If of unsound mind

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QUESTION 7b(i)

Q With reference to liquidation of a company, describe what a liquidator might do in case there is surplus after payment of company's debts provided in the winding up. (4 marks)
A

Solution


What a liquidator might do in case there is surplus after payment of company's debt provided in the winding up.

1. Distribute final dividend if any to members.

2. The balance if any is distributed between members.

3. Adjust the rights of contributories among themselves.

4. Make final return to contributions.

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QUESTION 7b(ii)

Q Explain three circumstances when a company will be deemed unable to pay its debts. (6 marks)
A

Solution


Circumstances when a company will be deemed unable to pay its debt.

1. When a creditor who is owed Ksh. 100,000 or more demands in writing that the debt be paid off and the company doesn't comply within 21 days, the creditor may choose to settle the debt or have it compounded to their satisfaction.

2. Where a judgement or decree against the company remains unsatisfied either wholly or in part.

3. where it is proved to the court's satisfaction that the company is unable to meet its debt obligations as they fall due and payable.

4. When it is established that a company's assets are worth less than its current and future liabilities combined.

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