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CPA
Intermediate Leval
Company Law November 2018
Suggested Solutions

Company Law
Revision Kit

QUESTION 1(a)

Q Analyse the legal principles applicable in the above case and advise Fanika Ltd (10 marks)
A

Solution


The legal principle is the pre-incorporation contract validity.

Advice.

(i). Before incorporation, a company has no legal existence, and it cannot contract or have legal agents.

(ii). At common law, Pre-incorporation contract cannot be ratified by the company after incorporation because the agreement was made before the company was formed.

(iii). At common law, If the firm enters into a new contract that is identical to the pre-incorporation agreement after becoming incorporated, the pre-incorporation agreement is still enforceable by or against the company.

(iv). In common law, When a person claims to serve as an agent but the legal standard is not in place at the time, they are personally accountable for the contract.

(v). At common law, a contract purportedly entered into by a non-existed person is void because the contract must have at least two persons.

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QUESTION 1(b)

Q Discuss the doctrine of ultra vires in relation to the memorandum of association ofa limited company. (4 marks)
A

Solution


Ultra vires literally means beyond the powers. This is the rule of capacity which restricts the transaction of the company to the objects clause and those reasonably incidental to their attainment.

Effects of the doctrine of ultra vires.

i. A transaction is ultra vires if it is beyond the powers of the company.

ii. It means the company had no capacity to enter into the transaction.

iii. The transactions are unenforceable under law.

iv. Such transaction are null and void

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QUESTION 1(c)

Q Explain to a new shareholder of a central depository account three circumstances in which a central depository securities account might be suspended. (6 marks)
A

Solution


Circumstances in which a central depository securities account might be suspended.

1. CDS is served with a court order to suspend an account.

2. Request for suspension is received from a depositor.

3. In case of individual depositor, the second exchange is notified that the depositor has died.

4. A cabinate directive for the sake of national security

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QUESTION 2(a)

Q Summarise the exceptions to the above rule.(10 marks)
A

Solution


(i). Unless the company is, for the time being, private.

(ii). Unless the holding company serves as the director and the leading company as the subsidiary.

(iii). The company's regular business activities include lending money and providing guarantees, and these services are provided as part of those activities.

(iv). The funds are required to cover expenses incurred or anticipated to be incurred by the directors for company objectives or to allow him to effectively carry out his responsibilities as an employee of the company.

(v). The payment must be approved at the general meeting during which particulars of the payment including the amount are to be disclosed

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QUESTION 2(b)

Q Summarise six circumstances under which a company might pav interest out of capital (6 marks)
A

Solution


Circumstances under which a company may pay interest out of capital.

The general rule is that interest and dividend are paid out of profit but they may be paid out of capital.

(i). If permitted by a special resolution or an article.

(ii). If the registrar sanctions the payment

(iii). The company is required to provide a guarantee for the payment of the costs.

(iv). They shouldn't be interpreted as a reduction of the amount paid up on the shares in respect of which they are paid.

(v). Should not exceed 5% or such other rate as the cabinate may by notification in the official gazette direct.

(vi). The payment shall be made only for such period as may be determined by the registrar

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QUESTION 2(c)

Q Explain the meaning of the term.

(i). insider dealing". (2 marks)

(ii).State two persons who might engage in insider dealings. (2 marks)
A

Solution


(i). insider trading.

This is the acquisition or selling of company stocks on behalf of or by someone whose connection to the company makes it likely that he will have access to important information about the firm that is not publicly known.

(ii). Persons who might engage in insider dealings.

(1) Directors of the company.
(2) Shareholders of the company.
(3) Close friends and relatives to directors of the company

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QUESTION 3(a)

Q Explain the distinction between "statutory companies" and "non-statutory companies", (4 marks)
A

Solution


Distinction between statutory companies and non-statutory companies.

Statutory companies are companies created by an act of parliament.

They are managed by the government and it's the government to appoint its management structure.

They include parastatals and public corporation.

Non-statutory companies are companies other than statutory companies.

They include registered companies, unlimited companies, limited companies, chartered companies, corporate sole and corporate aggregate.

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QUESTION 3(b)

Q Describe four reasons why a court in exercising its inherent jurisdiction for the sake of justice might disregard the principle of legal personality. (8 marks)
A

Solution


Why the court may disregard the principle of legal personality.

(i). Fraud or improper conduct - Courts lift the veil of incorporation to identify individuals using the body corporate to perpetuate fraud or evade existing legal obligations.

(ii). Ratification of corporate Acts - judicial authority have shown that whenever the general meeting ratifies an abuse of power by director the transaction becomes valid contract of the company.

(iii). Group enterprise - case law shows that courts have qualified the rule in Solomon's "case by holding that a company and its subsidiary are one for employment purposes.

(iv). Determination of company residence - A company's residence is the country in which its affairs are controlled and managed.

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QUESTION 3c(i)

Q Outline four undertakings that would amount to promotional acts of a company during its formation. (4 marks)
A

Solution


➢ Preparation of the Memorandum and Articles of the proposed company.

➢ Paying the preliminary expenses etc.

➢ Preparation of the prospectus.

➢ Negotiating the preliminary contracts.

➢ The appointment of the first directors.

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QUESTION 3c(ii)

Q Explain four consequential attributes that flow from incorporation of unincorporated associations. (4 marks)
A

Solution


Consequential attributes that flow from incorporation of unincorporated association.

(i). Capacity to own property.

(ii). Limited liability.

(iii). Can sue and be sued

(iv). Capacity to contract.

(v). Legal personality.

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QUESTION 4(a)

Q Explain four rights of creditors in winding up proceedings.(8 marks)
A

Solution


Rights of a creditor during winding up proceedings.

(i). To pass the resolution for voluntary winding up.

(ii). To appoint a committee of inspection.

(iii). To nominate a liquidator.

(iv). Right to receive from the directors a full statement including list of the creditors.

(v). Right to repayment of their money

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QUESTION 4(b)

Q Describe the manner of service of summons and notices upon foreign companies. (6 marks)
A

Solution


The manner of service of summons and notices upon foreign companies.

1. Authorised representative.

2. Registered post.

3. Principal of file.

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QUESTION 4(c)

Q Outline six benefits of corporate restructuring to a company. (6 marks)
A

Solution


Benefits of corporate restructuring to a company.

(i). To re-organize the company's capital structure.

(ii). To negotiate with the business's creditors.

(iii). It does prevent company from being wound up

(iv). To overcome the company's financial challenges.

(vi). To expand the goals of the company.

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QUESTION 5(a)

Q With reference to the types of companies, summarise three provisions relating to the liabilities of the members of a company. (6 marks)
A

Solution


Provision relating to the liabilities of the members of the company.

(i). Companies limited by share - they are companies having the liability by the memorandum to the amount if any unpaid on the share held beyond which the members are not liable.

(ii). Companies limited by guarantee - they are companies having the liabilities of the members limited by the memorandum to the amount which they have undertaken to contribute to the assets of the company in the event of it being wound up while they are still members or one year of cessation of membership.

(iii). Unlimited by companies - these are companies not having the liability of their members limited by the memorandum.

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QUESTION 5b(i)

Q Explain three types of misrepresentation.(3 marks)
A

Solution


Types of misrepresentation.

(a). Innocent misrepresentation - is a false statement of a substantial fact made by the defendant, who was not aware that the statement was false when the contract was signed. Rescission or cancellation of the contract is typically the appropriate course of action in this case.(The company was the only one with such kind of seeds)(The seeds could yield 20bags while in real sence only 5bags)

(b). Fraudulent misrepresentation - is a claim that the defendant made with knowledge that it was untrue or carelessly in order to persuade the other party to sign a contract. The harmed party has the right to demand that the contract be void and compensation from the defendant.(The seeds could thrive in arid land which is false)

(c). Negligent misrepresentation - is a claim that the defendant failed to make any effort to confirm was accurate before signing a contract. This goes against the idea of "reasonable care" that a party is required to exercise before making an agreement. Contract revocation and maybe financial compensation are the remedies for negligent misrepresentation.(Saulo Mpoa did not read the prospectus)

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QUESTION 5b(ii)

Q Explain five elements of misrepresentation.(5 marks)
A

Solution


Elements of misrepresentation.

(a) The statement was false in material particular.

(b) The statement was more than a mere sales talk.

(c) The statement was one of fact and not opinion.

(d) The statement was intended to be acted upon by the person to whom it was made.

(e) The false statement was innocently, fraudulently and negligently made..

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QUESTION 5b(iii)

Q Advise Saulo, Baraka and Sadiki on possible action against the company. (6 marks)
A

Solution


(a) Advice to Saulo Mpoa is that since he did not read the prospectus which he was entitled to read and understand before subscribing for the shares he has a burden to prove that he was not negligent.

(b) Advice to Baraka is that he cannot prove that the statement was materially false and it was a fraudulent.

(c) Advice to Sadiki is that he must prove that he was innocent and negligent also he must prove that the statement was one fact and not opinion and it was meant to be acted upon by those it was intended to

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QUESTION 6a

Q In the context of company accounts, audit and inspection, highlight six individuals to whom the court might provide a copy of the inspector's report. (6 marks)
A

Solution


Individuals to whom the court might provide a copy of the inspection report.

1. The registrar of companies.

2. The company being investigated.

3. Corporate body being dealt in the report.

4. Applicant for investigation

5. Share holders

6. Creditors

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QUESTION 6b(i)

Q Highlight six types of company charges which require registration as outlined in the Companies Act. (6 marks)
A

Solution


Types of company charges which require registration.

1. Floating charges.

2. Fixed charges.

3. A charge on mortgage.

4. A charge on uncalled share capital.

5. A charge on book debt of the company

6. A charge in a strip of shares

7. A charge in goodwill, patent, license and trademark.

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QUESTION 6b(ii)

Q Explain four disadvantages of a floating charge to a debenture holder. (8 marks)
A

Solution


Disadvantages of a floating charge to the debenture holder.

1. Since the company keeps selling and buying stock, the security's value is still uncertain.

2. A fixed charge created subsequently to a floating charge has priority in the satisfaction of the claim .

3. Other interest have satisfaction of claim.

4. Any floating charges generated within the six months prior to the start of the winding are considered fraudulent and void.

5. A floating charge created within 12 months before the commencement of winding up is invalid unless it is proved that the company was solvent immediately after its creation

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QUESTION 7(a)

Q With reference to the case of National Dwelling Society Vs Sykes, enumerate five duties and five powers of the Chairman of a general meeting of a company. (10 marks)
A

Solution


Duties and powers of the chairman of a general meeting.

Duties.

1. To ensure everyone in the meeting is acting in an orderly manner.

2. He needs to familiarize himself with the meeting's agenda.

3. He must highlight issues for discussion by the meeting.

4. He must be certain that the meeting is duly constituted.

5. Ensure that the minutes of the meeting are kept.

6. Conduct voting by show of hands and pull.

7. Sign the minutes of the meeting.

Powers.

1. To call the meeting into order.

2. To determine who speaks and for how long.

3. To demand voting by pull.

4. To declare the outcome of the voting.

5. Order removal of any person

6. To adjourn the meeting in events or disorder.

7. To close the meeting at appropriate time.

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QUESTION 7(b)

Q Advise Bidii, Mapesa and Shinda on the legal issue relating to the proposed issue of shares to Zindua and payments thereon. (6 marks)
A

Solution


1. The parties must enter into agreement to buy and sell the shares.

2. They must execute the proper instrument of transfer.

3. The instruments of transfer are presented for certification of the transfer..

4. The share certificate is issued for stamping.

5. The certified instrument is presented to the company for registration.

6. On registration, the share certification is issued

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QUESTION 7(c)

Q Explain the benefits of including a negative pledge clause in a floating charge to the holder.
A

Solution


Benefits of including a negative pledge clause in a floating charge to the holder.

1. Negative clause is a clause inserted to the debenture stating that the business must not establish a charge that comes before the existing one.

2. It ensures that such charge has priority in satisfaction of the claim.

3. Ensures that the value of the security remains unknown

4. Ensures that a fixed charge created subsequently to the floating charge has priority in satisfaction of claims

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