The University of the South Pacific

Serving the Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

School of Accounting and Finance

AF205 Law of Associations

Final Examination – Semester 2, 2019

Time Allowed 3 hours plus 10 minutes reading

INSTRUCTIONS
This paper contains 5 questions.
Answer all questions.
Marks total 50.

You may use your own hardcopies of the Partnership Act, Companies Act 2015,
Regulations to the Cos Act, Schedule 2 and Table A. Legislation may contain
underlining, highlighting, marginal notes and cross references. You cannot
interleaf any additional materials in the legislation.

Note: supply reasons for your answers (including reference to any relevant
section/s) unless directed otherwise.

Note: questions may contain irrelevant information.

Note: all questions are located in Fiji and are governed by Fiji law unless stated
otherwise.

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Question One (total 7 marks)
This story takes place in Suva, Fiji.
Three good friends – Ana, Joe and Kim – graduate from high school. Times are tough. There
are few jobs for young people. The three friends quickly recognize that their only option is to
be ‘self-employed’.

Self-employed doing what? They brainstorm. And decide upon a BBQ stand.

A BBQ stand business requires a limited amount of plant, a small amount of working capital,
a good location and either a permit or free meals to the inspector. (There is too a need for
dedication, basic culinary skills, customer relations skills, enterprising menu etc etc.)

Micro Finance Co Ltd (‘MFco’) provides start-up capital and advice to young entrepreneurs.

The three friends approach MFco.

MFco agrees to provide loan funds of $3,000.

MFco assists in drafting a simple partnership agreement. The agreement provides inter alia:
 the partners shall be Ana, Joe and Kim
 the business of the firm shall be a BBQ stand business in the Suva area
 the partnership will trade under the name Three Amigos BBQ
 profits and losses will be split evenly among the partners
 each partner shall devote his/her full energies to the business
 each partner shall have full authority to act on behalf of the firm

MFco also helps in the registration of the business name, the establishment of a firm bank
account with Bankco, the creation of a simple accounting system, the application for a permit
etc etc.

One further fact. Ana, Joe and Kim graduated from high school in 2014. It is now 2019.

So how did they do? They did well. Today the firm has five BBQ stands in the Suva area
with a workforce of twenty-five trained workers. Bankco early on saw the firm’s strong cash
flow and has funded each subsequent expansion of the firm’s business. The partner’s aren’t
rich but they are doing well.

Two questions.
First: Suppose you were MFco supplying the initial start-up money of $3,000. Would you
prefer to loan $1,000 to each of Ana, Joe and Kim, with each then making a capital
contribution to the firm of $1,000, or would you prefer to loan the firm $3,000?
Provide reasons in support of your answer and include reference to any relevant section/s.
(3 marks)

Second: One final fact. There is currently a small problem. Here’s the background. Ana and
Joe were always sweethearts. In October 2019 they married and went for a honeymoon in
New Zealand. While the couple honeymooned Kim was left in sole control of the partnership
business. Ana and Joe returned to Suva at the start of November to be told by an excited Kim
that he had just negotiated the firm’s first franchise agreement with an individual called
Green.

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The franchise agreement authorises Green to use the name Three Amigos BBQ and requires
that Green operate his BBQ stand in accordance with training and rules stipulated by the firm.
Green pays an initial licence fee and thereafter a monthly fee. Additionally Green is obligated
to purchase all supplies from the firm.

Ana and Joe are opposed to granting any franchise. Ana contacts Green and advises him there
will be no franchise and that the firm will seek an injunction if Green uses the name Three
Amigos BBQ. In reply Green insists he has a binding franchise agreement with the firm.
Suppose this dispute does go to court. If you were the judge how would you decide it?
(4 marks)

Question Two (total 10 marks)

[Some advice. This is a lengthy question. Take your time to understand the facts before
attempting the questions that follow the facts.]

A, B, C and D, all males and all talented musicians, compose a rock band commonly known
as Red Rose. From a legal vantage point, A, B, C and D are partners in a live musical
entertainment business trading as Red Rose.

The partnership assets include a sound system, a van, goodwill and the business name Red
Rose. The personal talents of each partner, of course, are also central to the success of the
business.

The firm employs a manager (‘M’) to assist in running its business. M’s job is to find gigs for
the band [i.e. engagements] and to generally promote and publicise the band. M’s duties also
include the more mundane responsibilities of overseeing the maintenance of equipment,
organising transportation and accommodation when the band is on tour and handling the
band’s finances.

Accounting services for the firm and each of its members are provided by ‘Kumar and
Associates’. Kumar and Associates is an accounting services business owned by Ms Kumar.
Besides Ms Kumar, three qualified accountants plus semi-professional staff (all employees)
work in the business. (If you ask Ms Kumar who are the associates she will tell you there are
none.)

Over time the popularity of the band grows. With this comes increased revenues and with this
in turn comes increased income tax liabilities for each of the firm’s partners. The band
consults Ms Kumar as to how their affairs might be structured in a tax efficient manner.

Kumar identifies that each partner has a significant number of dependants (spouse, children,
elderly parents) and recommends that each partner should attempt to spread his income
(currently his share of the firm’s profits for the year) among his dependants. This can be best
accomplished utilising a trust. Kumar proposes that a different legal structure be adopted to
carry on the live musical entertainment business. At the centre of this structure is a trading
trust. A detailed account of the legal restructuring follows.

First, a company, Trust Co Pte Ltd (‘Tco’) is created. The form A2 is filed with the Registrar
of Companies. Inter alia this form states that the company’s initial members are to be A, B, C
and D with each taking 1 ordinary share at an issue price of $1 per share. Articles of the

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proposed company accompany the form A2. These articles state that the company’s directors
shall be A, B, C and D and that each shall hold office for life. The articles also state that the
company’s object is to act as a trustee. In all other respects the articles are in the form of
Schedule 2.
The Registrar duly issues a Certificate of Registration.

Second, the Tco board of directors appoints Ms Kumar as company secretary and adopts as
the company’s registered office the address of Kumar and Associates.

Third, Ms Kumar settles the sum of $10 on Tco to hold on trust. The terms of the trust are
contained in a document (the trust deed) signed by Tco. By this deed Tco agrees to act as
trustee of what therein is called the ‘Families Trust’.
Here are some details concerning Families Trust.
The deed grants the trustee a discretion to invest the trust property in such shares, bonds or
operating business as the trustee may from time to time select. The beneficiaries of the trust
are identified as ‘such persons as settle monies on the trustee’. A beneficiary’s interest in the
trust is determined by reference to his or her percentage contribution to the aggregate monies
settled on the trustee. The trustee is required to annually distribute all income of the trust to
beneficiaries in proportion to each beneficiary’s interest. Finally the deed provides that in
return for acting as trustee, Tco shall be entitled to an annual fee equal to 10% of the
revenues of the trust.

Fourth, the board of Tco approves the establishment of two accounts with Bankco. Account 1
is entitled Company Account, and Account 2 is entitled Trust Account.

Fifth, the dependents of A settle $10,000 on Tco as trustee of the Families Trust. The
dependents of each of B, C, and D settle equivalent sums.

Sixth, a contract of purchase and sale is negotiated and signed between the firm and Tco. The
contract provides that Tco shall purchase all tangible assets of the firm plus goodwill. The
contract price is $34,000 to be paid in cash. Performance is scheduled for one week after
signing of the agreement. Tco as trustee of Families Trust plans to use the assets acquired to
conduct a live musical entertainment business. The business’s principal ‘product’ will be a
band to be called Red Rose.

Seventh, the partners agree to dissolve their partnership immediately after performance of the
sale is completed.

Eighth, Tco enters into employment agreements with each of A, B, C, D and M. The duties of
the four employees A, B, C and D is to attend and perform music as directed by their
employer Tco. The employment duties of M are to market and administer the live music
business conducted by Tco.

Following the events outlined above, there has been a complete legal restructuring of the live
music business. However, from the vantage point of a fan of the band Red Rose nothing
much seems to have changed. Indeed, fans of the band will generally have no knowledge of
the legal restructuring that has taken place.

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 Answer the following questions.
You need to briefly explain your answers to all questions excepting the last.

(i) At the start of the story there is only one business.

Following the restructure is there still only a single business? (2 marks)

(ii) Following the restructure, A [and likewise B, C and D] has 3 distinct legal
roles/identities.
- What are these distinct legal roles/identities?
- Will these roles provide distinct income streams for A? (2 marks)

(iii) Ms Kumar as company secretary is entitled to a salary. M as manager of the company’s

music business is entitled to a salary.
- From which bank account (Account 1 or Account 2) is Ms Kumar’s salary paid?
- From which bank account is M’s salary paid? (2 marks)

(iv) In this story each of A, B, C and D as directors of Tco owe fiduciary duties to Tco. Does
Tco itself owe fiduciary duties to anybody?
(1 mark)

(v) Is Tco permitted to pay a dividend to its members before distributing income of the trust
to the beneficiaries?
(2 marks)

(vi) At the end of this story what is the issued capital of Tco?
(No reasons required. Just state the dollar figure.) (1 mark)

Just a reminder: you need to briefly explain your answers to all questions excepting the last.

Question Three (total 15 marks)

(a) All companies have members. All companies must have a register of members. In the case of
a company limited by shares the register is often more particularly known as the register of
shareholders or shareholders register. The shareholders register contains quite a lot of
information. Aside from the shareholders name what do you suggest are the most important
details concerning a shareholder that appear in the register? (Limit your answer to three
details.)
(2 marks)

(b) How can a person become a member of a company limited by shares? State and briefly
describe the two most usual means.
(2 marks)

(c) Bonds and shares have some element of similarity. Both are financial instruments. Both are
‘securities’. Some legal rules apply equally to both. For example a private company cannot
offer shares and cannot offer bonds to the public (s.16). A public company offering shares to
the public or offering bonds to the public must utilise a disclosure document, that is, a
prospectus (s.283). So there is some element of similarity.

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 However, there are too, points of difference. For example, nation states (e.g. the State of Fiji)
issue bonds but nation states do not issue shares.
Similarities and differences: which is the greater? Pretty obviously the differences greatly
outweigh the similarities. Only if we stand a long way back and look at the big picture, for
example the world of investment, do we see similarities. If we stand up close and focus on
details we see that bonds and shares are very different ‘things’.
Required:
Identify, describe and explain 3 significant legal differences between shares and bonds.
(6 marks)

(d) This question concerns the Macraes notes.

- One of the sale terms was that this was a ‘rights issue’. What does that mean? Explain the
expression as it is used in the Macraes story.
- It is quite common to see companies making a rights issue of shares. It is very uncommon to
see a company making a rights issue of bonds. What feature of the Macraes notes causes the
company to make a rights issue?
(3 marks)

(e) Typically shareholders of a company wish to receive dividends. Meanwhile creditors of a

company wish to be paid the debt due to them on time and in full. As between the two
different groups there is an obvious tension. Every time the company pays a dividend to
members there is a real outflow of resources, the company is less wealthy, creditors are now
creditors of a less wealthy debtor.
Here is the question: How does the law strike a balance between the legitimate expectation of
shareholders that they will receive a dividend as reward for their investment and the
legitimate expectation of creditors to be paid in full and on time?
(2 marks)

Question Four (total 10 marks)

This question concerns the case Regal (Hastings) Ltd v Gulliver and Others.
Regal (Hastings) Ltd (‘Regal’) had altogether 5 directors.
Gulliver was a director and chairman of the board of directors of the company.
The ‘Others’ in the case name were the 4 remaining directors, A, B, C and D plus the
company’s lawyer.
Regal sued its 5 former directors plus the company lawyer.
The company succeeded in its claim against the former directors A, B, C and D.

Regal planned to create a mini chain of cinemas.

To carry out its plan Regal created what was initially a subsidiary company Hastings
Amalgamated Cinemas Ltd (‘Amalco’).

Amalco entered negotiations to obtain long term leases of two cinemas.

The Landlord required that either the Amalco directors provide personal guarantees of the
rent or that Amalco have a greater paid up capital. Amalco in fact raised a further $3,000 paid
up capital.

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Required:
Draw a diagram illustrating the situation that existed once Amalco obtained the lease of the
two cinemas.
……………………………………………..

Shortly after Regal together with Amalco had established the mini chain of cinemas, all of the
shares in Regal and Amalco were acquired by a third party. Let’s call that party Buyco.

Required:
Draw a diagram illustrating the situation that exited after the transaction/s with Buyco.
……………………………………………..
(2 marks)

Following the acquisition by Buyco, the directors of Regal and Amalco resigned. New
directors of Regal were appointed by Buyco. The newly constituted board of directors of
Regal decided that Regal should sue (inter alia) the former directors A, B, C and D. As noted
earlier the claim succeeds.

Required:
Answer the following questions.
(i) Regal sued the former directors for breach of fiduciary duty. What was the particular duty
that was said to be breached?
(ii) To succeed in its claim did Regal have to prove that the former directors acted in bad
faith?
(iii) What was the remedy given against the former directors?
(iv) What should the former directors have done in order to forestall (prevent) this legal claim
by Regal? (Here is a hint. Think about the case North-West Transport where the director Mr
Beatty sold a ship to the company of which he was a director.)
(8 marks)

Question Five (8 marks)

Briefly describe each of the following things, people or events.

(i) mortgage debenture

(ii) receiver
(iii) liquidator
(iv) compulsory winding up

THE END