AUE1601/102/3/2021

Tutorial Letter 102/3/2021

LEGAL ASPECTS IN ACCOUNTANCY

AUE1601

Semester 1 and 2

Department of Auditing

IMPORTANT INFORMATION
This tutorial letter contains a timetable for study purposes as well as additional
questions and solutions to work through as part of your studies.

BARCODE

Open Rubric
 CONTENTS

Page

1. PROPOSED ALLOCATION OF STUDY TIME ............................................................................. 3

2. ABBREVIATIONS USED IN THIS TUTORIAL LETTER .............................................................. 3
3. QUESTIONS................................................................................................................................. 3
4. MARK ALLOCATION ................................................................................................................. 15
5. SUGGESTED SOLUTIONS TO QUESTIONS ............................................................................ 16
6. CONCLUSION............................................................................................................................ 46

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1. PROPOSED ALLOCATION OF STUDY TIME

Topic Topic Minimum

number hours of
study
Preface General overview 4
1 Interpretation, purpose, application and formation of a company 10
2 Records required by companies 10
3 Shareholders and shares 12
4 Directors 12
5 Enhanced accountability and transparency 8
6 Transactions 8
7 Business rescue, compromise with creditors
8
8 Offences 4
Completion of assignments and additional questions in Tutorial letter 102 20
Revision for examination 24

2. ABBREVIATIONS USED IN THIS TUTORIAL LETTER

MOI = Memorandum of Incorporation; Companies Act 71 of 2008 = Companies Act, as

amended and the Companies Regulations = Regulations.

3. QUESTIONS

The following questions apply to various topics in your study guide. Please attempt them after
you have completed your study guide and thereafter compare your answers with the solutions
also provided in this tutorial letter. Also, keep in mind the time allocated to each question.

The questions consist of past UNISA exam and assignment questions; as well as adapted and
new UNISA questions.

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Question Topic Areas covered Time Number
allocation of
(in marks
minutes)

1 Topics Companies Act: Related and interrelated persons, 106 88

1, 3, 4 & 6 and control; Liquidity and solvency requirements;
Financial assistance to directors; Shareholders’
resolutions and meetings; Share buy-backs;
Standards of director’s conduct; Removal of
directors; Appointment of directors.

2 Topics Companies Act: Authorisation and issue of shares; 54 45

3, 4 & 5 Directors personal financial interest; Duties of the
audit committee.

3 Topics Companies Act: Reckless trading; Distributions; 29 24

1&6 Financial assistance to acquire shares.

4 Topic 5 Companies Act: Appointment and rotation of 30 25

auditors; Composition of the audit committee;
Independence of the auditor.

5 Topic 3 Companies Act: Share Issue; Meetings. 36 30

6 Topics 1 & Companies Act: Related and inter-related persons 36 30

3 and control; Director’s personal financial interest;
Voting; Distributions.

7 Topics 4 & Companies Act: Requirements to have annual 48 40

5 financial statements audited; Appointment of audit
committee; Duties of the audit committee; Removal
of director; Appointment of auditor.

8 Topic 1 Companies Act: Pre-incorporation contracts. 7 6

9 Topics 2 & Companies Act: Calculation of the PIS (Public 15 12

5 Interest Score).

QUESTION 1 (Topics 1, 3, 4 & 6) 88 marks

You are a Chartered Accountant (SA) and an expert on the Companies Act.

Document Exchange Ltd (“Docex”) specialises in the distribution of local and international mail
and parcels. Docex has branches countrywide to spread its service delivery footprint and its
customers range from individuals to large companies.

Docex holds a 70% interest in Carrier and Freight Company Ltd (“CFC”).

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The following extract is from the annual financial statements of Docex at 30 June 2020:

2020
R
ASSETS
Total Non-Current Assets 7 400 000
Total Current Assets 1 500 000
8 900 000
LIABILITIES
Total Non-Current Liabilities 6 600 000
Total Current Liabilities 9 200 000
15 800 000

The company is in a net liability position of R6 900 000 as at 30 June 2020.

An extract of the minutes of the meeting of the Board of Directors (“Board”) of Docex:

DOCUMENT EXCHANGE LTD

MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS HELD ON 31 JULY 2020

Present:

Mr Fana Freight, chairman, independent non-executive director

Mr Clement Courier, non-executive director
Mr Tim Transport, sales and marketing director
Mr Lesley Logistics, managing director
Ms Patricia Post, financial director
Mr Mannie Mail, company secretary

Apologies:

Mr Rocky Road, executive director

Matters for discussion:

1. Loan to Jerel Speed

Lesley Logistics presented the application for a loan of R1 million from Docex by Jerel
Speed, managing director of CFC. Lesley Logistics noted that Jerel Speed approached
Docex to obtain a loan from Docex. In the application, Jerel Speed indicated that CFC is
experiencing financial difficulties and that he, therefore, cannot obtain the loan from CFC.
The application also guarantees the loan will be repaid in full over two years and interest of
the prime overdraft rate will be applicable.

Lesley Logistics explained to the Board that Jerel expressed the urgency of the loan due to
unforeseen personal reasons. The Board evaluated that all the conditions and restrictions in
respect of the granting of financial assistance, as set out in the memorandum of
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incorporation (MOI) of Docex, will be satisfied if the loan is granted to Jerel Speed. Lesley
Logistics noted that this is the first time this type of loan will be approved and granted since
the incorporation of Docex.

The voting commenced and the proposed application to provide Jerel Speed with a loan was
approved by the Board. Notice of these resolutions will be provided to all shareholders in
writing within 15 business days.

2. Shareholders’ meetings

Clement Courier is unsure and requested information be provided on when and how
shareholder meetings should occur, as it seems to her the meeting today does not comply
with the requirements of the Companies Act.

3. Acquisition of shares

Patricia Post presented to the Board that the company is experiencing financial difficulties.
She proposed that the company should consider restructuring, starting with the ownership of
the company. Patricia Post proposed the acquisition of 300 000 of the company’s shares as
follows:

120 000 shares will be acquired by CFC and the remaining 180 000 shares will be acquired
by Docex so that there would no longer be any shares of Docex in issue.

The Board of Docex approved the acquisition of all shares at the current market value of the
shares.

4. Dismissal of a director

Fana Freight presented to the Board that allegations recently arose against Rocky Road,
regarding his involvement in a fraudulent scheme where R3 million was stolen from Docex.
Fana Freight explained that Rocky Road has not been found guilty yet; however, it is in the
best interest of the company to dismiss Rocky Road immediately.

The Board agreed and approved the decision to remove Rocky Road as director of Docex.

5. Appointment of director

The Board resolved that Rocky Road will be replaced as director. Clement Courier
presented a list of recommended candidates to be considered for the position to replace
Rocky Road as director. The following candidates were presented on the list:

• Mr Air Mail, Patricia Post’s 17-year-old son who obtains high marks for accounting.
• Container Incorporated, a personal liability company.
• Ms Delores Stamp, Chartered Accountant (SA), the court declared her as a
rehabilitated insolvent.
• Mr Mpho Letter was convicted and imprisoned due to his involvement with fraudulent
activities at his previous company.

The Board resolved that the appointment of the new director from the list of recommended
candidates will be made at the next board meeting.

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Lesley Logistics approached you for advice regarding the resolutions made on the meeting of
the Board of Directors held 31 July 2020.

REQUIRED Marks

1 Matter 1:

1.1 Determine if CFC is a related party of Docex in terms of the Companies Act. (4)

1.2 Discuss whether Docex satisfies the solvency and liquidity test as defined by
the Companies Act taking into account the extract from the financial
statements. First, give the requirements of the Companies Act and then
apply the requirements to Docex. (7)

1.3 (i) List the Companies Act requirements for the granting of a loan or
financial assistance to directors of related companies. (10)
(ii) Discuss the legality of the granting of the loan to Jerel Speed in terms of
the requirements of the Companies Act. (8)

2 Matter 2:

2.1 List the requirements for shareholders’ meetings as required by the Companies
Act in terms of the following points:

(i) Requirements for a special resolution to be approved by shareholders; (1)

(ii) Requirements for notice of shareholders’ meeting; (1)
(iii) Requirements for a shareholders’ meeting quorum. (3)

3 Matter 3:

3.1 Discuss the legality of the acquisition (share buy-back) of the shares of
Docex by Docex and CFC in terms of the Companies Act requirements.
First, give the requirements of the Companies Act and then apply the
requirements to the scenario. (13)

4 Matter 4:

4.1 List the requirements for the standards of director’s conduct in terms of the
Companies Act. (10)

4.2 Discuss the legality of the removal of Rocky Road in terms of the
requirements of the Companies Act, by first listing the requirements and
then applying it to the scenario. (16)

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5 Matter 5:

5.1 List the persons that are ineligible or disqualified from being appointed as a
director in terms of the Companies Act. (10)

5.2 Explain to the Board which of the candidates listed under point 5 of the
agenda, will be permissible and which of the candidates will not be
permissible in terms of the requirements of the Companies Act to be
appointed as the new director of Docex. (5)

QUESTION 2 (Topics 3, 4 & 5) 45 marks

You are a Chartered Accountant (SA) and an expert on the Companies Act.

Marvel Entertainment Ltd is a renowned retailer of comic books and toys. You have recently
been approached by Mr Wolverine, the financial director, of Marvel Entertainment Ltd to seek
advice on the legality of several proposed matters in terms of the Companies Act.

1.1 The following extract is from the company’s annual financial statements at 30 June 2020:

2020
R
EQUITY

Authorised share capital

150 000 Ordinary shares 75 000

Issued share capital

130 000 Ordinary shares 65 000

Mr Wolverine presented the following matters to you for your evaluation:

The audit committee is going to approve a decision to issue 30 000 shares at the next
audit committee meeting. The board has determined that the shares will be issued at the
current market value of the shares. 10 000 Of these shares are going to be issued equally
to the five directors of Marvel Entertainment Ltd.

REQUIRED Marks

Discuss the requirements of the Companies Act, for the issue of 30 000 shares,
only in terms of the following points:
• The authority to issue shares (2)
• Authorised shares available for issue (9)
• Consideration for the shares (3)
• Share issue to the directors (3)
• Voting requirements regarding a special resolution to be approved by
shareholders. (1)
(Do not discuss any requirements regarding giving notice or quorums).

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1.2 An extract of the minutes of the meeting of the board of directors of Marvel Entertainment
Ltd held on 25 June 2020.

Present:
Mr Parker, chairman, independent non-executive director
Mr Wayne, independent non-executive director
Mr Stark, marketing director
Mr Xavier, managing director
Mr Wolverine, financial director

Matters for discussion:

Expansion of operations

Suggestions on how to expand the company’s operations most effectively were discussed.
Mr Stark suggested the investment of the acquired funds from the share issue in shares of
the top 40 listed companies. Mr Xavier suggested the investment and acquisition of the
controlling interest in DreamWorks Ltd, a competitor in the comic industry. The directors
agreed with Mr Xavier’s suggestion.

Mr Xavier informed the meeting that his wife is the chief executive officer of DreamWorks
Ltd.

No further information was required by the meeting and the voting process proceeded. The
five directors voted and all the votes were for the decision to invest and acquire the
controlling interest in Dream Works Ltd.

REQUIRED Marks

Discuss if Mr Xavier has a personal financial interest in the investment and

acquisition of the controlling interest in DreamWorks Ltd, and conclude on the
legality of the adopted resolution in terms of the Companies Act. First, give the
requirements of the Companies Act and then apply the requirements to the
scenario. (16)

1.3 Mr Wolverine is not fully informed about all the duties of the audit committee. He explained
to you that he believes that the duties of the audit committee are …
• to ensure that the appointment of the auditor complies with the provisions of the
Companies Act, and any other legislation relating to the appointment of auditors;
• to perform other functions determined by the board, including the development and
implementation of a policy and plan for a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, control, and
governance processes within the company; and
• to pre-approve any proposed agreement with the auditor for the provision of non-
audit services to the company.

REQUIRED Marks

List the remaining duties of the audit committee which Mr Wolverine is not aware
of in accordance with the Companies Act. (11)

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QUESTION 3 (Topics 1 & 6) 24 marks

Vineyard Ltd, a leading producer and distributor of fine wines, spirits and ciders, has a
significant equity interest of 85% in Aqua Vitae (Pty) Ltd.

The following extract is from Vineyard Ltd’s annual financial statements at 30 June 2020:

2020
R
ASSETS
Total Non-Current Assets 4 000 000
Total Current Assets 2 000 000
6 000 000
LIABILITIES
Total Non-Current Liabilities 6 000 000
Total Current Liabilities 5 000 000
11 000 000

REQUIRED Marks

1.1 With reference to the extract from Vineyard Ltd’s annual financial statements at
30 June 2020 answer the following:

Evaluate and conclude if Vineyard Ltd is trading recklessly in terms of the

requirements of the Companies Act. (5)

1.2 Vineyard Ltd is experiencing severe cash flow problems. The company decided to
attempt a strategy to attract potential investors and to increase the satisfaction of
current shareholders and to discourage any disinvesting. Mr Barcardi proposed to
declare a dividend at the end of the financial year to accomplish the company’s goal.

The board of directors approved the decision with no director opposing the decision.

Discuss the requirements of the Companies Act, in respect of the above

transaction and then apply the information provided in the scenario to the
requirements of the Companies Act. (8)

1.3 During the financial year, the board of directors approved the granting of a loan to Aqua
Vitae (Pty) Ltd to acquire shares in Vineyard Ltd. The board of directors approved the
decision with no director opposing the decision.

Evaluate and conclude on the legality of providing financial assistance for the
acquisition of shares in Vineyard Ltd in terms of the requirements of the
Companies Act. (11)

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QUESTION 4 (Topic 5) 25 marks

Pick-n-Play Ltd is a major manufacturer and distributor of toys and has a 31 December financial
year-end.

DTT Incorporated, a firm of registered auditors, has been Pick-n-Play Ltd’s external auditors for
the 6 preceding years. DTT Incorporated was asked to resign following a disagreement with the
management of Pick-n-Play Ltd concerning the accounting treatment of certain transactions.

The vacancy occurred on 10 February 2020. Mr Shoprite, the managing director of Pick-n-Play
Ltd, recommended A-Team Incorporated to the audit committee of Pick-n-Play Ltd on 15
February 2020 to be considered for appointment as the new external auditor for the financial
year ended 31 December 2020.

Mr Shoprite is a member of the audit committee and believes that it will benefit Pick-n-Play Ltd
to appoint A-Team Incorporated as the new external auditors. Reason for this benefit is Mr
Murdock, one of the partners of A-Team Incorporated and the designated auditor for Pick-n-
Play Ltd, is the previous financial director of Pick-n-Play Ltd. Mr Murdock resigned as financial
director of Pick-n-Play Ltd a year ago to pursue other opportunities.

REQUIRED Marks

Discuss the requirements of the Companies Act (theory), for the appointment of A-
Team Incorporated as the new external auditors of Pick-n-Play Ltd (application),
only in terms of the following points:
• Requirements to be appointed as an auditor of a company and whether or not
Mr Murdock may be appointed. (7)
• Requirements where a vacancy arises in the office of an auditor. (3)
• Rotation of auditors. (3)
• Composition of the audit committee. (7)
• Considerations which were taken into account to determine whether or not A-
Team Incorporated is independent. (5)

QUESTION 5 (Topic 3) 30 marks

Computer Services (Pty) Ltd is a large computer services firm which specialises in the
implementation of computer networks. As would be expected, its own financial and related
systems are fully integrated and make use of leading-edge technology.

The company has fifteen ordinary shareholders.

The chief executive officer, Mr Buys has informed you as the company’s secretary and
Companies Act expert of his intention to raise additional finance amounting to R2 500 000 for
the company by issuing additional ordinary shares. The company’s authorised share capital is
100 000 ordinary shares. However, these shares have already been issued in full. It is intended
that the directors of Computer Services (Pty) Ltd will be offered shares. None of the directors
currently hold shares. The new shares to be issued are to be of the same class as the existing
shares and will have the same rights and limitations. The company’s memorandum of
incorporation (MOI) prohibits shareholders’ meetings from being held electronically. Computer
Services (Pty) Ltd does not have un-certificated shares.

Mr Buys has therefore asked you for advice in this regard and would like further advice on any
Companies Act requirements relating to the share issue.

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REQUIRED Marks

Discuss the requirements of the Companies Act with which Computer Services (Pty)
Ltd will need to comply in respect of the proposed share issue (theory and
application). You must accept that a special resolution will not be proposed by the
directors if the MOI may require an amendment.

You must answer the question under the following headings:

1.1 MOI requirements regarding the issue of shares (private company & share-
holders’ rights). (6)

1.2 Authorised shares available for issue & possible amendments to the MOI. (4½)

1.3 Authority required for the share issue. (1½)

1.4 Requirements applicable where shares of no-par value are issued and the
consideration for the issued shares. (3)
1.5 Requirements applicable where some shares are issued to directors. (1½)

1.6 Requirements regarding notices for the meeting where the issue to
directors is to be authorised. (3)
1.7 Quorum requirements for the meeting referred to above (in 1.6) and related
matters in the determination of the validity of the persons making up the
quorum. (3)
1.8 Requirements regarding the content of the resolution to be voted upon. (1½)

1.9 Voting rights required to be exercised for a valid resolution. (3)

1.10 Secretarial requirements after receiving the consideration for the shares. (3)

QUESTION 6 (Topics 1 & 3) 30 marks

The memorandum of incorporation (MOI) of Shipping Engineers (Pty) Ltd, a manufacturing

company in the marine engineering sector contains, inter alia, the following clause:

"Any director or prescribed officer of the company who has a personal financial interest in a
contract in which this company has entered or will enter, either directly or indirectly, shall comply
with the Companies Act. The contract will be binding provided that the authority of the company
in a general meeting is obtained by poll for the contract prior to the contract being entered into”.

The minutes of the board’s meetings reveal that the company entered into a contract with
Technical Systems (Pty) Ltd for the purchase of five highly sophisticated and expensive radar
systems valued at approximately R1,5 million each. Greg O’Reilly is a director of Shipping
Engineers (Pty) Ltd, and his brother Brian is the majority shareholder of Technical Systems
(Pty) Ltd.

The board of Shipping Engineers (Pty) Ltd decided to declare a R200 000 dividend at the end of
the financial year to the members after having its property revalued in January 2020. The
resolution was passed with no director opposing the decision. The valuator is a registered
person and the excess value exceeded the current book value by R500 000 and is of a
permanent nature.
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The following extract is from Shipping Engineers (Pty) Ltd’s annual financial statements at 30
June 2020.

2020
R
ASSETS
Total Non-Current Assets 3 000 000
Total Current Assets 1 000 000
4 000 000

LIABILITIES
Total Non-Current Liabilities 2 000 000
Total Current Liabilities 3 000 000
5 000 000

REQUIRED Marks

1.1 Discuss the requirements of the Companies Act concerning the contract
entered into by Shipping Engineers (Pty) Ltd with Technical Systems (Pty) Ltd,
particularly given the relationship between Greg and Brian. (12)

1.2 Comment on whether the shareholders’ meeting to ratify the contract could be
held by electronic communication. (5)

1.3 Describe the difference between voting on a show of hands and by poll. (3)

1.4 Discuss the requirements of the Companies Act in respect of the R200 000
dividend declared. You may accept that in terms of common law, such surplus
forms part of the distributable income and is subject to section 46 like any other
income. (10)

QUESTION 7 (Topics 4 & 5) 40 marks

Painters (Pty) Ltd is a private company in the paint wholesaling business. John Smit, the newly
appointed chief executive officer, is keen to improve the company’s corporate governance and
has approached you for some advice on various aspects of the Companies Act which directly
affect governance. Currently, the company’s public interest score is about one hundred (100)
and the company’s annual financial statements are subject to independent review. However,
John Smit informs you that he wants the company’s annual financial statements to be externally
audited on an annual basis and an audit committee to be appointed. He tells you that the
directors have agreed to have the current year’s financial statements audited voluntarily, but
that he wants to make the annual external audit and the appointment of an audit committee a
requirement in terms of the company’s Memorandum of Incorporation (MOI). He believes that
an external audit would be very beneficial and that it should not be dependent on the company’s
public interest score.

Concerning appointing an audit committee, John Smit requires that the audit committee be
constituted as required by the Companies Act and that the committee’s duties be at least those
which are required by the Act.
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For the voluntary audit of the current financial statements, the board of directors will appoint the
auditor, but for future years, the auditor will be appointed as laid down in the Companies Act.
This is, of course, assuming that the annual audit becomes mandatory in terms of the MOI.

John Smit also tells you that since joining the company, he has been somewhat concerned
about the attitude and performance of one of the directors, Ryan Hansen. He wants to know
whether Ryan Hansen could be removed from his position as a director and if so, what
procedures would have to be followed. John Smit is aware that Ryan Hansen will not resign his
directorship. The company has six directors in total.

Painters (Pty) Ltd’s MOI is consistent with the Companies Act and contains no variations on
quorums, notice periods, approval of resolutions, appointments of directors, etc. It does provide
for the appointment of an audit committee. The company has twenty shareholders.

John Smit has also given you a list of potential firms/individuals which the board is considering
for appointment as auditor for the upcoming audit. The list is as follows:

• Lee Westwood – a registered auditor (RA) and brother of Peter Westwood, one of the
major shareholders of Painters (Pty) Ltd.
• Fin Advisors Inc – a dynamic company, the shareholders of which are Don Roets (RA),
Anne Naidoo (BCom, LLB) and Mark Wilkes (RA).

REQUIRED Marks

1.1 Explain to John Smit how the external audit of Painters (Pty) Ltd.’s annual
financial statements can become a requirement in terms of the company’s MOI.
Your answer must not include details of, or requirements for, meetings which
may have to be held i.e. quorums, notice, etc. (5)

1.2 Describe to John Smit the requirements applicable to:

A. Appoint an audit committee and (10)
B. Outline the duties of the audit committee in terms of the Companies Act. (10)
1.3 Advise John Smit on whether Ryan Hansen could be removed from his position
as a director of Painters (Pty) Ltd (do not include any meeting requirements such
as notices, quorums, etc. in your advice). (12)

1.4 Advise John Smit as to which, if either, of the two firms/individuals listed for
appointment as auditor for the voluntary audit, would be suitable for
appointment. (3)

QUESTION 8 (Topic 1) 6 marks

Edward is the owner of Scissor-hands (Pty) Ltd, a very successful hairdressing business.
Edward is considering expanding his business and starting another company. He has already
entered into a new lease agreement with a third party for premises for his new company. He is
unsure about the requirements of the Companies Act regarding pre-incorporation contracts.

REQUIRED Marks

Explain to Edward the Companies Act requirements concerning pre-incorporation

contracts. (6)

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QUESTION 9 (Topics 2 & 5) 12 marks

REQUIRED Marks

Calculate the public interest scores in order to consider whether the following
companies should be audited or not:

• ABC (Pty) Ltd (ABC). Mr X and Mr Y each hold 20% of the shares of ABC and
the remaining 60% of the shares are held by 40 other shareholders. The
company employs an average workforce of 165 employees. The financial
statements of the company are compiled by Mr Z, a partner at the accounting
firm Creative-Accountants-R-Us. ABC had a turnover of R185,5 million and the
only liability of the company is its bank overdraft of R7 million. (6)

• XYZ (Pty) Ltd (XYZ). Mr X owns 50% of the shares in XYZ. Due to Mr X’s
excellent financial background, he handles all the financial matters of XYZ,
including the compilation of the financial statements. The company employs a
workforce of 70 employees on average. The company had a turnover of R80
million and owes no third-party liabilities. Mr Y (10%) and Mr Z (40%) hold the
remaining shares. (6)

4. MARK ALLOCATION

Each question specified how long it should take you to answer it, as well as the maximum marks
that could be obtained.

Remember to remain within the prescribed time limits and time yourself.

In some instances, the solution allows you to earn more marks than what is required by the
question. This makes it an “easier” question; however, you are limited to the maximum number
of marks allocated to the question.

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5. SUGGESTED SOLUTIONS TO QUESTIONS

QUESTION 1 88 marks

Solution

MATTER 1

1.1 RELATED PARTY

In terms of section 2 of the Companies Act, a juristic person is related to another juristic
person if either is a subsidiary of the other. (1)

CFC is a subsidiary of Docex since Docex holds a 70% interest in CFC. (1½)
Therefore, CFC is related to Docex. (1½)
Marks (4)

1.2 LIQUIDITY AND SOLVENCY TEST

In terms of section 4, a company satisfies the solvency and liquidity test at a particular
time if, considering all reasonably foreseeable financial circumstances of the company at
that time (1)

(a) the assets of the company, as fairly valued, equal or exceed the liabilities of the
company, as fairly valued; and (1)

(b) it appears that the company will be able to pay its debts as they become due in the
ordinary course of business for a period of 12 months after the date on which the
test is considered. (1)

The company is not solvent, since the liabilities (R15.8 million) of Docex fairly valued,
exceed the assets (R8.9 million) fairly valued. (1½)

Docex is not liquid, since the current liabilities (R9.2 million) exceed the current assets
(R1.5 million), (1½)

thus, the company might not be able to pay its debts as they become due in the ordinary
course of business, for a period of 12 months. (1½)

Therefore, Docex does not satisfy the solvency and liquidity test. (1½)
Maximum marks (7)

1.3 GRANTING OF THE LOAN TO JEREL SPEED

(i) In terms of section 45, except to the extent that the MOI of a company provides
otherwise, (1)

the board may authorise the company (1)

to provide direct or indirect financial assistance to a director or prescribed officer of

the company or of a related or inter-related company, provided: (1)

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any conditions or restrictions in respect of the granting of financial assistance set

out in the MOI are satisfied; (1)

the board of directors is satisfied that immediately after providing the financial
assistance the company will satisfy the solvency and liquidity test; (1)

a special resolution is adopted within the previous two years, approving the loan to
the recipient/category of potential recipients; and (1)

written notice of the resolution is given to all shareholders (1)

and to any trade union representing the company’s employees (1)

within 10 business days after adoption of the resolution by the board, (1)

if the value of the financial assistance exceeds 0.1% of 1% of the net worth of
Docex (1)

else, the notice must be given within 30 business days after the end of the
company’s financial year. (1)
Maximum marks (10)

(ii) The loan is granted to Jerel Speed, the managing director of CFC, the subsidiary of
Docex (and therefore a person related to Docex). (1½)

The board successfully evaluated that all the conditions and restrictions in respect
of the granting of financial assistance set out in the MOI will be satisfied if the loan
is granted. (1½)

Docex does not satisfy the liquidity and solvency test after granting the loan. (1½)

This is the first time this type of loan will be approved and granted since the
incorporation of Docex and therefore a special resolution would not have been
obtained within the previous two years, approving the loan to the recipient/ category
of potential recipients. (1½)

A notice of the resolution was sent to all the shareholders within 15 business days,
therefore not within 10 business days after adoption of the resolution. (1½)

It should have been sent out within 10 business days after adoption of the
resolution, as the loan of R1 million to Jerel Speed exceeds one-tenth of 1 percent
the net worth of Docex of R6900 (R6.9 million x 0.1x1%). (1½)

Based on the information provided, a loan was granted illegally to Jerel Speed as
the requisite approval was not obtained, thereby constituting a breach of section 45
of the Companies Act, 2008. (1½)
Maximum marks (8)

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MATTER 2

2.1 SHAREHOLDERS’ MEETINGS

(i) Requirements of a special resolution to be approved by shareholders

In terms of section 65, for a special resolution to be approved by shareholders, it

must be supported by at least 75% of the voting rights exercised on the resolution.
(1)
Marks (1)

(ii) Notice of shareholders’ meeting

In terms of section 62, the company must deliver a notice of each shareholders
meeting in the prescribed manner and form to all of the shareholders of the
company as of the record date for the meeting, at least (1)

15 business days before the meeting is to begin, in the case of a public company or
a non-profit company that has voting members. (1)
Maximum marks (1)

(iii) Shareholders’ meeting quorum

In terms of section 64, a shareholders’ meeting may not begin until sufficient
persons are present at the meeting to exercise, in aggregate, at least 25% of all of
the voting rights that are entitled to be exercised in respect of at least one matter to
be decided at the meeting; and (1)

A matter to be decided at the meeting may not begin to be considered unless

sufficient persons are present at the meeting to exercise, in aggregate, at least 25%
of all of the voting rights that are entitled to be exercised on that matter at the time
the matter is called on the agenda. (1)

If a company has more than two shareholders, a meeting may not begin, or a matter
begin to be debated, unless (1)

at least three shareholders are present at the meeting. (1)

Maximum marks (3)

MATTER 3

3.1 SUBSIDIARY ACQUIRING COMPANY’S SHARES

In terms of section 48,

(a) the board of a subsidiary company may determine that it will acquire shares of its
holding company, but:
(i) No more than 10%, in aggregate, of the number of issued shares of any class
of shares of a company may be held by, or for the benefit of, all of the
subsidiaries of that company, taken together; and (1)
(ii) No voting rights attached to those shares may be exercised while the shares
are held by the subsidiary, and it remains a subsidiary of the company whose
shares it holds. (1)

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Despite any provision of any law, agreement, order or the MOI of a company, (1)

the company may not acquire its own shares, and a subsidiary of a company may not
acquire shares of that company if, as a result of that acquisition, there would no longer be
any shares of the company in issue other than … (1)

(a) shares held by one or more subsidiaries of the company; or (1)

(b) convertible or redeemable shares. (1)

The decision by a subsidiary or the company to acquire the company’s shares must
satisfy the requirements of section 46. (1)

In terms of section 46, a company must not make any acquisition of the company’s own
shares unless it …

(i) is pursuant to an existing legal obligation of the company; (1)

(ii) or a court order; or (1)
(iii) the board of the company, by resolution, has authorised the transaction; and (1)

it reasonably appears that the company will satisfy the solvency and liquidity test
immediately after completing the proposed transaction; and (1)

the board of the company, by resolution, has acknowledged that it has applied the
solvency and liquidity test, and reasonably concluded that the company will satisfy the
solvency and liquidity test immediately after completing the proposed transaction. (1)

Docex does not satisfy the solvency test after acquiring the company’s own shares after
considering all reasonably foreseeable financial circumstances of the company. (1½)

Based on the information provided the acquisition of the company’s own shares will be
illegal, since it does not satisfy the solvency and liquidity test, thereby constituting a
breach of section 48 of the Companies Act 71 of 2008. (1)

CFC will acquire 40% (120 000/300 000) of the number of issued shares of Docex which
is more than 10% in aggregate. (1½)

Therefore, as CFC is not permitted to acquire more than 10% of the issued shares of
Docex it will be in contravention with the Companies Act 71 of 2008. (1)
Docex and CFC will acquire 300 000 issued shares of Docex, which will result in there no
longer being any shares of Docex in issue. (1½)

Therefore, the acquisition of the full 300 000 shares in issue by Docex and CFC will be in
contravention of the Companies Act. (1)
Maximum marks (13)

MATTER 4

4.1 DIRECTORS CONDUCT

In terms of section 76, a director of a company must not use the position of director, or
any information obtained while acting in the capacity of a director … (1)

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 (a) to gain an advantage for the director, or another person other than the company or
a wholly-owned subsidiary of the company; or (1)

(b) to knowingly cause harm to the company or a subsidiary of the company; and (1)

the director must communicate to the board at the earliest practicable opportunity any
information that comes to the director’s attention unless the director … (1)

(a) reasonably believes that the information is immaterial to the company; or (1)

(b) generally available to the public, or known to the other directors; or (1)

(c) is bound not to disclose that information by a legal or ethical obligation of

confidentiality. (1)

A director of a company, when acting in that capacity, must exercise the powers and
perform the functions of director …

(a) in good faith and for a proper purpose; (1)

(b) in the best interests of the company; and (1)

(c) with the degree of care, skill and diligence that may reasonably be expected of a
person … (1)
(i) carrying out the same functions in relation to the company as those carried out
by that director; and (1)
(ii) having the general knowledge, skill and experience of that director. (1)
Maximum marks (10)

4.2 REMOVAL OF DIRECTOR

A company’s MOI may provide for the removal of one or more directors by any person
who is named in, or determined in terms of, the MOI. (1)

In terms of section 71, despite anything to the contrary in the MOI, a director may be
removed by an ordinary resolution at a shareholders’ meeting (1)

by the persons entitled to exercise voting rights in the election of a director. (1)

If a company has more than two directors, and a shareholder or director has alleged that
a director of the company has neglected, or been derelict in the performance of, the
functions of director, (1)

the board must determine the matter by resolution and may remove that director. (1)

The director concerned may not vote on his removal. (1)

Before the shareholders of a company may consider such a resolution the …

(a) director must be afforded the chance to defend himself; (1)

(b) director must be given notice of the meeting (15 business days for public company)
and a copy of the resolution to remove him; (1)

(c) director must be afforded a reasonable opportunity to make a presentation (in

person or through a representative) before voting takes place. (1)

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If the director is removed by the board, he has 20 business days to apply to court for a
review. (1)

If the director is not removed, any director or shareholder who voted to have him/her
removed may apply to court for a review (20 business days). (1)

The board of directors consists of more than two directors. (1½)

Rocky Road was allegedly involved in a fraudulent scheme where R3 million was stolen
from Docex. (1½)

Rocky Road was dismissed by a board resolution at a board meeting. (1½)

Rocky Road was not given any further notifications, neither a notice of the meeting nor a
copy of the proposed resolution; or (1½)

a reasonable opportunity to make a presentation, in person or through a representative,

to the meeting before the resolution is put to a vote as (1½)

Rocky Road was not present at the board meeting where the resolution was made to
dismiss him. (1½)

Docex is therefore in contravention with the Companies Act, 2008 regarding the removal
of Rocky Road. (1½)
Maximum marks (16)

MATTER 5

5.1 INELIGIBILITY AND DISQUALIFICATION OF PERSONS TO BE A DIRECTOR

In terms of section 69, a person is ineligible to be a director of a company if the person …

(a) is a juristic person; (1)

(b) is an unemancipated minor, (1)

or is under a similar legal disability; or (1)

(c) does not satisfy any qualification set out in the company’s MOI. (1)

A person is disqualified to be a director of a company if …

(a) a court has prohibited that person to be a director or declared the person to be
delinquent; (1)

(b) subject to section 69(9) – 69(12), the person

− is an unrehabilitated insolvent; (1)
− is prohibited in terms of any public regulation to be a director of the company;
(1)
− has been removed from an office of trust, on the grounds of misconduct
involving dishonesty; or (1)
− has been convicted, in the Republic or elsewhere, and imprisoned (1)

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 − without the option of a fine, or fined more than the prescribed amount, for theft,
fraud, forgery, perjury or an offence. (1)

A court may exempt a person from the application of any provision of disqualification to
be a director of a company. (1)
Maximum marks (10)

5.2 CANDIDATES PERMISSIBLE AND NOT PERMISSIBLE TO BE APPOINTED AS

DIRECTOR

Air Mail, Patricia Post’s 17-year-old son who is has a strong financial background is
ineligible to be a director of a company since he is an unemancipated minor. (1½)

Container Incorporated, a partnership, is ineligible since a juristic person cannot be a

director of a company. (1½)

Delores Stamp, Chartered Accountant of South Africa, is eligible and qualifies to be the
new director of Docex since the court declared her as rehabilitated insolvent. (1½)

A court may exempt a person from the application of any provision of disqualification to
be a director of a company and therefore she is not an unrehabilitated insolvent. (1½)

Mpho Letter was convicted due to his involvement with fraudulent activities at his
previous company and is, therefore, is disqualified to be a director of a company since he
has been convicted, in the Republic or elsewhere, and imprisoned. (1½)
Maximum marks (5)

Comments

MATTER 1

Question 1.1

It is important to know what the requirements are for a situation to constitute control, or for it to
lead to a related party relationship. In this question, it is important to refer to section 3 of the
Companies Act, which deals with subsidiary relationships.

Question 1.2

It is important to note that financial information is provided in the scenario and students are
required to calculate whether the company satisfies the liquidity and solvency tests, using this
information. You should know the definition of the liquidity and solvency tests, as dealt with in
section 4 of the Companies Act. A company is solvent if the assets of the company, fairly
valued, exceed the liabilities of the company, fairly valued. A company is liquid if the current
assets exceed the current liabilities of the company (which indicates that the company will be
able to pay its debts as they become due, in the ordinary course of business).

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Question 1.3

It should be noted that marks are awarded for: theory in part (i), therefore stating the
requirements as per the Companies Act. In part (ii), the given information in the scenario should
be applied to the requirements of the Companies Act, as listed in part (i). A conclusion should
be reached on whether or not the matter complies with the requirements of the Companies Act,
thereby concluding if the transaction is legal or not.

The given information should be applied to the requirements of section 45 of the Companies
Act.

The requirements of section 45 of the Companies Act state that the company should satisfy the
solvency and liquidity tests immediately after completing the proposed distribution. Remember
that you have already evaluated this requirement in question 1.2, and thus, you only need to
state whether the company does, or does not comply with the liquidity and solvency tests.

Note that there is a requirement in this section, stating that if the value of the financial
assistance exceeds one-tenth of 1% of the net worth of the company, a written notice of the
resolution must be given to all shareholders and any trade union representing the company’s
employees, within 10 business days after adoption of the resolution.

If the value of the financial assistance does not exceed one-tenth of 1% of the net worth of the
company, the notice must be given within 30 business days after the end of the company’s
financial year. The amount of the loan is provided in the scenario, as well as other financial
information, in order for you to calculate whether the value of the financial assistance (the value
of the loan) exceeds one-tenth of 1% of the net worth of the company. The total net worth of the
company is equal to the net asset value of the company, which is provided in the question.

You will thus have to evaluate if the notice of the resolution has been given in time to all
relevant parties.

MATTER 2

Question 2.1

The question requires you to “list the requirements”. It should be noted that marks are awarded
for the theory, therefore stating the requirements as per the Companies Act.

The mark allocation is also provided as a guide in determining the extent of detail required in
answering each specific point.

MATTER 3

Question 3.1

Note that you are required to “discuss the legality” in terms of the Companies Act requirements.
It should be noted that marks are awarded for theory, therefore stating the requirements as per
the Companies Act. The given information in the question should subsequently be applied to the
requirements of the Companies Act (theory). A conclusion should be made on whether the
requirements of the Companies Act were met, thereby concluding whether the transaction is
legal or not.

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The requirements of section 48 of the Companies Act state that a company should satisfy the
solvency and liquidity tests immediately after the acquisition of these shares. Remember once
again that you have already evaluated this requirement in question 1.2, and you can therefore
merely state that the company does or does not comply with the liquidity and solvency tests.

MATTER 4

Question 4.1

Note that you are only required to “list the requirements”. Marks are awarded for the theory,
therefore stating the requirements as per the specific section of the Companies Act, applicable
to directors’ conduct.

Question 4.2

This question requires you to “discuss the legality”. It should be noted that marks are awarded
for theory, therefore stating the requirements as per the Companies Act. The given information
in the question should subsequently be applied to the requirements of the Companies Act. A
conclusion should be reached whether the requirements of the Companies Act are met, thereby
concluding if the removal of the director is legal or not.

MATTER 5

Question 5.1

You are only required to “list the requirements”, which means that the relevant requirements in
terms of the Companies Act should be listed.

Question 5.2

The question requires to “explain which of the candidates will be permissible in terms of the
requirements of the Companies Act 71 of 2008”. This indicates that you should evaluate each of
the candidates in terms of the listed requirements as per the first part of the question. Therefore,
each candidate should be individually evaluated and a conclusion should be reached if the
candidate is permissible to be appointed as the new financial director of the company.

QUESTION 2 45 marks

Solution

1.1 SHARE ISSUE OF 30 000 SHARES

Authority to issue shares

The approval of the issue of the shares by the audit committee is presumably to make a
submission to the directors to vote on at their board meeting after they were requested
by the board to advise them on the issue. The authority for issuing shares lies with the
board as stated below. (1)

In terms of section 38, the board of a company may resolve to issue shares of the
company at any time, (1)

but only within the classes and to the extent that the shares have been authorised by or
in terms of the company's MOI, in terms with section 36. (1)
Maximum marks (2)
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Authorised shares available for issue

In terms of section 38, if the board issues shares which have not been authorised or are
in excess of the number of authorised shares per the MOI, (1)

the issue may be retroactively ratified by special resolution (section 36). (1)

In terms of section 36, the authorisation, classification and numbers of authorised

shares as well as the preferences, rights and limitations, (1)

may be changed only by … (1)

(a) an amendment to the MOI by special resolution of the shareholders; or (1)

(b) the board of the company, in the manner contemplated in section 36(3), (1)

except to the extent that the MOI provides otherwise. (1)

Marvel Entertainment Ltd has an authorised share capital of 150 000 ordinary shares,
130 000 of which are issued (1½)

and therefore the 30 000 share issue will be in excess of the 20 000 available
authorised shares as per the MOI. (1½)

Marvel Entertainment Ltd must increase the authorised share capital. (1½)

If the board of a company acts pursuant to its authority contemplated in section 36(3), the
company must file a Notice of Amendment of its MOI, setting out the changes
effected by the board. (1)
Maximum marks (9)

Consideration for the shares

In terms of section 40, the board may issue authorised shares only for adequate
consideration to the company, as determined by the board. (1)

Before a company issues any particular shares, the board must determine the
consideration for which, and the terms on which, those shares will be issued. (1)

A determination by the board of a company in terms of subsection (2) as to the

adequacy of consideration for any shares may not be challenged on any basis other
than in terms of the requirements applicable to standards of director’s conduct (section
76), read together with the requirements regarding liability of directors (section 77(2)).
(1)

The shares will be issued at the current market value of the shares, which can be
regarded as adequate consideration, as determined by the board. (1½)
Maximum marks (3)

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 Share issue to the directors

In terms of section 41(1)(a), an issue of shares must be approved by special

resolution of the shareholders of a company, (1)

if the shares are issued to a director, future director, prescribed officer or future
prescribed officer of the company. (1)

Shares are going to be issued to the directors of Marvel Entertainment Ltd and
therefore a special resolution by the shareholders of Marvel Entertainment Ltd will
be required. (1½)

The proposed share issue will be approved by the audit committee and not by a
special resolution of the shareholders of Marvel Entertainment Ltd. This will be
contrary to section 41 and therefore any director who formed part of the audit committee
and who is present when the resolution was passed and failed to vote against such issue
would be liable for any loss, damages or costs sustained by Marvel in terms of section
77(3) & (3)(e)(ii). (1½)
Maximum marks (3)

Voting requirements regarding a special resolution to be approved by

shareholders

In terms of section 65(9), for a special resolution to be approved by shareholders, it must

be supported by at least 75% of the voting rights exercised on the resolution. (1)

A company’s MOI may in terms of section 65(10) permit a different percentage of

voting rights to approve any special resolution, provided there Is a difference of at
least 10% between the highest requirement for an ordinary resolution and the lowest
requirement for approval of a special resolution. (1)
Maximum marks (1)
Total marks (18)

1.2 MR XAVIER’S PERSONAL FINANCIAL INTEREST IN THE INVESTMENT AND

ACQUISITION OF THE CONTROLLING INTEREST IN DREAMWORKS LTD

Theory

In terms of section 75(5), if a director has a personal financial interest in respect of a

matter to be considered at a meeting of the board, or knows that a related person
has a personal financial interest in the matter, the director (1)

must disclose the interest and its general nature before the matter is considered at
the meeting; (1)

must disclose to the meeting, any known material information relating to the matter;
(1)

may disclose any observations/pertinent insights relating to the matter if requested to

do so by the other directors; (1)

if present at the meeting, must leave the meeting immediately after making any
disclosures as indicated above; and (1)

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must not take part in the consideration of the matter (other than the above); (1)

while absent from the meeting:

• Is to be regarded as being present at the meeting for the purpose of determining
whether sufficient directors are present to constitute the meeting; and (1)
• Is not to be regarded as being present at the meeting for the purpose of
determining whether a resolution has sufficient support to be adopted; and (1)

must not execute any document on behalf of the company in relation to the matter
unless specifically requested or directed to do so by the board. (1)

In terms of section 73(6), any declaration given by notice or made by a director as

required by section 75 must be included in the minutes of the board meeting. (1)
1 mark per statement, limited to (7)
Application

Mr Xavier, the managing director, has a personal financial interest in the decision to
invest and acquire the controlling interest in DreamWorks Ltd, (1½)
since his wife is the chief executive officer of DreamWorks Ltd. (1½)

Mr Xavier disclosed his interest and its general nature before the matter was
considered at the meeting. (1½)

Nobody required any further information; therefore, the requirement that any insights
may be disclosed if requested by the other directors was complied with.
(1½)

Mr Xavier did not leave the meeting immediately after making the disclosures
because the voting progressed with him still in the meeting (sec 75(5)(d)). (1½)

Mr Xavier voted at the meeting and therefore took part in the consideration of this
matter (sec’s 75(5)(e) & (f)(ii)). (1½)

The declaration made by Mr Xavier was included in the minutes of the board
meeting as clearly indicated. (1½)

Based on the information provided, the requirements in terms of section 75(5)(d),(e) &
(f)(ii) were not met, therefore the decision of the board constitutes a breach of the
Companies Act. (1½)
1½ marks per statement limited to (9)
Maximum marks (16)

1.3 DUTIES OF THE AUDIT COMMITTEE

In terms of section of 94, an audit committee of a company has the following duties:

(a) To nominate, for appointment as auditor of the company under section 90, a
registered auditor who, in the opinion of the audit committee, is independent of
the company; (1)

(b) To determine the fees to be paid to the auditor, and (1)

the auditor’s terms of engagement; (1)

27
 (c) To determine, subject to the provisions of Chapter 3 regarding enhanced
accountability, the nature and extent of any non-audit services that the auditor
may provide to the company, (1)

or that the auditor must not provide to the company or a related company; (1)

(d) To prepare a report, to be included in the annual financial statements for that
financial year … (1)
(i) describing how the audit committee carried out its functions; (1)
(ii) stating whether the audit committee is satisfied that the auditor was
independent of the company; and (1)
(iii) commenting in any way the committee considers appropriate on the
financial statements, the accounting practices and the internal financial
control of the company; (1)

(e) to receive and deal appropriately with any concerns or complaints, whether from
within or outside the company or on its own initiative, relating to … (1)

(i) the accounting practices and internal audit of the company; (1)
(ii) the content or auditing of the company’s financial statements; (1)
(iii) the internal financial controls of the company; or (1)
(iv) any related matter; (1)

(f) to make submissions to the board on any matter concerning the company’s
accounting policies, financial control, records and reporting; (1)
Maximum marks (11)

Comments

Question 1.1
It should be noted that marks were awarded for theory, therefore stating the requirements as
per the Companies Act. The requirements must subsequently be discussed with regards to the
information provided and it should be stated whether the given information in the question
complies with all the requirements of the relevant Companies Act requirements as discussed.

Students should take note of any instructions in a question. In this question, you had to discuss
the requirements of the Companies Act, only in terms of certain points listed. The idea was to
give you guidance, narrow down the possible answer in order for you not to waste any time
discussing other points that might have been applicable in the question.

You should have considered the given fact that 130 000 shares out of a possible 150 000
shares have already been issued (only 20 000 shares available for issue). The reason being
that there are therefore insufficient authorised shares for the envisaged 30 000 shares issue
and that you should have considered this in your answer. It should be noted that the question
does not focus on one specific section of the Companies Act, however numerous concerns
regarding the share issue are indicated. Various sections of the Companies Act should be
noted, such as the fact that the shares are issued to directors (section 41) and the consideration
of the shares (section 40). It should be noted that the audit committee authorised the share
issue, who do not possess the authority to approve such transactions.

Since a special resolution may be required to change the MOI or to issue shares to the
directors, various sections in the range between 61 and 65 may apply, however, the question

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only requires you to discuss the voting requirements (section 65). It is important to follow the
instructions in the required part as otherwise, you will lose marks and valuable time.

The mark allocation is also provided to guide you in the answering of the question and to
determine how much to write per specific point.

Question 1.2
It should be noted that marks were awarded for theory, therefore stating the requirements as
per the Companies Act. The given information in the question should subsequently be applied
to the requirements of the Companies Act. A conclusion should be made whether the situation
complies with the requirements of the Companies Act, therefore concluding if the transaction is
legal or not.

The given information should be applied to the requirements of section 75 of the Companies
Act.
Your answer should be structured as follows to present a logical structure to your answer:

1. Theory (requirements of the Companies Act).

2. Application (evaluate the information provided in the question against each of the
requirements of the Companies Act).

3. Conclusion (formulate a conclusion, in this case, if the personal financial interest matter
is dealt with legally or not in terms of the Companies Act requirements).

Question 1.3
You are required only to list the requirements in terms of the Companies Act. Therefore, no
discussion of the provided information was required.

Students should note that only the remaining duties of the audit committee should have been
listed. You should first determine which duties have been provided in the question and ensure
that you do not waste unnecessary time writing down the duties that have already been given.
Only the remaining duties that have not been provided by the question should be provided in
your answer.

QUESTION 3 24 marks

Solution

1.1 RECKLESS TRADING

Theory

According to section 22, a company must not carry on its business recklessly, with
gross negligence, with intent to defraud any person or for any fraudulent purpose; (1)

If the Commission has reasonable grounds to believe that a company is engaging

in conduct prohibited as stated in the above paragraph, or is unable to pay its
debts as they become due and payable in the normal course of business, (1)

29
 the Commission may issue a notice to the company to show cause why the
company should be permitted to continue carrying on its business, or to trade, as
the case may. (1)

Should the company fail within 20 business days to satisfy the Commission that it
is not engaging in conduct prohibited by the first paragraph above, or that it is able
to pay its debts as they become due and payable in the normal course of business,
the Commission may issue a compliance notice to the company requiring it to cease
carrying on its business or trading, as the case may be. (1)

Application

In this instance Vineyard Ltd will not be able to satisfy the Commission if it receives
the notice indicated above, as ...

Vineyard Ltd does not satisfy the solvency test, since considering all reasonably
foreseeable financial circumstances of the company, the assets (R6 000 000) of the
company fairly valued, do not exceed the liabilities (R11 000 000) of the company
fairly valued, and (1½)

Vineyard Ltd is not liquid, since the current liabilities (R5 000 000) exceed the current
assets (R2 000 000). (1½)

Vineyard Ltd is therefore trading recklessly and is therefore in contravention with the
Companies Act. (1½)
Maximum marks (5)

1.2 DECLARING OF A DIVIDEND

Theory

In terms of section 46, a company must not make any proposed distribution unless …

(a) the distribution …

(i) is pursuant to an existing legal obligation of the company, (1)
or a court order; or (1)
(ii) the board of the company, by resolution, has authorised the distribution;
(1)

(b) it reasonably appears that the company will satisfy the solvency and liquidity test
(1)

immediately after completing the proposed distribution; and (1)

(c) the board of the company, by resolution, has acknowledged that it has applied
the solvency and liquidity test, and reasonably concluded that the company will
satisfy the solvency and liquidity test immediately after completing the proposed
distribution. (1)

Application

Vineyard Ltd does not satisfy the solvency requirements after making the dividend
distribution, because considering all reasonably foreseeable financial circumstances of
the company, (1½)
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the liabilities (R11 000 000) of the company fairly valued, exceed the assets (R6 000
000) of the company fairly valued. (1½)

Vineyard Ltd is not liquid, since the current liabilities (R5 000 000) exceed the current
assets (R2 000 000). (1½)

Based on the information provided the dividend distribution will be illegal, since it
does not satisfy the solvency and liquidity requirement, thereby constituting a
breach of section 46 of the Companies Act. (1½)

Any director of Vineyard Ltd is liable to the extent set out in section 77(3)(e)(vi) if that
director was present at the meeting when the board approved a distribution and failed to
vote against the distribution, despite knowing that the distribution was contrary to section
46 – which is the case here. The directors also did not apply their duties regarding the
application of the solvency and liquidity test properly, otherwise, the distribution would
never have been approved. (1½)
Maximum marks (8)

1.3 FINANCIAL ASSISTANCE TO A SUBSIDIARY TO PURCHASE SHARES IN THE

HOLDING COMPANY

The exception where section 44 does not apply, is not applicable in this case, since
Vineyard Ltd does not lend money in the ordinary course of their business. (1)

Section 44 provides that to the extent that the MOI of a company does not provide
otherwise, (1)

the board may authorise Vineyard Ltd to provide financial assistance by way of a
loan to any person (which will include Aqua Vitae Pty Ltd), to purchase any
securities of the company, subject to the following requirements: (1)

The board may not authorise any financial assistance unless the particular provision of
financial assistance is pursuant to a special resolution of the shareholders,
adopted within the previous two years, and which relates to the specific recipient,
or generally for a category of potential recipients, and the recipient falls within that
category; and (1)

the board is satisfied that immediately after providing the assistance, the company
would satisfy the solvency and liquidity test; and (1)

the terms under which the assistance is proposed to be given are fair and
reasonable to the company. (1)

The board must ensure that any conditions or restrictions respecting the granting of
financial assistance set out in the company’s MOI have been satisfied. (1)

Vineyard Ltd will not satisfy the solvency requirements after providing the
assistance, because considering all reasonably foreseeable financial circumstances of
the company, (1½)

the liabilities (R11 000 000) of the company fairly valued, exceed the assets
(R6 000 000) of the company fairly valued. (1½)
31
 Vineyard Ltd is not liquid, since the current liabilities (R5 000 000) exceed the
current assets (R2 000 000). (1½)

The board of directors approved the decision to provide the financial assistance and
therefore a special resolution would not have been obtained within the previous
two years. (1½)

Based on the information, the financial assistance provided is illegal, since it does not
satisfy the solvency and liquidity requirement, thereby constituting a breach of
section 46 of the Companies Act. (1½)
Maximum marks (11)

Comments

Question 1.1
The answer is straight forward and section 22 applies where a company trades recklessly – in
this case, the company did not meet the solvency and liquidity tests.

Question 1.2
In order to answer the question, you had to know that a dividend is deemed a distribution in
terms of section 1. Once you knew that, you would have been able to apply section 46. Take
note that section 1 also includes a share buy-back as a distribution. If you, therefore, get a
question on a share buy-back, you may also apply the requirements of section 46 to that
question.

Question 1.3
As section 44 is the only section that applies, there is no comment.

QUESTION 4 25 marks

Solution

REQUIREMENTS TO BE MET TO BE APPOINTED AS AN AUDITOR OF A COMPANY

(SECTION 90(2))

Theory

To be appointed as an auditor of a company a person or firm must be a registered auditor; (1)

in addition to the prohibition contemplated in section 84(5) (disqualified to serve as a director of

any particular company), a person or firm must not be …

(a) a director or prescribed officer of the company; (1)

(b) an employee or consultant of the company who was or has been engaged for more than
one year in the maintenance of any of the company’s financial records or the
preparation of any of its financial statements; (1)

(c) a director, officer or employee of a person appointed as company secretary; (1)

(d) a person who, alone or with a partner or employees, habitually or regularly performs the
duties of accountant or bookkeeper, or performs related secretarial work, for the
company; (1)
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(e) a person who, at any time during the five financial years immediately preceding the
date of appointment, was a person contemplated in any of subparagraphs (a) to (d)
above; or (1)

(f) a person related to a person contemplated in subparagraphs (a) to (e); and (1)
must be acceptable to the company’s audit committee as being independent of the
company. (1)

Application

Mr Murdock, the designated auditor for the audit of Pick-n-Play Ltd, was the previous financial
director of Pick-n-Play Ltd, therefore will not be seen as independent of the Pick-n-Play Ltd
by the audit committee. (1½)

Mr Murdock resigned as financial director of Pick-n-Play Ltd a year ago and therefore was a
director at any time during the five financial years immediately preceding the date of
appointment. (1½)

Mr Murdock may therefore not be appointed as designated auditor, somebody else in A-

Team Incorporated may, however, be acceptable. (1½)
Maximum marks (7)

Requirements where a vacancy arises in the office of an auditor

Theory

In terms of section 91, if a vacancy arises in the office of an auditor of a company, the board of
that company …

must appoint a new auditor within 40 business days, if there was only one incumbent
auditor of the company (which is the case here). (1)

Before making an appointment …

(a) the board must propose to the company’s audit committee, (1)

within 15 business days after the vacancy occurs, the name of at least one registered
auditor to be considered for appointment as the new auditor; and (1)

(b) may proceed to make an appointment of a person proposed in terms of paragraph (a)
above if, within five business days after delivering the proposal, (1)

the audit committee does not give notice in writing to the board rejecting the
proposed auditor. (1)

33
Application

The vacancy occurred on 10 February 2020. Mr Shoprite, the managing director of Pick-n-
Play Ltd recommended A-Team Incorporated to the audit committee of Pick-n-Play Ltd on
15 February 2020, therefore within 15 days after the vacancy occurred. (1½)

As we do not have any information to confirm that the board appointed A-Team Incorporated
within five days after delivering the proposal to the audit committee, or that the audit
committee rejected A-Team Incorporated, we cannot comment on that.
Bonus mark (1½)
Maximum marks (3)

ROTATION OF AUDITORS

In terms of section 92, the same individual may not serve as the auditor or designated
auditor of a company for more than five consecutive financial years. (1)

If an individual has served as the auditor or designated auditor of a company for two or
more consecutive financial years and then ceases to be the auditor or designated
auditor, (1)

the individual may not be appointed again as the auditor or designated auditor of that
company until after the expiry of at least two further financial years. (1)

DTT Incorporated has been Pick-n-Play Ltd’s external auditors for the 6 preceding years.
They would have been in contravention with this requirement of the Companies Act (1½)
Maximum marks (3)

COMPOSITION OF THE AUDIT COMMITTEE

Theory

In terms of section 94, each member of an audit committee of a company must …

(a) be a director of the company, (1)

(b) who satisfies any applicable requirements prescribed by the Minister who may
prescribe minimum qualification requirements for members of an audit committee as
necessary to ensure that any such committee, taken as a whole, comprises persons with
adequate relevant knowledge and experience to equip the committee to perform its
functions. (1)

The Minister prescribed in Regulation 42 that at least one–third of the members of a

company’s audit committee at any particular time must have academic
qualifications or experience in economics, law, corporate governance, finance,
accounting, commerce, industry, public affairs or human resource management. (1)

(c) not be …
(i) involved in the day-to-day management of the company’s business, or (1)

have been so involved at any time during the previous financial year; (1)
(ii) a prescribed officer, or full-time employee, of the company or another related
or inter-related company, or (1)

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have been such an officer or employee at any time during the previous three
financial years; or (1)
(iii) a material supplier or customer of the company, such that a reasonable and
informed third party would conclude in the circumstances that the integrity,
impartiality or objectivity of that director is compromised by that relationship; and (1)

(d) not be related to any person who falls within any of the criteria set out in (c) above.
(1)

Application

Mr Shoprite is currently the managing director of Pick-n-Play Ltd and a member of the
audit committee. (1½)

He is therefore involved in the day-to-day management of the company’s business, (1½)

and should not be a member of the audit committee according to the requirements of the
Companies Act. (1½)
Marks limited to (7)

CONSIDERATIONS TAKEN INTO ACCOUNT TO DETERMINE IF THE REGISTERED

AUDITOR IS INDEPENDENT

Theory

In terms of section 94, in considering whether a registered auditor is independent of a company,

the audit committee of that company must …

(a) ascertain that the auditor does not receive any direct or indirect remuneration or
other benefit from the company, except … (1)
(i) as auditor; or (1)
(ii) for rendering other services to the company, (1)

(b) consider whether the auditor’s independence may have been prejudiced … (1)
(i) as a result of any previous appointment as auditor; or (1)
(ii) having regard to the extent of any consultancy, advisory or other work
undertaken by the auditor for the company; and (1)

(c) consider compliance with other criteria relating to independence or conflict of

interest as prescribed by the Independent Regulatory Board for Auditors established by
the Auditing Profession Act, in relation to the company, and if the company is a member of
a group of companies, any other company within that group. (1)

Application

Since Mr Murdock, a partner of A-team Incorporated, is the previous financial director of Pick-n-
Play Ltd and resigned as financial director of Pick-n-Play Ltd a year ago to pursue other
opportunities, he can hardly be independent in terms of section 94 or the criteria in terms of the
Code of Professional Conduct. (1½)
Maximum marks (5)

35
Comments

The question required that you discuss the requirements of the Companies Act for the
appointment of A-Team Incorporated as the new external auditors of Pick-n-Play Ltd, only in
terms of certain points. It is important to discuss only those points and according to the
sequence indicated.

Your answer had to be structured as follows to present a logical structure to your answer:

Theory (requirements of the Companies Act).

Application (apply the information provided in the question to each of the requirements of
the Companies Act. In this case sections 90, 91, 92, 94 & Regulation 42 and section 94
again, respectively).

QUESTION 5 30 marks

Solution

1.1 MOI REQUIREMENTS REGARDING THE ISSUE OF SHARES (PRIVATE COMPANY,

SHAREHOLDERS’ RIGHTS)

1.1.1 As Computer Services (Pty) Ltd is a private company, its Memorandum of

Incorporation (MOI) …
1.1.1.1 will prohibit it from offering the shares to the public, and
1.1.1.2 will restrict the transferability of its shares. (1½)

1.1.2 In making the issue, the board will have to consider any requirements in the MOI
related to the proposed issue. For example, the rights of existing shareholders of
Computer Services (Pty) Ltd.
1.1.2.1 In terms of section 39(3) each existing shareholder of Computer Services
(Pty) Ltd has a right, before any other person who is not a shareholder of
Computer Services (Pty) Ltd, to be offered, and to subscribe for, a
percentage of the shares to be issued equal to the voting power of that
shareholder's general voting rights before the offer was made, but (1½)
1.1.2.2 the company’s MOI may limit, negate, restrict or place restrictions on this
right. (1½)
1.1.2.3 In terms of section 39(4), if the shares are offered to existing shareholders
as stated in 1.1.2.1 above, the shareholders may subscribe for fewer shares
than entitled to and those shares not subscribed for by the existing
shareholders within a reasonable time may be offered to other persons
(such as the directors in this scenario). (3)
Maximum marks (6)

1.2 SHARES AVAILABLE FOR ISSUE & POSSIBLE AMENDMENTS TO MOI

1.2.1 Computer Services (Pty) Ltd’s MOI sets out the number and class of authorised
shares and as the existing authorised shares have all been issued, an amendment
to the MOI will have to be made (refer 1.2.2). (1½)

1.2.2 In terms of section 36(3), the board may increase the number of authorised shares,
except to the extent the MOI provides otherwise – in other words, the board may
amend the MOI. (1½)
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1.2.3 The MOI must also set out the preferences, rights, limitations or terms as well as the
classification of the shares and, in terms of section 36(3), this can also be decided
by the board except to the extent the MOI provides otherwise. (1½)

1.2.4 Since an amendment to the MOI is made (such as the changes to authorised
shares in point 1.2.1 above), the company must file a Notice of Amendment to its
MOI with CIPC. (1½)
Maximum marks (4½)

1.3 AUTHORITY REQUIRED FOR THE SHARE ISSUE

1.3.1 The board of Computer Services (Pty) Ltd may resolve to issue more shares at any
time but only within the class and to the extent the shares have been authorised
(section 38). (1½)
Maximum marks (1½)

1.4 REQUIREMENTS APPLICABLE WHERE SHARES OF NO PAR VALUE ARE ISSUED

AND THE CONSIDERATION FOR THE ISSUED SHARES

1.4.1 In terms of the Companies Act 2008, shares have no par value. (This presents no
problem for Computer Services (Pty) Ltd as its existing and proposed shares are of
no par value.) Bonus (1½)
1.4.1.1 In terms of section 40, the board must determine the consideration for
which the shares will be issued – this must be an adequate consideration
from the perspective of the company. (1½)
1.4.1.2 The consideration determined by the directors cannot be challenged (say,
by existing shareholders) other than on the basis that the directors did not
act in good faith in the best interests of the company and with the degree of
skill and diligence reasonably expected of a director. (1½)
Maximum marks (3)

1.5 REQUIREMENTS WHERE SOME SHARES ARE ISSUED TO DIRECTORS

In terms of section 41, this issue of shares must be approved by special resolution of the
shareholders because it is intended that some of the shares be issued to the directors.
(1½)

1.5.1 In certain instances a special resolution is not required, however that does not apply
in this situation since …
• the directors do not have a pre-emptive right as they are not shareholders.
• the issue is not
• the issue is not in proportion pursuant to an employee share scheme or
underwriting agreement.to existing holdings.
Anyone of the three for (1½)
Maximum marks (1½)

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1.6 REQUIREMENTS REGARDING NOTICES FOR THE MEETING WHERE THE ISSUE
OF SHARES TO DIRECTORS IS TO BE AUTHORISED

1.6.1 As (see point 1.5 above) there is a need to hold a shareholders’ meeting to pass a
special resolution, the board will have to provide all shareholders with written notice
• of the date, time and place of the meeting
• the specific purpose of the meeting (share issue) (a copy of the resolution
must be provided)
• the percentage of voting rights required for the special resolution
• that any shareholder entitled to vote may appoint a proxy (this must be
reasonably prominently displayed on the notice)
• that satisfactory identification will be required from shareholders to attend.
One mark each to a maximum of (3)

1.6.2 This written notice must be given at least 10 business days before the meeting is to
begin. (The MOI may stipulate a longer or shorter notice period). (1½)
Maximum marks (3)

1.7 QUORUM REQUIREMENTS FOR THE MEETING REFERRED TO ABOVE AND

RELATED MATTERS IN DETERMINATION OF THE VALIDITY OF THE PERSONS
MAKING UP THE QUORUM

1.7.1 The meeting to pass this resolution may only begin if 25% of the voting rights
entitled to vote on at least one matter to be decided at the meeting (there will be
other matters covered at this meeting) are present (s64(1)(a)).
1.7.1.1 for the debate to commence on the share issue resolution there must be
holders of at least 25% of the shares entitled to vote on the share issue
present when the matter is called on the agenda. For Computer Services
(Pty) Ltd this means holders of at least 25% of the (existing) ordinary
shares. (Note: the MOI may stipulate lower percentages). (1½)

1.7.2 As Computer Services (Pty) Ltd has more than two shareholders, the meeting may
not begin, or a matter begin to be debated unless at least three shareholders are
present at the meeting (s64(3)(a)). (1½)

1.7.3 At the commencement of the meeting, shareholders’ identities must be verified and
their right to attend or participate verified. The person presiding over the meeting
must be satisfied with the validity of the shareholders’ identities (s63(1) (a)). (1½)
Maximum marks (3)

1.8 REQUIREMENTS REGARDING THE CONTENT OF THE RESOLUTION TO BE

VOTED UPON

1.8.1 The proposed resolution must be sufficiently clear and specific and must be
accompanied by sufficient information to enable a shareholder to decide whether to
participate in the meeting and “influence the outcome” of the vote on the resolution.
(1½)
(1½)

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1.9 VOTING RIGHTS REQUIRED TO BE EXERCISED FOR A VALID RESOLUTION

1.9.1 For the special resolution on the share issue to be passed, it must be supported by
at least 75% of the voting rights exercised on the resolution. (Note: the MOI may
stipulate a lower (or higher) percentage but the difference between the percentage
for an ordinary and special resolution, must be at least 10%). (1½)

1.9.2 Voting should be by poll (not on a show of hands). Voting by poll enables those
shareholders with larger shareholdings to have more influence on the vote. (1½)
(3)

1.10 SECRETARIAL REQUIREMENTS AFTER RECEIVING THE CONSIDERATION FOR

THE SHARES

1.10.1 When Computer Services (Pty) Ltd has received the consideration for the shares
(s40(4)) …
1.10.1.1 the shares are regarded as fully paid up; and
1.10.1.2 the company must issue share certificates in the name of the new
shareholder, and
1.10.1.3 enter the details of new shareholders/shareholdings in the company’s
share (securities) register, e.g. name, address and number of shares.
One mark each to maximum of (3)
(3)
Total marks 30

Comments

In the examination, many students did not address sub-sections 1.1 to 1.10 separately. Instead,
it was discussed as one very long “essay”. This is not the correct approach to follow. Each sub-
section should be addressed separately, and if you are merely required to give the Companies
Act requirements, you should list the theory in point format. If you are required to discuss a
certain matter with regards to the Companies Act, you should firstly state the theory of the Act
(in point format) and then apply the theory to the scenario. The application should also be done
in point format (in the same sequence as the points under theory). Note that theory usually
weighs one mark, whilst the application thereof will account for one and a half marks.

QUESTION 6 30 marks

Solution

1.1 CONTRACT ENTERED INTO BY SHIPPING ENGINEERS AND TECHNICAL

SYSTEMS

1.1.1 In terms of the Companies Act 2008 (section 76) ...

1.1.1.1 Greg O’Reilly should have communicated to the board of Shipping
Engineers (Pty) Ltd at the earliest practicable opportunity, any information
which was material to Technical Systems (Pty) Ltd, e.g. it would be
important for the board to know that Greg and Brian are related as a R7.5
million deal could be influenced by the relationship. (1½)
1.1.1.2 Greg O’Reilly must at all times perform his function and exercise his powers
as a director ...
1.1.1.2.1 in good faith
1.1.1.2.2 in the best interests of the company. (1½)
39
 1.1.2 In effect Greg O’Reilly had a conflict of interest – the company or his brother. (1½)

1.1.3 In terms of section 75 of the Companies Act 2008, if Greg O’Reilly had a personal
financial interest in the matter to be considered at a meeting of the board (sale of
the radar systems), or had known that a related person had a personal financial
interest, he should have: Any one of the two for (1½)
1.1.3.1 disclosed the interest and its general nature before the matter was
considered at the meeting.
1.1.3.2 disclosed to the meeting any material information relating to the sale which
was known to him.
1.1.3.3 disclosed any observations or pertinent insights into the matter if he had
been requested to do so by the other directors.
1.1.3.4 left the meeting (if he was present) immediately after making the
disclosures to the meeting, and
1.1.3.5 have taken no further part in the meeting, and
1.1.3.6 would not have voted on the decision. Any 4 for a maximum of (6)

1.1.4 As Greg and Brian O’Reilly are brothers, they are regarded as related for the
purposes of the Companies Act 2008, as they are within two degrees of
consanguinity. (1½)

1.1.5 In terms of section 76(2)(b) this information need only be disclosed if it is material.
A contract of R7.5 million would probably be regarded as material. (1½)
Maximum marks (12)

1.2 RATIFICATION BY ELECTRONIC COMMUNICATION

1.2.1 The meeting of shareholders to ratify the contract can be held by electronic
communication provided
1.2.1.1 the company is not prohibited by its MOI from conducting the meeting by
electronic communication. (1½)

1.2.2 In terms of section 63, one or more shareholders (or their proxies) may participate in
an electronic meeting, provided (1)
1.2.2.1 the electronic communication employed ordinarily enables all persons
participating in that meeting, to communicate concurrently with each other
without an intermediary (1)
and to participate reasonably effectively in the meeting. (1)

1.2.3 The notice of the meeting must inform shareholders of the availability of that form of
participation (1½)

and provide the necessary information to enable shareholders (proxies) to access

the available medium (the cost to be borne by the shareholder). (1½)
Maximum marks (5)

1.3 DIFFERENCE BETWEEN VOTING BY SHOW OF HANDS AND BY POLL

Voting by a show of hands - each shareholder (or proxy) has one vote irrespective of the
number of shares held by the shareholder. (1½)

Voting by a poll - shareholder (or proxy) must be allowed to exercise all the voting rights
attached to the shares held by the shareholder. (1½)
(3)
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1.4 DIVIDEND DECLARED

In terms of section 46, Shipping Engineers (Pty) Ltd must not make any proposed
distribution, unless …

(a) the distribution

(i) is pursuant to an existing legal obligation (not applicable) of the company,
Bonus (1)
or a court order (not applicable); or Bonus (1)
(ii) the board of the company, by resolution, has authorised the distribution (this
did happen according to the given information); (1½)

(b) it reasonably appears that the company will satisfy the solvency and liquidity test
immediately after completing the proposed distribution; and (1)

(c) the board of Shipping Engineers (Pty) Ltd, by resolution, has acknowledged that it
has applied the solvency and liquidity test, and reasonably concluded that the
company will satisfy the solvency and liquidity test immediately after completing the
proposed distribution. (1)

Shipping Engineers (Pty) Ltd does not satisfy the solvency requirements after making the
dividend distribution, considering all reasonably foreseeable financial circumstances of the
company, (1½)

the liabilities (R5 000 000) of the company fairly valued, exceed the assets (R4 000 000) of
the company fairly valued. (1½)

Shipping Engineers (Pty) Ltd is not liquid, since the current liabilities (R3 000 000) exceed
the current assets (R1 000 000). (1½)

Based on the information provided the dividend distribution will be illegal, since it does not
satisfy the solvency and liquidity requirement, thereby constituting a breach of section 46
of the Companies Act. (1½)

Any director of Shipping Engineers (Pty) Ltd is liable to the extent set out in section
77(3)(e)(vi) if that director was present at the meeting when the board approved a
distribution and failed to vote against the distribution, despite knowing that the distribution
was contrary to section 46 – which is the case here. The directors also did not apply their
duties regarding the application of the solvency and liquidity test properly; otherwise, the
distribution would never have been approved. (1½)
Maximum marks (10)

Comments

This question dealt with a director who had an interest in a contract that the company entered
into. It also dealt specifically with shareholders’ meetings and distributions. We noted that
students tend to get confused between shareholders’ and board meetings and resolutions. Note
that the shareholders are the “owners” of the company, whilst the directors are the persons who
manage the company. Study the definitions of ordinary and special resolutions in section 1 of
the Act, as well as section 73 on board meetings, in this regard.

41
QUESTION 7 40 marks

Solution

1.1 REQUIREMENT TO HAVE ANNUAL FINANCIAL STATEMENTS AUDITED

If John Smit wants to include the audit requirement in the company’s memorandum of
Incorporation (MOI), the MOI will have to be amended in terms of the Act. (1½)

A special resolution to amend the MOI is required. (2)

If the resolution is passed, a Notice of Amendment (with the prescribed fee) must be filed
with CIPC. (1½)
Maximum marks (5)

1.2 A THE REQUIREMENTS APPLICABLE TO APPOINTING AN AUDIT COMMITTEE

IN TERMS OF THE COMPANIES ACT

The Companies Act does not require a private company to appoint an audit committee,
but according to the information Painters (Pty) Ltd’s MOI does require such an
appointment. (1½)

Shareholders must appoint the audit committee at each annual general meeting. (1½)

The audit committee must consist of at least three members. (1½)

Each member must be a director of the company. (1½)

Each member must satisfy the minimum qualifications prescribed by the Minister to
ensure that the audit committee taken as a whole, comprises persons with adequate
financial knowledge and experience. (1½)

Regulation 42 requires that at least one-third of the members of the audit committee have
academic qualifications or experience in economics, law, accounting, corporate
governance, etc. Bonus (1½)

Members of the audit committee must not be

• involved in the day to day running of the company or have been so involved at
any time during the previous financial year; or (1½)
• a prescribed officer, or full-time executive employee of Painters (Pty) Ltd (or
any related or inter-related company) or have held such post at any time
during the previous three financial years; or (1½)
• a material supplier or customer of the company, such that a reasonable and
informed third party would conclude that, in the circumstances, the integrity,
impartiality or objectivity of that member of the audit committee would be
compromised; or (1½)
• a “related person” to any person subject to these prohibitions e.g. the wife of a
full-time executive employee of Painters (Pty) Ltd. (1½)
Maximum marks (10)

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1.2 B THE DUTIES OF THE AUDIT COMMITTEE IN TERMS OF THE COMPANIES ACT
ARE TO …

nominate a registered auditor for appointment as auditor by the shareholders (must be

satisfied nominated person/firm is independent of Painters (Pty) Ltd). (1½)

determine the auditors’ fees and terms of engagement. (1½)

ensure the appointment of the auditor complies with the Companies Act and the Auditing
Profession Act. (1½)

determine the nature and extent of any non-audit services the auditor may provide to
Painters (Pty) Ltd; and (1½)

pre-approve any agreement with the auditor for the provision of these services. (1½)

prepare a report to be included in the AFS which

• describes how the audit committee carried out its function. (1½)
• states whether the auditor was independent of the company. (1½)
• comments in any way the committee considers appropriate of the financial
statements, the accounting practices and internal controls of the company.
(1½)

receive and deal with appropriately, any concerns or complaints relating to

• the accounting practices and internal audit of the company;
• the content or audit of the AFS;
• internal financial controls; or
• any related matters. Any two for a maximum of (3)

make submissions to the board on any matters dealt within (2.6) above. (1½)

perform other functions determined by the board. (1½)

Maximum marks (10)

1.3 ADVISE JOHN SMIT ON WHETHER RYAN HANSEN COULD BE REMOVED FROM
HIS POSITION AS A DIRECTOR OF PAINTERS (PTY) LTD

If the MOI contained a clause which designated an individual e.g. John Smit in his
capacity as CEO, the power to remove Ryan Hansen from the board, that power could be
exercised. (1½)

Ryan Hansen can also be removed by an ordinary resolution of the shareholders at any
general meeting. (1½)

Ryan Hansen may also be removed if a shareholder or fellow director (e.g. John Smit)
alleges, inter alia, that he has been negligent or derelict in his duties as a director. (1½)

The board must consider the allegation and vote on his removal. (1½)

Whatever “method” of removing Ryan Hansen is attempted, he must be afforded the

chance to defend himself; (1½)
43
 • he must be given notice of the meeting (10 business days) and a copy of the
resolution to remove him. (1½)
• he must be afforded a reasonable opportunity to make a presentation (in
person or through a representative) before voting takes place. (1½)

Where Ryan Hansen is to be removed by the board, he may not vote on his removal.(1½)
For the removal resolution to be accepted, the majority of directors voting would need to
vote in favour. (1½)

If Ryan Hansen is removed by the board, he has 20 business days to go to court for a
review. Bonus (1½)

If he is not removed, any director or shareholder who voted to have him removed may go
to court for a review (20 business days). Bonus (1½)
Maximum marks (12)

1.4 ADVISE JOHN SMIT AS TO WHICH, IF ANY, OF THE TWO AUDIT

FIRMS/INDIVIDUALS LISTED FOR APPOINTMENT AS AUDITOR FOR THE
VOLUNTARY AUDIT, WOULD BE SUITABLE FOR APPOINTMENT

Lee Westwood: not suitable for appointment as he is, in terms of the IRBA Code of
Professional Conduct (CPC), not independent as he is the brother of one of the major
shareholders of Painters (Pty) Ltd. (1½)

In terms of section 90(2)(c) of the Companies Act, an auditor must be acceptable to the
company’s audit committee as being independent of the company and according to the
above and the given information, he is not independent. (1½)

This relationship is likely to be a threat to his independence, (primarily familiarity) and

would certainly be seen to impinge upon the independence of the opinion given by Lee
Westwood in his capacity of auditor. (1½)

Fin Advisors Inc: not suitable for appointment as the company could not be registered
with the IRBA and therefore cannot conduct audits (section 90(2)(a) of the Companies
Act). (1½)

The reason why the company could not be registered with the IRBA is that for any
incorporated practice to register as an audit company, all shareholders must be
registered auditors. Anne Naidoo is a lawyer and not qualified for registration with the
IRBA. (1½)
Maximum marks (3)

Comments

This question dealt with audits, auditors and audit committees. Students performed fairly well in
this question however we did pick up that students did not study section 90(2) very well. It is
also important to note that the audit committee does not appoint the auditor, but merely
nominates the auditor for appointment by the shareholders.

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 AUE1601/102/3/2021

QUESTION 8 6 marks

Solution

PRE-INCORPORATION CONTRACTS

A person may enter into a written agreement in the name of or on behalf of, an entity that is
contemplated to be incorporated but does not yet exist at the time. (1)

A person who does anything as explained above is jointly and severally liable with any other
such person for liabilities created as provided for in the pre-incorporation contract while
so acting if … (1)
(a) the contemplated entity is not subsequently incorporated; or (1)
(b) after being incorporated, the company rejects any part of such an agreement. (1)

If, after its incorporation, a company enters into an agreement on the same terms as, or in
substitution for, an agreement contemplated above, the liability of the person in respect of the
substituted agreement is discharged. (1)

Within three months after the date on which a company was incorporated the board of
that company may completely, partially or conditionally ratify or reject any pre-incorporation
contract purported to have been made in its name or on its behalf. (1)

If within three months after the date on which a company was incorporated, the board
has neither ratified nor rejected a particular pre-incorporation contract, the company will
be regarded as having ratified that agreement. (1)

To the extent that a pre-incorporation contract has been ratified …

(a) the agreement is enforceable against the company as if the company had been a
party to the agreement when it was made; and (1)
(b) the liability of a person who entered into the pre-incorporation contract in respect of
the ratified agreement is discharged. (1)

If a company rejects the agreement before the incorporation of the company, a person who
bears any liability for that rejected agreement may assert a claim against the company for
any benefit it has received or is entitled to receive, in terms of the agreement. (1)
Maximum marks (6)

Comments

This question was self-explanatory; you merely had to write down the requirement of section 21
of the Companies Act.

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QUESTION 9 12 marks

Solution

CALCULATION OF PUBLIC INTEREST SCORE

• ABC has a public interest score of: 400 (165 + 7 + 186 + 42) (½)

1 point for every one of the average number of employees employed during the year (165).
(1½)
1 point for every R1 million (or portion thereof) in third party liability of the company at the
financial year-end (7). (1½)

1 point for every R1 million (or portion thereof) in turnover during the financial year (186).
(1½)

1 point for every individual who at the end of the financial year, is known by the company to
directly or indirectly have a beneficial interest in the company’s issued securities (42- note that
you have to count Mr X and Mr Y as well). (1½)

ABC is therefore subject to a ‘public interest audit’ as the company has a public interest score of
more than 350 and needs to be audited by a registered auditor.
Maximum marks (6)
• XYZ has a public interest score of 153 (70 + 0 + 80 + 3). (½)

1 point for every one of the average number of employees employed during the year (70). (1½)
1 point for every R1 million (or portion thereof) in third party liability of the company at the
financial year-end (0). (1½)

1 point for every R1 million (or portion thereof) in turnover during the financial year (80). (1½)

1 point for every individual who at the end of the financial year, is known by the company to
directly or indirectly have a beneficial interest in the company’s issued securities (3). (1½)

XYZ is therefore subject to a ‘public interest audit’ as the company has a public interest score of
more than 100 but less than 350, and their financial statements are internally compiled. Thus,
the company needs to be audited by a registered auditor. (1½)
Maximum marks (6)
Comments

In the case of ABC, it is irrelevant that their financials are compiled externally, as the public
interest score is above 350. Consider how your answer would have been different if the public
interest score was below 350.

In the case of XYZ, consider how your answer would have been different if the financial
statements were compiled externally.

6. CONCLUSION

If you find, when comparing your answers with this key, that your answer in respect of any
specific topic is less than satisfactory, then you should go back to that topic and study it again.

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