ACCA F4 2008 Singapore Answers

Answers

Fundamentals Level – Skills Module, Paper F4 (SGP)Corporate and Business Law (Singapore) June 2008 Answers

1 (a) Statutes are laws passed by the legislative body created by the Constitution. In Singapore, that legislative body is theParliament of Singapore. Statutes start out as Bills that have to be passed by Parliament and assented to by the President.With the President’s assent, a Bill becomes an Act of Parliament and a law of Singapore. The Act will come into force on thedate specified in the Act or if no date is specified, on the date it is published in the Singapore Gazette. Statutory law alsoincludes subsidiary legislation, such as regulations, orders and notifications. These are promulgated by the relevant Minister,who has powers delegated to him by Parliament.

There is a range of statutes (or legislation) covering a wide range of subjects in the Statutes of the Republic of Singapore. Inthe commercial realm, there is, for example, the Companies Act (Cap 50) which has more than 400 sections on many aspectsof company law. In the criminal realm, there are statutes like the Penal Code (Cap 224) and the Computer Misuse Act (Cap 50A). The statutes provide the principles as well as the detailed rules on the subject.

(b) Law is also found in court decisions. For example, the tort of negligence was established not by statute but by the case ofDonoghue v Stevenson (1932), and developed and refined by subsequent cases. Case law, or reported decisions of judges,is a primary source of law. It refers to law that has been created by judges through the decisions in the cases they have heard.It is also known as the common law. In the common law system, a judgment contains principles, which may be binding insubsequent cases.

It should be further noted that even where there is a statute on the subject, cases can still be a source of law. Cases arereferred to for the purpose of assisting in the interpretation of statutory provisions, such as where there is ambiguity in themeaning of a section.

2 This question requires an explanation of the rules relating to the acceptance and revocation of offers in contract law.

(a) A contract comes into effect when an offer is accepted. Both parties are bound and the offeror can no longer revoke, i.e.,withdraw his offer, nor can the offeree withdraw his acceptance. In order for an acceptance to be valid, it must be anunequivocal acquiescence to the terms of the offer. An offeree who introduces new contractual terms into their purportedacceptance is making a counter-offer, which does not constitute acceptance: Hyde v Wrench (1840). Likewise, a conditionalacceptance cannot create a binding contract. Acceptance may be express (either orally or in written form) or implied (fromconduct).

As a general rule, acceptance must be communicated to the offeror and silence does not amount to acceptance: Felthouse vBindley (1863). An exception to the general rule applies where the offeror has waived the right to receive communication.Thus in unilateral contracts, such as Carlill v Carbolic Smoke Ball Co (1893), acceptance occurs when the offeree performsthe required act and does not have to inform the offeror. Another exception to the general rule requiring communication iswhere the acceptance is made by post. Acceptance by post is complete as soon as the letter, properly addressed and stamped,is posted. The contract is concluded even if the letter subsequently fails to reach the offeror: Adams v Lindsell (1818).

(b) Revocation refers to the cancellation of an offer and occurs when the offeror withdraws his offer. A counter-offer also operatesto cancel the original offer. An offer may be revoked at any time before acceptance. However, once an offer has been revoked,the offeree can no longer accept the original offer: Routledge v Grant (1828). Revocation is effective only when it is actuallyreceived by the offeree: Byrne v Van Tienhoven (1880). Communication of revocation may be made through a reliable thirdparty: Dickinson v Dodds (1876).

3 This question requires a discussion of how the limited liability partnership (LLP) combines benefits of both a partnership and acompany.

The LLP allows partners to carry on business as a partnership and at the same time, to be incorporated with limited liability.

The LLP functions very much like a partnership as regards the internal relations between the partners. Relations between thepartners are governed by the provisions of the First Schedule to the Limited Liability Partnership Act (Cap 163A), subject to theterms of any limited liability partnership agreement. So the partners can use the partnership agreement to determine how they willown and conduct business through the LLP. The First Schedule contains the default provisions for the rights of partners. Some ofthese are:

– All the partners of a limited liability partnership are entitled to share equally in the capital and profits of the limited liabilitypartnership.

– The limited liability partnership must indemnify each partner in respect of payments made and personal liabilities incurredby him:– in the ordinary and proper conduct of the business of the limited liability partnership; or – in or about anything necessarily done for the preservation of the business or property of the limited liability partnership.

– Every partner may take part in the management of the limited liability partnership. – No person may be introduced as a partner without the consent of all the existing partners. – Any matter or issue relating to the limited liability partnership shall be decided by resolution passed by a majority in number

of the partners, and for this purpose, each partner shall have one vote.

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As far as relations between the LLP and external parties are concerned, the LLP functions very much like a company. The LLP isa body corporate and is a separate legal entity from its partners (s.4), has perpetual succession and any change in the partnerswill not affect the existence of the LLP (s.4). Like a company, the LLP can sue and be sued in its own name, acquire, own andhold property (s.5). Another significant difference between a partner in a partnership and partner in an LLP is the fact that thelatter is not personally liable for obligations incurred by the LLP (s.8).

4 The concept of contributory negligence is that although the defendant may have been negligent and thereby caused damage orinjury to the plaintiff, the plaintiff himself may have been partly at fault as well. Section 3(1) Contributory Negligence & PersonalInjuries Act (Cap 54) provides:

‘Where a person suffers damage as the result partly of his own fault and partly of the fault of any other person, the damagesrecoverable by him may be reduced to such an extent as the court thinks just and equitable having regard to the claimant'sshare in the responsibility for the damage.’

Essentially, if the plaintiff has himself been at fault (and fault is defined in the section to include negligence), the court will reducehis claim to the extent that his negligence has caused the damage. For example, if the court is of the view that the plaintiff’snegligence contributed equally to the damage, it will reduce his claim by half.

The defence of consent or voluntary assumption of the risk, as it is also called, is expressed in the maxim volenti non fit injuria,which means literally – ‘that to which a person consents cannot be considered an injury’. The risk may be assumed by thedefendant by express agreement (for example, when a patient signs a consent form prior to an operation) or implied from conduct(for example, a spectator to a motor racing event is regarded as having consented to the risk of injury: Hall v Brooklands RacingClub (1933)). The defendant has to show that the plaintiff knew of the risk, and agreed to it.

5 Equity or share capital refers to the money or assets contributed by the members to the company when they subscribe for sharesin the company. The money contributed becomes the property of the company and shares are issued to the members in return.Debt or loan capital on the other hand refers to money borrowed by a company on terms that the company will pay interest aswell as the principal sum when due.

The principal differences between equity and debt are as follows:– Creditors are paid interest at an agreed rate regardless of whether the company is making a profit whereas dividends are

payable to shareholders only out of profits if declared by the directors.– The company is required to repay the principal at the end of the term of the loan whereas shareholders do not normally expect

repayment of the equity capital so long as the company is a going concern. The question of distribution of the equity amongshareholders only arises when the company is in liquidation and is subject to rules.

– On a winding up of the company creditors have priority over shareholders for repayment of the principal.– Creditors are not members of the company and generally have no membership rights such as voting rights whereas

shareholders are members of the company with rights conferred by the Companies Act (Cap 50), the company’smemorandum and the articles of association.

– Creditors have no right to share in any surplus assets on a winding up of the company whereas shareholders have a right toparticipate in surplus assets on a winding up of the company.

– Capital provided by creditors under a debt is for a fixed period and is expected to be repaid at the end of the term of the loan,before winding up, whereas share capital provided is long-term and there is no expectation that it shall be repaid until awinding up of the company.

6 By virtue of s.75 Companies Act (Cap 50), every company is required to hold a meeting of its members referred to as an annualgeneral meeting (AGM) at least once in every calendar year; subject to a maximum period of 15 months. This means that if acompany held its AGM on 1 January 2007, then it must hold its next AGM by 31 March 2008 at the latest.

The purpose of the AGM is for the company to report to members on the affairs of the company and the business conducted atAGMs tends to be routine such as the re-election of directors, consideration of accounts and approval of dividends. In line with therecognised distinction between public and private companies the Companies Act permits private companies, subject to approvalby a unanimous vote, to dispense with the holding of AGMs. Under s.175A, it is no longer necessary for a private company toconvene a general meeting where the members have unanimously signed a written resolution setting out a particular course ofaction.

The extraordinary general meeting (EGM) is any meeting other than an AGM. EGMs are usually called by the directors, althoughmembers holding 10% of the voting shares may requisition such a meeting under s.176.

The class meeting refers to the meeting of a particular class of shareholder; i.e. those who hold a type of share providing particularrights, such as preference shares. Where it is proposed to alter the rights attached to particular shares, it is necessary to obtain theapproval of the holders of those particular shares to any such alteration. In order to achieve this approval, a meeting of thoseholding such shares has to be called to seek their approval of any proposed alteration s.74(6).

The manner in which meetings may be convened is governed by the articles of association and the Companies Act. The directorsof the company may convene meetings under Article 37 of Table A and s.176. Two or more members holding not less than 10%of the issued share capital may call a meeting of the company under s.177. The court may order a meeting under s.182 whereit is impracticable otherwise to call a meeting.

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7 When a wrong is done to a company, the right to commence legal action against the wrongdoer belongs to the company (thisprinciple is known as the rule in Foss v Harbottle). The company is said to be the proper plaintiff. In exceptional situations, thelaw may allow an individual shareholder or some other person to commence an action in the name of the company. Such an actionis known as a ‘derivative’ action; it is derived from the company.

Sections 216A and 216B of the Companies Act (Cap 50) allow a shareholder of a company (other than a listed company) to applyto the court for permission to commence a derivative action (or to intervene in an action to which the company is a party). If hesatisfies the court that:

– he has given 14 days’ notice to the directors of his intention to apply,– he is acting in good faith, and– it is prima facie in the interests of the company that the derivative action be brought,

the court may in its discretion allow him to commence the derivative action. The sections also empower the court to order thecompany to pay the costs, including legal fees and disbursements, of the application or the action.

In addition to these sections, s.216(2)(c) makes provision for a derivative action to be taken where there has been oppression.

8 Heng will have the right to terminate the contract if he can claim to be discharged from the car rental contract on account ofSpeedy’s breach. Speedy has breached the term that specified a Mercedes Benz as the type of car to be rented. A contracting partyis entitled to a discharge if there was a breach of condition or a breach of an innominate term where the consequences went tothe root of the contract: Hong Kong Fir Shipping Co v Kawasaki Kaisen Kaisha (1962). A condition is a term that is very importantor fundamental to the contract. It depends on whether Speedy knows that the Mercedes was rented for the purpose of Heng’swedding. If so, the term specifying the type of car was likely to be a condition as the choice of a Mercedes was important to thecontract.

As long as Speedy has breached a contract term, Heng would be entitled to claim damages. As regards the higher rental, Heng’sloss is the difference in rental. That was caused by Speedy’s breach because Heng would not have to look for another car rentalif not for Speedy’s breach. The difference in price would also pass the test of remoteness in Hadley v Baxendale (1854) as it arosenaturally, in the usual course of things. Heng also has a duty to mitigate his loss by taking reasonable steps to minimise loss.Although the alternative car rental is at a higher price, Heng would be entitled to claim the difference as long as it was a reasonableoffer.

9 As a shareholder, Cheong has the option of a member’s voluntary winding up. A member’s voluntary winding up is only for theliquidation of a solvent company. The steps involved include the following:

– Written declaration of solvency by directors of the company stating that the company will be able to pay its debts in full within12 months, having regard to the company’s affairs: s.293 Companies Act (Cap 50);

– Special resolution by members at a general meeting to wind up the company voluntarily: s.290; and– Appointment of a liquidator at a general meeting: s.294(1).

Winding up is deemed to have commenced from the time of the passing of the special resolution to wind up the company. Therole of the liquidator is to take possession of the company’s assets (s.269(1)), realise the company’s assets (s.272(2)) anddistribute the proceeds among the company’s creditors and if there is any surplus, to distribute the surplus among the members(s.300). Finally the liquidator’s job is to dissolve the company (s.275 and s.308).

The directors cease to have power to act on behalf of the company on the appointment of the liquidator except with the consentof the liquidator (s.294(2)). The company ceases to carry on business except where the liquidator deems it necessary for thebeneficial disposal or winding up of the business (s.292(1)). Transfers of shares of the company requires the approval of theliquidator, otherwise it will be void: s.292(2).

If the liquidator feels that the company will not be able to pay its debts in full within the 12-month period, the liquidator is requiredto call a meeting of the company’s creditors and to carry on with winding up as a creditors’ voluntary winding up: s.295.

When the winding up is completed, the company is dissolved.

10 Whether the company is bound by the purchase agreement depends on the authority of Dan and the effect of the restriction inArticle 58.

Dan in his capacity as the managing director of the company generally has very wide powers to enter into contracts in the day-to-day running of the company’s business. In addition to his express authority, he has wide implied authority. It is arguable whethera managing director would usually be considered as having authority to sign purchase agreements on behalf of the company asproperty acquisitions are serious matters and more appropriately decided by the board of directors.

Article 58 authorises the managing director to enter into purchase agreements of up to $500,000. Dan therefore has actualauthority to enter into agreements up to this limit. However, Article 58 goes on to say that for agreements exceeding $500,000,prior board approval is required. According to the doctrine of constructive notice, all parties dealing with a company are deemedto know of, and are affected by, the public documents of a company. The articles of association, being accessible to the public atthe Registry of Companies & Businesses, are such a document.

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However, in Singapore, the doctrine of constructive notice has been abolished. Section 25A of the Companies Act (Cap 50)provides that a third party is not deemed to have notice of, and is not affected by, the public documents of a company. The selleris therefore not deemed to know of Article 58. Instead, the seller is affected only if he has actual knowledge of the article and,hence, Dan’s lack of authority. It therefore appears that the seller can rely on the implied authority of Dan as managing director.As explained above, it is debatable whether Dan’s implied authority extends to the purchase of a shophouse.

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Fundamentals Level – Skills Module, Paper F4 (SGP)Corporate and Business Law (Singapore) June 2008 Marking Scheme

1 6–10 A thorough answer which explains what statutory law is and how it is passed; also explains what is case law and howlaw can be found in cases.

0–5 A less complete answer, lacking in detail or unbalanced in that it does not deal with some aspects of the question.

2 6–10 A thorough answer that explains the rules relating to the acceptance and revocation of offers in contract law. 0–5 A less complete answer, lacking in detail or unbalanced in that it does not deal with some aspects of the question.

3 6–10 A thorough answer that discusses how the limited liability partnership combines the features of both a partnership and acompany.


4 6–10 A thorough answer which explains the rules relating to the two defences of contributory negligence and consent.0–5 A less complete answer, lacking in detail or unbalanced in that it does not deal with some aspects of the question.

5 6–10 A thorough answer that explains the differences between share capital and loan capital. 0–5 A less complete answer, lacking in detail or unbalanced in that it does not deal with some aspects of the question.

6 6–10 A thorough answer that explains the basic rules relating to annual general meetings, extraordinary meetings, and classmeetings.


7 6–10 A thorough answer that explains the concept of the derivative action and how a shareholder can bring such action underss.216A and 216B of the Companies Act.


8 6–10 A thorough answer that explains the application of the rules relating to the discharge of a contract and a damages claimin contract law to the facts in the question.


9 6–10 A thorough answer that explains the rules relating to a member’s voluntary winding up of a company. 0–5 A less complete answer, lacking in detail or unbalanced in that it does not deal with some aspects of the question.

10 6–10 A thorough answer that explains the rules relating to the authority of a managing director to contract on behalf of thecompany.


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Documents

ACCA F4 2008 Singapore Answers