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No of Questions - 06

SCHOOL OF ACCOUNTING AND BUSINESS

BSc. (APPLIED ACCOUNTING) GENERAL / SPECIAL DEGREE PROGRAMME

YEAR II SEMESTER II INTAKE XI WE (WEEKEND GROUP)

END SEMESTER EXAMINATION –SEPTEMBER/OCTOBER 2021

LAW 20225 Corporate Law

Date : 09th October 2021

Time : 09.30am – 11.30am

Duration : Two (02) Hours

Instructions to Candidates

• This is an online open book examination. You are supposed to use your own paper
materials as the answer script.
• This paper consists of six questions. ANSWER ONLY FOUR (04) questions.
• The total marks for the paper is 100.
• The marks for each question are shown in brackets.
• Answers should be written neatly and legibly.
Question No. 01

“Sweet and Spicy” is a private limited company incorporated under the Companies Act No 07 of
2007.

Mr. Sugar Mrs. Chillie and Mr. Sour are directors of the company. In the process of managing the
company the following things are revealed:

- Mr. Sugar has made a calculation errors and this has translated into the approval given to the
report confirming that the company satisfied the solvency test. Therefore even though in
reality the company was bankrupt they have continued business as usual.

- Mr. Sugar and Mrs. Chillie are married. They have set up a business called “Sweet Treats”
using the same model as “Sweet and Spicy” and they have used some of the products that
“Sweet and Spicy” was using through the contacts they have set up with the suppliers. They
have not revealed about their business to any of the other directors. They continued to vote
on matters affecting suppliers even though both of them were using the same suppliers for
their business. They have also not indicated this in the interest registry.

- Mr. Sour has applied for a loan. The articles of the company states, before any application
for loan or financial commitment above Rs. 10,000,000 is made, it is necessary to obtain the
approval of the board of directors. Mr. Sour has made the application for a loan of Rs 20,
000, 000 without presenting it to the board.

- All three directors have used the company materials and equipment in their personal business
without indicating this to the company.

- Mr. Sour lacks knowledge and experience in handling financial matters, however he fails to
seek advice or information from the capable professionals in the company regarding the
information contained in the Annual Report and Audit Reports and the financial statements
of the company and blindly approves everything.

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 I. Discuss the Directors Duties breached by Mr. Sugar Mrs. Chillie and Mr. Sour.
(15 Marks)

II. Discuss the qualifications needed to be appointed as a director under the Companies Act No
07 of 2007. Mention how a company can introduce additional qualifications.
(10 Marks)
(Total 25 Marks)

Question No. 02

“The Auditor is a watchdog, not a bloodhound”

Lord Justice Lopes in the case Re: Kingston Cotton Mills Co. (No 2)(1896).

I. Explain the main duties of an auditor in light of above statement.

(10 Marks)

II. Auditors are employees of a company. However, they enjoy special rights and duties, which
are not available for other employees. An auditor is a person who makes an independent
report to a company's members
Explain how law protects independence of auditors with provisions from the Companies Act.
(10 Marks)

III. What would you suggest to further improve the independency of auditors?
(05 Marks)
(Total 25 Marks)

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 Question No. 03

Sirisena and Nanadasena decide to start a private medical college in Sri Lanka with the purpose
of promoting medical education in the country with the new technology.as they expect it to grow
into a university they want to formalize the process and incorporate it under the Companies Act
No,07 of 2007.

I. Explain with reference to the types of companies the best business structure suited for their
purpose.
(08 Marks)

II. Explain the procedure to incorporate a Limited Company online with reference to the required
documents.
(08 Marks)

III. “Private limited companies should be granted more benefits and privileges by law.”
Discuss whether you agree with the above statement.
(09 Marks)
(Total 25 Marks)

Question No. 04

Capital maintenance is a fundamental principle of Company Law. Before 2007 capital was a part
of memorandum and Companies had to go to court to reduce its capital. However 2007 Act provide
that subject to the provisions of companies Act companies now can reduce its stated capital without
court intervention. The reduction of capital is done by companies for numerous reasons.

I. Explain weather companies reduce its stated capital

(08 Marks)

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 II. Explain the procedure to reduce ‘Stated Capital.’
(04 Marks)

III. The Directors of ADIDA PLC are proposing to declare a dividend payment to its shareholders.
However, the directors are hesitant whether the company would pass the solvency test after the
said dividend is declared. They have approached you with an extract of the statement of
financial position of the company which shows the position after accounting for the proposed
dividend.

Statement of Financial Position of ADIDA PLC as at 31/12/2020.

Property, Plant & Equipment 50,000

Current Assets 30,000
80,000
Stated Capital 40,000
Retained Earnings 6,000
Profit for the year 4,000 10,000
Non-current liabilities 10,000
Current liabilities 20,000
80,000

*Presume that the company can pay its debts as and when they fall due.

a) Perform the Solvency Test as per the provisions of the Companies Act on the data given
on the Statement of Financial Position and inform the Directors as to whether the company
can satisfy the Solvency Test, if proposed dividend is declared.
(07 Marks)

b) Write a legal advice for directors of the company focusing importance of the Solvency
Test.
(06 Marks)
(Total 25 Marks)

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Question No. 05

Compare and Contrast the following pairs,

(a) Private Company and Guarantee Company

(b) Corporate Governance and directors duties
(c) Preferential shares and Debentures
(d) Special Resolution and Ordinary Resolution
(e) winding –up and bankruptcy
(05 Marks each)
(Total 25 Marks)

Question No. 06

Generally companies are run and controlled by majority shareholders. This is known as Majority
rule. However, There are number of protections provides by the Companies Act No.07 of 2007 for
the benefit of minor shareholders. Discuss Minority protections available under the Companies
Act.
(Total 25 Marks)