e The University of the South Pacific

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

School of Accounting and Finance

AF205 Law of Associations

Blended Mode

Final Examination - Semester 1, 2017

Time Allowed 3 hours plus 10 minutes reading

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

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

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

Note: questions may contain irrelevant information.

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

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 •
Question One (total 10 marks)

(a) In partnership law it is theoretically possible for the partners to terminate the partnership, to
divide the firm assets among the former partners, thereafter each partner going his or her (or
its) separate way, all the while ignoring claims of unpaid creditors of the firm.
This doesn't look very responsible. But it is legally possible and legally permissible.

Required: What justifies this? Why does the law allow partners to behave in this way?
Your answer should include reference to any relevant sections of the Partnership Act.
(5 marks)

(b) 'Suva Can' and 'Suva Lawyers' are the trading names of two different partnerships.
Here are some details re each firm.
Suva Can: There are two equal partners: A and B. The firm's business is manufacturing cans.
This business requires significant capital.
Suva Lawyers: There are two equal partners: X and Y. The firm's business is providing legal
services. This business requires very little capital.

Both firms are well established.

Both firms make good profits.
Both firms are planning to expand their business.

C is experienced in manufacturing.
Z is a talented lawyer.

Suva Can invites C to join the firm on terms that C will be an equal and active partner in the
firm.
Suva Lawyers invites Z to join the firm on terms that Z will be an equal and active partner in
the firm.

Each of C and Z have an opportunity to become apart owner of an established, successful

and profitable business. Fantastic.
But there are no free lunches.
The offers of partnership made to C and Z respectively, require the new partner to pay
$100,000.

What more specifically is the deal in each case?

Is the $100,000 to be paid to the firm or is the $100,000 to be paid in equal parts to each of
the two existing partners personally?
In fact we are not told.
Required: Deal with each case (Suva Can and C) (Suva Lawyers and Z) in tum.
In each case what do you suggest are the more likely terms of the deal regarding application
of the $100,000? Provide reasons in support of your answer.
(5 marks)

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 Question Two (10 marks)

The Fiji Companies Act provides a legal mechanism for a promoter to create (bring into
existence) a company. Any company promoter faces a number of design choices. What type
(category) of company is to be created? What are the articles to say on a variety of different
issues? What, for example, are the articles to say concerning the selection of directors?

This question requires you to write about design issues for company promoters. Specifically:
(i) What choices exist concerning the type (category) of company to be created? Outline and
describe the different choices.
(ii) Identify and explain two issues that need to be addressed in the articles. In explaining the
issues you may want to illustrate the choices.
(In answering this question (ii) you cannot use the issue of selection of directors.)

Question Three (total 10 marks)

(a) Every subject has its jargon.

Explain how the following collection of terms fit together.
purchase/subscribe/transfer/allot/primary market/secondary market
(3 marks)

(b) This question concerns the Fiji company ATH.

For the purposes of this question, presume that the company's articles are in the form of
Table A.

ATH was created as one step in the privatization of the Fiji Government's historical
ownership of the fixed line telephone business. The principal role for which ATH was created
was to acquire all outstanding shares in TFL from the Government.

Very early in the life of ATH a directors meeting was held. Our course materials include a
copy of the board minutes.
In resolution 2 the board resolved that the company enter into the 'TFL share sale agreement'
in the form produced to the meeting.
The board then in the following resolution 3 resolved as follows:
'The common seal of the Company be affixed to the TFL share sale agreement,
for the purpose of resolution 2.'

Resolution 2 was the important substantive resolution. The 'TFL share sale agreement' was
the draft contract to acquire the TFL shares.

By contrast, resolution 3 was concerned with what we might call 'housekeeping' or a matter
of crossing every 't' and dotting every 'i'.

Here is the question:

Why was resolution 3 necessary?
(3 marks)

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 (c) Bus Co Pte Ltd ('Busco')is a private company. The company has two directors and fifteen
members. All issued shares are ordinary shares. Busco has articles in the form of Schedule 2.

x, Y and Z are members of Busco and collectively own a majority of issued shares. X, Y and
Z are unhappy with the performance of the company's two directors A and B.

X, Y and Z organize a lunch date with A and B. At the lunch, X, Y and Z ask A and B to
resign as directors. A and B refuse. X, Y and Z then ask A and B to call a shareholders
meeting so that all members can discuss whether A and B should be replaced as directors.
Again A and B refuse.

X, Y and Z now consult you.

They want advice as to whether they can;
(a) legally force A and B from office; and
(b) if so, what steps (given the current circumstances) they need to take.
(4 marks)

Question Four (total 15 marks)

Sam Salomon is a sole trader. He owns and operates a convenience store. The business has a
net book value of $1 00,000.

Sam decides to utilize a limited company to own and operate his business. A company named
Salomon Trading Co Ltd ('Sco') is formed for this purpose. Sam files Form A2 (Application
for Registration as a Company) with the Registrar. The Form A2 document lists the
company's original members as Sam and Wilma (Sam's wife) each taking one share at an
issue price of $1. The Form A2 document also lists Sam and Wilma as the company's initial
directors.

Sco's articles provide that the company is to have two directors and that Sam and Wilma are
to be directors for life. In all other respects the articles are identical with Table A.

Following creation of the company, Sam and Sco enter into an agreement for the purchase
and sale of Sam's business as a going concern (the "Sale Agreement"). The sale price is
$100,000. Payment as to one half is by an issue of 49,998 fully paid-up shares of Sco, issue
price $1 per share, and as to the other half by an issue of five bonds. Each bond has a face
value of$10,000 and pays annual interest of3%. The bonds mature at one year intervals. The
bonds are to be in registerable form and are to be secured by a charge over all of the
company's assets both present and future.

Following execution of the Sale Agreement both parties promptly perform.

Answer the following questions. Unless stated otherwise, explain your answers fully and
include reference to any relevant section/so

(i) At the start of this story what is Sco's issued capital?

At the end ofthis story what is Sco's issued capital?
(No reasons required. Just state the dollar values.)
(1 mark)

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(li) The deal is priced at $100,000. What reason/s could there be for structuring this as a part
cash-part credit sale rather than an all cash sale?
Explain your answer fully.
(4 marks)

(iii) Following performance ofthe Sale Agreement what filings must be made with the registrar of
companies? (Hint there are 3.)
Your answer should include reference to any relevant section/so
(3 marks)

(iv) Following performance of the Sale Agreement can Sam expect to receive a share certificate?
Your answer should include reference to any relevant section/so
(1 mark)

(v) Directors are subject to fiduciary duties. Prima facie the sale by Sam to Sco involves a breach
of fiduciary duty. Explain how and why this is so.
Your answer should include reference to any relevant case law.
(4 marks)

(vi) Aside from fiduciary duties, directors in Fiji are subject to statutory duties. Are Sam and
Wilma (or anyone of them) subject to any statutory duty of disclosure in relation to Sco's
acquisition?
(2 marks)

Question Five (5 marks)

In the House of Lords decision Regal Hastings v Gulliver the company Regal Hastings
('RH') planned to put together a small chain of Cinemas utilising the legal vehicle Amalco.
The plan ran into problems when the landlord of the two cinemas declined to grant leases to
Amalco because Amaleo was insufficiently capitalised. RH was itself unable to invest further
funds in Amaleo. In these circumstances, the directors of RH carne to the rescue contributing
40% of the required capital for Amaleo from their own pockets. Arguably the directors ofRH
were heroes. Without their assistance RH's plan would have been frustrated and there would
have been no chain of cinemas.

The Regal story ends with the directors (now former directors) being successfully sued for
breach of fiduciary duty. This looks like a story of good guys corne last.
Explain why the former directors lost the case?

THE END