Additional practice questions with marking guidelines in preparation for the exam: KRG

200 2022
Question 1
Assume that all statements pertain to The South African Ethics Regulator, a public entity to
which the Public Finance Management Act 1 of 1999 and Public Audit Act 25 of 2004 applies.
The Regulator licenses and oversees compliance by medical professionals working in
vulnerable societies. Fit the following terms to the descriptions below.
1. Unauthorised expenditure
2. Overspending
3. Fruitless and wasteful expenditure OR Material irregularity
4. Irregular expenditure
5. Material irregularity
6. Fruitless and wasteful expenditure
7. None of the mentioned options
A
The entity consistently failed to pay the rent for the premises from which it operates,
notwithstanding that it had sufficient funds to do so. As a result, the rental agreement was
cancelled. The lessor obtained judgment against the entity for damages based on breach of
contract in the amount of R12 000 000. The entity had to rent new premises at a rental rate
that exceeded the previous rental amount by 25%.
B
The entity entered into a contract with one of its directors in terms of which the director
provided professional services in his personal capacity to the entity. Assume that this was the
type of contract in respect of which tender procedures stipulated by the relevant legislation
had to be complied with, but that these procedures were not complied with because the
director provided the services at a remuneration rate that was well below the rate normally
charged for rendering these services.
C
The entity exceeded its budget with R6 000 000.
D
The entity honoured its obligations in terms of an agreement with the International Horse
Racing Association. In terms of this agreement, an amount of R5 000 000 was payable as a
donation towards the Association’s objective to purchase more race horses.
E
The entity entered into a contract with one of its employees in terms of which it paid a deposit
of R7 000 000 into the employee’s account. The deposit was paid to the employee in his
personal capacity and for the purpose of conducting research for the entity as an independent
contractor. It turns out that the employee did not only overcharge for the services to be
rendered, but forged the data upon which the findings in the report were based. As a result of
the findings, the Regulator prohibited many professionals to work in vulnerable societies,
causing the deterioration of the well-being of these societies.
A (3) B (4) C (2) D (1) E (5)
Question 2
Clause 1 of the Memorandum of Incorporation of ABC (RF) Ltd determines that the company
may only trade in educational material for children. Amy, duly authorized to act as an agent of
the company, exceeded her authority as director and bought five racehorses. Assume that
there are grounds to hold her personally liable in terms of the provisions of section 77(3)(a) of
the Companies Act 71 of 2008. Samantha is a shareholder of ABC (Pty) Ltd and notices that
nothing is being done about the purchase of the racehorses by Amy. Should the proper plaintiff
omit to institute action, may a shareholder institute action on behalf of the company against
Amy? Discuss the most suitable option available to the Samantha under these circumstances
and indicate which steps that she (Samantha) has to take if she decides to make use of this
option. [5]
Marking guideline:
Derivative action [1]
Company is proper plaintiff as the losses are suffered by the company [1]
Provision is made for a shareholder to take action on behalf of the company where
a wrong has been done to the company but those in control of the company do not
take action [1]
Company must be served with a demand to commence action to protect its legal
interests [1]
Leave must be obtained from the court [1] to bring proceedings in the name of and
on behalf of the company [1] if the company does not apply to have the demand
set aside [1] or refuses to institute action even after a committee was appointed [1]
If leave is granted, Samantha may institute action against Amy to recover the
losses suffered by the company for and on behalf of the company [1] Max 5 marks
Question 3
HALLO! Inc is a company with one director (A) who is also the sole shareholder of the
company. A is a trained environmental compliance attorney and, as such, HALLO! Inc
monitors compliance with environmental regulations in vulnerable nature reserves of South
Africa. The National Department of Environmental Affairs recorded HALLO! Inc as a category
4 impact entity (equal to 400 000 National Impact Points). It employed 343 employees in the
2021 financial year and generated an annual turnover of R6 000 000. Its liabilities towards
third parties (creditors) were calculated at R300 000. It received donations in the amount of
R1 500 000 in 2021.
1. Calculate the 2021 public interest score for HALLO! Inc. [5]
2. Indicate the financial reporting standards that HALLO! Inc has to comply with. Provide
comprehensive reasons for your answer. [3]
3. Provide your own definition of the concept “public interest score” as found in the
Companies Act 71 of 2008 and indicate the purpose of this score. [2]
Marking guideline:
1.
Employees (number of points equal to the average number of employees during
the financial year) = 343 points [1]
PLUS turnover (one point for every R1 000 000 (or portion thereof) in turnover
during the financial year) = 6 [1]
PLUS third party liability held by creditors (one point for every R1 000 000 (or
portion thereof) in TPL during the financial year) = 1 [1]
PLUS beneficial interest holders (shareholder in this case) = 1 [1]
TOTAL = 351 [1]
2.
IFRS [1]
PI Score exceeds 350 [1]
This is a personal liability company (which is a profit company, other than an SOC
or a public company [1].
3.
Discretion of marker – quantification of impact on society (‘public interest audit’) +
reference components (employees, shareholders, turnover, liability) + used to
determine if (and which of) chapter 3’s provisions apply, and the reporting
standards that need to be complied with.
Open ended but max 2 marks.
Question 4
Compare, and differentiate between, the solvency and liquidity test and the test for financial
distress as prescribed by the Companies Act 71 of 2008. Your answer must clearly set out the
similarities and differences between these two tests. [5]
Marking guideline:
Both tests concern the financial health of the company [1], considering the solvency
and liquidity of the company [1].
However, the tests are used in different contexts e.g. financial assistance versus
business rescue [1].
The SL test considers the solvency and liquidity of the company after a particular
transaction has taken place [1], whereas the FD test considers the solvency and
liquidity of the company within six months (forward looking) [1].
In respect of the SL test, there is a forward looking component in respect of liquidity
(12 months) [1], but not in respect of solvency [1]. In respect of the FD test, the
time is 6 months, and this applies to both solvency and liquidity [1].
In respect of the SL test, the solvency and the liquidity subtests need to be satisfied
[1], whereas only one ‘issue’ (either solvency or liquidity) needs to exist for the FD
test to be satisfied [1]. [Max 5 marks]
Question 5
1. You are a business rescue practitioner. Karabo approaches you for advice. She is an
employee of XYZ Ltd and wants to place XYZ Ltd in business rescue. Name the two
manners in which business rescue may be initiated, and explain which of these options
are available to Karabo. Provide a reason for your answer. [3]
2. Choose ONE of the following statements (A OR B OR C) and indicate whether the
statement that you chose is true or false. Provide a comprehensive reason for your
answer. Note that your reason must be correct and no marks will be given for ‘true’ or
‘false’ if the reason is not correct. Only your first answer will be marked – you need to
discuss ONLY ONE of the following statements and you can CHOOSE WHICH ONE
you want to discuss: [2]
a. The court may be approached for an order placing a company in business
rescue if the company is not yet factually or commercially insolvent.
b. A person is eligible to be a business rescue practitioner as long as he or she
holds any professional degree certificate, has had the prescribed vocational
training and has the necessary practical experience to rescue failing
companies.
c. Enabling a company to exit business rescue as a solvent concern is not the
only objective of business rescue.
Marking guideline
1. Two manners: board resolution [1] and by way of court order [1] Karabo has to
approach the court [1] as she is an affected person [1] she is an employee [1] 3 marks
max
2. a. True, the test for 'financial distress' [1] is forward looking in that the company will
experience difficulty in future. The company need not yet be insolvent. [1] [2 marks]
b. False, only certain professions are designated and eligible to be BRPs [1] such as
law, accounting, etc. but not all professions [1] [2 marks]
c. True, the second objective set out in section 128 is where the business rescue
results in a better return for creditors or shareholders [1] than in liquidation [1] [2 marks
max]
Question 6
The board of directors of BB Spiers Ltd authorised the repurchase of the company’s shares
from existing shareholders for a total amount of R5 million. The share repurchase was
authorised at a board meeting attended by all the directors of the company: Amy, Mpho,
Lerato, Johnny and Nereshnee. Immediately after transferring the amount of R5 million to its
shareholders, the company’s liabilities exceeded its assets. It turned out that only an amount
of R3 million could have been distributed without causing the company to go into factual
insolvency. BB Spiers Ltd was able to recover only R1 million from the selling shareholders
(in e􀃖ect, the shareholders from whom BB Spiers Ltd had repurchased the shares).
1. Explain the requirements for a lawful repurchase by a company of its own shares. [4]
2. Mpho realised that the company would be insolvent after the repurchase, because she
scrutinised the financial records of the company. Therefore, she voted ‘no’ at the
 meeting, thus against repurchasing the shares. Explain whether BB Spiers Ltd or the
shareholders can recover the losses from her, and if so, what amount. [3]
3. Johnny realised that the company would be insolvent after the repurchase, because
he scrutinised the financial records of the company. However, he was also a
shareholder and wanted to sell the shares to obtain cash. Consequently, he voted ‘yes’
at the meeting, thus in favour of repurchasing the shares. Explain whether BB Spiers
Ltd or any other stakeholder of the company can recover the losses from him, and if
so, what amount. [3]
Marking guideline
1. The board of directors must authorise the repurchase [1] but must first satisfy the
solvency and liquidity test [1] which entails that the assets of the company, fairly
valued, must equal or exceed the liabilities of the company, fairly valued and the
company must be able to pay its debts in the ordinary course of business as they fall
due after the repurchase, [1] which constitutes a distribution [1], and the directors must
acknowledge [1] that they reasonably concluded that the company would satisfy the
test. [1] Student can also refer to the relevant sections: 46 and 48 [1] [4 marks max]
2. BB Spiers Ltd will not have a right of recourse [1] against Mpho because she voted
‘no’ [1]. The shareholders will also not be able to hold Mpho liable in terms of section
20(6) because she did not cause damage to the company through intentional,
fraudulent or gross negligence. [1] [3 marks max]
3. BB Spier Ltd will have a right of recourse [1] against Johnny because he voted yes [1]
knowing that the company would not be able to satisfy the S + L test [1]. He will be
held liable for the difference between the unlawful amount (R 2 million) and the amount
recovered (R 1 million). He can be held liable for R 1 million [1]. Section 77 [1] student
can also refer to section 20(6) [1] [3 marks max]
Question 7
Journalist Nyathi reported on the questioning of Ms Kwinana by the Zondo commission. In her
report, she refers to the following request by Kwinana: "Former South African Airways (SAA)
board member Yakhe Kwinana has asked the state capture commission to judge her not as a
chart[er]ed accountant, but as an individual." (You can read the full report AFTER the exam –
you do not need to read it to answer this question – https://ewn.co.za/2020/11/07/judge-me-
as-a-person-not-as-a-chartered-accountant-says-kwinana-in-hot-seat). Assume that this
comment was made in the context of a director's duty to act with the necessary care, skill and
diligence. You can rely on the following facts: Kwinana is a chartered accountant and was a
board member of South African Airways. You have to explain the test for determining whether
a director acted with the necessary care, skill and diligence in detail and provide an opinion
as to whether it is possible to disregard the fact that Kwinana is a chartered accountant. [5]
Marking guideline
The standard of care applicable here is the degree of care, skill and diligence that may
reasonably be expected of a person carrying out the same functions in relation to the company
as those carried out by that director [1] this is the objective test [1] and having the general
knowledge, skill and experience of that director [1] this is the subjective test [1] According to
Delport, the objective standard sets the minimum standard and the subjective test is taken into
account when it would increase the level above the objective standard [1]. The fact that
Kwinana is a chartered accountant would have to be considered [1] (discretion based on
argument of student) [5 marks max]
Question 8
1. Discuss the thresholds that will determine the financial reporting standards of this
company as required by the Companies Act 71 of 2008 – in particular, whether the
annual financial statements need to be audited and the requirement of appointing an
auditor. [4]
2. For purposes of this question only, assume that BB Spiers (Pty) Ltd has a PIS (Public
Interest Score) of 170. Its annual financial statements were prepared internally. What
are the implications of the PIS for BB Spiers’ financial statements? Provide
comprehensive reasons for your answer. [2]
3. The board of BB Spiers (Pty) Ltd ’s registered auditor, has the following information
available regarding its PIS: The company has had 30 full time employees for the
current financial year; The company has had a tough year due to Covid-19 and only
had a turnover R40 million for the year; The company has 32 names entered in its
securities register for the current financial year. Company BB Spiers (Pty) Ltd is a profit
company with limited liability. Calculate the PIS (show your calculations) and advise
the auditor comprehensively on the applicable reporting standards that this company
must follow. [6 marks]
Marking guideline
1. A private company must prepare audited financial statements – as it is required to in
terms of section 30(2)(b) and regulation 28(2)(a) of the Companies Act 71 of 2008 [1]
if in the ordinary course of business [1] it holds assets in a fiduciary capacity on behalf
of clients [1] where the aggregate value of the assets exceed R5 million in any fiscal
year. [1] All companies that are mandated to submit audited financial statements must
appoint an independent auditor. [1] [4 marks max]
2. Any company with a PIS of at least 100 [1] are subjected to mandatory audited financial
statements [1] in the case where the annual financial statements were internally
prepared [1] It is not subject to audit or review proceedings if all the directors are
shareholders and there is no regulation that prescribes audit or review. [1] [2 marks
max]
3. PIS – 30 + (1 equal to average number of employees during financial year.) [1] 40 + (1
x point for every R1 million in turnover during the current financial year) [1] 32 (number
of known individuals with beneficial interests in the company’s issued securities) [1]
PIS = 102 [1] The Act provides that any company’s financial statements are subject to
review [1] in the following conditions: It has a PIS Score of at least 100 [1] whose
financial statements were compiled by a registered auditor or member of professional
accredited body [1] [6 marks max]
Question 9
K, L and M are the shareholders of KLM Ltd. K found out that one of the directors of KLM Ltd
is stealing funds from the company. K also found out that the other directors suspect theft but
refrain from taking action because they do not want to bring the thieving director's reputation
into disrepute.
 1. Which remedy is available to K to recover the funds from K for the company? Provide
comprehensive reasons for your answer. [3]
2. Assume that the directors find out that the shareholders want to call a meeting to
dismiss the thieving director. Also assume that K's vote is indeed influential. The
directors are of the opinion that this would damage the reputation of the company as
the thieving director is an influential public figure. As such, the directors issue 100
shares to three new shareholders: N, O and P. As a result, K now holds 30% of the
shares. Each share entitles a shareholder to one vote. The new shareholders are
unaware of the theft and the director is not dismissed. Which duty did the directors
breach? Provide comprehensive reasons for your answer. Your answer must include
the test for breach of this duty. [5]
3. Assume that the directors find out that the shareholders want to call a meeting to
dismiss the thieving director. Also assume that K's vote is indeed influential. The
directors are of the opinion that this would damage the reputation of the company as
the thieving director is an influential public figure. As such, the directors issue 100
shares to three new shareholders: N, O and P. As a result, K now holds 30% of the
shares. Each share entitles a shareholder to one vote. Name the remedy available to
K to protect his rights against the actions of the directors. [1]
Marking guideline
1. Derivative action [1] it allows a shareholder [1] to bring an action on behalf of the
company [1] to protect the company's interests [1] where the wrongdoers are in control
of the company [1] [Max 3 marks]
2. Fiduciary duty [1] section 76(3)(a) [1] to act with a proper purpose [1] test: identify the
power – in this case, the power to issue shares [1] identify the purpose for which this
power was given – in this case, to raise capital for the company [1] identify the
substantive purpose for which the power was indeed exercised – in this case, to dilute
K's shareholding and prevent dismissal of a director [1] decide whether this purpose
was proper – no [1] NB only half marks if no application to facts
3. Oppression remedy/ remedy against prejudicial and oppressive conduct [1]
Question 10
In respect of Absidy (Pty) Ltd, C purchased a plot of land in the name of the company with the
intention of building a new fitness centre. After the property is registered in the name of the
company, it is discovered that the land is not suitable for development purposes. The
shareholders allege that C is liable for breach of his duty to exercise reasonable care and skill
in concluding the transaction. You can assume that C had the necessary authority to conclude
the contract. Advise C, in detail, whether he has any defence that he could rely on. If so, what
must C prove to be relieved of liability under the Companies Act 71 of 2008? [5]
Marking guideline
Business judgment rule [1] He will be deemed to have acted with care and skill provided that
he had taken reasonably diligent steps to become informed about the matter [1], had no
material personal financial interest in the subject matter of the decision (and had no
reasonable basis to know that any related person had a personal financial interest in the
matter) [1] or had declared the interest [1]; and had a rational basis for believing [1], and did
believe [1], that the decision was in the best interest of the company [1] [max 5 marks]
Question 11
A Ltd has the power to appoint four of the six directors in B Ltd. A Ltd holds 25% of the voting
rights in C Ltd. B Ltd holds 75% of the voting rights in C Ltd. C Ltd holds 5% of the voting
rights in A Ltd. Discuss in detail whether any of these companies are in a holding/subsidiary
relationship. [5]
Marking guideline
A is the holding company of B/B is a subsidiary of A [1], by virtue of its right to appoint a
majority of the directors of B [1]. B is the holding company of C/C is a subsidiary of B [1], by
virtue of holding of a majority of C’s voting rights [1] A is the holding company of C [1] because
A in combination with its subsidiary B is able to exercise all the voting rights in C [1] C is a
wholly-owned subsidiary of A [1] Marks may also be allocated if student used diagram/picture
to explain relationship. [max 5 marks]