TAKE HOME EXAMINATION

< SEP 2020>

< BBUS 2103>

< COMPANY LAW>

MATRICULATION NO : <960828016204001>

IDENTITY CARD NO. : <960828016204>

PART A
QUESTION 1
a)
A member is one of the company’s owners whose name has been entered on the register of

members. Members delegate certain powers to the company’s directors to run the company

on their behalf. In the ordinary commercial usage, the term ‘Member’ denotes a person who

holds shares in accompany. The members or the shareholders are the real owners of a

company. They collectively constitute the company as a corporate body. According to

Section 41 of the Companies Act divides the members into three classes as the persons who

have subscribed to the Memorandum of a company, every other person who has agreed in

writing to become a member of the company and whose name has been entered in the

Register of Members and every person holding equity share capital of a company and whose

names are recorded as beneficial owner in the depository records are considered as members

of the concerned company. The criteria of second category members are the person must

have agreed in writing to become a member and his/her name must have been entered in the

Register of Members. If any of the conditions is not satisfied, the person shall not be a

member under this Act. For the third category of members also 2 conditions are to be fulfilled

to become the member of the company such as the person must hold equity shares of the

company and his/her name must be entered as beneficial owner in the records of the

depository. The members of a company enjoy several rights and they are the ultimate

authority in the matters of the company and its management. A member has the right to

obtain a copy of the company documents such as the company memorandum and articles of

association, the resolutions and minutes of general meetings, the company registers including

for example register of members, the financial statements, director’s report and auditor’s

reports and the financial statement of any subsidiary (another company owned by the

company) in the past 10 years. Furthermore, the important statutory rights are rights to
receive notice of meetings, attend to take part in the discussion and vote at the meetings, right

to transfer the shares (public companies), right to inspect the documents of the company such

as register of members, annual returns, right to participate in appointments of directors and

auditors in the Annual General Meetings, right to apply to the National Company Law

Tribunal for relief in case of oppression and mismanagement under Secs. 397 and 398, rights

to apply to the Government for ordering an investigation into the affairs of the company,

companies with one member, hold an Annual General Meeting (AGM) within 15 months of

the last AGM. Usual AGM business includes discussing the company’s financial statements,

the directors’ report and the auditor’s report, discussing any recommendation from the

directors to declare a dividend, electing new directors to replace those stepping down and

appointing or re-appointing an auditor and deciding how much they will be paid. A member

or several members of a company with at least 10% of the paid-up share capital and voting

rights in the company can also require the company’s directors to call an EGM. If a company

doesn’t have a share capital, members with at least 10% of the voting rights can require the

directors to call the EGM. If the directors do not do so, the member can call the meeting

themselves. Where it is impractical to calk or conduct a general meeting, a member can ask

the High Court to order the holding of a meeting in whatever manner it thinks fit. Any

member who has the right to vote at a general meeting of a company can appoint a person (a

‘proxy’) to attend the meeting on their behalf and use their vote. A proxy also speaks at the

meeting for the member. In addition, members can decide to end a company’s existence by

special resolution or if it is unable to pay its debts, by ordinary resolution. This is done at a

general meeting at which a liquidator is appointed. After the creditors debts and liquidator’s

costa are paid any remaining money is divided among the members according to their

entitlements (unless the articles of association provide otherwise). A member can also ask the

High Court to wind up a company if the company can longer achieve its aims, certain
members no longer want to stay in business with other members, management cannot agree

on how to move the company’s business forward, the company has illegal objectives or

someone is using the company to commit fraud. Besides, Cases of Oppression occurs when

directors are running a company against the interests if some of its members or running it in a

fraudulent or illegal manner. This could mean for example, that members are being excluded

from company general meeting or refused access to financial statements. These are the rights,

which are given to the members by the General Law. A member can ask the High Court to

correct such situation. The Court is free to choose an appropriate remedy. Next, the liability

of the member of a company depends on the nature of the company. Unlimited companies are

those companies without limited liability. Section 3 specifically provides that any 7 or more

persons (2 or more in case of a private company0 may form an incorporated company with or

without limited liability. Company with unlimited liability each member is liable in full for

all the debts contracted by the company during the period he was a member. Companies

limited by shares are the most common and may be a public company or a private company.

Each member is liable to pay the full nominal vale of the share held by him. If he has already

paid a part of the amount on the shares his liability is limited to the unpaid amount on the

shares in respect of which he is a member. Companies limited by guarantee, in this type of

company’s liability of members of a company is limited to fixed amount which members

undertake to contribute the assets of company in the event of its being would up. Each

member is liable to contribute the amount guarantee by him to be paid in the event of

winding up of the company. Finally, a mixed liability company may have guarantee

members, unlimited members and shareholders (if the company has a share capital). A

member may if the Memorandum and articles permit be a member of more than one type.
b) Transferability is an important feature of a share in a company registered under the

Companies Act, from which emanates another feature of a company-perpetual sucession. It

endows a company with perpetual and uninterupted existence. A company acquires its own

independent legal personality and legal entity in the company. Section 82 states that the share

shall be a movable property and transferable in a manner provided by the articles of the

company. Shares in a private company are not freely transferable and are subject to the

restrictions imposed by the articles of the company, shares in a public company are freely

transferable. There are different types of transfer and transmission shares. There are several

differences between transfer of shares and transmission of shares. First of all, transfer of

shares refers to the intentional transfer of title of the shares between the tansferor (one who

transfers) and the transferee (one who receives). Transmission of shares takes place due to the

operation of law that is when the holder is no more or has become lunatic or insolvent. It can

also take place when the holder of share is a company and it has wound up. There is no

transfer deed executed and the transferee will be given the rights to the shares, and the

transmission is recorded only when the transferee gives proof of entitlenment to the shares. In

case of the death of the holder the shares, it will be transferred to the legal representative and

in case of insolvency to the official assignee. Secondly, the transfer of shares is initiate by the

parties to transfer, i.e. transferor and transferee. Unlike transmission of share which is

initiated by the legal representative of the concerned member or receiver. Thirdly, transfer of

shares liabilitoes of transferor cease on the completion of transfer but the original liability of

transmission sharea continues to exist. Next, stamp duty is payable on the market value of

shares in case of transfer while in the transmission shares no stamp duty is to be paid. The

fifth differences is execution of valid transfer deed is necessary when there is the transfer of

shares, but not in the transmission of shares. The following differences is the transferee pays
an adequate consideration to the transfer of shares. In the case of transmissiom of shares, no

consideration shall be paid. Furthermore, when the shares are transferred by one party to

another party, voluntarily, it is known as transfer of shares. When the transfer of shares

happens due to the operation of law, it is referref to as transmission of shares. Finally, the

transfer of shares is done intentionally whereas death, bankruptcy and lunacy are the reason

for transmission osf shares.

QUESTION 2
a)
A company charge is a security interest held by a lender over the personal property of a

company. The charge is given by the company (the chargor) to the lender (the chargee) to

secure payment of a debt or obligation. A charge does not give the lender a legal interest in

the property by way of mortgage or possession but a right to enforce its interest upon the

happening of an event, such as default or insolvency. Company charges have been ideal in

corporate financing as they provide security for the lender yet flexibility for the company.

The loan contract sets out the type and terms of the charge that the borrower agrees to grant.

The charge can be fixed over identified property or float over transient assets such as trading

stock. The different types of company charges which is fixed charge and floating charge.

A fixed charge attaches to specific identifiable assets of the company such as motor vehicles,

plant or equipment. The chargor retains ownership of the assets however if the chargor

defaults, the charge has the right to enforce payment of the loan through proceeds of the sale

of asset. Assets subject to a fixed charge cannot be dealt with transferred sold, mortgaged by

the company without it first obtaining the charge’s consent. Besides, if a debt is subject to

affixed charge, the borrowing will be secured against a substantial and identifiable physical

asset such as land, property, vehicles, plant and machinery. If the business is unable to keep

to terms of the finance agreement, the lender will take charge of the asset and look to sell it in

order to recoup the money it is owed. When a lender has a fixed charge, it effectively has full

control over the asset the charge applies to. If the business wants to sell, transfer or dispose of

the asset, it will have to get permission from the lender first or pay off the remaining debt. Its

also important to note that a fixed charge gives the lender a higher position in the queue than

a floating charge for the repayment of the debt in the event of the borrower’s insolvency. A
common example of a fixed charge in practice can often be seen in factoring or invoice

discounting facilities. In this type of arrangement, the finance provider buys a business’s

outstanding invoices and lends money against them. The debtor book is then subjected to a

fixed charge, which means the business’s invoices effectively belong to the finance provider

and not the company. Examples of financial arrangements that are commonly subject to a

fixed charge include mortgages, leases, invoice factoring arrangements and bank loans.

A floating charge ‘floats’ over all company assets, present or future or certain categories of

assets. The assets are non-specific in that they may change over the duration of the charge,

for example, stock in trade or accounts receivable. Floating charges essentially ‘float’ above

changing assets and only become fixed charges, a process known as ‘crystallisation’ in the

following circumstances: the company defaults on the repayment and the lender takes action

to recover the debt, the company is about to be wound up, the company appoints the receiver

and the company will cease to exist in the future.‘Crystallisation’ of a floating charge is

triggered by an event such as default on repayment of the loan or a receiver or administrator

being appointed to the company. Upon crystallisation, the charge becomes fixed and attaches

to the assets and the leader can enforce its rights to recover the debt. Once fixed, the chargor

cannot enter into any agreements in relation to those assets. The distinction between a fixed

and floating charge is important in terms of flexibility and priorities over security interests. A

floating charge gives greater flexibility to the company borrowing funds as assets may be

dealt with without the lender’s consent. From a lender’s perspective, a fixed charge is more

effective as it secures the loan over a specific asset or assets and the lender is likely to receive

priority in the event of a dispute. Compare this with a floating charge where other creditors

may also have interests in assets which may restrict the chargee’s recourse to repayment or

the amount available to satisfy the security. Furthermore, a floating charge applies to assets

with a quantity and value that can change periodically, such as stock, debtors and moveable
plant and machinery. It gives the business much more freedom than a fixed charge because

the business can sell, transfer or dispose of those assets without seeking approval from the

lender or having to repay the debt first. From the lender’s point of view, a floating charge

leaves it more exposed than a fixed charge because the value of the assets and will change

over time. Finally, however it’s not possible to attach a fixed charge to every company asset,

which is why floating charges are used.

b)

Fixed charge holders are first in line for repayment and receive the money they are owed

from the sale of the asset they hold a fixed charge over. Floating charge holders must wait

until fixed charge holders, preferential creditors such as employees and the insolvency

practitioner have received the money they are owed before they are repaid. By that point,

there may be enough funds to repay the debt in full. Under the Insolvency Act 1986, the

hierarchy for repayment in an insolvency situation is:

-Preferential creditors (typically employees with wage arrears)

-Secure creditors with a floating charge

-Unsecured creditors

-The liquidators feed and expenses

-Secure creditors with a fixed charge

Floating charge holders must wait until fixed charge holders, preferential creditors such as

employees and the insolvency practitioner have received the money they are owed before

they are repaid. By that point, there may not be enough funds to repay the debt in full. Under

the Insolvency Act 1986, the hierarchy for repayment in an insolvency situation is:

-Unsecured creditors
- Secured creditors with a floating charge

-Preferential creditors (typically employees with wage arrears)

-Secured creditors with a fixed charge

-The liquidator’s fees and expenses

PART B

QUESTION 1

It’s common for companies to have different classes of shares, each of them conferring

different rights to shareholders. Most companies only have one kind of shares. Ordinary

shares represent the company’s basic voting rights and reflect the equity ownership of a

company. Ordinary shares typically carry one vote per share and each share gives equal right

to dividends. These shares also give right to the distribution of the company’s assets in the

event of winding-up or sale. The rights attached to ordinary shares are generally defined in

the articles of association of the company and in the shareholders agreement. Non-voting

ordinary shares carry the same conditions as ordinary shares except with regards to voting

rights. Shareholders may have voting rights under certain circumstances, or they may have no

voting rights at all. Preference shares give their holder a preferential right to a fixed amount

of dividend, meaning that they will receive dividends ahead or ordinary shareholders.

Preferred shareholders also have a higher priority claim to the company’s assets in case of

insolvency. Because this class of shares carries many benefits and guarantees, it is mostly

issued to investors, for example to venture capitalists, who invest in start-ups. However,

preferred shareholders do not have the same ownership rights in the company as ordinary

shareholders, they are often non-voting and sometimes redeemable. Redeemable preference

shares are common way of financing a business. It allows a company to repurchase its shares

in the future such as interest rates fall and company wants to issue new shares with a lower

dividend rate, while giving investors the possibility to get their money back at a pre-agreed

price. Cumulative preference shares give holders the right that, if a dividend cannot be paid

one year, it will be carried forward to successive years. Dividends on cumulative preference

share must be paid, despite the earning levels of the business, provided the company has

profits that can be distributed. Redeemable shares are the shares that can be bought back by
the company at some point in the future. The redemption date can either be fixed in advance,

for example, 3 years from the date the share is issued or decided at the company’s discretion.

The redemption price is usually the same as the issue price but not necessarily. Shares given

to employees are often redeemable, so that the company can get its shares back if the

employee leaves. However, the ability to redeem shares is limited and is subject to specific

statutory requirements. For instance, the company may only redeem the shares out of

accumulated profits or the proceeds of a new issue of shares. A company cannot issue only

redeemable shares, so they must ensure that they also issue non-redeemable share. Deferred

shares carry fewer rights than ordinary shares and can include shares in which dividends are

only paid after all other classes of shares have been paid, shares in which dividends are only

paid after a certain date or event, shares that are not tradable until a certain date such shares

are usually issues to employees in order to give them a long term interest in the company and

to increase their loyalty and shares which, in the event of insolvency, do not give their

holders any rights until all other shareholders are paid. The differential rights are in respect of

voting power and dividend. So, generally equity shares with less voting rights carry higher

rate of dividend but whereas the equity shares with higher voting shares carries with lesser

rate of dividend. Equity shares with higher voting rights are generally given to promoters, key

managerial persons, Managing directors.

Equity shares with differential rights generally companies give because they want to improve

the capital base, but they do not want to lose the control or management of the affairs of the

company. By issuing shares with differential voting rights, the share capital will increase but

the control and management is remaining in the hand of promoters. Hence the management

of the company will not be diluted by issuing shares with differential rights thereby helping

the minority shareholders. That is these minority shareholders do not want the change in

management but still wants to increase the capital base. In case the company issues share
with differential voting rights that means, generally one share carries one voting power. But

in the case of differential voting rights, one share carries more than one voting right or carries

with lesser than one voting rights. Furthermore, different voting rights share act as one of the

key investment tools which are much needed by the companies to cope up with the

competition prevailing in the market and for their survival and companies issue different

voting rights shares for prevention of a hostile takeover. Next, bringing in passive strategic or

retail investors which promoters of a company may not always be able to meet the company’s

growing funding demands. In such cases, companies and promoters seek investment from

external sources including from passive strategic or retail investors, who are not much

interested in voting rights. Companies issue different voting right shares to fund new large

projects or business expansions, due to fewer voting rights. It also helps strategic investors

who do not want control but are looking at a reasonably big investment in a company.

Besides, safeguard the dilution of voting rights. External rounds of financing not only lead to

dilution of the promoter’s shareholding in the company, but also result in key business

decision being mad by investors who have brought in more capital in the company. The

dilution of voting rights might hamper company’s decision-making power, ultimately

resulting in a loss of control over the affairs of the company. In such a scenario, shares with

different voting rights help promoters in retaining their right to vote on business decisions

irrespective of their capital contribution.

The general power to allot shares, grant rights to subscribe in the shares, convert any security

into shares and allot shares under an agreement or option or offer is vested in the members by

passing a resolution (s75 of the Companies Act 2016). There are exceptions to this general

principle. First, the directors may allot shares or grant rights under an offer to existing

members in proportion to the members shareholding. Second, the directors may allot shares

or grant rights on a bonus issue of shares to existing members in proportion to the members
shareholding. Third, the allotment of shares to the company’s promoter that the promoter has

agreed to take. Fourth, the shares are issued as consideration or part consideration for the

acquisition of shares or assets by the company. The CA 2016 has included a provision in s85

to safeguard existing shareholders. It provides that where a company issues new shares which

rank equally to existing shares as to the voting or distribution rights, the company must first

offer the new shares to the holders of existing shares on a prorated basis unless the

company’s constitution provides otherwise. All issues of shares shall be right issues unless

otherwise prescribed in the company’s constitution. The CA 1965 did not permit the class

rights to be varied if the rights were incorporated in the company’s memorandum of

association. However, the class rights could be varied if they were found in the company

articles and its memorandum or article allowed it. As a company’s memorandum and articles

are now combined to firm its constitution, the CA 2016 allows the rights attached to the

preference shares to be modified or varied. If the company’s constitution has provided the

procedure for the variation of class rights, then the procedure is to be followed section 91(1)

(a). If the constitution does not prescribe the procedure, then the company may do so with the

consent of the holders of the shares in that class section 91(1)(b). The consent of the holders

may be obtained as: First the approval may be by way of written consent representing not less

than 75% of the total voting rights of the holders of shares of that class. Second, the approval

may be given by passing a special resolution of the holders of shares of that class. Finally, for

an investor, who wants to be in the company’s decision processes, different rights shares are

not an attractive proposition due to limited voting rights, but if an investor isn’t concerned

much with voting rights, then investing in different voting rights would certainly be an

attractive option.
QUESTION 2

A quorum is the minimum number of members of a deliberative assemble (a body that uses

parliamentary procedure, such as a legislature) necessary to conduct the business of that

group. Quorum normally consists of a group that is considered as large as possible to be

depended on to attend all corporate meeting, which is qualitative assessment. The plural of a

quorum is “Quorum”. Since there is no strict number that constitutes a quorum, which

established as a simple majority of members within an organization. It is also possible to

outline a hard number in the by-laws of a company in which case it overrides the simple

majority if that number is larger. It is important that the number decided on is not so small

that it doesn’t accurately represent the entirety of the members, but not so large that it

becomes hard to legally hold a meeting. The idea and guidelines of a quorum were set by

“Robert’s Rules of Order”. These rules were implemented to help protect organizations from

the decision-making power of a select few who might be uniformed or duplicitous.

Furthermore, a notice of meeting of a company is a document informing the members or

directors of a company about an upcoming meeting. This document specifies the date, time

and place of the meeting and the general nature of the business to be transacted at the

meeting. Notice calling a meeting is one of the important proceedings that must be complying

by a company before having a meeting. The notice of the meeting is a communication to the

shareholders of as company informing them that shareholder meeting will take place and the

items that are on the agenda for that meeting. The type of notice being sent depends on the

type of association in which companies reside and the type of meeting the board plans to call.

In the case of a private company, the notice of meeting should be given at least 14 days or
any longer period as specified in the constitution (except for a meeting to pass a special

resolution). For a special resolution, a notice of not less than 21 days must be given to

members (Section 292). Section 319 of CA 2016 allows fir the notice to be sent either in hard

copy or in electronic form.

The examples of notice are owners meeting, board meeting, a board meeting to adopt the

budget or special assessment, rules and regulations. Next, each director will have one vote

and decisions will be carried by a simple majority on a show of hands. The chairperson may

have the right to exercise a casting vote if votes for and against a motion are equal; check the

articles. It should also be remembered that on certain issues individual directors may be

prevented from voting by a conflict of interest. However possible for the company’s articles

of association or a shareholder’s agreement to establish some other system. A company may

wish to avoid deadlock by adopting a provision giving weighted voting rights, possibly in

proportion to the directors’ shareholdings in the company on certain matters. If a director

represented interested party in relation to an agenda item, the director shall state the

important aspects of the of the interested party relationship at the respective meeting. When

the relationship is likely to prejudice the interest of this corporation, that director may not

participate in discussion or the voting on the item and may not exercise voting rights as proxy

for another director. Besides, for companies with share capital, subject to any rights or

restrictions attached to any class of shares, each member has one vote on a show of hands. On

a poll, each member has one vote for each share they hold. For companies without share

capital, each member has one vote both on a show of hands and a poll. There are several

effects if the above matters were not complied with. The general rule is that business

transacted in the absence of a quorum is null and void. In fact, members who vote on motions

at meetings without a quorum can at times be held personally liable for their actions.

However, when a quorum is not met during a meeting, the existing attendees can conduct up
to three actions on behalf of the company. First, when a quorum is not met, attendees of a

meeting can adjust the established time for the meeting’s adjournment. Doing so allows the

company and its members to reschedule the existing meeting to a later date when more

people can attend. Second, the existing attendees can simply adjourn the meeting and try

again at an upcoming meeting that is already scheduled. This occurs if there were regularly

scheduled budget meetings, for example, and the posed budgeting decision is not time

sensitive. Third, the least painful action is a simple recess in which the existing members of a

meeting pause for a break in the hopes additional members show up or are rounded up. This

normally happens if some members leave on their own for a break, and a quorum is not met

mid-meeting. Finally, a privileged motion can be called under special circumstances where

additional measures can be taken to establish a quorum. A committee can be formed for

example, to call absent members. Furthermore, sometimes, due to an administrative error, the

company may fail to give the notice of meeting to one or more members. Section 335

provided that accidental omission to give notice of the meeting to a person, or non-receipt by

any person of notice of the meeting, does not invalidate the meeting unless the person applies

to the Court for a declaration that the proceedings of the meeting are void. Notice of general

meeting should be sent to all persons entitled to receive it. Failure to give notice to those

entitled to receive it may invalidate the meeting. Accordingly, identifying the persons entitled

to receive notice is an important undertaking. The task will invariably be easier where the

company is a small private company with only one class of shares, compared to where the

company is a large listed public company with several classes of shares and a global

shareholder base.