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Law Ii Question Paper

Law Ii

Course:Cpa Part Ii

Exam Year:2004

KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD
CPA PART II
LAW II
JUNE 2004 TIME: 3 HOURS
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ANSWER ANY FIVE QUESTIONS. All Question have equal marks

QUESTION ONE
(a)The principle of corporate legal personality is an important and fundamental aspect of company law.Discuss this statement citing relevant decided cases. (6 marks)

(b)Ropoff Company Ltd., a private limited company, has been under inquiry on alleged fraudulent financial transactions. The officers of the company under suspicion have denied any association with the company.At the inquiry it was suggested that the corporate veil be lifted and the realities of the company in question be looked into.
Explain the instances when the veil of incorporation may be lifted. (14 marks)

QUESTION TWO
a)“The rule in the case of Ashbury Railway Carriage Vs. Riche (1875) stated that an act has not been authorized by the objects clause of a company’s Memorandum of Association in ultra vires to the company and the members cannot ratify it.”
Discuss. (8 marks)

b)Explain the various ways in which persons intending to form a company may avoid personal liability on contracts they make on behalf of the proposed company.(6 marks)

c)It has been held that the memorandum and Articles of Association of a company shall, when registered, bind the company and the members to the same extent as if the documents has been signed and sealed by each member and contained covenants an the part of each member to observe all the provisions of the memorandum and the articles.
Explain the effect of this provision on the relationship between shareholders and their company and between shareholders themselves. (6 marks)

QUESTION THREE
(a)Outline the qualified minority rights of a member which can only be enforced by the joint efforts of a membership group as defined under the Companies Act.(10 marks)

(b)The Articles of X Company Ltd provide that every member is entitled to one vote for each of the first ten shares and thereafter to one vote for each additional ten shares.Jane owns one hundred shares. She transfers ten of her shares to her nine nominees to increase her voting powering general meetings. Joseph, who is the chairman at the general meeting, refuses to accept the votes of Jane’s nominees.
Advise Jane on the validity of the Chairman’s action and her right as a member.

QUESTION FOUR
(a)Explain the category of persons to whom an auditor owes a duty of care in the preparation of his audit report.

(b)Enumerate the rights accorded to an auditor to enable him perform his duties as the auditor of a company.

(c)In Hedley Byrne V. Heller (1964) the court held that provided that it could be established that a special relationship existed between parties it was possible for a person to sue for having suffered a financial loss even though no contractual relationship existed between the parties.Highlight the factors that should be established in order for a third party to successfully sue an auditor for professional negligence. (8 marks)

QUESTION FIVE
(a)Explain the circumstances when a dividend may become payable and enforceable as a debt against the company.

(b)Give reasons why a company may seek to control the funds from which dividends are paid.

(c)Explain the effect of the failure by the company to register a charge of a debenture.

QUESTION SIX
(a)Outline the provisions of the Companies Act, relating to civil and criminal liability in respect of non compliance with provisions relating to a prospectus on the Company and the directors.

(b)Makanga, Kamore and Gatweku are directors of Wakwetu Co. Ltd. The company is in dire need of capital to fund its expansion.Advise them on the methods available for raising capital from the public.

(c)State the circumstances under which a Company can pay an underwriting commission.

QUESTION SEVEN
The Board of Borrowers Company Ltd. has applied for a loan from Uchumi Commercial Bank. The Bank has advised that any loan will be conditional upon the bank being granted security in the form of a combination of fixed and floating charges on the companies assets. The bank has also advised Borrowers Company Ltd. that the charges will be contained in the bank’s standard form debenture document. This contains a “negative pledge clause” and a term which enables the bank to place the company in administrative receivership in the event of default by the company.

(a)(i)In numbered paragraphs distinguish between a fixed and a floating charge.
(6 marks)
(ii)What are the disadvantages of a floating charge to the bank? (4 marks)

(b)Explain the meaning of a “negative pledge” clause. (4 marks)

(c)Explain how administrative receivership differs from liquidation. (6 marks)

QUESTION EIGHT
Section 40 (1) of the Companies Act requires a prospectus to contain the matters and reports specified in Part I and II of the Third Schedule.Explain these matters as outlined in the Third Schedule.

Law Ii Question Paper

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