F4_ah_ans Guide

ACCA F4 Mock Examination Answers Guide 1. Sources of law are to be found in Statutes and Cases because sources of law can be seen from:a) b) c) d) e) f)

Singapore Constitution; Common Law and Equity; Judicial Precedent; Legislation; English statutes recognized as valid Singapore laws due to Application of English Law Act; & Custom and customary Laws.

a) Singapore Constitution – Greatest source of law in Singapore – Article 4 of the Constitution states that Constitution is the supreme law of the Land and any laws inconsistent with the Constitution will be void. – Constitution spells out how institutions of government are to be formed, how members of Parliament are to be elected, our citizens’ rights and powers of the State. b) Common Law and Equity – because Singapore was formally colonized, therefore our laws and system are greatly influenced by it – historically, development of Common Law came from the Norman Conquest of Britain in 1066 – there was no system of common law and rules of customs were applied in local courts – it was the King’s judges that that developed a common set of rules and principles that becomes Common Law or jus commune from various customs – people can take action by way of “writ” under such Common Law system -- as rules of Common Law was strictly applied and Common law remedies are not plenty, people who are not happy can apply to the King for royal intervention – these petition referred to the King’s subject, the Lord Chancellor who will deal with the case on ‘fair and just’ grounds on royal powers– that’s how Equity (or aequitas – meaning justice) or Equity Courts was born – when common law and equity conflict, the King declared that equity will win (Earl’s of Oxford (1615) case) – the separation of the Common Law courts and Equity courts fused together in Britain by English Judicature Acts 1873-1875 thus 1 court can now deal with these 2 sets of rules – save time and money – Singapore courts also fused the 2 courts by Straits Settlements Civil Law Ordinance 1878 and in Civil Law Act and now known as Application of English Law Act. c) Judicial Precedent – decision of the court – recorded and collected and published in law reports in book form or disc – not all court decisions will be natural sources of law – judicial precedent is developed over time as Common Law and is applied based on stare decisis (like “cases should be decided alike” or “let the decision stand”) – the lower courts are obliged to follow the higher court’s decision in a same court system – Binding precedent means that if the facts of a particular present case is same as earlier case, then the principles of the earlier case will similarly apply to present case. d) Legislation – or Acts of Parliaments or Statutes – created by passing it by the State’s Legislature – 3 readings must go through and passed by majority of votes in Parliament with the President’s consent and published in Gazette before a Bill becomes Page 1

Act of Parliament – Sometimes, even after 3rd reading, if it is a sensitive issue relating to minority based on race or religion, Presidential Council for Minority Rights can check on before President look into it. e) English statutes recognized as valid Singapore laws due to Application of English Law Act – used to be the problematic Section 5 of the Civil Law Act – but the Application of English Law Act repeal this old Act and state that “the common laws and equity laws of England apply, so far as it was part of Singapore Law, to continue as part of Singapore Law, so far it applies to circumstances of Singapore and its inhabitants and subject to such modifications as required” – it applies in 2 instances – so long it is specifically spelt out in the first schedule of the new Act and where any Singapore law specifically says that English law is to be imported into Singapore as part of Singapore Law. f) Customary Law and Custom – Customary Law is part of personal law which previously was not provided for under the legislation – For example, we have Chinese customary marriages – now we have Women’s Charter and Administration of Muslim Law Act to recognize such customs – Custom can also be based on standard business practices and such customs changes from time to time – some of such customs are recognized as laws whereas some are created by government as legislations – customs form a subsidiary source of law. 2. Acceptance by post is an exception to the general rule that acceptance must come to the attention of the offeror before it is valid. Therefore, the general ‘postal rule’ is that acceptance by post takes effect upon posting rather than delivery (Adams v. Lindsell case – briefly describe the case facts) Postal acceptance rule applies:Acceptance by post must have been requested by the offeror or acceptance by post must be a normal, reasonable or anticipated means of acceptance (Henthorn v. Fraser (1892) case) – The letter of acceptance must be properly stamped and addressed (Re London & Northern Bank, ex parte Jones (1990) case) – it must be posted (Brinkibon case) and handing over to postman who was authorized to deliver was held not to have been posted (Re London case). The postal rule must not have been expressly excluded in the offer (Holwell Securities v. Hughes (1974) case whereby it was held that an offer which required acceptance ‘by notice in writing’ meant that actual communication of acceptance must reach the offeror and as such the claimants could not rely on the postal rule to assert the existence of a contract – and the use of the postal rule must not create ‘manifest inconvenience or absurdity’. The postal rule also applies if the letter of acceptance is received after notice of revocation of the offer has been sent (Henthorn case) – and will also apply if the letter of acceptance is never received by the offeror (Household Fire Insurance Co. v. Grant (1879) case). 3. Misrepresentation is a statement of fact which is untrue, made by one party to another in order to induce that party to enter into the contract. A fraudulent misrepresentation is a false statement made knowingly or recklessly – intention to Page 2

deceive or cheat must be there – could be liable for tort of deceit and could be possibly prosecuted for cheating based on Criminal Penal Code (Derry v. Peek case) – Negligent misrepresentation, on the other hand, is a false statement made by one party who has no reasonable grounds for believing it to be true (Section 2(1) of Misrepresentation Act 1967) – and the only remedy is discretion lies with the Courts in deciding whether rescission is allowed and damages may be awarded in lieu of rescission – this shows that fraudulent misrepresentation has more extensive remedies than negligent misrepresentation. Also, the main difference between the 2 types of misrepresentation is the degree of culpability of the party making the statement – fraudulent misrepresentation shows the intent to cheat whereas in negligent misrepresentation, there is no intent to cheat. 4. Consideration is defined as the mutual exchange of promises – the price to pay for the promise – it is a benefit to one party or detriment to the other – it is the fulfillment of obligations as mutually agreed between parties -- In essence, valuable consideration is for money or for monies worth. Three types of consideration:• • •

Executory Consideration; Executed Consideration; & Past Consideration.

Executory Consideration:- where consideration is not fully completed yet but will be in the future. Executed Consideration:- where consideration have been fully completed. Past Consideration:- Past Consideration is no good consideration in the law – such consideration that is done without any initial consensus/agreement is used to negotiate for a contract at a later stage is no good consideration – consideration that has been provided before contract is entered into. However, any further/subsequent promises made in recognition of the past consideration provided, as good consideration, then the law shall treat such past consideration as valid legal consideration – Eg., If A found B’s dog which has been lost, and now B wanted to pay A money as he is happy to get his dog back shows that B supported what A has done initially to find his dog back as good consideration to B’s payment (Lampleigh case/Re Casey’s Patents case (briefly describe the case facts; show exception that in such circumstances that the law recognizes that past consideration as good consideration). 5. (a) Define and explain the Common-law position for ultra vires rule before Section 25 of the Companies Act and its difficulties faced and the position on the “specific purpose objects clause” and the “Bell House general purpose objects clause”; A detailed explanation of Sections 25(1) and 25(2) of the Companies Act and its effect and highlighting its changes on the Common-Law ultra vires rule; explain in detail the recent amendments made to Companies Act in 2004 – the introduction of Section 23(1A) of the Companies Act and elaborate on its effect on ultra vires rule. Page 3

5. (b) Explain in detail the rule in the case of Turquand “The Indoor Management Rule”– the case facts and the principle of law declared in that case; Explain the exceptions to the indoor management rule :- where the outside party knew or should have known of the agent’s ‘no authority’ to contract on behalf of the company (Howard v. Patent Ivory Manufacturing case facts and principle of law; or where circumstances make the outside party aware or put him on inquiry that the agent had no authority; or where the company’s memorandum and articles clearly spell out that the agent had no authority. 6. (a) Define and explain the pre-incorporation contract – contract procured and signed by a promoter on behalf of a ‘soon to be incorporated’ company with a third party; explain in detail Section 41(1) and 41(2) of the Companies Act – Section 41(1) which states that a contract which is entered by a promoter purportedly on behalf of a ‘soon to be incorporated company’ and company once formed, may ratify such pre-incorporation contract; Section 41(2) states clearly that a promoter can escape liability only if it is shown that the pre-incorporation contract entered into with a third party is done on behalf of the ‘soon to be incorporated company’ . (b) Explain Section 74 of the Companies Act – where direct alteration of class rights could unfairly prejudice the rights of that affected class – such affected class could get court assistance to investigate into such alteration of class rights approved by resolution – the courts can affirm the alteration wholly, partially or deny the alteration of class rights (the requirements of Section 74); A simple example of how Section 74 can be invoked. 7. (a) Auditor must report “true and fair view” of accounts properly obtained and in accordance to Section 207(7) of the Companies Act and has a duty to be honest and has a duty of care to his clients and companies that he serves – under good faith; Fomento vs. Seldson Fountain Pen Co. Ltd case “an auditor must be curious and inquire on the affairs of the company on a neutral mind, but not to be suspicious of dishonesty or thinking that there is a mistake”; An auditor who has negligently audited accounts has liability under both contract law and tort law. In contract, he would be liable for breach of contract since a key term of this contract is that he should exercise care and skill in carry out the audit. In tort, he has liability under tort of negligence – the elements of this tort are:- existence of duty of care, breach of duty (standard of care), causation and damage must not be too remote to be claimed; note “Special relationship” aspect in Hedley Byrne vs. Heller and Partners – the relationship exists if the maker of the statement possesses skill or information, the maker knows or ought to have known that the recipient would rely on the statement and it is reasonable for the recipient to rely – also, the maker must not have disclaimed liability; the auditor’s duty of care does not extend to potential investors of the company who rely on his records without him knowing the purpose for which the records are relied for or to any single shareholder of the company for potential takeover but a duty of care to the body of shareholders as a whole (Caparo Industries v. Dickman case); McNaughton Paper Group case shows that if the purpose is made known to the auditor and advice relied upon by the other person, then possibly the auditor have a duty of care to this person; Ikumene Singapore Pte Ltd case shows that auditor has no duty of care to guarantors too. Page 4

7. (b) Ownership in the hands of the shareholders of the company; Controllers of the company are directors of the company; Articles normally have a clause to say that directors are the ones who manage the company and shareholders cannot override the decision of the directors (Automatic Self-Cleaning Filter Syndicate vs. Cunningham (1906) – same as Section 157A of Companies Act; except in circumstances if the Board of Directors cannot act or are incapacitated, then its powers will exercisable by its members (Barron vs. Potter (1916) case whereby directors are not on speaking terms with each other); The Board would usually vest the general management powers in the managing director and some to directors and all are required to settle business operational issues like hiring of workers/employees, enter in business contracts, enhance the interests of the shareholders (corporate governance), and so on. Whereas certain powers are reserved to the shareholders though with limited powers of control – such as power to approve loans to directors (Section 162 of the Companies Act), appointment and/or removal of directors, to attend and vote in meetings and so on. 8. (a) A contract is said to be frustrated when it becomes impossible for the contract to be performed. When a frustrating event occurs, the contract is void and the parties are released from all further obligations under the contract. While the following instances are not exhaustive, they do indicate when frustration is likely to occur:i) ii) iii) iv) v)

When the subject matter of the contract is destroyed; Personal incapacity in cases of contracts for personal service; Government intervention or supervening illegality; Non-occurrence of an event which is the sole purpose of the contract; and Defeat of the contract’s commercial purpose.

(b) Generally a contract is not discharged by performance unless performance is complete and exact. At common law, unless performance is complete and exact, payment is not due. The main exception is if the contract is divisible. When Poh failed to complete the paintings, it is possible to argue that he is not entitled to any payment at all; not even for the complete portrait since the contract was indivisible because Lim wanted the paintings to be hung as a complete set. This argument is not terribly convincing, and is not likely to be accepted by the court. Furthermore, Poh’s failure to complete the contract was due to his nerve disorder, and not some willful act on his part. When contracts for personal service cannot be completed because of incapacity, the contract is frustrated (unless the incapacity is self-induced). Under the Frustrated Contracts Act, all sums paid are recoverable and all sums payable cease to be payable. If the contract is considered to be indivisible, Poh must return the $1,000/- deposit, subject to the court allowing him to retain such fair amounts for expenses or to claim the value of the benefit – the completed portrait – conferred. If the contract is divisible, both Lim and Poh have no further obligations under the remaining, uncomplete part of the contract and Poh is discharged from any further performance. 9. The issue here concerns the authority of company directors to act on behalf of the company. The general principle is that a company director acting with authority will effectively bind his company if he enters a contract on its behalf. The only issue is the extent of a director’s authority. Page 5

9. (a) Tay is acting here as managing director of (L). Even though he has no express authority to act on behalf of the company in respect of this particular transaction, Tay nonetheless possesses the usual authority of a managing director of a company. In Watteau v. Fenwick, the court held that although a hotel general manager did not possess express authority to order cigars on credit, his action bound the hotel since it was within the usual authority of the hotel general manager to order cigars on credit. Similarly, we can assume that a managing director of a company like L would have the usual authority to order office equipment such as computers for his company. (b)(i) It would make no difference even if Tay were not appointed MD and was allowed to act as if he was the MD because the principle of ostensible or apparent authority would cloak him with authority and thus bind the company (Freeman & Lockyer v. Buckhurst case). (b)(ii) There would be a difference since all third parties are put on notice as to the lack of authority of the managing director to make contracts beyond $10,000/-. Not only will Tay lack express authority, but notice of this fact is served through the articles of association. 10. The question concerns the breach of directors’ duties and the possibility of a derivative action. As a fiduciary, a director is required by law to act honestly in the interests of the company. He must not place himself in a position where there is a conflict of interests and he must certainly not make use of the company’s facilities and assets for his personal purposes. By allowing his son to use the bungalow, while the company incurred $15,000/- to accommodate its guest, N has certainly breached his fiduciary duties to Sin Pte Ltd. The main difficulty in suing N is the rule in Foss v. Harbottle which states that if a wrong has been committed against the company, the company and not any of its shareholders, is the proper plaintiff. The problem is that N, being a director, is unlikely to allow the company’s name to be used to sue him. The only way out of this dilemma is Section 216 of the Companies Act. Section 216A and B govern derivative actions – ie. Actions by shareholders on behalf of the company – in respect of unlisted companies, M as member of the company can commence an action in the name of Sin Pte Ltd against N for breach of fiduciary duties provided he satisfies the court that:a. he gave the directors of the company 14 days notice of his intention to make the application if the directors failed to bring the action; b.

that he was acting in good faith; and

c.

that it appears to be in the interests of the company that the action be brought.

If M satisfies the court, he can commence the derivative action and even obtain an order the company to pay legal expenses incurred by the action.

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