AUE 1601 Exam pack .

AUE 1601 Exam pack . AUE1601 - Legal Aspects In Accountancy. Circumstances when an individual will be related to a juristic person include the following,  If the individual indirectly controls the juristic person  If the individual directly controls the juristic person Relationship between AAA and XYZ; Mr Xolani (the marketing director of AAA Hospitals Ltd) has a son who owns XYZ Motors. 1.2) Public Companies Private Companies 1 Listed on the Johnsonburg stock of Exchange Not listed 2 Minimum of three directors Minimum of one director 3 Ends with Ltd Ends with (Pty) Ltd 4 Mandated to appoint external auditors Not mandated but may appoint 5 Mandated to appoint a company’s secretary Not mandated but may appoint Only one difference was enough for two marks 1.3) Reckless trading means managing the business with gross negligence, with intent to defraud any person or for any fraudulent purpose; or trade under insolvent circumstances. Yes the purchase of vehicles will constitute reckless trading because the company is insolvent as its noncurrent liabilities () are greater than its non-current assets (). 1.4)  Must disclose the interests before the meeting  Must disclose to the meeting any material information relating to the matter  May disclose any observations relating to the matter if requested to do so by other directors  If present at the meeting, must leave the meeting immediately after making disclosures  Must not take part in the consideration of the matter (must not vote)  Must not execute any document on behalf of the company.  Must be regarded as present at the meeting even though he will be absent for the purpose of determining whether sufficient directors are present to constitute the meeting. 1.5) The purchase is illegal. Reasons: The company is not satisfying solvency and liquidity tests. - The company is insolvent as its non-current liabilities (R) are greater than its noncurrent assets (R). - The company does not meet liquidity test as its current assets (R) are less than current liabilities (R). The decision to purchase vehicles was made in the presence of a director (Mr Xolani) who has personal financial interests which is non-compliance in terms of the company’s act. There is no special resolution passed by shareholders to approve the directors to use the company’s vehicles. 1.6) Ineligible - An emancipated minor - A juristic person - A person not meeting the requirements of the MOI Disqualified - Prohibited by the court order - Unrehabilitated insolvent - Declared delinquent by a court order 1.7) The most important statutory duties that directors owe to their company are to:  Act in good faith and for a proper purpose  Act in the best interests of the company  Avoid using their position as director or using corporate information to their own advantage or knowingly cause harm to the company or its subsidiary  Convey the company information that may be of importance to the company  Exercise reasonable care, skill and diligence in the performance of their duties  Declare any personal financial interest in a matter in which the company is interested Only two points from any of the above were required. 2.1) Public interest score Aspect Quantity /Amount Public interest scores Employees 40 40 Turnover R169.5 million 169.5 Third party liabilities R201 million 201 Shareholders 5 5 Total scores 415.5= 416 The company must be audited and not independently reviewed because its public interest scores are greater than 350. 3.1) Individual Eligible or Not eligible Reason OHM Inc eligible At least one employee or partner must be the resident of SA and must have required knowledge and experience Mr Opperman Not eligible He was disqualified from acting as a director when declared an unrehabilitated insolvent. Mr Tetto eligible Five years have lapsed after committing a criminal offense. He is a resident of SA. 4.1) Requirements to be met to issue additional shares.  The board of directors has power to determine the consideration of additional shares.  There must be director’s resolution if the shares are issued to existing shareholders.  Notice and quorum requirements must be adhered to regarding the board meeting and resolution  If the board of director’s issue shares above the authorized shares, they must obtain a special resolution of shareholders.  A special resolution of shareholders must increase the authorized shares from 150 000 shares to 170 000 shares or above  The MOI must be amended in terms of authorized shares before or after the issue of additional shares 2 4.2) Shares to be issued to Living  After issuing shares to Living, all subsidiaries must not hold more than 10% of the shares of AAA Ltd. 30 000 shares/170 000 shares x 100%/1 = 17.65%. For this reason, the issue will be illegal in terms of the company’s act.  If the shares are issued to the directors of Living ,there must be a special resolution of shareholders.  If the shares are issued to the directors of Living , there is need for directors resolution.  Meeting and quorum requirements must be met  The total number of shares to be bought by Living must not allow it to have voting rights. 4.3) Shares to be issued to Mr Yaseen  Mr Yaseen is a director of AAA Ltd and therefore the board of directors does not have power to issue additional shares to directors.  The board of directors must seek for a special resolution of shareholders before issuing shares to Mr Yaseen.  When shareholders vote for the issue, meeting and quorum requirements must be met.  If the board of directors issue shares without an approval of shareholders, the issue will be considered illegal. 4.4) Consideration of the shares (section 40)  The board of the company may issue authorized shares only for adequate consideration to the company, as determined by the board.  The board must determine the consideration for which and terms and conditions of the issue.  There is no basis to challenge the consideration.  The name of the holder must be entered in the company’s securities register after the shares are fully paid. 5.1) The sale of non-current assets worth 85 million (83.33%) out of a total of 102 million constitutes a sale of greater part of assets because the company will be left with a percentage of 16.67%. The following are the requirements which are not found ,  The notice of a shareholder’s meeting to consider a resolution to approve the special resolution in the first point must be made .  The special resolution must be accompanied by a written summary of the precise terms of director’s explanation  A special resolution of the shareholders was adopted by the majority, in accordance with section 115.  The company has satisfied all other requirements set out in section 115, to the extent that those requirements are applicable to such disposal by that company since ‘directors explanation showed that the decision would not have any negative impact on turnover.  Shareholders’ meeting requirements must be met (quorum must have 25% and above).  Terms and conditions must be fair and reasonable to the company  Written summary of the transaction 6.1) Circumstances are,  Faces a financial crisis, but  There must still be a reasonable chance that the company can be rescued 6.2) General powers and duites of the business rescue practioner are ;  consult the creditors, other affected persons and the management of the company  prepare a business rescue plan for consideration  Do a meeting to determine the future of the company  Inform parties present at the meeting whether there may be a reasonable prospect of the company being rescued. 7.1) In terms of the company’s act, pre-incorporation contracts:  Must be in writing  After incorporation the directors have three months to ratify or reject the contract  After three months have expired the contract automatically ratified  If the company is not incorporated, the person who entered into the contract will be personally liable  If the contract is rejected, the person who entered into the contract will be liable but may also claim any benefits already received from the company.  If a company rejects an agreement, a person who bears any liability for that reject agreement or action may assert a claim against the company for any benefits it has received, or is entitled to receive, in terms of the agreement or action. OCTOBER NOVEMBER 2017 QUESTION 1 1.1)It is not legal because the company’s act (Section 48 (2(b)(i) states that all the subsidiaries of the company may not, in aggregate, hold more than 10% of the shares of the company. Since Mats is not the only subsidiary of Arms, aggregation of its shares and a third party [ (10 000+5000)/115 000] 1 x 100%) = 13,04 % which exceeds 10% 1.2.1) List six of the requirements of the standards of director’s conduct in terms of section 76 of the company’s Act (6) Answer The most important statutory duties that directors owe to their company are to:  Act in good faith and for a proper purpose  Act in the best interests of the company  Avoid using their position as director or using corporate information to their own advantage or knowingly cause harm to the company or its subsidiary  Convey the company information that may be of importance to the company  Exercise reasonable care, skill and diligence in the performance of their duties  Declare any personal financial interest in a matter in which the company is interested (refer to sec 75). 1.2.2) In terms of section 71 of the company’s Act, the following must be considered when removing a director from his position (7) Answer  Ordinary resolution of shareholders (unless stated otherwise in the MOI)  Director must be given notice  Notice must include reference to the resolution to remove him/her  Director must be afforded opportunity to make a presentation However, if a shareholder or a director alleges that a director  Became ineligible or disqualified  Incapacitated to perform his duties  Neglected his duties or became derelict as a director (abandoned his duties) Then…  The board of directors may vote to remove the director  The director in question may not vote  Director must be given notice  Notice must include reference to the resolution to remove him/her  Director must be afforded opportunity to make a presentation NB! This does not apply to companies with fewer than 3 directors! 1.2.3) Answer He was not legally removed because of the following reasons, The reason for his removal is not specified as given in the case study. This can only happen if according to the company’s act David, Richard or Peter alleges that Andre Akita  Became ineligible or disqualified  Incapacitated to perform his duties  Neglected his duties or became derelict as a director (abandoned his duties) Furthermore, there is no evidence of the board of directors voting for the removal of Andre Akita Although the directors mentioned that they were going to formally advise him, their notice was not going to include reference to the resolution to remove him. And finally, Andre Akita was not afforded opportunity to make a presentation 1.3) 1.3.1) Describe the company’s Act requirements, in terms of section 44, that need to be compiled with in order to provide financial assistance for the subscription of its shares (6) Answer  It should be approved by the board (directors’ resolution)  Any restrictions in the company’s MOI must be complied with; a special resolution should have been passed within the previous two years, which approved such assistance either for the specific recipient or generally for a category of potential recipients, and the particular recipient(s) should fall within this category  The board should be satisfied that the solvency and liquidity tests have been satisfied immediately after providing the financial assistance  The board should be satisfied that the terms under which the financial assistance is to be given are fair and reasonable to the company  The board must ensure that if the company’s MOI includes any conditions or restrictions regarding the giving of financial assistance, they must have been complied. 1.3.2) It is not legal, Reasons  It was not approved by the board of directors but was rather approved by one director David Doberman.  Liquidity tests are not satisfied by directors before and after providing financial assistance. Although solvency tests are satisfied, liquidity test has to be satisfied again. Solvency Assets fairly valued =/ liabilities fairly valued, that is (34 000 32 000) Liquidity Test -A company can pay its debts as they become due in the normal course of business for a period of 12 months. Current assets fairly valued=/ current liabilities fairly valued.  There is no evidence that terms and conditions of the loan meets company’s MOI conditions or restrictions. However, since the loan interest rate of 13,5% exceeds a prime lending rate of 10 %, board may be satisfied that the terms under which the financial assistance is to be given are fair and reasonable to the company which can make it legally permissible 1.4) 1.4.1) Answer He will be offered protection as a whistle blower because he is acting in good faith and David a director has caused environmental damage Type of protection offered to whistle blower - Job security - Life protection 1.4.2) The requirements that must be met in order to put Peter Pit-bull on probation include the following, Section 162 (7) - When Peter was present at a meeting and failed to vote against a resolution despite the inability of the company to satisfy the solvency and liquidity test, contrary to this test. - When Peter acted in a manner materially inconsistent with the duties of a director David Doberman is not permitted to put Peter under probation because he is not allowed by the company’s Act to punish Peter for whistle-blowing. Question 2 2.1) 2.1.1) Describe the Company’s Act requirements that need to be considered when entering into a pre-incorporation contract in the name of a company. (6) Answer In terms of the company’s act, pre-incorporation contracts:  Must be in writing  After incorporation the directors have three months to ratify or reject the contract  After three months have expired the contract automatically ratified  If the company is not incorporated, the person who entered into the contract will be personally liable  If the contract is rejected, the person who entered into the contract will be liable but may also claim any benefits already received from the company.  If a company rejects an agreement, a person who bears any liability for that reject agreement or action may assert a claim against the company for any benefits it has received, or is entitled to receive, in terms of the agreement or action 2.1.2)2.1.2)  If the board rejected before three months, Mr. Fever will be liable for the consequences in terms of the company’s act. However, if the board rejected the contract after three months, the contract would have automatically ratified.  Although Mr. Fever will be liable, he may also claim any benefits already received by the company from deliveries made before rejection of the contract.  The decision by the board of directors to judge that Regal Robusta became unreliable in terms of deliveries must be clear that an informed person or reasonable person can make the same judgement, otherwise the contract would not be rejected and Mr Fever may not be reliable. 2.2) 2.2.1) Answer  Must be resident of RSA  Must have required knowledge and experience 2.2.2) It is not legal. Reasons:  He is not a resident of Republic of South Africa