Question 1

Video Pioneer Pte Ltd (VP) runs a video hire shop in the suburbs. You are the accountant for this company. The two directors are Jason and Chiew.

Over the last three years the company has found it harder to run at a profit. Sales are down because of customers choosing to download from the internet and the emergence of new players in the market such as Netflix.

In preparing the cash flow statements for the company and the financial accounts to date you note that the company is nearly insolvent. It only survives because Jason gave a personal guarantee to the Bank for additional funds.

Furthermore you are also aware of the following:

1.The business is locked into a five year lease of the shop and has another 2 years to go.

2.VP has a term loan of $60,000 from the bank of Singapore which is secured by the assets of the shop i.e. the shop fittings, computer, cash register and the trading stock.

3.Jason also gave a personal guarantee to the Bank for the loan.

4.Given the decline in sales and the fact the business cannot pay each of them a sufficient salary; Chiew decides to use the company car as her own and transfers ownership from the company to herself. She does not pay the company anything for the car. The car had a book value in the company of $12,463.This was done on 5 April 2015.

5.One supplier of confectionery to the business demanded immediate payment of its debt of $1,856. If VP did not pay the amount immediately the confectionery supplier would apply to wind up the company. This amount was paid on 31 January 2015.

Required:

Explain to Jason and Christine:

1.What is the best option for the company, insolvency or judicial administration and why?

(5 marks)

2.If VP cannot pay the interest on the term loan of $60,000 what rights does the Bank of Singapore have to recover the principal and the outstanding interest?

(5 marks)

3.What is the impact of the personal guarantee on Jason?

(5 marks)

4.Assuming the company is placed in liquidation on 31 May 2015, what is the impact of transactions 4 and 5 above?

(5 marks)

In your answer please refer to relevant case law and legislation.

(20 marks)

Question 2:

Refer to the case study regarding Bloomingdale Florists Pte Ltd discussed in lectures.Please answer the following issues raised from the case study:

1.What authority if any, does Sally have to order stationery? What if she ordered $3,000 worth of stationery? What if half of it was delivered to her home for her to run her own private business?

(5 marks)

2.Tiger Lily Investments Pte Ltd is a preference shareholder of Bloomingdale Florists Pte Ltd. Explain why it is a preference shareholder and not an ordinary shareholder.

(5 marks)

3.Yohan was not appointed as a director of Bloomingdale Florists Pte Ltd. Explain whether the actions of Andy in taking customers and information away from the company was a breach of any common law or statutory duties he owed to Bloomingdale Florists Pte Ltd

(5 marks)

4.Glenn as a fellow director was not given notice of the meetings of the directors and excluded from the management affairs of the company. Explain what rights he has against the directors or company and what clause in the company's articles of association that the directors may have breached by not giving him notice of the meeting.

(5 marks)

Required:

Please answer each of the four issues above. In your answer please refer to relevant case law and legislation.

Total marks for Question 2(20 marks)

Question 3:

You have been working for Christopher's accounting practice now for over a year and he feels that you are experienced enough to run a training program for the more junior accountants.

In preparing the training program he wants you to explain the meaning, the purpose and provide an example in respect of the following:

1.What is the purpose of a share buyback?

(5 marks)

2.What is the purpose of the indoor management rule and who does it benefit?

(5 marks)

3.What is the purpose of not allowing directors to engage in wrongful or reckless trading?

(5 marks)

4.If a lender to a company is going to take security over the assets of the company, which type of charge is best and what does the lender need to do to ensure that the security is enforceable?

(5 marks)

Required:

Please explain to your fellow colleagues the meaning or implications of the above terms and provide an example and refer to the relevant legislation.

Total marks for question (20 marks)

QUESTION ONE

You are asked by your client who is considering establishing a company the meaning of the following terms:

1. What does the term "entrenched provision" mean and why do they exist?

(5 marks)

1. What is the purpose of a derivative action taken by a member and why does it arise?

(5 marks)

1. Why does a company need to maintain its share capital and explain one statutory exception to this rule?

(5 marks)

Required:

Please answer the above three questions and refer to relevant provisions of the Companies Act.

(15 marks)

(30 minutes)

QUESTION TWO

You are the auditor of a finance company. It is a public company. As part of your audit process you are reviewing the Board of Directors minutes. You have also had discussions with the managing director.

During your review and discussions you come across the following transactions:

1.Stephen a director of the company was removed by the majority of directors because he was facing charges of importation of body enhancing drugs. He has been charged but not yet convicted. The directors did not want the members to know so they agreed by majority in a Board meeting to remove him as a director.

2.The sales and marketing manager on behalf of the company entered into a contract to rent a conference room in Clementi for a three day presentation to the public which was subsequently cancelled. The conference facility is demanding payment and from the Board minutes you know that the sales and marketing manager was given authority to hire the room but only with the approval of the managing director, which was not obtained.

3.The IT director of the company had recommended to the Board that they replace the old IBM computers with Apple i Pads and Apple Macs. She argued that in the long term this would be beneficial to the company from a cost and efficiency view. The Board of directors agreed to the change. You subsequently discovered that she received from the Apple distributor a free trip to Apple headquarters in San Francisco. She took the trip and was also provided with 5 days paid accommodation in New York for her and her family. She did not disclose any of this to the Board of directors.

Required:

The audit partner requests you provide in writing to him the corporate law implications of the above transactions as they may have an impact on his audit report to the members of the company.

Please advise him of the consequences of the above and what the company should do.

In your answer please refer to relevant case law and legislation.

(15 marks)

(30 minutes)

QUESTION THREE

Eng Ching is the managing director of a sports supply company, Clean Sports Pte Ltd. The number of customers has decreased significantly over the last 10 months. However the company is still locked in to a 3 year lease of expensive premises in Robinson Road, which costs $132,000 per annum.

Eng Ching had gone on behalf of the company to the CBA Bank for an increase in the company's overdraft facility to $467,000 from $129,000. The Bank will only increase the overdraft if Eng Ching, Sophie and Keng Siew being the three directors all give personal guarantees. Reluctantly all three directors agree to give a personal guarantee to the Bank.

However after three months the cost of the rent, staff costs and other overheads have meant that the company is running out of funds. Staff wages of $167,000 are outstanding which includes directors' wages of $86,872.

A supplier of computer software is owed $5,800 and has demanded immediate payment. The amount of $5,800 had been outstanding for 69 days. Sophie one of the directors decided that the company should pay this creditor the money demanded immediately as the creditor had threatened to wind up the company. Payment was made on 6 September 2014.

Trade creditors of $98,000 are still outstanding.

Keng Siew's son was at school and needed a computer. Therefore Keng Siew bought a computer from the company but only paid $300 for it. The market value of the computer was $680. This transaction took place on 3 February 2014.

As at 18 September 2014, being the date that Eng Ching comes to see you, there is cash at bank of $65,789, trade debtors are $212,650, of which $35,148 has been outstanding for more than 120 days. Debt collection action has been commenced against these debtors and it is expected on 25% of them will be collected and the balance of the $35,148 uncollectable.

The company has fixed assets being computer equipment and furniture of $128,000 being it's written down value.

The total amount of the outstanding creditors is $235,000, which includes outstanding wages to the directors of $86,872 plus the overdraft of $467,000

The bank will not extend the overdraft further beyond the $467,000 and of the directors only Eng Ching is prepared to lend the company a further $50,000. The other directors and shareholders of the company will not contribute any further funds.

Eng Ching comes to see you as an insolvency expert. Based on the information above please advise Eng Ching on the following questions he has raised.

Required:

1.Based on the financial information as at 18 September 2014 is the company insolvent or is it a liquidity issue?

2.If the company is wound up what are the issues regarding the two transactions involving Sophie and Keng Siew?

3.Do the directors in a winding up have priority to be paid their wages before other employees?

4.What is the impact of the personal guarantee on the directors?

In your answer please refer to relevant case law and legislation.

(15 marks)

(30 minutes)

QUESTION FOUR

Ali and Nasir are two directors and shareholders of a company that runs a shop specializing in military memorabilia.Ali is the managing director and Nasir a director. Ramesh is the shop manager.

In the company's articles of association it states that the purpose of the company is to run a business selling military memorabilia.

Ali decides to expand the business into selling computers.

To do so he goes to HSBC Bank and gets a loan of $85,000 on behalf of the company. The articles of association state that any loans over $50,000 must be approved by all shareholders. The purpose of the loan is to purchase computers to sell in the shop.

Nasir is away on holidays so approval of both shareholders was not obtained.

The HSBC Bank had always been the banker for the company and had always dealt with Ali.The bank manager was aware of the business of the company and had always encouraged Ali to expand the business.

Ali wanted Ramesh to be the computer technician and sales man. He asked Ramesh to look at courses relating to computer training. Ramesh did so and registered in a course costing $22,000.

Ramesh also ordered computer parts worth $13,000 from Tech Supplies Pte Ltd.

Nasir comes back from holidays and finds out about these activities.

Required:

Advise Nasir whether the company is liable to pay the loan to the HSBC Bank, the course fee and the computer supplies.

Also advise Nasir of the consequences for the company in not carrying on activities within its objectives.

(15 marks)

(30 minutes)

Question 1

Jules, Ramesh and Jasmine are the three directors of a company called JRJ Pte Ltd. The company runs an internet caf business near SIM on Clementi Road. The company has been renting a building since 2010. The rent has become very expensive and the company is contemplating buying its own building. Jasmine is the finance director of the company.

The directors therefore resolve at a board meeting that the following will take place:

A purchase of a building for $1.8m and Jules and Ramesh are authorized to sign the contract of purchase under seal.

The board also authorizes Jasmine to approach the Bank to only negotiate for a loan on behalf of the company for $1m. Once the loan is negotiated she is to report back to the Bank. She is NOT to sign any documents.

The articles of association of the company says that the loan must be approved by all the directors in a board meeting.

Jasmine also goes to the bank to arrange the finance and negotiates the terms of the loan. However Sebastian the lending officer of the Bank insists that she sign the documents, as he has studied company law and knows if one director signs there is a binding contract. Reluctantly she signs the contract.

She then reports to the Board but does not tell them she signed a contract for the loan.

The bank takes a mortgage over the building as security.

Later on Ramesh's best friend Filepe, who is a mortgage broker, tells Ramesh that the terms of the loan are outrageous and he could get a better deal for the company.

Ramesh advises the Board and tells them the company can get out of the contract as no contract has been signed.

The property that was purchased was owned by Jules. Jules did not tell the other directors that he owned the property. The true value of the property was $1.2m but the company paid $1.8m for the property.

REQUIRED:

Advise the bank if the contract for the loan of $1m is enforceable or can JRJ Pte Ltd avoid the contract.

Advise the company of the consequences of Jules not telling the other directors of his interest in the land bought by the company and what the company can recover from him.

In answering the question please refer to relevant case law and legislation.

(20 marks)

Question 2:

Tan Lin Tze always wanted to run a caf. He decided to buy a franchise. The one he liked the best was called Pie Shop. After carrying out his due diligence on Pie Shop he purchased one of the franchises.

It is a new concept in Singapore and was introduced to allow expatriates working in Singapore to taste their home country food and also to encourage local people to try a different cuisine.

Tan Lin Tze is unsure of the structure that he should use to run the franchise.

Required:

Explain to Tan Lin Tze three benefits to him of having the business run via a company.

If you agree a company is the best structure what type of company should you register for Tan Lin Tze?

(5 marks)

Assuming that Tan Lin Tze agrees to run the business via a company he, his wife and parents will contribute funds to the company to buy the franchise and run the business. The shareholders will be himself, his wife and his parents. Tan Lin Tze does not want his parent to have any influence in the way the business is run.

Required:

Explain to Tan Lin Tze if he is a director along with his wife how he can retain control of the management of the company.

Also if he does not wish his parents to interfere what type of shares (if any) should the parents own compared to the type of shares he and his wife should own.

Is there any benefit to the company if the parents lend money to the company rather than invest in the company?

(5 marks)

Once the company was established and the business had been running for a number of years, the business was not very profitable because the franchisees had to buy all their products from the franchisor and also had to pay very expensive royalties for marketing, advertising. In addition the rent of the shop was very expensive. Also the franchisee allowed other stores to open close by and this affected sales.

As the accountant you review the financial accounts for the company and note that the company is insolvent as it is unable to pay its debts when demanded.

Required:

Explain to Tan Lin Tze what the consequences of the company being insolvent means for himself and his wife Kim

Explain what is the purpose of judicial management

(5 marks)

After discussion with Tan Lin Tze because of the perilous nature of the company you recommend that the company be liquidated. As a result of the liquidation you discover the company had sold to Tan Lin Tze a motor car valued in the company's accounts at $86,000 for $55,000. This transaction took place three months before the company was placed into liquidation.

The company directors Tan Lin Tze and his wife Kim are owed wages of $10,000 each.

Required:

Explain to the liquidator:

the consequences of the transfer of the car to Tan Lin Tze and

do the directors get paid their wages before unsecured creditors?

(5 marks)

Total marks for Question 2(20 marks)

Question 3:

You have been asked by your employer to run a training session for new graduate accountants. Your employer requires you to explain to the staff the meaning of the following and to provide an example explaining the principles you are asked to discuss.

Required:

The issues he wants you to discuss and explain are:

1.What is an objects clause? What is its purpose and where would I find it?

2.What is voting by poll mean and how does it occur?

3.If a company is solvent can it be liquidated and in what circumstances would this occur?

4.What do we mean by registering a charge? Who do we register it with and who benefits the lender or the borrower?

Each question is worth 5 marks

Total marks for question (20 marks)

Question 1:

Julie the managing director from Bloomingdale Florists Pte Ltd rings you on Friday afternoon with the following issue. From the case study discussed in lectures you will recall that she asked her father to go to the bank and borrow funds from the bank on behalf of the company. However she told him not to borrow more than $100,000. However her father borrowed in excess of the amount on behalf of the company. He borrowed on behalf of the company $160,000. The Bank also requested a personal guarantee form Julie before they would lend the company the money.

You mention to her that the company's constitution states that any borrowings over $100,000 have to be approved by the Board of directors. This was not done.

Julie is concerned that the company may face financial pressure in repaying the debt and could possibly become insolvent.

Required:

Julie has the following questions for you:

A.Is the company bound by the contract that her father entered into on behalf of the company? (10 marks)

B.Explain to Julie the implications of giving the bank a personal guarantee (5 marks)

C.What is the point of having a rule in the constitution if her father does not follow the rules? (5 marks)

(10 marks + 5 marks + 5 marks)

Total (20 marks)

Question 2:

Dick Smith Ltd is a large retail electronics store in Singapore with stores throughout the island. It has been operating for 10 years. It has a loan from the Bank of Singapore of $140M. Due to lower than expected sales over the last year the company has faced cash flow issues. The bank which had loaned the company the $140M was reluctant to extend the terms or refinance the loan. No other Banks in Singapore were prepared to lend money to the company.

The trading results for the Christmas 2015 period were well under budget and the accountants indicated that there would be insufficient cash flow to pay for the stock purchased, the rent and running costs of the stores including staff wages after three months. The company was reliant on the banks extending the terms of the loan.

It is now February 2016 and the cash flow position has deteriorated even further and the directors come to you and seek your opinion:

Required:

A.Is the company insolvent and what are the consequences for the directors of the company? (5 marks)

B.What can the bank do to protect the $140m loaned to the company? (5 marks)

C.What is the best option for the company? (5 marks)

(5 marks + 5 marks + 5 marks)

Total (15 marks)

Question 3:

REIT Ltd is an unlisted public building development company. The directors are Jasmine, Sun Chee and Crystal. They believe that given the down turn in property prices, now is the time to acquire land for future property development. Gerald who is the uncle of Jasmine owns some land in the north of Singapore. Gerald is under financial pressure from the bank to repay the loan on the block of land and is therefore keen to sell. Jasmine is aware of this

The directors of REIT Ltd are keen to buy the land. Jasmine believes it is none of the board's business if the land is bought from Gerald and does not disclose to the other directors her relationship to Gerald. She attends the board meeting and votes in favour of the company acquiring the land for $650,000 which just happens to be the market value as well as the amount of the debt Gerald owes to the Bank.

The other two directors decide to buy the land, and knowing that land prices are depressed they do not bother to get an independent valuation of the property. Three months later the directors learn that the land the company bought from Gerald was prone to flooding and the commercial value was only $200,000.

Jasmine's brother Dennis is the owner and director of an architectural practice company.

REIT Ltd wants to engage an architectural firm to design plans for theirbuildings.

Crystal is in charge of getting offers from the various architectural firms. She tells Dennis what each architectural firm is going to charge. This allows Dennis to offer a price which the company accepts. Crystal does not attend the board meeting or vote as she was away on holiday at the time, which was paid for by Dennis in gratitude. She did not tell the Board that Jasmine's brother was going to submit a tender.

REQUIRED:

Sun Chee seeks your advice as to what common law duties and statutory duties if any have Sun Chee, Jasmine and Crystal breached?

In your answer you are required to refer to relevant legislation and case law

(15 marks)

END OF EXAM PAPER