CL 4 Corporate Law

PRACTICE & REVISION KIT
CA SRI LANKA CURRICULUM 2020
CL 4 Corporate Law
Fifth Edition 2020
www.casrilanka.com
2020
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Contents
Page
Chapter
Questions Answers
Chapter 1 1 5
Chapter 2 15 21
Chapter 3 29 34
Chapter 4 41 46
Chapter 5 56 62
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Contents
How to use this Practice & Revision Kit
This Practice & Revision Kit comprises banks of practice questions of the style that
you will encounter in your exam. It is the ideal tool to use during the revision phase of
your studies.
Questions in your exam may test any part of the syllabus so you must revise the
whole syllabus. Selective revision will limit the number of questions you can answer
and hence reduce your chances of passing. It is better to go into the exam knowing a
reasonable amount about most of the syllabus rather than concentrating on a few
topics to the exclusion of the rest. You should at all costs avoid falling into the trap of
question spotting, that is trying to predict what are likely to be popular areas for
questions, and restricting your revision and question practice to those.
Practising as many exam-style questions as possible will be the key to passing this
exam. You must do questions under timed conditions and ensure you write full
answers to the discussion parts as well as doing the calculations.
Planning your revision
When you begin your course, you should make a plan of how you will manage your
studies, taking into account the volume of work that you need to do and your other
commitments, both work and domestic.
In this time, you should go through your notes to ensure that you are happy with all
areas of the syllabus and practise as many questions as you can. You can do this in
different ways, for example:
 Revise the subject matter a module at a time and then attempt the questions
relating to that module; or
 Revise all the modules and then build an exam out of the questions in this
Practice & Revision Kit. Review the exam structure and then group together the
relevant number of MCQs and longer questions from different syllabus areas to
create a practice exam.
Using the practice questions
The best approach is to select a question and then allocate to it the time that you
would have in the real exam. All the practice written response questions in this
Practice & Revision Kit have mark allocations, so you can calculate the amount of time
that you should spend on the question.
However, this is an approximate guide: for example, some MCQs are very short and
just require a factual response, which you either know or you don’t, while others are
more complex, requiring calculations, which will inevitably take more time.
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Using the suggested solutions
Avoid looking at the answer until you have finished a question. It can be very
tempting to do so, but unless you give the question a proper attempt under exam
conditions you will not know how you would have coped with it in the real exam
scenario.
When you do look at the answer, compare it with your own and give some thought to
why your answer was different, if it was.
In multiple choice questions if you did not reach the correct answer make sure that
you work through the explanation or workings provided, to see where you went
wrong. If you think that you do not understand the principle involved, go back to your
own notes or your study materials and work through and revise the point again, to
ensure that you will understand it if it occurs in the exam.
Passing the [Business Level [I or II] – Business Environment and Economics
If you have honestly done your revision then you can pass this exam. What you must
do is remain calm and tackle it in a professional manner. There are a number of
points which you should bear in mind.
 You must read the question properly. Students often fail to read the question
properly and miss some of the information. Time spent reading the question a
second time would be time well spent. Make yourself do this, don't just rush into
it in a panic.
 Stick to the timings and answer all questions. Do not spend too long on one
question at the expense of others. The number of extra marks you will gain on
that question will be minimal, and you could have at least obtained the easy
marks on the next question.
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Format of the exam
Mode: Paper based examination

Open books: CL 2 Financial Reporting & Governance , CL 4 Corporate Law
Time: 3 hours
Pass Mark: 50%
The exam comprises of three sections, as follows:

Section 1
Total 20 marks; Ten (10) multiple choice, fill in the blanks, Matching questions, etc. of
two marks each (including scenario based questions)
Section 2
Total 40 marks: Four (4) questions of ten (10) marks each based on mini scenario
leading to non-complex applications and analysis.
Section 3
Total 40 marks: Two (2) questions of twenty (20) marks, each questions on complex
scenario based analysis and applications.
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Exam techniques
Using the right techniques in the real exam can make all the difference between
success and failure.
Here are a few pointers:
1. Allocate the time available to the questions. You have 120 minutes to answer
50 questions which is an average 2.4 minutes per question, however this should
only be taken as a rough guide as some questions may require less time to
answer than others.
2. Make sure that you attempt every objective test question. Do not leave any
blank. If you run out of time or are not sure of an answer you should select the
option you think is most suitable. You can come back to the question later if
time permits.
3. Read the question. Read it carefully once, and then read it again to ensure that
you have picked everything up. Make sure that you understand what the
question wants you to do, rather than what you might like the question to be
asking you.
4. If you finish the exam with time to spare, use the rest of the time to review your
answers and to make sure that you answered every objective test question.
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Action verbs checklist
Knowledge Process Verb List Verb Definitions
Tier - 1 Remember Define Describe exactly the nature, scope or meaning

Recall important
information Draw Produce (a picture or diagram)
Identify Recognise, establish or select after consideration
List Write the connected items one below

the other
Relate To establish logical or causal connections
State Express something definitely or clearly
Tier - 2 Calculate/Compute Make a mathematical computation

Comprehension
Explain important Discuss Examine in detail by argument showing
information different aspects, for the purpose of arriving at a
conclusion
Explain Make a clear description in detail
revealing relevant facts
Interpret Present in understandable terms or to translate
Recognise To show validity or otherwise, using knowledge

or contextual experience
Record Enter relevant entries in detail
Summarise Give a brief statement of the main points

(in facts or figures)
Classify Allocate into categories

Describe Communicate the key features
Provide Give illustrations to support or illuminate

a point or assertion
Tier - 3 Application Apply Put to practical use

Use knowledge in a
Assess Determine the value, nature, ability
setting other than the or quality
one in which it was
learned/solve close- Demonstrate Prove, especially with examples
ended problems
Graph Represent by means of a graph
Prepare Make ready for a particular purpose
Prioritise Arrange or do in order of importance
Reconcile Make consistent with another

Solve To find a solution through calculations and/
or explanations
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Conduct Organize and carry out a task

Communicate Transmit thoughts or knowledge
Display Make evident or noticeable
Perform Do or execute, usually in the sense of

a complex procedure
Reconcile Make or prove consistent or compatible

or show differences
Set Fix or establish
Select Choose from a range of options

or possibilities
Support Assist to make decisions by providing
appropriate information about
respective concepts
Use Apply in a practical way
Undertake Commit to do or perform
Tier - 4 Analysis Analyse Examine in detail in order to determine
the solution or outcome
Draw relations among
Compare Examine for the purpose of
ideas and to compare
discovering similarities
and
Contrast Examine in order to show
contrast/solve open- unlikeness or differences
ended problems
Construct Build or make a diagram, model
or formula
Differentiate Constitute a difference that

distinguishes something
Outline Make a summary of significant features
Write Provide word descriptions to express an opinion

or idea
Tier - 5 Evaluate Advise Offer suggestions about the best course of
Formation of action in a manner suited to the recipient
judgments and Convince To persuade others to believe something
decisions about the using evidence and/or argument
value of methods, ideas, Criticise Form and express a judgment
people or products
Comment Provide written remarks expressing an opinion
in both positive and negative perspectives
Evaluate To determine the significance by careful appraisal
Conclude Form a judgment about, or determine or resolve

the outcome of, an issue through a process
involving reasoning
Determine Ascertain or conclude after analysis and
consideration; judge
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Justify Give valid reasons or evidence for
Review Study critically with a view

to correction or improvement
Recommend A suggestion or proposal as to the
best course of action
Resolve Settle or find a solution to a
problem or contentious matter
Validate Check or prove the accuracy
Tier - 6 Synthesis Compile Produce by assembling information

Solve unfamiliar problems by collected from various sources
combining different aspects Design Devise the form or structure according to
to form a unique or novel a plan
solution Develop To disclose, discover, perfect or unfold a
plan or idea
Propose To form or declare a plan or intention

for consideration or adoption
Anticipate Foresee, or experience or realise

beforehand
Draft Write original material for the scrutiny

of others
Formulate Devise and put into words
Plan Devise the plan for an assurance

engagement
Report Give the formal final conclusion for an

assurance engagement
Submit Send a completed document to a

particular party
Suggest Put forward an idea or give reasons
Synthesize Make or propose a new concepts or ideas

by combining existing knowledge in
different aspects
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CHAPTER 1
INCORPORATION OF A COMPANY
MCQs
(1) The following statements are on the effects or consequences of the ‘corporate
personality’.
i. A company gets perpetual succession.

ii. A company becomes capable of suing and being sued in its name.
iii. A company can acquire assets, as long as they are in the names of all its
shareholders.
iv. A company can enter into contracts in its name and be bound by obligations.
The correct ones would be:
a. Only i and ii.
b. Only i and iii.
c. Only i, ii and iv.
d. Only ii, iii and iv.
(2) “The ‘veil of incorporation’ is a legal concept that separates the personality of a company
from the personalities of its shareholders.”
Select the case which gave the landmark judgment in establishing the principal of the veil
of incorporation.
a. Salomon v. Salomon Co. Ltd.

b. United States V. Milwaukee Refrigerator Co.
c. Littlewoods Mail Order Stores Ltd V. Inland Revenue Commissioners.
d. Kosmopoulos v. Constitution Insurance Co. of Canada.
(3) The following are in relation to situations where the courts have been known to lift the veil
of incorporation.
i. When the company has been used as a cover for a deliberate wrongdoing.
ii. When the chairman of the company has been declared as bankrupt.
iii. When the controlling shareholder uses the company as his agent for an unlawful
purpose.
iv. In order to prevent a fraud.

a. Only i and ii.

b. Only iii and iv.
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c. Only i, iii and iv.
d. Only ii, iii and iv
10 Marks Questions
Question (1) - [10 marks]
Larry (L) was a former managing director of Merry Caravans Ltd (M).
His employment contract prevented him from attempting to solicit M’s customers in the event of
L leaving M’s employment.
L was fired by M and he subsequently set up a competing company which undercut M’s prices.
M did not have any legal restraints upon L’s company.
You are required to:

(a) Advise M with reference to a decided case, whether he can hope to succeed in suing L
individually for this breach of contract.
(5 marks)
(b) State 5 instances where the courts have been known to lift the veil of incorporation.
(5 marks)
Ranil, a first time director of a startup company named Anuhas (Pvt) Limited, has been informed
that one of the most important consequences of incorporation is the corporate personality which a
company acquires.
Explain to Anil:
 the legal status of a company as per the Companies Act No. 7 of 2007, and
 the consequences of the corporate personality.

The Companies Act 7 of 2007 provides for the incorporation of limited companies.
Compile a list of features of a limited company incorporated under the Companies Act 7 of 2007.

You as an Accountant, have been invited to do a presentation to a group of chartered accountancy
students on the topic of:
“Salomon v. Salomon Co. Ltd (1897) AC 22 -: The landmark judgment on the corporate veil”
Required:
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Explain:
 the facts of the above case, and
 the significance of its judgment and why it is considered as the landmark case on the
concept of the corporate veil.
20 Marks Questions
Question (1) – [20 marks]

Sumith and Dolewatta are partners in a partnership business, exporting spices to the United
Kingdom for the last 10 years.
As they plan to expand their business they are in need of attracting more investors to their
business.
Recently they had a discussion with another investor; Paula, who is willing to invest in this
export business.
But Paula insists that the partnership must be converted into a limited company, and that she
needs shares in this new company for her investment.
Sumith and Dolewatta consult you in order to decide whether to convert their existing
partnership business model into a limited company or not.

Discuss with Sumith and Dolewatta;
 the advantages and disadvantages of incorporating a limited company, and
 your opinion on their query.
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Mr. Silva is the sole proprietor of a furniture shop in Moratuwa.

He sold furniture from this shop to ABC (Pvt) Limited (“ABC”). Mr. Silva is the sole
shareholder of ABC.
He took a fire insurance policy on the furniture from XY Insurance PLC (“XY”). This policy
was taken in Mr. Silva’s own name and not in the name of the ABC.
Subsequently a fire destroyed this furniture which was worth Rs 2Mn.
XY refused to pay the insurance claim, taking the stance that the furniture was owned by ABC
and not by Mr. Silva; and that no insurance policy had been taken on this furniture.
Mr Silva’s stance was that since he is the sole shareholder of ABC, the insurance policy taken
under his name covers the furniture owned by ABC.

Conclude with reference to the relevant legal principles and case laws, whether the correct
stance was taken by XY or by Mr. Silva.
[You are expected to mention the facts of 2 related decided cases in your answer]
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Answers : Chapter 1
MCQs
1
2
a. Salomon v. Salomon Co. Ltd.
3 c.. Only i, iii and iv.
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10 Marks Questions
Answer – Question 1 - [10 marks]

Part (a)
 Similar facts were discussed in the case of Gilford Motor Co Ltd V Horne.
Mr Horne was a former managing director of Gilford Motor Home Co Ltd
(Gilford). His employment contract prevented him from attempting to solicit
Gilford’s customers in the event that Horne left Gilford’s employment. Horne was
fired and he subsequently set up a competing company which undercut Gilford’s
prices. Gilford did not have any legal restraints upon Horne’s company, only Horne
himself. Gilford commenced proceedings against Horne individually, claiming that
Horne’s company was an attempt to evade the legal obligation (of not soliciting
customers).
Held: As the company was set up as a mere device to evade Horne’s contractual
obligations, the court “pierced the corporate veil” and ordered an injunction against
Horne.
 Therefore it is seen that the courts can “pierce the corporate veil” if a company is trying
to evade legal obligations by hiding behind the veil.
 In the given scenario the company was used as a cover for a deliberate wrongdoing by
L.
 Therefore M can file action in court and hope to succeed in suing L individually for the
breach of his employment contract with M.
Part (b)
[Any 5 points from the instances given below; would serve as the answer.]
Instances where the courts have been known to lift the veil of incorporation.
1. When the number of members fall below the statutory minimum.
2. If the controlling shareholder uses the company as his agent, or if the corporate body is
abused for an unlawful or improper purpose.
3. To prevent a fraud.
4. To determine a company’s place of residence for the application of specific statues such as
tax laws.
5. To prevent the deliberate evasion of contractual obligations.
6. To promote the interests of national security, or to ensure conformity with public policy.
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7. Legislation sometimes lifts the veil in requiring holding and subsidiary companies to
prepare group accounts.
The legal status of a company is mentioned in the Companies Act No. 7 of 2007 under section
2(1) as follows:
“A company incorporated under this Act shall, by the name by which it is registered from time to
time, be a body corporate”.
The consequences of the corporate personality of a company would be as follows:

• A company has perpetual succession.
That means that the company continues to exist even in the instance of death, bankruptcy,
or transfer of ownership interest of its shareholders.
• A company is capable of suing and being sued.

That means it can take legal action to enforce its rights or be sued by others for liabilities
owed to them.
• A company can acquire, hold and dispose of property in its own name. The shareholders
as owners have no proprietary interest in the company assets.
• A company can carry out business, enter into contracts and be bound by obligations, in the
same way as a normal legal person.

[Any 5 points from the instances given below; would serve as the answer.]
Features of a limited company incorporated under the Companies Act 7 of 2007:
• Separate legal personality

By registration under the Companies Act, a company becomes vested with corporate
personality. Such a company is treated as a legal person. This means that a company is
independent and separate from its members.
• Limited liability
This means that the liability (namely the contribution a member will have to make once
the company is being wound up) of the members of the company is limited to the
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contribution made to the assets of the company up to the face value of shares held by him.
i.e: A member is liable to pay only the uncalled money due on shares held by him.
In other words the liability of members is limited by shares; each member is bound to pay
the nominal value of shares held by him/her and his/her liability ends there.
• Perpetual succession
A company exists until it is specifically wound up.
Membership (ownership) of a company may keep on changing from time to time but that
does not affect the life of the company. Insolvency or death of a member does not affect
the existence of the company. The incorporated firm will continue to exist unaffected by
the death of any of its owner(s) or the transfer of its shares to a new owner.
• Separate Property
As the company is a distinct legal entity, its property is its own and such ownership is
independent of the members of the company.
When a company is wound-up, its assets would be sold to settle its creditors and/or other
statutory liabilities and only the remaining assets (if any) can be shared amongst the
members.
• Transferability of shares
Shares in a company are freely transferable, subject to certain conditions, such that no
shareholder is permanently or necessarily bound to a company.
When a member transfers his shares to another person, the transferee steps into the shoes
of the transferor and acquires all the rights of the transferor in respect of those shares.
• Capacity to sue and to be sued

A company can sue and be sued in its own name as distinct from its members. Thus,
members are not named as parties in a case when a company institutes action or is sued by
a third party.

 Salomon v Salomon & Co. Ltd. (1897) AC 22
Mr. Salomon, a boot manufacturer, converted his business into a limited liability company.
His wife, children and he were shareholders. Salomon also took out debentures in his own
name. About a year later the company became insolvent. The assets of the company were
8 CA Sri Lanka
just sufficient to pay the debentures, and nothing was left to pay the unsecured creditors.
The creditors sued against Salomon to recover their amounts.
It was argued on behalf of the unsecured creditors that, though the company was
incorporated, it never had an independent existence. It was S himself trading under another
name.
Held: As the company was duly incorporated, it is an independent person with its rights
and liabilities appropriated to itself, thus, making Salomon & Co. Ltd liable, and not
Salomon.
 Significance of the judgment of this case.
Under company law, subsequent to incorporation a company becomes a separate legal personality
as compared to its members.
In other words, the company is distinct and different from its members in the eyes of the law. It
has its own seal and its own name; its assets and liabilities are separate and distinct from those of
its members. It is capable of owning property, incurring debt, and borrowing money, employing
people, having bank accounts, entering into contracts and suing and being sued separately.
One of the most important consequences of incorporation is this corporate personality which a
company acquires.
This legal concept that separates the personality of a company from the personalities of its
shareholders, and protects them from being personally liable for the company's debts and
obligations, is known as the corporate veil (or the veil of incorporation).
The judgment given in Salomon v. Salomon Co. Ltd. (1897), (which held that the legal personality
of a company is a veil or mask which covers the identity of its shareholders), established for the
first time this concept of the corporate veil.
All subsequent decisions of courts have followed the principles of this decision when explaining
the principles of the veil of incorporation.
Hence it is treated as the landmark case in relation to the concept of the corporate veil.
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Answer - Question (1) – [20 marks]
The advantages of a incorporating a limited company

• Independent corporate existence
This is a central feature of a limited company. By incorporating under the Companies Act
No. 7 of 2007, a company becomes vested with corporate personality, which is independent
and distinct from its members.
A company is a legal person which can sue and be sued in its own corporate name.
Therefore, a shareholder is safeguarded from bearing any liability upon a lawsuit being
filed on behalf of or against the company.
• Ease of raising capital

A limited company can raise capital by issuing shares, as it attracts more investors due to
its limited liability.
Further a limited company is a more stable form of business.
Also it is more attractive to lending institutions and investors.
• Transfer of Ownership
The ownership of a limited company can be transferred fairly easily by simply selling the
shares of the company. In such an instance the company assets will remain unchanged and
owned by the company itself. This ensures the continuity of the business as well as proving
to be more attractive of an investment to investors.
• Limited Liability
The shareholders of an incorporated company are not liable for the company’s debts
beyond the value of their shares. This is considered as the most important advantage of
incorporation as a shareholder’s personal assets are safeguarded and independent of the
assets of the company.
• It enhances the credibility of the business
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Suppliers, customers and business associates often perceive a limited company as being a
stable form of business; as incorporation conveys permanency, credibility, and stability,
and communicates commitment to the ongoing success of the business venture.
• Perpetual Existence
A limited company is one of the most enduring legal business structures, as it can continue
indefinitely, regardless of what happens to its individual directors, officers, managers, or
shareholders.
• Separate Management
A limited company is administered and managed by its managerial personnel. (i.e. the
board of directors.)
The shareholders are simply the holders of shares of the company and need not necessarily
be the managers/directors of the company.
The disadvantages of incorporating a limited company

• Higher cost and longer duration to incorporate
Incorporating a company will take longer to set up when compared to other types of
business structures. Incorporation also incurs higher start-up expenses.
Further there are also ongoing fees for maintaining a company.
• Double Taxation
Incorporating a business will also mean annually having two tax returns to file. This is
commonly referred to as double taxation. Double taxing involves corporation tax (for the
company) and income tax (for the shareholders).
• Complex Procedure
An incorporated company will need to take care of detailed books, take notes and minutes
of meetings, as well as create and maintain reports, a share register, tax return files, a share
transfer register, bank account records and audit books.
The reason being that certain statutes and regulations, require the company to do so.
• Lack of Control
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Once the company is incorporated it has a separate existence from the shareholders.
The board of directors will be actually controlling the business, except in certain instances
where the shareholder approval is needed.
But in a partnership, the partners have direct physical control of the business.
• Ongoing Paperwork
Most corporations are required to file annual returns of the company. The ongoing
paperwork also includes tax returns, accounting records, meeting minutes and any required
licenses and permits for conducting business.
Furthermore, there are certain statutory documents that need to be filed with the relevant
authorities. (Eg: Annual Returns to be filed with the Registrar of Companies)
In addition to that certain changes/developments in the company must be reported to the
relevant authorities within the prescribed time periods (Eg: a change of directors or the
secretary or the registered address).
• Difficulty in Dissolving
While perpetual existence is a benefit of incorporating, it can also be a disadvantage

because it can require significant time and money to complete the necessary procedures for
dissolution.
Opinion
As per the given information it seems that the main reason for considering converting the
existing partnership to a limited company, is that there is a need to attract more investors in
order to expand the business operations.
As an investor, Paula would definitely consider the security of her investment as well as the
gains she can make from it.
In considering the advantages and disadvantages mentioned above, it is advisable to convert
the existing partnership business into a limited company, as all the above benefits could be
enjoyed whilst limiting the investors’ liability as mentioned above.
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The Companies Act No. 7 of 2007 (“Act”), defines the corporate personality of a company, in
section 2(1) as;
“a company incorporated under this Act shall, by the name by which it is registered from time to
time, be a body corporate”.
This means that subsequent to incorporation a company becomes a separate legal personality
distinct from its owners (shareholders); and that the law recognizes a company as a legal entity or
“person” capable of acting independently and in its own right.
This concept of the separate legal personality of a company was also established in the landmark
case of Salomon v Salomon & Co. Ltd. (1897) AC 22, the facts of which are as follows:
Mr. Salomon, a boot manufacturer, converted his business into a limited liability company.
His wife, children and he were shareholders. Salomon also took out debentures in his own
name. About a year later the company became insolvent. The assets of the company were
just sufficient to pay the debentures, and nothing was left to pay the unsecured creditors.
The creditors sued against Salomon to recover their amounts.
It was argued on behalf of the unsecured creditors that, though the company was
incorporated, it never had an independent existence. It was S himself trading under another
name.
Held: As the company was duly incorporated, it is an independent person with its rights
and liabilities appropriated to itself, thus, making Salomon & Co. Ltd liable, and not
Salomon.
[Note: An alternative case relating to the separate legal personality concept would be the case of
‘Lee v Lee’s Air Farming Ltd (1960) 3 All ER 420’
Lee formed a company in which, out of 3000 shares, he held 2999 and the last share was
held by his lawyer. He was the governing director of the company and was also employed
as the chief pilot of the company. When he was killed in a plane crash his wife sued the
company claiming compensation under the Workers’ Compensation Act (under which the
employer is liable to pay compensation to a worker who suffers an injury during the course
of his employment).
She succeeded in her claim as the Privy Council held that the company has a separate legal
personality distinct from Lee and that the company could enter into a contract of
employment with Lee and also appoint him governing director, or chief pilot.]
By considering the above case/s and the legal provisions of the Act, it is clear that even though
Mr. Silva is the sole shareholder of ABC (Pvt) Limited, he and the company are two separate legal
persons in the eyes of the law.
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The decided case of ‘Macaura v Northern Assurance (1925) A.C. 619’, lays down the principle
that the property of a company does not belong to the owner of the company.
Mr. Macaura owned a timber estate. He sold timber from this estate to Irish Canadian
Sawmills Ltd., a company in which Mr. Macaura was the sole owner with nominees. He
took out insurance policies on the timber against fire with Northern Assurance in his own
name and not in the name of the company. Due to a fire, Northern Assurance refused to
pay because the timber was owned by the company and not by Mr. Macaura. Therefore,
because the company was a separate legal entity, it was not bound to pay Mr. Macaura any
money.
Held: That the insurers were not liable on the contract, since the timber that perished in the
fire did not belong to Mr. Macaura in whose name the insurance policy was held.
“It was not his. It belonged to the Irish Canadian Sawmills Ltd, He stood in no ‘legal or
equitable relation to’ the timber at all. His relation was to the company, not to its goods.”
The given scenario too is similar to the case of ‘Macaura v Northern Assurance (1925) A.C. 619.’
When considering the separate legal personality concept and the decision given in “Macaura’s”
case, it is clear that Mr. Silva will not be able to claim on the insurance policy, since the law
considers Mr. Silva and ABC Pvt Limited as two separate legal entities. Which results in the
furniture owner and the insurance policy owner, being two different persons.
Therefore in the given scenario, the correct stance has been taken by XY.
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CHAPTER 2
MCQs
(1) Different types of companies can be incorporated under the Companies Act No. 7 of
2007.
The following statements are relating to Private Limited Companies
i. Private Limited Companies are the companies which have a limited number
of shareholders with the maximum number being fifty.
ii. The fundamental rule in a Private Limited Company is that its shares can be
offered to the public.
iii. Generally the company model used mostly by start-up businesses is that of
a Private Limited Company.
iv. Private Limited Companies are also ideal for business models which require
power to be centralized in a smaller group of individuals.
a. Only i and iii.

b. Only ii and iv.
c. Only i, iii and iv.
(2) The following are in relation to the documents which are required to be submitted to
the Registrar of Companies at the point of incorporating a new company.
i. Name Approval application.

ii. Form 01
iii. Articles of Association
iv. Form 41
The correct document/s would be :
a. Only i.
b. Only i and ii.
c. Only i and iii.
d. Only i, ii and iii.
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(3) The following statements are in relation to the Articles of Association (AOA) of a
company under the Companies Act 7 of 2007 (Act).
i. The AOA is a document that specifies the regulations applicable for the company's
operations.
ii. The AOA is the constitution of a company.
iii. The Memorandum of Association is another name for the AOA.
iv. Companies incorporated under the Act are allowed to adopt the Model Articles
which are set out in the First Schedule to the Act.
The correct statements would be:
a. Only i, ii and iii.

b. Only i, ii and iv.
c. Only ii, iii and iv.
d. Only ii and iv.
10 Marks Questions

XYZ (Pvt) Limited, was formed with the sole objective, ‘to buy and sell plastic water
bottles’ to customers.
This objective was mentioned in the object clause in its Articles of Association.
Subsequently the company entered into a contract with Aruna, ‘to manufacture and sell
100 plastic water bottles’ for the use of the students of his school.
Determine with reference to a decided case and the provisions of the Companies Act No.
7 of 2007, whether the contract entered into between the company and Aruna is legally
valid.
16 CA Sri Lanka
Amal was appointed as a promotor for the incorporation of ZEY (Pvt) Limited.
During this process Amal was entrusted to purchase a land for the company to be incorporated.
Amal’s friend Vijitha had a land for sale for Rs. 4Mn, but he was finding it difficult to sell due to
a slump in the real estate market.
Amal got into an arrangement with Vijitha, whereby this land was sold to the company for
Rs. 5Mn and out of the sales proceeds Vijitha was to give Amal Rs. 1Mn.
Amal did not disclose this arrangement between himself and Vijitha, to the company.
Subsequently after the company was incorporated, at a board meeting one of its directors, Asiri
Perera, informed the board that he got to know from a third party about this secret arrangement
between Amal and Vijitha.
Advise the board, whether Amal has breached any of his duties as a promoter in this instance, and
whether the company can take any action against Amal to recover its loss.
Answer to Question (2) – [10 marks]
Amal as the promoter was obliged to adhere to the following duties towards the company in
relation to this land transaction with Vijitha.
A promoter has a duty of not making any secret profit out of the promotion of the company.
A secret profit is made by entering into a transaction on the promoter’s own behalf and then selling
the concerned property to the company at a profit, without making disclosure of the profit to the
company or its members.
The promoter can make profits in his dealings with the company, provided the promoter discloses
these profits to the company and its members.
What is not permitted is making secret profits. (i.e. making profits, without disclosing them to the
company and its members.)
Therefore Amal as the promoter should have made full disclosure to the company of all relevant
facts, including the profit he made from this transaction with the company.
CA Sri Lanka 17
As a result, Amal is in breach of his above mentioned duties as the promoter of the company.
Further the law says that in case the promoter fails to disclose the profits made by him in the course
of promoting the company, whereby the person relying on his statements, makes a loss, the
promoter will be liable to make good the loss, suffered by that person.
Therefore in the given scenario, the company has suffered a loss of Rs. 1Mn due to Amal’s breach
of his duties as a promoter.
Therefore the company can sue Amal for damages and for the loss suffered by the company on
this land transaction.
ABC PLC which listed in the Colombo Stock Exchange (CSE) very recently, has got to know
about the “Code of Best Practices on Corporate Governance”.
As the board of directors of the company are not very knowledgeable on corporate governance,
they have consulted you.
Describe to the board, what corporate governance is and its importance to a Public Listed
Company.
This principle, known as the 'Indoor Management Rule' or ‘Turquand Rule’, was authoritatively
laid down in the 19th century case of Royal British Bank v Turquand (1856) 6 E&B 327.
Explain:
 the basic facts and decision of the above case, and
 the 'Indoor Management Rule' or ‘Turquand Rule’.
18 CA Sri Lanka
20 Marks Questions
Neil, was the promoter on behalf of a future company, Pramuka (Pvt) Limited (PPL).
Neil agreed with Priyanka an experienced marketer, that she will be employed and
appointed as the Chief Marketing Officer (CMO) of PPL after its incorporation at a salary
of Rs.200,000/- per month.
Subsequently PPL was incorporated and the directors of PPL refused to employ Priyanka
as its CMO.
Priyanka is aware that for the type of contracts similar to the one she entered into with Neil
in his capacity as a promoter, the applicable legal provisions differed before and after the
Companies Act No. 7 of 2007 (Act).
(a) Identify the type of contract entered into between Neil as the promoter and Priyanka.
(b) Explain :
 the legal provisions applicable prior to the Act, for the type of contract you
mentioned in your answer to (a) above, and
 against whom Priyanka should initiate legal action for the breach of the contract.
(c) Explain :
 the legal provisions applicable after the Act, for the type of contract you mentioned
in your answer to (a) above, and
 against whom Priyanka should initiate legal action for the breach of the contract.
CA Sri Lanka 19
The Companies Act 7 of 2007 sets out the documents required to be submitted and the procedure
to be followed, in order to incorporate a company.
Saru and Viru who were involved in the plantation sector for almost 20 years decided to form a
private limited company.
As they are not experts in the company formation process, they wish to know the answers to the
following queries
:
 What must be considered when selecting a name for the proposed company;
 The incorporation process and the forms that they must file with the Registrar of Companies (ROC) to
incorporate this company;
 The proof they will get from ROC, that the proposed company has been duly incorporated.
 About the statutory press notices that have to be inserted in relation to this incorporation.
Advise Saru and Viru on their above mentioned queries.
20 CA Sri Lanka
ANSWERS - CHAPTER 2
MCQs
1. c. Only i, iii and iv.
2.
3.
Answer to Question (1)
• The Companies Act No. 7 of 2007 dispenses with the ultra vires rule.
• The ultra vires rule prevented companies from entering in to contracts outside its objects clause
mentioned in its memorandum or articles of association.
.
• In terms of the doctrine of ultra vires, a company was prohibited to engage in any business which
is not one of those specified in its object clause. Any act which was outside the object clause was
held to be ultra vires, hence void.
• In the decided case of Ashbury Railway Carriage and Iron Co. Ltd v Riche (1875); the Plaintiff
company was formed with the objective ‘to make and sell, or lend on hire, railway-carriages…’.
The company entered into a contract with Riche who would construct the railway. The contract
was ratified by all the company’s members. The company later terminated the contract and Riche
sued the company for its breach. The House of Lords held that the directors have acted beyond their
powers in the companies’ Articles and was therefore ultra vires.
• But in terms of Section 13, of the Companies Act No. 7 of 2007 (Act), freedom has been granted
to companies to carry out any business activity without being restricted to its object clause.
• Section 17 (1) of the Act provides that, “where the Articles of a company sets-out the objects
of the company, there shall be deemed to be a restriction placed by the Articles in carrying on any
business or activity that is not within those objects, unless the articles expressly provide otherwise.”
CA Sri Lanka 21
• But section 17 (2) of the Companies Act states that, “Where the Articles of a company provide for
any restriction on the business or activities in which the company may engage:
(a) the capacity and powers of the company shall not be affected by such restriction ; and
(b) no act of the company, no contract or other obligation entered into by the company and
no transfer of property by or to the company, shall be invalid by reason only of the fact that
it was done in contravention of such restriction.”
• Therefore even though the Act has dispensed with the requirement of the objects clause altogether,
a company may set out its objects in the Articles at its discretion.
• Further as Section 17(2) specifically states, the capacity and powers of the company shall not be
affected by its object clause, and therefore the contract entered into between the company and
Aruna is a legally valid one.
Amal as the promoter was obliged to adhere to the following duties towards the company in
relation to this land transaction with Vijitha.
A promoter has a duty of not making any secret profit out of the promotion of the company.
A secret profit is made by entering into a transaction on the promoter’s own behalf and then selling
the concerned property to the company at a profit, without making disclosure of the profit to the
company or its members.
The promoter can make profits in his dealings with the company, provided the promoter discloses
these profits to the company and its members.
What is not permitted is making secret profits. (i.e. making profits, without disclosing them to the
company and its members.)
Therefore Amal as the promoter should have made full disclosure to the company of all relevant
facts, including the profit he made from this transaction with the company.
As a result, Amal is in breach of his above mentioned duties as the promoter of the company.
Further the law says that in case the promoter fails to disclose the profits made by him in the course
of promoting the company, whereby the person relying on his statements, makes a loss, the
promoter will be liable to make good the loss, suffered by that person.
Therefore in the given scenario, the company has suffered a loss of Rs. 1Mn due to Amal’s breach
of his duties as a promoter.
Therefore the company can sue Amal for damages and for the loss suffered by the company on
this land transaction.
22
CA Sri Lanka
Corporate governance
Corporate governance is a process that aims to allocate corporate resources in a manner that
maximizes value for all stakeholders – shareholders, investors, employees, customers, suppliers,
environment and the community at large and holds those at the helm to be accountable by
evaluating their decisions on transparency.
Good corporate governance is globally accepted as being fundamental to an organisation’s

competitiveness, growth and sustainability.
There is great attention given by boards of directors to discharge their duties with high ethical
values and accountability in their commitment to good governance practices.
Some of the ingredients of a good corporate governance system are; strong business ethics, sound
policies and procedures, effective and efficient monitoring systems.
These corporate governance practices have been codified in the “Code of Best Practices on
Corporate Governance”, the latest version of which was released in 2017.
The importance of corporate governance to a PLC.
The Securities and Exchange Commission of Sri Lanka as the apex regulator of the capital market
in Sri Lanka, tries to maintain a high standard of corporate governance in order to maintain market
integrity.
In view of this broader objective, the Securities and Exchange Commission of Sri Lanka (SEC)
together with the Institute of Chartered Accountants of Sri Lanka (CA) published the first “Code
of Best Practices on Corporate Governance” in order to establish good corporate governance
practices in the Sri Lankan capital market.
Public Limited Companies (PLCs) are carefully scrutinised and monitored by the Securities &
Exchange Commission and the CSE, as the shareholding of these types of companies are held by
the general public.
Therefore PLCs are expected to adhere to and comply with the “Code of Best Practice on Corporate
Governance”.
But it is not mandatory for a PLC to follow this Code.
However, any PLC following and adhering to this Code is generally regarded as a good corporate
citizen, which in turn will enhance investor confidence in the company.
CA Sri Lanka 23
Royal British Bank v Turquand
Turquand was the liquidator of the insolvent ‘Cameron’s Coalbrook Steam, Coal, and Swansea
and London Railway Company’.
The company had given a bond for £2000 to the Royal British Bank, which secured the company’s
drawings on its current account. The bond was under the company’s seal, signed by two directors
and the secretary.
The company alleged that under its articles of association, directors only had power to borrow
what had been authorised by a company resolution. The company claimed that there was no
resolution passed authorising the issue of the bond and that therefore the company was not liable.
Held: The company was entitled to sue on the bond. As the requirement for the resolution was a
matter of internal regulation for the company and the bank could not know whether such resolution
had in fact been passed, it was entitled to presume that the resolution had indeed been passed.
‘Indoor Management Rule’ or the ‘Turquand Rule’
A person dealing with a corporation or company, has no obligation to ensure that the corporation
has gone through any procedures required by its articles, by-laws, resolutions, contracts, or policies
to authorize a transaction or to give authority to a person purporting to act on behalf of the
corporation.
Therefore a person acting in good faith and without knowledge of any irregularity and dealing with
a corporation need not inquire about the formality of the internal proceedings of the corporation,
but is entitled to assume that there has been compliance with its Articles and by-laws.
24
CA Sri Lanka
20 Marks Questions
Answer – Question 1 – [20 marks]
(a) Pre-Incorporation Contracts
The contract entered between Neil as the promoter and Priyanka, is known as a pre-
incorporation contract.
A pre- incorporation contract is a contract entered into for and on behalf of the company
before it is formally incorporated.
These types of contracts are used where the promoters must obtain properties or secure
other rights and obligations as a prerequisite to the incorporation of the company.
(b) Legal provisions applicable for a Pre-Incorporation Contract, prior to the Act.
• Under the law as it existed prior to the Act, pre incorporation contracts were not recognized
and hence had no legal effect.
• As two parties are needed to enter into contract, there cannot be a contract if one of the parties
to the contract is not in existence at the time of entering into the contract. i.e: the company
to be incorporated is not in existence and hence has no capacity to contract.
• Therefore as the company cannot enter into a contract before it comes into existence, an
agreement in the name of the company before its incorporation is void.
• The promoters, when entering into contracts, act as agents of the company. But when the
principal (i.e. the company) is not in existence, it cannot appoint an agent to act on its behalf.
• Therefore it is the promoters themselves and not the company, that become personally liable
for all contracts entered into by them even though they are acting for the prospective
company.
• The following decided case, explains very clearly the principles governing pre-
incorporation contracts, before the coming into being of the Act.
CA Sri Lanka 25
Kelner v Baxter [1866] L.R.2 CP 174
The promoters of a hotel company entered into a contract on its behalf for the purchase of
wine. When the company formally came into existence it ratified the contract. The wine
was consumed but before payment was made the company went into liquidation. The
promoters, as agents, were sued on the contract. They argued that liability under the
contract had passed, by ratification, to the company.
It was held, however, that as the company did not exist at the time of the agreement the
contract would be wholly inoperative unless it was binding on the promoters personally
and a stranger cannot by subsequent ratification relieve them from that responsibility.
• Such contracts cannot be ratified by the company after it has been formed.
• A ratification has a retrospective effect. Since the company was not formed at the time of
contracting, it cannot give authority to an agent at the time of contracting.
• Therefore in such a situation the promoter is solely liable for the breach of the contract,
because it is the promoter who entered into the contract, and not the company.
• Hence in applying the law prior to the Companies Act No. 7 of 2007, Priyanaka will not
be able to take action against the Pramuka (Pvt) Limited.
But she can take action against Neil who acted as the promoter in this instance.
(c) Legal provisions applicable for a Pre-Incorporation Contract, after the Act.
• The new Act however not only to recognize pre-incorporation contracts, but it regulates
the process by making it a legal requirement to ratify a pre-incorporation contract within a
reasonable time after the incorporation of the company.
• In terms of Section 24 of the Act, where a person enters into a pre incorporation contract
for and on behalf of a company, that person is deemed to give an implied warranty that,
(a) the company will be incorporated within such period as may be specified in the
contract, or if no period is specified, within a reasonable time after the making of
the contract; and
(b) that the company will ratify the contract within such period as may be specified in
the contract or if no period is specified, within a reasonable time after the
incorporation of such company.
26
CA Sri Lanka
Therefore under the above provisions, Priyanka can take action against Pramuka
(Pvt) Limited for the breach of the contract she entered through the promoter of the
company.
Things to consider when selecting the company name:
Section 6(b) of the Companies Act No. 7 of 2007 (Act) provides that the name of every ‘private
company’ shall end in the words "(Private) Limited" or by the abbreviation "(Pvt) Ltd”.
Section 7(1) of the Act provides that:

(a) A company shall not be registered by a name which is identical with the name of any
other company or of any registered overseas company.
(b) A company shall not be registered by a name which contains the words "Chamber of
Commerce", unless the company is a company which is to be registered under a licence
granted under section 34 without the addition of the word "Limited" to its name ; or
(c) A company shall not be registered by a name which is in the opinion of the Registrar
misleading.
Section 7(2) lists out the names that cannot be used by a company, unless the prior permission of
the Minister has been obtained.
Therefore S & V must first chose a name for their company which falls within the above mentioned
criteria.
The incorporation process and the forms to be submitted for incorporation:
Section 4(1) of the Companies Act reads as follows:
“Subject to the provisions of subsection (2), any person or persons may apply to incorporate a
company, by making an application for the same to the Registrar in the prescribed form signed by
each of the initial shareholders, together with the following documents :
(a) a declaration stating that to the best of such person or persons knowledge, the name
of the company is not identical or similar to that of an existing company.
(b) the articles of association of the company, if different from the articles set out in
the First Schedule hereto and signed by each of the initial shareholders.
(c) consent from each of the initial directors under section 203, to act as a director of
the company; and
(d) consent from the initial secretary under subsection (2) of section 221, to act as
secretary of the company.”
Therefore S & V must perfect and submit to the Registrar of Companies (ROC), the following
prescribed forms and documents (along with the ROC fees) in order to incorporate their proposed
private limited company:
CA Sri Lanka 27
a. Name Approval Application
b. Once the name has been approved by the ROC they must submit :
i) Form 01 : Application for Registration of a Company
ii) Form 18 : Consent and Certificate of Director
iii) Form 19 : Consent and Certificate of Secretary/Secretaries
iv) Articles of Association
Upon submission of the aforementioned documents and relevant payments, if the Registrar is
satisfied that all requirements have been fulfilled, he will cause a Certificate of Incorporation to
be issued.
Proof of incorporation:
The Certificate of Incorporation shall be conclusive evidence of the fact that all the requirements
under the Act relating to the incorporation of a company have been complied with and the company
has been incorporated under the Act on the date specified in such Certificate of Incorporation.
Section 5(2) of the Act states that the Certificate of Incorporation will contain the following:
(a) The name and number of the company.
(b) The date on which the company was incorporated.
(c) Whether the company is a limited company, an unlimited company or a company,
limited by guarantee.
(d) Whether the company is a private company.
(e) Whether the company is an off shore company.
Statutory requirement on the press notice regarding incorporation:
Section 5(2) of the Act states that within 30 working days of its incorporation, a company must
give public notice of its incorporation.
This notice must contain the following details of the company:

 Its name.
 Its number.
 Its registered address.
Further the Act says that this notice must be published at least once in the Gazette.
It must also be published at least once in a daily newspaper in the Sinhala, English and Tamil
languages.
28
CA Sri Lanka
CHAPTER 3
EQUITY AND DEBT CAPITAL
MCQs
1. The following statements are in relation to the ‘reduction of stated capital’ by a

company.
i. A company can reduce its stated capital by passing an ordinary resolution of its
shareholders.
ii. A company must give public notice of the proposed reduction in its stated capital
at least sixty days prior to the passing of such resolution.
iii. Where a company has agreed to obtain its creditors’ consent prior to the reduction,
a resolution passed without such consent shall be invalid.
iv. Under special circumstances, a company can reduce its stated capital by merely
passing a unanimous resolution of directors.
a. Only i and iii.

b. Only i and iv.
c. Only ii and iii.
d. Only iii and iv.
2. The following statements are in relation to ‘a company providing financial assistance to
purchase its own shares’.
i. Unless the company is a licensed bank, it is prohibited in granting financial assistance to
purchase its own shares.
ii. The Companies Act No. 7 of 2007, permits a company to fund the purchase of its own
shares, when it is in the interests of the company.
iii. The Companies Act No. 7 of 2007, does not under any circumstances permit a company
to fund the purchase of its own shares.
iv. It is mandatory for the company to satisfy the solvency test immediately after giving
financial assistance to purchase its own shares.
a. Only i and ii.

b. Only i and iii.
c. Only ii and iii.
d. Only ii and iv.
(3) The Companies Act, No. 7 of 2007, recognizes derivative actions under section 234.
CA Sri Lanka 29
Accordingly courts may, on the application of a shareholder or director of a company, grant leave
(permission) to that shareholder or director to file action on behalf of the company.
The following statements are relating to the factors a court will consider when granting such leave.
i. The likelihood of the success of proceedings.
ii. The costs of the proceedings in relation to the relief likely to be obtained.
iii. The percentage of shareholding of the shareholder in the company.
iv. The percentage of shareholding that the director has in the company.
The correct ones would be :
a. Only i and ii.

b. Only i and iii.
c. Only ii and iv.
d. Only iii and iv.
30 CA Sri Lanka
10 Marks Questions

Equity capital is the money raised by a business in exchange of share ownership in the company.
Explain the advantages and disadvantages of raising equity capital.

Dealings in relation to the shareholding in a company are closely monitored and regulated by the
Companies Act No. 7 of 2007 (Act), as shareholding essentially constitutes the ownership of a
company.
Redemption of shares is one such type of share dealing that can be seen in a company.
The directors of a company are looking at the possibility of redeeming most of the shares of the
company.
You are a well-known expert on this subject. Therefore the directors have consulted you in this
regard.
Explain to the directors the types of redemptions recognized by the Act.
At the recent Annual General Meeting of DEF (Pvt) Limited, Mr. Alwis one of the minority
shareholders raised concerns over one of the company’s transactions, which according to him will
result in the company eventually going bankrupt.
The directors did not take his concerns seriously and some of the shareholders blamed Mr. Alwis
for raising these concerns.

Advise Mr. Alwis whether he can take a derivative action on behalf of the company in relation to
this transaction.
CA Sri Lanka 31
Its Board of Directors of Sanwin (Pvt) Limited decided to close down the part of its business which
involved the import of motor vehicles, due to the Covid 19 epidemic.
In relation to this decision the Board resolved to dispose 51% of the total assets of the company.
Presently the total assets of the company amounts to Rs 100mn.

(a) Analyse as per the Companies Act, No. 7 of 2007, the type of transaction this decision falls
under.
(b) Explain the steps the directors should take in executing this decision.
20 Marks Questions
Question 1 – [20 marks]

The directors of YZ PLC at their recent board meeting discussed the possibility of paying a
dividend to its shareholders since they have a considerable profit this year.
However, they were not sure on the steps they must follow before paying dividends.
Further, Anil one of the directors, raised a question on the requirement of a solvency test before
paying a dividend.
Finally, the directors of YZ, decided to seek an opinion from you as an independent accountant.
At the consultation with you, the directors shared the following information about YZ with you:
Total Assets = Rs 500mn; Total Liabilities = Rs. 300mn ; Stated Capital = Rs. 100mn.
These figures are after accounting for the proposed dividend declaration.
You are required to :

(a) Advise with reference to the provisions of the Companies Act, No. 7 of 2007;
 what a dividend is, and
 the steps to be followed in paying a dividend to the shareholders.
[In your explanation make references to distributions and the solvency test.]
32 CA Sri Lanka
(b) Calculate whether YZ will be able to pay a dividend, based on the result of the solvency
test.

The Directors of Sarupath PLC intend to issue shares of the company to the public and raise money
in order to rebuild the company after the COVID-19 epidemic.
However, they are not sure of the various types of shares permitted by the Companies Act No. 7
of 2007, for a Listed Company to issue to the Public.
Hence they have consulted you as the company’s Financial Controller.
Explain the different types of shares a Listed Company could issue to the public in order to raise
equity capital.
CA Sri Lanka 33
ANSWERS - CHAPTER 3
EQUITY AND DEBT CAPITAL
MCQS
1
c. Only ii and iii.
2. .
3. a. Only i and ii.
10 Marks Questions

The advantage of raising equity capital
• Equity financing allows a business to obtain funds without incurring debt and without
having the burden of associated interest/principal payments.
• Lack of recurring principle/interest payments makes the business better able to cope with
the ebb and flow of the business and increases its margin of safety.
• The corporation’s risk is shared with its shareholders.
• The correct investors can add a significant value.
• It is a smooth transition option for business owners looking to ease out of the business.
• May be the only possible type of capital for rapidly growing and asset-light companies.
• An equity investor is committed to the company until his/her exit. As a result if the
company gets into trouble, the equity investor is likely to help with the turn around.
The disadvantages of raising equity capital

• The owners are answerable to the investors and this results in some loss of control.
• It can be more expensive than debt capital (albeit at a lower risk).
• It takes longer to raise equity capital than debt capital.
• The terms of the deal can be complex. Without good counseling, the company may
unknowingly allow the investor to undervalue the company and take a disproportionately
higher percentage of the company compared to the value of the investment made.
34 CA Sri Lanka
Methods of redemption of shares which are recognized by the Act.
• Redemption at the option of the holder of the shares

Where a share is redeemable at the option of the holder of the share and the holder gives
proper notice to the company requiring the company to redeem that share, such redemption
will take place on the date specified in the notice or if no date is specified, on the date of
receipt of the notice.
Once redeemed, the share is deemed to be cancelled on that date. From that date, the former
shareholder ranks as an unsecured creditor of the company for the sum payable on
redemption.
• Redemption on a date fixed in the Articles

In terms of Section 69 of the Companies Act, where a share is redeemable on a specified
date as set out in its Articles of Association, the company shall redeem the share on that
particular date.
Here too once redeemed, the share is deemed to be cancelled on that date. From that date,
the former shareholder ranks as an unsecured creditor of the company for the sum payable
on redemption.
• Redemption by the company at its own option

The redemption by the company at its own option is considered as different to the other
two forms of redemptions. It is because the directors have the opportunity to misuse this
option for their own benefit.
Therefore before such redemption is made, the board of directors of the company, must
resolve that the redemption is in the best interest of the company.
A redemption of a share at the option of the company is deemed to be an acquisition
by the company of the share, for the purposes of section 64(3)[‘purchase of own shares by
a company’] and a distribution for the purposes of section 56.
35
CA Sri Lanka
The right to a derivative action was originally developed as an exception to the rule laid down in
Foss v. Harbottle (1843) 67 ER 189, in which it was held that proper party to bring an action for
wrongs committed against a company was no one but the company itself.
This rule was severely detrimental to the rights of the minority shareholders as where the majority
shareholders who are in control of the company fail or ignore to act in the best interest of the
company, the minority shareholders became helpless.
The principle underlying derivative action is that since a company has a duty to act in the best
interest of its shareholders, a shareholder has a right to file a suit acting on behalf of the company
when the directors and management are failing to act for the benefit of the company and all of its
shareholders.
A derivative action often arises in cases of fraud, mismanagement, self-dealing and/or dishonesty
which are being ignored by officers and the board of directors of a corporation.
The Companies Act No. 7 of 2007, recognizes derivative actions under section 234.
Accordingly, the court may, on the application of a shareholder or a director of a company, grant
leave to that shareholder or director to:
(a) bring proceedings in the name and on behalf of the company or any subsidiary of that
company.
Therefore when relating the above theory into the given scenario, Mr. Alwis is in position to take
an action on behalf of the company.
However according to section 234(2) he has to convince the court in order to obtain leave to
proceed.
The court will consider the following in granting leave;
(a) the likelihood of the success of proceedings.
(b) the costs of the proceedings in relation to the relief likely to be obtained.
(c) any action already taken by the company or subsidiary to obtain relief.
(d) the interests of the company or subsidiary in the proceedings being commenced, continued,
defended or discontinued, as the case may be.
Further section 234(3) says that leave to bring proceedings may be granted only if the court is
satisfied that either,
(a) the company or subsidiary does not intend to bring, diligently continue, defend or
discontinue the proceedings, as the case may be or
36 CA Sri Lanka
(b) it is in the interests of the company or subsidiary, that the conduct of the proceedings should
not be left to the directors or to the determination of the shareholders as a whole.
Therefore in conclusion, Mr. Alwis can take a derivative action on behalf of the company, in
according to section 234 of the Act.

(a) Transaction type :
As per section 185 of the Companies Act the decision taken by the Sanwin PLC falls under a major
transaction.
The Act states that the following activities fall under major transactions and the given scenario
falls unto point (b) below.
(a) the acquisition of or an agreement to acquire whether contingent or not, assets of a value
which are greater than half the value of the assets of the company before the acquisition.
(b) the disposition of an agreement to dispose of, whether contingent or not, the whole or more
than half by value of the assets of the company.
(c) a transaction which has or is likely to have the effect of the company acquiring rights or
interests or incurring obligations or liabilities of a value which is greater than half the value of the
assets before the acquisition; or
(d) a transaction or series of related transactions which have the purpose or effect of
substantially altering the nature of the business carried on by the company.
(b) Steps in executing the transaction:

As the proposed transaction is a major transaction, the directors of the company must adhere to
the following steps prior to the execution of their decision.
Section 185(1) says that such a transaction must be either;
(a) approved by a special resolution, or
(b) contingent on approval by special resolution, or
(c) consented to in writing by all the shareholders of the company, or
(d) a transaction which the company is expressly authorized to enter into by a provision in its
articles, which was included in it at the time the company was incorporated.
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Answer - Question 1 – [20 marks]
Part (a)
Dividend:
Section 60(1) states that a dividend is a distribution out of profits of the company, other than an
acquisition by the company of its own shares or a redemption of shares by the company.
A dividend is the benefit that the shareholders get in return for their investment in the company.
The shareholders of the same class are entitled to equal treatment in respect of dividends.
A distribution made by the company may be termed as a 'dividend' if it fits the description of a
dividend as specified in Section 60(1).
Steps to be followed in paying a dividend to the shareholders:

Section 56 of the Act says that, when making a distribution which includes a dividend, it must be
authorized by the board, and unless the Articles of the company provide otherwise, be approved
by the shareholders by ordinary resolution.
The board has the discretion to propose a dividend declaration at such time and in such amount as
it thinks appropriate; but only if the company passes the “solvency test” immediately after the
dividend is declared.
Further the directors must obtain a solvency certificate from auditors of the company.
Section 56 also says that the directors’ who vote in favour of making the dividend distribution,
must sign a certificate stating that in their opinion the company will satisfy the solvency test
immediately after the distribution is made.
Section 57(1) of the Companies Act provides that a company shall be deemed to have satisfied the
solvency test, if:
(a) it is able to pay its debts as they become due in the normal course of business; and
(b) the value of the company's assets is greater than ,
(i) the value of its liabilities, and
(ii) the company's stated capital.
38 CA Sri Lanka
Section 57(2) says that In determining whether a company satisfies the solvency test, the board:
(a) shall take into account the most recent financial statements of the company
prepared in accordance with section 151 of the Act,
(b) shall take into account circumstances the directors know or ought to know which
affect the value of the company's assets and liabilities,
(c) may take into account a fair valuation or other method of assessing the value of
assets and liabilities.
As per the given information about the financial position of YZ, its;
Total Assets = Rs 500mn.
Total Liabilities = Rs. 300mn.
Stated Capital = Rs. 100mn.
Therefore it can be seen that YZ’s, Assets > Liabilities + Stated Capital
[ie: 500 > 300+100]
Further if YZ is in a position to pay off its debts when such debts are demanded, then it can pass
the solvency t immediately after the proposed dividend declaration.
If the solvency test is passed, then YZ can go ahead and pay dividends to its shareholders.
Answer - Question 2 – [20 marks]

Types of Shares a Listed company can issue to the public:
There can be different classes of shares in a company. They are as follows:
Ordinary Shares (Voting Shares)

The basic form of shares is ordinary shares. Most companies have just ordinary shares. Ordinary
shares vest the owner with one vote per share; entitlement to participate equally in dividends; and
if the company is wound up, share in the proceeds of the company's assets after all the debts have
been paid. Holders of ordinary shares have a right to unrestricted participation in the dividends of
the company and to the distribution of its remaining property. The risk is that holders of ordinary
shares will be entitled to dividends only if the company makes profits.
Preference Shares
In terms of Section 49(3)(b) of the Companies Act, a Company can issue shares having a ranking
above ordinary shares in specified aspects. Preference shareholders have a priority to a fixed
dividend and to a return of capital in a winding up. These usually confer rights to preferential
dividends which may be cumulative or non-cumulative. The terms relating to preference shares
have to be clearly stated at the time of issue.
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Deferred Shares
These shares are issued with limited rights. In a modern world company, the tendency is not to
issue deferred shares. The fact that the deferred shares have no right to dividends during a
particular period does not mean they are not ordinary share capital. Deferred shares are often
created for commercial reasons, to enable private investors to take capital growth instead of
dividend income. They are generally issued to founders or directors of the company. These shares
receive no rights to a company's remaining assets in the event of bankruptcy until all common and
preferred shareholders have been paid.
Non-voting Shares
In terms of Section 49(3)(c) of the Act, the company can issue shares which do not carry voting
rights at all, or which carry limited rights of voting in specified situations as set out in its Articles
of Association. Such shares are usually issued for the purposes of retaining control with the
promoters. For example, there could be situations where the law prohibits foreign control of certain
types of companies.
Redeemable Shares
In terms of Section 49(3)(a) of the Act, redeemable shares are created on the understanding that
they will be bought back by the company. The redemption may be at the option of the company or
the shareholder, or on a fixed date or upon the occurrence of an event. The price at which the
shares must be redeemed may also be specified either on the basis of a predetermined price or a
formula.
40 CA Sri Lanka
CHAPTER 4
DIRECTORS, COMPANY SECRETARY AND AUDITORS
MCQs
(1) The following are in relation to the different types of directors that can be appointed in a
Public Limited Company in Sri Lanka.
i. Non-Executive Directors
ii. Executive Directors
iii. Independent Non-Executive Directors
iv. Nominal Directors
d. Only i, ii and iv.
(2) The following statements are in relation to the persons who are disqualified from being
appointed as directors of a company under the Companies Act No. 7 of 2007.
i. A person who is under eighteen years of age.

ii. A person who is an undischarged insolvent.
iii. A person who has been adjudged to be of unsound mind.
iv. A person who is a corporate personality.
The correct ones would be :
a. Only i and ii.

b. Only i, ii and iii.
d. Only iv.
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(3) The Companies Act No. 7 of 2007 has codified the duties of directors, and the statements
given below are in relation to these duties.
i. A director has a duty to act in good faith.

ii. A director shall enter in the company’s interests register when he has an
interest in a transaction with the company.
iii. A director can at any time disclose any information, as long as the
information was received by him in the course of his functions.
iv. Directors have a duty to call for an Extraordinary General Meeting of the
company, when its net assets are less than a quarter of its stated capital.
The correct duties are mentioned above in:
a. Only i.
b. Only ii.
c. Only i and ii.
d. Only iii and iv.
42 CA Sri Lanka
10 Marks Questions

The requisite qualifications for the post of a Company Secretary were prescribed by the
regulations made under the Companies Act No. 17 of 1982 and published in the Gazette
Extraordinary No. 471/6 of 14th September 1987.
These qualifications were also recognized as valid under the Companies Act No. 7 of 2007.
Sunil just completed his Finance Degree from the University of Colombo, and he is planning
to become a Company Secretary.
Required:
Explain to Sunil these gazetted qualifications which are required to be a Company Secretary.

‘Corporate Governance’ refers to the way a corporation is governed.
The responsibility of implementing this concept in a company, has been placed on its board of
directors.
You are required:
Explain briefly the concept of corporate governance and the role of directors in ensuring the
establishment of this governance culture within their company.

Mr. Wilson is the Chairman of the Board of Directors of Wilson Motors Limited (WML), a
public company which has been in business for almost 50 years.
Mr. Wilson and his five sons are the directors of the company.
Mr. Wilson will be reaching 70 years in November 2020.
As he intends to continue as the chairman of the board, for a further 2 years, he consults you.

Advise Mr. Wilson with reference to the provisions of the Companies Act 7 of 2007, as to how
he can remain as the chairman for 2 more years after reaching the age of 70 years.
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You have gone for an interview for the post of Accountant at P & S (Pvt) Limited, a startup
company.
At the interview you have been asked to do a presentation on the spur of the moment.

Describe to the interview board, as per the Companies’ Act No 7 of 2007;
a. the main function of an auditor, and
b. the provisions to be followed, when appointing an auditor to the company.
20 Marks Questions

Mr. Ratnayake (R), was in the Banking industry for almost 35 years and has gathered vast
experience in both commercial and development banking.
After his retirement, Samadi Bank PLC – a leading commercial bank in the country, invited R to
be one of the non-executive directors of the bank.
Yasantha, the Company Secretary of Samadi Bank PLC, has informed R that he must fill an
affidavit and declaration to prove his fitness to become a director of the bank.
Before filling them, he consults you, in order to ensure that he is eligible to accept this
directorship of the bank.
At the consultation, he informs you that previously he had filed a case against one Mr. Perera on
a land dispute, and that the verdict of this case had been against R.

Advise R;
(a) on the criteria laid down in the Banking Act No. 30 of 1988, that must be fulfilled in order
become a director of a licensed commercial bank;
44 CA Sri Lanka
(b) as to whether the verdict of the land case filed by him previously, will be treated as a
disqualification under the provisions of the Companies Act No. 7 of 2007, to be appointed as
a director in Samadi Bank PLC.
Raw Builders (Pvt) Limited (company) is engaged in constructing apartments.

Karu, Anil, Sam and Ravi are its directors.
On behalf of the company, Sam contracts to buy a house from Pediris for Rs 25 million.
Two return air tickets to Dubai were given to Sam by Pediris, in appreciation of negotiating this
deal. Sam did not inform the company nor the director board about this.
The company wishes to convert this house to an apartment and that task was given to Ravi.
The contract for the interior designing of the apartment was awarded to New Deco (Pvt) Limited,
in which Ravi is the main shareholder.
Before the contract was given to New Deco (Pvt) Limited, Ravi mentions this fact to Karu and
Anil when he met them at a club.
Required:
Explain:
(a) the duties imposed on a director by the Companies Act No. 7 of 2007.
(b) whether Sam and Ravi have respectively breached these duties.
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ANSWERS - CHAPTER 4
Directors, Company Secretary and Auditors
1.
2.
b. Only i, ii and iii.
3.
c. Only i and ii.
46 CA Sri Lanka
The requisite qualifications for the post of Secretary which were published in the Gazette
Extraordinary No. 471/6 of 14th September 1987 are given below as follows.
A person to be entitled to act as the secretary of a company having a turnover of

Rs. 1 million or more per annum or a stated capital of Rs. 500,000/- or must be : -
(1) firstly a citizen of Sri Lanka.
Secondly he/she must have/be any one of the following:

(2) an Attorney - at - Law, or
(3) a member of the Institute of Chartered Accountants of Sri Lanka.
(4) a member of the Association of Chartered Secretaries and Administrators of Sri Lanka, or
(5) a member of the Institute of Cost and Management Accountants (now The Chartered
Institute of Management Accountants), or
(6) a member of an Association or Institute approved by the Minister, which provides a

course in Company Law or Company Secretarial Practice, or
(7) a person who has obtained any special qualification in relation to company secretarial
work from an institution or other body approved by the Minister, or
(8) a person who, by virtue of holding or having held any other position, or being a member
of any other body in the public or private sector for a period of not less than 20 years,
appears to the Registrar to be capable of discharging the functions of secretary of a
company, or
(9) on the day immediately prior to the date of coming into operation of the Companies Act
No. 17 of 1982 held the office of secretary or deputy secretary or assistant secretary of a
company and satisfied the Registrar of his/her competence to discharge the duties of a
secretary.
(10) For the purpose of the abovementioned provisions, a corporate body or a firm may
function as secretary of a company if a director of such corporate body or all the partners
of the firm, as the case maybe, possess the qualifications set out in item (a) and any one of
the qualifications set out in item (b) above.
CA Sri Lanka 47
Corporate governance in essence, is the system by which companies are directed and controlled
in the proper manner. The board of directors of a company are particularly responsible for the
governance of that company and it is noted that the rules, codes and directives all indicate that it
is “proper governance” that is required and not “mere governance”.
The Code of Best Practice in this regard has been established in this regard by the Institute of
Chartered Accountants of Sri Lanka (CA Sri Lanka) which relate to Financial Aspects of
Corporate Governance (1997), the Code of Best Practice on Audit Committees (2002) and the
Code of Best Practice on Corporate Governance (2003).
While the Voluntary Code of Best Practice on Corporate Governance is as the name suggests –
voluntary, in relation to listed companies, the Mandatory Code of Corporate Governance has also
been adopted in 2008 which provides minimal regulation with regard to corporate governance.
Particularly this Code deals with the inclusion of non-executive directors and independent
directors; the requirement of disclosures relating to directors; setting out a criterion to define
“independence”; and setting up a remuneration committee and an audit committee in listed
companies.
The Code of Best Practice on Corporate Governance states that “Directors are accountable to the
shareholders and shareholder participation is necessary to make that accountability effective.
This should be done in a structured manner to be progressive, effective and fair and not to in any
way hamper the overall business objectives of the company.
In this regard the responsibilities of the board include setting the company’s aims, providing the
correct leadership to put them into effect, supervising the management of the business and
reporting to the shareholders on their upright stewardship.
48 CA Sri Lanka
Section 210 of the Act, addresses the age limit of directors as follows -
(1) No person shall be capable of being appointed a director of a public company or of a private
company which is a subsidiary of a public company if he has attained the age of seventy years.
(2) Subject to the provisions of section 211, a director of a public company or of a private
company which is a subsidiary of a public company, shall vacate office —
(a) at the conclusion of the annual general meeting commencing next after he attains the age of
seventy years.
(b) if he is reappointed as a director after attaining the age of seventy years, at the annual general
meeting following that reappointment.
Therefore, any person shall not be appointed as a director of a public company or of a private
company which is a subsidiary of a public company, after he has reached the age of seventy. In
terms of section 210 (as explained above), where a director reaches the age of seventy, he shall
vacate office at the conclusion of the annual general meeting immediately following the
attainment of that age.
As WML is a public company, the provisions of section 210, applies to Mr. Wilson.
But an exception to section 210 is provided in section 211, which allows a director who has
attained seventy years of age to be appointed as a director if the appointment is or was made or
approved by a resolution passed by the company at a general meeting which declares that the age
limit referred to in section 210 shall not apply to that director, However, any resolution approved
at a general meeting will be valid only for one year from the date of that directors appointment.
In applying the provisions to the given scenario, Mr. Wilson must vacate the office of director at
the next annual general meeting of the company, to be held any date after he attains the age of 70
years in November 2020.
The fact that he vacates as a director means that he automatically vacates as the chairman of the
director board.
But as Mr. Wilson wishes to remain as the chairman of the director board for the next 2 years
after reaching the age of 70 years, he can do so if the following procedure is followed:
a. The company must at a general meeting, pass a resolution to say that the age limit of
70 years given in section 210 will not apply to Mr. Wilson.
b. Once this resolution is passed, Mr. Wilson can remain as the chairman for a further
period of one year from the date he was so appointed.
c. Since he intends to continue for 2 more years after passing the age of 70 years, the
steps (a) and (b) above, must be repeated until the 2 year period expected by Mr.
Wilson is covered.
CA Sri Lanka 49
Main function of an auditor

The main function of the auditor is to audit and express an opinion on the company’s financial
statements (and the group financial statements where applicable) for the accounting period after
the balance sheet date for which the financial statements were audited.
Appointment of the Auditor as per the Companies’ Act No 7 of 2007 (“Act”)

Section 154(1) of the Act says that an auditor is appointed at the annual general meeting of the
company. This appointment is done by the shareholders passing an ordinary resolution.
According to Section 154(1) (a) of the Act, an auditor so appointed will hold office from the
conclusion of the meeting in which he was appointed until the conclusion of the next annual
general meeting.
The first auditor of a company may be appointed by the board of the company before the first
annual general meeting, and if so appointed, will hold office until the conclusion of that meeting.
(Section 159).
Though the appointment of an auditor of a company is an inherent right of shareholders, the

directors have also been bestowed with this power in limited circumstances.
According to section 154 (2) the board of a company may fill any casual vacancy in the office of
the auditor, but while the vacancy remains the surviving or continuing auditor, if any, may
continue to act as auditor.
Section 156 provides that a partnership may be appointed by the firm’s name to be the auditor of
a company, if the partners are persons who are qualified to be appointed as auditors of the
company.
50 CA Sri Lanka
Part (a)
Under section 42 of the Banking Act No. 30 of 1988, a director of a licensed commercial bank
needs to be fit and proper to hold such office and should not be prevented from doing so by any
written law. The following criteria is laid sown in this section, to determine whether a person is
capable and proper to be such a director:
(a) He must possess academic or professional qualifications or effective experience in
banking, finance, business or administration or of any other relevant discipline.
(b) There must be no finding of any regulatory or supervisory authority, professional
association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka
or abroad, to the effect that such person has committed or has been connected with the
commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct.
(c) He must not be subject to an investigation or inquiry consequent upon being served with
notice of a charge involving fraud, deceit, dishonesty or other similar criminal activity, by any
regulatory authority, supervisory authority, professional association, Commission of Inquiry,
tribunal or other body established by law, in Sri Lanka or abroad.
(d) He must have not been convicted by any court in Sri Lanka or abroad in respect of a
crime committed in connection with financial management or of any offence involving moral
turpitude.
(e) He must not be an undischarged insolvent, nor be declared a bankrupt in Sri Lanka or
abroad.
(f) He must have not failed, to satisfy any judgment or order of any court whether in Sri
Lanka or abroad, or to repay a debt.
(g) He must have not been declared by a court of competent jurisdiction in Sri Lanka or
abroad, to be of unsound mind.
(h) He must have not been removed or suspended by an order of a regulatory or supervisory
authority from serving as a director, Chief Executive Officer or other officer in any bank or
financial institution or corporate body, in Sri Lanka or abroad.
(i) He must have not been a director, Chief Executive Officer or held any other position of
authority in any bank or financial institution, whether in Sri Lanka or abroad –
(i) whose license has been suspended or cancelled; or
(ii) which has been wound up or is being wound up, or which is being compulsorily
liquidated.
CA Sri Lanka 51
Therefore in the given scenario, if Mr. Ratnayake meets the guidelines given above, he is eligible
to be appointed as a director of Samadi Bank PLC.

Part (b)
Section 213(1) of the Companies Act No. 7 of 2007 which deals with disqualifications of
directors, provides as follows:
Where a person—
(a) has been convicted of any offence under this Act (Companies Act No. 7 of 2007) which is
punishable by imprisonment;
(b) has been convicted of an offence involving dishonest or fraudulent acts;
such person shall not, during the period of five years after the conviction or adjudication, as the
case may be, be a director of a company, unless that person first makes an application to obtain
the leave of the court.
Further section 214(1) provides that;

Where a person—
(c) has been convicted of an offence of involving dishonest or fraudulent acts in a country other
than Sri Lanka; or
(d) was a director of a company which became insolvent and that person’s conduct as a director
of that company or of any other company makes that person unfit to be a director of a company,
the court may make an order that the person shall not, without leave of court, be a director of a
company, for such period not exceeding ten years as may be specified in the order.
Mr Ratnayake’s losing a land case is not an offence which falls under the criteria specified above
in both sections 213 and 214 of the Companies Act.
Therefore it will not be a disqualification factor under the Companies Act, for him to become a
director of Samadi Bank PLC.
52 CA Sri Lanka
Part (a)
Directors Duties
The Companies Act No. 7 of2007 mentions the duties of directors as follows:
• A director has a duty to act in good faith, in what he believes to be in the interest of the
company. Directors are bound to act in the interests of the company even though it might be
against their own interest. [Section 187]
However, a director of a wholly owned subsidiary may act in the interests of the holding
company even though it may not be in the interests of the subsidiary.
• A director of a company shall not act or agree to the company acting, in a manner that
contravenes any provisions of the Act, or the provisions contained in the Articles of the
company. [Section 188]
• A director shall not act in a manner which is reckless or grossly negligent and shall exercise the
degree of skill and care that may reasonably be expected of a person of his knowledge and
experience. [Section 189]
• The directors are permitted to rely on information provided to them by employees, professional
advisors and experts within their areas of competence, or by other directors. However, in doing
so, they should act in good faith, make proper inquiries when there is reason to do so and not
have reason to believe that such reliance was unwarranted. [Section 190]
• A director shall enter in the company’s interests register when he has an interest in a transaction
or proposed transaction with the company. Such disclosure must set out the nature and extent of
such interest. [Section 192]
A director of a company is considered to be “interested” in a transaction if he receives a
financial benefit from the transaction, or if he has a financial interest in another party to
the transaction, if he is a director or officer of another party who will receive a financial
benefit from the transaction or if he is the parent, child, or spouse of another party to or
person who will receive a financial benefit from the transaction. [Section 191]
• A director shall not disclose or use any information received by him in the course of his
functions, except for the purposes of the company or as required by law. [Section 197]
• If a director believes the company is unable to pay its debts as they fall due, the director must
immediately call a board meeting to consider whether the board should apply to court to wind up
the company. If a director fails to do so and the company is subsequently placed in liquidation a
court may hold the directors liable for any loss suffered by the creditors as a result of the
company continuing its business. [Section 219]
CA Sri Lanka 53
• Where a company’s net assets are less than half of its stated capital, the board must call an
Extraordinary General Meeting within twenty working days of the directors becoming aware of
the fact. Such notice of the meeting shall be accompanied by a report from the board advising the
shareholders of the nature and the extent of the loss suffered. [Section 220]

Part (b)
Has Sam breached any of his duties as director?

The question is whether Sam has breached his duties as a director, in receiving return air tickets
from Pediris, without informing the company.
A director is a fiduciary for the company. Section 187 of the Act says that a director must act in
good faith – this is also a common law duty of loyalty. Therefore the receipt of the return air
ticket raises the possibility of a breach of fiduciary duty.
Directors must act honestly and in good faith and in the interests of the company when they are
carrying out their functions.
Sam has a fiduciary duty to make a disclosure of such benefit. He cannot gain secret benefits -
must act honestly - cannot make a selfish advantage or gain personal benefit to the disadvantage
of the company.
If a director profits personally from his position, even if the company has not suffered a loss
because of this action, he must pass on any profits made to the company.
In particular, a director must not allow his personal interests to conflict with the company – IDC
V Cooley.
Nor must he make a secret profit – Regal (Hastings) Ltd V Gulliver.
Therefore accepting a benefit from a third party to the detriment of the co is a clear violation of
section 187 of the Act.
Therefore in the given scenario, it is clear that Sam has breached his duties as a director.
54 CA Sri Lanka
Has Ravi breached any of his duties as director?
The issue is whether Ravi has allowed his personal interest to be in conflict with that of the
company.
Ravi has a duty to avoid a conflict of interest and must not allow any conflict between his
personal interests and his duties as a director.
In other words a director must avoid a situation in which he has, or can have, a direct interest that
conflicts, or possibly may conflict, with the interests of the company. [Aberdeen Railway Co v
Blaikie Bros.]
If a director has not made a disclosure of an interest he has in a transaction and had withheld
such interest or information for his benefit and in ignorance if the company has entered into a
transaction such director would be liable for a breach of fiduciary duty that he owed to a
company.
Section 192 - A director is under a statutory duty to declare the nature of any interest in which he
is "in any way, whether directly or indirectly, interested" in relation to "a contract or proposed
contract with the company", to a meeting of the directors of the company. Such disclosure should
be to the whole board.
Section 192 requires directors to declare the nature and extent of their interest in any proposed
transaction or arrangement with the company. The declaration must be made before the company
enters into the transaction or arrangement.
Disclosure may be not necessary if the other directors are already aware of the transaction or
arrangement and it has been authorized by them.
However, Ravi has only told Karu and Anil and not Sam, when the disclosure should have been
to the entire board.
Also, this disclosure may not amount to a full disclosure declaring the ‘nature and extent’ of his
shareholding interest in New Deco (Pvt) Limited.
Therefore from the given facts it is clear that Ravi has breached his duties as a director.
CA Sri Lanka 55
CHAPTER 5
MEETINGS, RESOLUTIONS AND COMPANY RECORDS
MCQs
(1) Given below are different types of meetings that can be held by an incorporated
company.
i. The Annual General Meeting.
ii. Extra Ordinary General Meetings.
iii. Board Meetings.
iv. Corporate Management Meetings.
Which of the above are recognized as shareholder meetings?

a. Only i and ii.
b. Only ii and iii.
(2) In order to be effective, the following events require the passing of a resolution of the
shareholders of the company.
i. To change the name of the company.

ii. To adopt or amend the articles of association of the company.
iii. To reduce the stated capital of the company.
iv. To approve the annual budget of the company.
The events which require a special resolution would be:
a. Only i and ii.
b. Only ii and iii.
c. Only i, ii and iii.
d. Only i, iii and iv.
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(3) Under the provisions of the Companies Act No. 7 of 2007, a company is required to keep
certain specified documents at its registered office.
Given below are some of these documents.
i. The certificate of incorporation and the articles of the company.
ii. Minutes of all meetings and resolutions of shareholders passed within the
preceding 10 years.
iii. Minutes of all meetings and resolutions passed by the directors, within the
preceding 5 years.
iv. The annual reports of the company since its inception.

a. Only i and ii.
b. Only ii and iii.
c. Only i, ii and iii.
CA Sri Lanka 57
10 Marks Questions
The newly appointed Accountant of PQR (Pvt) Ltd (“PQR”), wishes to know whether there are
any provisions in the Companies Act, No. 7 of 2007 (“Act”), relating to a company’s duty to keep
accounting records.
He also wishes to know on whom the duty to prepare financial statements of the company, has
been imposed on by the Act.
He also tells you that PQR does not have any subsidiaries.
Explain your response to his above mentioned 2 queries.

“The law which relates to the content of accounting records is primarily set out in the Sri Lanka
Accounting and Auditing Standards Act No 15 of 1995.”

Discuss the above statement with reference to the contents of the relevant sections of this particular
Act.
Question (3)– [10 marks]
Arun Food (Pvt) Limited (AF) is a family owned company with the shareholders being Arun and
his 3 brothers.
Arun, the chairman of AF, is not very keen to have the Annual General Meeting (AGM) of AF for
2020 physically, due to the Covid-19 pandemic.
Arun is aware that the Companies Act, No. 7 of 2007 allows a company to conduct its AGM
through a circular resolution.
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Describe the relevant provisions of the Act that allow for the holding of an AGM through a circular
resolution.

Bimal, one of the shareholders of AON (Pvt) Limited, has some concerns over the manner in which
the company is managed by its current board of directors.
Currently Bimal holds 11% of the voting shares of the company.
He intends to make a request from the company to hold an Extra Ordinary Meeting (EGM) to
discuss his concerns.
Explain to Bimal, the provisions of the Companies Act 7 of 2007, which govern such request and
whether he could make this request.
20 Marks Questions
Part (a)
The Companies Act No. 7 of 2007 (Act), imposes a responsibility on a company to maintain certain
important and specified records and documents at its registered office, for specified periods of
time.
Champa Perera, a shareholder of the MNO (Pvt) Limited (MNO), who has got into a dispute with
the other shareholders, intends to inspect some old documents of the company.
Before approaching the company, she has consulted you in this regard.
(a) Prepare a list of documents that MNO should keep at its registered office in compliance with
the Act.
(b) Explain to Champa the documents which she is entitled to inspect and whether MNO is
obliged o allow her to inspect them.
CA Sri Lanka 59
Part (a)
The Annual General Meeting of ABC (Pvt) Limited is scheduled to be held on Friday, 8th July
2020 at 9.30am at No 1234, Galle Road, Colombo 4.
The directors of the company are the shareholders of the company as well.
They are: Mr. Saman Silva (Chairman), Mr. Kumara Silva, Mr. Priyanga Silva and Ms. Shenara
Silva.
The secretary of this company is Ms. Samanthi Perera.
The directors intend to get the approval of the shareholders for the following items at this AGM:
• The minutes of the last AGM of the company which was held on 1st July 2019.
• The audited accounts for the financial year ended 31st March 2020 together with the
reports attached thereto.
• To re-elect Ms. Shenara Silva, the director retiring by rotation.
• To re-appoint AS Silva and Sons, Charted Accountants, as the external auditor for the
financial year 2020/2021.
The directors also want to give the shareholders an opportunity to discuss any other matter that
crop up during the meeting under the category, ‘any other businesses.
The directors are also of the view that the proxy form can be in any accepted format and it can
be handed over to the secretary by the proxy at the AGM.

Prepare the notice for this AGM, assuming you are the company secretary.
Part (b) - [This part is linked to the AGM referred to in part (a)]
You as the company secretary, have been informed of the following in relation to the AGM of
ABC (Pvt) Limited:
- It was held as scheduled.
- All the directors and shareholders were present.
- You as the company secretary too were present.
- All items in the notice were approved.
- The shareholders did not have anything else to discuss under ‘any other businesses.
Prepare the minutes of the AGM.
60
CA Sri Lanka
CA Sri Lanka 61
ANSWERS - CHAPTER 5
Meetings, Resolutions and Company Records
MCQs
1. a. Only i and ii.

2. c. Only i, ii and iii.
3. a.Only i and ii.
62 CA Sri Lanka
10 Marks Questions
Answer – Question (1) – [10 marks]
Reply to the 1st query:

Section 148(1) of the Act says that “every company shall keep accounting records which correctly
record and explain the company's transactions, and will:
(a) at any time enable the financial positions of the company to be determined with reasonable
accuracy;
(b) enable the directors to prepare financial statements in accordance with the Act; and
(c) enable the financial statements of the company to be readily and properly audited.”
Reply to the 2nd query:

Maintaining the company’s financial statements is the duty of its directors. The board must ensure
that within a specified time period (in section 150) the financial statements of the company (which
comply with the requirements set out in section 151) are completed and certified that it is in
compliance with the Companies Act, by the person responsible for the preparation of the
statements and signed by two directors, or if the company has only one director, by that director.
The content of accounting records as laid down in the Sri Lanka Accounting and Auditing
Standards Act, No. 15 of 1995
Section 2 and 3 of this Act empowers the Institute of Charted Accountants of Sri Lanka to adopt
such accounting and auditing standards as may be necessary for the purpose of maintaining
uniform and high standards in business enterprises in Sri Lanka.
As such, authority is granted for the adoption of the “Sri Lanka Accounting Standards” and “Sri
Lanka Auditing Standards” which may be revised, altered and amended from time to time.
The schedule to the Act also specifies the businesses which are bound by it as “specified business
enterprises”.
CA Sri Lanka 63
Under section 6 of the Sri Lanka Accounting and Auditing Standards Act it shall be the duty of
every specified business enterprise to prepare its accounts in compliance with the Sri Lanka
Accounting Standards. It is further required that all necessary measures are taken to ensure that its
accounts are audited in accordance with the Sri Lanka Auditing Standards with the object of
presenting a true and fair view of the financial performance and financial condition of such
enterprise.
Section 7 of the Sri Lanka Accounting and Auditing Standards Act provides that such audits may
only be conducted by professionally qualified auditors licensed to practice by the Institute. The
auditor is required to certify in every audit that it has been conducted in compliance with the
auditing standards.
Shareholders’ Resolution in Lieu of a Meeting - section 144

Section 144 of the Companies Act provides for the passing of a Shareholders’ Resolution without
convening a general meeting. This is also known as a Circular Resolution.
However, this provision is not available to a company if its Articles expressly prohibit it.
Accordingly, a resolution in writing signed by not less than eighty five percent of the shareholders
who would be entitled to vote on that resolution at a meeting of shareholders, who together hold
not less than eighty five percent of the votes entitled to be cast on that resolution, is as valid as if
had been passed at a meeting of those shareholders.
Section 144(2) mentions that where a matter that is required by the Act or by the articles to be
decided at a meeting of the shareholders of a company is made by way of a circular resolution,
such matter is deemed to have been made in accordance with the provisions of the Act or the
articles of the company.
Further, section 144(3) sets out that it will not be necessary for a company to hold an annual general
meeting, if everything required to be done at that meeting is done by resolution in accordance with
section 144.
Also within five working days of a resolution being passed under section 144, the company must
send a copy of the resolution to every shareholder who did not sign the resolution.
64 CA Sri Lanka
Convening of an Extraordinary General Meeting (EGM) on the requisition of shareholders, is
governed by section 134 of the Companies Act 7 of 2007 (Act).
Sec. 134 (1) – “Notwithstanding anything in its articles, the directors of a company shall
on the requisition of shareholders holding at the date of the deposit of the requisition shares
which carry not less than ten per centum of the votes which may be cast on an issue,
forthwith proceed duly to convene an extraordinary general meeting of the company to
consider and vote on that issue. The meeting shall be convened not later than fifteen
working days after the date of the deposit of the requisition and held not later than thirty
working days after the date of the deposit of the requisition.”
Therefore in terms of section 134 of the Act, as Bimal holds 11% of the shares with voting rights
(which is more than the stipulated 10%), he can make a request to call for an extraordinary general
meeting to discuss his issues.
Further this request to hold the EGM, must contain the issues to be considered at the meeting and
the notice of the meeting must specify the issues in order to enable the shareholders to decide
whether it is in their interest to attend or not.
If the directors do not call such a meeting within fifteen days of the deposit of the requisition,
Bimal may himself call this meeting (provided that any meeting so convened shall not be held after
the expiration of three months). In such event all reasonable expenses incurred in convening such
a meeting must be repaid by the company.
20 Marks Questions
Part (a)
Documents / records to be kept at the company:
Under the provisions of section 116 of the Companies Act No. 7 of 2007, a company is required
to keep the following documents at its registered office.
i. The certificate of incorporation and the articles of the company.
ii. Minutes of all meetings and resolutions of shareholders passed within the preceding ten
years.
iii. An interest register, unless it is a private company which is dispensed with the need to
maintain such a register.
CA Sri Lanka 65
iv. Minutes of all meetings held, and resolutions passed by the board of directors and directors’
committees held within the preceding ten years.
v. Certificates required to be given by the directors under the Act within the preceding ten
years.
vi. The register of directors and secretaries as specified in section 223.
vii. Copies of all written communications to all shareholders or all holders of the same class of
shares during the preceding ten years, including annual reports prepared under section 166.
viii. Copies of all financial statements and group financial statements required to be completed
under the Act for the preceding ten completed accounting periods of the company.
ix. The copies of instruments creating, or evidencing charges and the register of charges
required to be kept under section 109 and 110.
x. The share register required to be maintained under section 123; and
xi. The accounting records required to be maintained under section 148 for the current
accounting period and for the preceding ten completed accounting periods of the company.
Part (b)
According to section 119 of the Companies Act, as a shareholder, Champa is entitled to inspect
the following documents:
(a) Minutes of all meetings and resolutions of shareholders.
(b) Copies of written communications to all shareholders or to all holders of a class of shares
during the preceding ten years, including annual reports, financial statements, and group
financial statements.
(c) Certificates issued by directors under the Act.
(d) The interests register of the company (if applicable).
66 CA Sri Lanka
Further in terms of section 120 of the Act, the following documents shall be made available for
public inspection. Therefore Champa has a right to inspect these documents as well in her capacity
as a member of the public.
(a) The certificate of incorporation of the company.
(b) The articles of the company if they are not the model articles.
(c) The share registers.
(d) The register of directors and secretaries.
(e) Particulars of the registered office of the company.
(f) Copies of the instruments creating, or evidencing charges and the register of charges kept
under sections 109 and 110.
Both sections 118 and 119 of the Act states that the failure of the company to allow a shareholder
or a member of the public respectively, to inspect these documents, is an offence under the Act.
Therefore MNO is bound by law, to allow Champa to inspect the above mentioned documents.
CA Sri Lanka 67
Part (a)
Notice of Meeting
NOTICE IS HEREBY GIVEN that the Annual General Meeting of ABC (Pvt) Limited will be
held on Friday, 8th July 2020 at 9.30 a.m. No. 1234, Galle Road, Colombo 4.
AGENDA
1. To read the Notice of Meeting.
2. To approve the minutes of the last AGM of the company held on 1st July 2019.
3. To approve the audited accounts for the financial year ended 31st March 2020 together
with the reports attached thereto.
4. To re-elect Ms. Shenara Silva, the director retiring by rotation.
5. To re-appoint AS Silva and Sons, Charted Accountants, as the external auditor for the
financial year 2020/2021.
6. Any other business.
By order of the Board
[Signed by the secretary]

Company Secretary
Colombo
5th June 2020 [This can be any date before 15 working days of the AGM date]
Notes
A member entitled to attend and vote at the meeting is entitled to appoint a Proxy to attend
and vote instead of him/her.
The proxy form can be in any accepted format and can be handed over to the company
secretary by the proxy holder at the AGM.
68 CA Sri Lanka
Part (b)
ABC (PVT) LIMITED

Minutes of the Annual General Meeting of ABC (Pvt) Limited held on Friday, 10th July
2020 at 9.30 a.m. No. 1234, Galle Road Colombo 4.
Present:
Mr. Saman Silva (chairman / shareholder), Mr. Kumara Silva (shareholder/director),
Mr. Priyanga Silva (shareholder/director), Ms. Shenara Silva (shareholder/director), and
Ms. Samanthi Perera (company secretary).
Minute No. 1 – Notice of Meeting

The Notice of meeting was taken as read.
Minute No. 2 – Approval of the minutes of the last AGM

The minutes of the last AGM of the company held on 1st July 2019
Minute No. 3 – Audited Accounts for the Financial Year ended 31st March 2020 together
with the reports attached thereto
The Audited Financial Statements for the year ended 31st March 2020 together with its reports
were tabled and approved by the shareholders.
It was proposed by Mr. Saman Silva seconded by Mr. Priyanga Silva.
Minute No. 4 – Re-election of director retiring by rotation

On the proposal of Mr. Kumara Silva, seconded by Mr. Saman Silva, Ms. Shenara Silva was re-
elected as a director of the company.
Minute No. 5. Re-appointment of Auditors.

Messrs. AS Silva and Sons, Chartered Accountants, were re-appointed as the external auditor of
the company to hold office until the next Annual General Meeting and the directors were
authorized to determine their remuneration.
This was proposed by Mr. Saman Silva and seconded by Ms. Shenara Silva.
CA Sri Lanka 69
Minute No. 6 – Any other business
In the absence of any other matters to be taken up the meeting was adjourned at 10 am.
CONFIRMED AS CORRECT
CHAIRMAN
70 CA Sri Lanka

CL 4 Corporate Law

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CL 4 Corporate Law

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PRACTICE & REVISION KIT

CA SRI LANKA CURRICULUM 2020

Mode: Paper based examination

The exam comprises of three sections, as follows:

Knowledge Process Verb List Verb Definitions

Tier - 1 Remember Define Describe exactly the nature, scope or meaning

Identify Recognise, establish or select after consideration

List Write the connected items one below

State Express something definitely or clearly

Tier - 2 Calculate/Compute Make a mathematical computation

Recognise To show validity or otherwise, using knowledge

Summarise Give a brief statement of the main points

Classify Allocate into categories

Provide Give illustrations to support or illuminate

Tier - 3 Application Apply Put to practical use

Prioritise Arrange or do in order of importance

Reconcile Make consistent with another

Conduct Organize and carry out a task

Display Make evident or noticeable

Perform Do or execute, usually in the sense of

Reconcile Make or prove consistent or compatible

Set Fix or establish

Select Choose from a range of options

Differentiate Constitute a difference that

Write Provide word descriptions to express an opinion

Conclude Form a judgment about, or determine or resolve

Review Study critically with a view

Tier - 6 Synthesis Compile Produce by assembling information

Propose To form or declare a plan or intention

Anticipate Foresee, or experience or realise

Draft Write original material for the scrutiny

Formulate Devise and put into words

Plan Devise the plan for an assurance

Report Give the formal final conclusion for an

Submit Send a completed document to a

Suggest Put forward an idea or give reasons

Synthesize Make or propose a new concepts or ideas

i. A company gets perpetual succession.

a. Salomon v. Salomon Co. Ltd.

iv. In order to prevent a fraud.

a. Only i and ii.

Question (1) - [10 marks]

You are required to:

Question (2) - [10 marks]

Question (3) - [10 marks]

Question (4) - [10 marks]

Question (1) – [20 marks]

You are required to:

Mr. Silva is the sole proprietor of a furniture shop in Moratuwa.

You are required to:

3 c.. Only i, iii and iv.

Answer – Question 1 - [10 marks]

5. To prevent the deliberate evasion of contractual obligations.

The consequences of the corporate personality of a company would be as follows:

• A company is capable of suing and being sued.

Answer – Question 3 - [10 marks]

Features of a limited company incorporated under the Companies Act 7 of 2007:

• Separate legal personality

• Capacity to sue and to be sued

Answer – Question 4 - [10 marks]

The advantages of a incorporating a limited company

• Ease of raising capital

The disadvantages of incorporating a limited company

While perpetual existence is a benefit of incorporating, it can also be a disadvantage