MRL2601 EXAM PACK 2021/2022

MRL2601 EXAM PACK 2021/2022. QUESTION 1 1.1 Ann, Jack and Sam are three friends who wish to start their own publishing company. While driving one Sunday afternoon, Jack comes across the perfect office building. He wishes to purchase this building on behalf of the proposed company. Advise Jack what the requirements are that would need to be adhered to in terms of the Companies Act 71 of 2008 in order to conclude a valid and binding contract on the company’s behalf before its incorporation. Also list the different common law alternatives that Jack could consider instead. (12) In terms of section 21 of the Companies Act 71 of 2008, any person wishing to establish a company can enter into a contract with a third party on behalf of a company that is not yet formed. After that company has been formed, then the entered contract will be transferred to the company. In this case, as Jack wishes to purchase the building on behalf of the proposed company, he can make use of this section. In terms of section 21 of the Companies Act, the contract will be valid and binding if: it is entered by a person wishing to start a company on behalf of a company that does not exist yet. In this case Jack would be doing so. the contract is in writing. the board of the company approves and accepts the terms and conditions of the contract within a period of three months after its formation. In terms of common law, it is impossible for any person to enter into a contract on behalf of a company that does not exist yet. However, there are other alternatives available under common law Jack could consider. They are; (i) Cession and delegation (ii) Nomination (iii) Option (iv) Contract for the benefit of a third party 1.2 Woodinn (Pty) Ltd has two shareholders, Tom and Sue who each hold 50% of the issued share capital. Tom, Sue and Jack are appointed as the company’s directors. The Memorandum of Incorporation determines that Woodinn (Pty) Ltd’s main business is manufacturing furniture. In addition, it stipulates that Jack may conclude contracts not exceeding the value of R500 000 on the company’s behalf. For any contract exceeding this amount, Jack is required to get prior permission from the board of directors. The company was registered early in 2018. No annual general meeting has been held as yet. Answer the following questions with reference to the Companies Act 71 of 2008 and the facts provided above: 1.2.1 Jack buys a load of timber to the value of R2 million from Xander. Jack does not seek permission from the board of directors as required. Xander does not take the trouble to find out what the company’s Memorandum of Incorporation determines but does not suspect any irregularity in the agreement. Is the company bound to the transaction? (5) In terms of section 20(1)(a) of the Companies Act, even if the Memorandum of Incorporation of a company may restrict some powers on the legal capacity of the company, that will not invalidate any contracts concluded by the directors of the company. This technically means that any contract that is concluded contrary to the Memorandum of Incorporation by the directors of the company is valid. In this case Jack concludes a contract of R2 million with Xander (contrary to the R500 000 limit imposed by the Memorandum of Incorporation) without seeking permission from the board of directors. Consequently, this contract is still valid. Hence the company is bound to the transaction. 1.2.2 Is the company required to hold an annual general meeting? (3) “In terms of the Companies Act, only public companies have a statutory obligation to convene annual general meetings.” Other companies may do so voluntarily. Since Woodinin (Pty) Ltd is a private company, it is thus not required to hold an annual general meeting, it may do so voluntarily. 1.2.3 What matters must be discussed at a company’s annual general meeting? (4) In term of section 61(8) of the companies Act the following matters must be discussed at a company’s annual general meeting: presentation of the directors’ report presentation of audited financial statements for the immediately preceding financial year presentation of an audit committee report election of directors to the extent required by the Companies Act or the company’s Memorandum of Incorporation appointment of an auditor for the following financial year appointment of an audit committee any matter raised by shareholders 1.3 List four (4) grounds on which an application can be brought against a director for an order declaring him or her delinquent in terms of section 162 of the Companies Act 71 of 2008. (4) In terms of section 162(5) of the Companies Act 71 of 2008, the grounds for delinquency order are that the person: served as a director while disqualified, or acted as a director while under probation in a manner that contravened the order of probation grossly abused the position of director took personal advantage of information or an opportunity, in conflict with the provisions of section 76(2)(a) of the Act 1.4 Figozo Ltd showed an increase in profits for the 2020 financial year. At a board meeting, the directors decide that dividends should be paid out to the company’s shareholders. Indicate what the requirements are in terms of the Companies Act 71 of 2008 that must be adhered to before the dividends may be declared and paid. (7) In terms of section 1 of the companies Act, a distribution includes among others, a direct or indirect transfer of money or any other property by a company to its shareholders in the form of a dividend. “However, usually dividends are paid from the profits of a company.” This is what Figozo Ltd is applying in this case. Section 46 of the Companies Act sets the following requirements before dividends may be declared and paid. Dividends may be paid if: the distribution is in accordance with an existing legal obligation of the company, or a court order; or the distribution is authorised by the board of directors of the company it reasonably appears that the company will satisfy the solvency and liquidity test immediately after the distribution; and the board resolution acknowledges that the board has applied the solvency and liquidity test and reasonably concluded that the company will satisfy the test immediately after completing the proposed distribution Solvency test shorty means that the company’s assets value is equal to or greater than the company’s debts. Liquidity test shortly refers the company’s ability to pay its debts on time. QUESTION 2 2.1 Mr Schmidt’s (a German citizen), Mr Ells (an English citizen) and Mr Dube (a South African citizen) are the only shareholders of West Meets South (Pty) Ltd, a company registered in South Africa with its head office located in Sandton. Due to the time and financial costs involved in travelling from Europe to South Africa each time there is a meeting, especially less important meetings, Mr Schmidt’s and Mr Ells ask you for advice whether or not it is possible for resolutions of shareholders to be passed without holding a general meeting of shareholders. Advise them. (10) Under common law, shareholders resolutions can be passed without holding a general meeting by a way of unanimous assent. In terms of this rule valid decisions may be taken without a meeting being held, “provided that all the members are fully aware of the facts and all of them have assented thereto…” It is not mandatory that this is in writing. In Gohlke and Schneider v Westies Minerals (Pty) Ltd it was held that “members may validly appoint a director to the board without any formal meeting being held, because there was evidence of their unanimous consent.” In this case Mr Schmidt’s and Mr Ells may use this option in order to save on financial cost. Section 60 of the Companies Acts provides another option. A resolution can be submitted to the shareholders who are entitled to vote to adopt it in writing. In that way there would not be any need to hold a meeting if the shareholders adopt the resolution. What is required is that the majority of the shareholders agrees in writing. Once this is done, then that resolution will be taken as valid, without actually physically holding a meeting. Hence Mr Schmitds and Mr Ells may also use this statutory option. However, section 60 does not apply in case of an annual general meeting. 2.2 Cornelius, a shareholder and director of Axxaro (Pty) Ltd, agrees to sell his shares in the company to James for R40 000. In order to enable James to acquire the shares, Axxaro (Pty) Ltd agrees to purchase a second-hand car from James for the sum of R40 000. Explain, with reference to case law, whether or not this transaction qualifies as financial assistance. (10) In Lipschitz v UDC Bank Ltd, it was held that the transaction must be assessed in two phases: First, it must be determined if there was financial assistance or not. In Gradwell (Pty) Ltd v Rostra Printers Ltd, the “impoverishment test” was formulated to assist in determining whether financial assistance was provided. In terms of the impoverishment test, one considers whether a transaction will have the effect of leaving the company poorer. If so, then financial