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FUNDAMENTALS OF ETHICS, CORPORATE

GOVERNANCE AND BUSINESS LAW

According to the following syllabus CMA (Business Level), ICMAB

Author Md. Sajjad Hossain CMA (4th Level), MBA (Accounting & Finance), BBA (Finance), LLB, ITP Income Tax Lawyer Member – Dhaka Taxes Bar Association Income Tax and Company Law Adviser

NOBBODOY PUBLICATION DHAKA, BANGLADESH


FUNDAMENTALS OF ETHICS, CORPORATE GOVERNANCE AND BUSINESS LAW

No part of this publication may be reproduced, stored, transmitted in any form or by any means of electronic, photocopying, recording or otherwise, without the prior written permission of the Author. All rights reserved.

Edition

: July 2018

Presented By

: Nobbodoy Publication Dhaka, Bangladesh.

Copyright

: All rights reserved by the Author

Price

: BDT 280.00 Only

Fundamentals of Ethics, Corporate Governance and Business Law, Written By: Md. Sajjad Hossain, Presented By: Nobbodoy Publication, Dhaka, Edition: July 2018. 1


PREFACE

With the growing demand of education, Accounting has gained a huge popularity. An Accounting degree makes the candidates suitable for lots of opportunities. As more and more multi-nationals are coming into the world, demand for Accounting degree has further increased. The employment peripheries for Accountants are various and can range from holding key positions in a company. The main objective of this book is to meet the basic requirements of the Accounting courses. It is helpful to the students of Bachelor of Business Administration, and Bachelor of Business Studies. It is also helpful for professional students and the persons who are intended to get admission into a professional institute. This book is written by following the curriculum of The Institute of Cost and Management Accountants of Bangladesh, Public and Private University, and National University of Bangladesh for the relative subject. I am grateful and deserve my thanks to the publisher, printers and designers of this book. Any criticism, favorable or unfavorable, and any constructive suggestion in regards of this book will be gratefully received.

Date: July 2018

Md. Sajjad Hossain

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Dedicated to my parents

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BRIEF TABLE OF CONTENTS

Chapter Title

Page No.

1. Ethics and business

11

2. Ethical conflicts

28

3. Corporate governance

40

4. Comparison of English law with alternative legal systems

69

5. The law of contract

82

6. The law of employment

112

7. Company administration and finance

128

4


র্঴.এম.এ প্রস্তুর্ত ক্লার঴ ভর্তি চ঱রে!

আমারের ববর্লষ্ট্যেঃ

√ আমাদের ঴ক঱ শলক্ষক ও শলক্ষার্থী প্রদেলনা঱ প্রশিষ্ঠাদনর; √ শ঴.এম.এ ব্যাদের ঴ক঱ ছাত্র–ছাত্রী আই.শ঴.এম.এ.শব্ প্রশিষ্ঠাদনর; √ শব্঳য় ও অধ্যায় শিশিক ল঱কোর শলট প্রোন করা ঵য়; √ শ঴.এম.এ শ঴দ঱ব্াদ঴র পালাপাশল শব্গি ব্ছদরর প্রশ্ন ঴মাধ্ান করা ঵য়; √ একাউশটিং শব্঳য় ঴মূদ঵ আই.এে.আর.এ঴ অনু঴রন করা ঵য়; √ গাশিশিক ঴ম঴যা ঴মাধ্াদনর ঴঵জ লকৌল঱ ললখাদনা ঵য়; √ শ঴.এম.এ পরীক্ষার অনুরূপ ক্লাল লটস্ট ও মদে঱ লটস্ট লনওয়া ঵য়।

যযাগারযারগেঃ নব্যেয় ঢাকা, ব্ািং঱াদেল। লমাব্াই঱ঃ ০১৭১১১৩৭০৩৯

শুক্রবাররর বযাচ ররেরে! ফ্রী ক্লা঴ করর ভর্তির র্঴দ্ধান্ত র্িি!

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DETAILED TABLE OF CONTENTS Chapter Title and Contents Chapter-1: 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. 1.9. 1.10. 1.11. 1.12. 1.13. 1.14. 1.15. 1.16. 1.17. 1.18.

Chapter-2: 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7. 2.8. 2.9. 2.10. 2.11.

Page No.

Ethics and business Definition of ethics Importance of ethics Branches of ethics Values and attitudes for professional accountants Legal frameworks for business Professional oversight boards for accountancy Auditing practices boards Role of international accounting bodies International federation of accountants Nature of ethics and its relevance to business and accountancy profession Rules based and framework approaches to ethics Seven principles of public life Personal development and lifelong learning Ethical principles Disclosure required by law Concepts of independence, scepticism, accountability and social responsibility CIMA code of ethics for professional accountants IFAC code of ethics for professional accountants Past exam questions and answers

11 11 11 12 12 13 14 14 15 15

Ethical conflict Relationship between ethics and law Distinction between ethical codes and contracts Meaning of unethical behavior Consequences of unethical behavior Definition of ethical dilemma How ethical dilemma arises How to resolve ethical dilemma Definition of ethical conflict Meaning of conflict of interest How conflict of interest arises Ethical conflict resolution Past exam questions and answers

28 28 28 28 29 29 30 31 31 32 32 32 34

16 17 17 18 18 19 19 20 21 23

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Chapter Title and Contents

7

Page No.

Chapter-3: 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 3.8. 3.9.

Corporate governance Definition of corporate governance Role of corporate governance Principles of corporate governance Objectives of corporate governance Importance of corporate governance Rules and principles based approaches to governance Corporate social responsibility Corporate governance codes Policies and procedures for ‗best practice‘ companies Past exam questions and answers

40 40 40 41 42 43 45 47 47 49 51

Chapter-4: 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7. 4.8. 4.9. 4.10. 4.11. 4.12. 4.13. 4.14. 4.15.

Comparison of English law with alternative legal systems Concept of civil law Branches of civil law Concept of criminal law Purpose of criminal law Differences between civil and criminal law Sources of English law Differences between common law and equity System of judicial precedent Doctrine of judicial precedent Sources of precedent law Effect of precedent law in lower court Essential elements of tort of negligence Judiciary system of Bangladesh Sources of shari‘ah law Five pillars of islam Past exam questions and answers

69 69 69 70 71 72 72 74 74 74 75 75 75 76 76 77 78

Chapter 5: 5.1. 5.2. 5.3. 5.4. 5.5. 5.6. 5.7. 5.8. 5.9. 5.10.

The law of contract Definition of contract Essential elements of a valid simple contract Ignorance of law is no excuse Consideration may be past, present or future Explanation of fraud Mere silence as to facts is not fraud Revocation of acceptance and communication of revocation Unilateral contract and bilateral contract There cannot be a contract to make a contract Converting a proposal into promise

82 82 82 83 83 83 83 84 84 84 84


Chapter Title and Contents 5.11. 5.12. 5.13. 5.14. 5.15. 5.16. 5.17. 5.18. 5.19. 5.20.

Page No.

Differences between contingent contract and wagering agreement Parties of a contract must be competent to contract A stranger to a contract cannot sue Essentials of a valid consideration An invitation to offer is not an offer Legal rules as to acceptance A contract can be void ab-initio Law of contract is not whole law of agreement Remedies of breach of contract Distinction among void contract, voidable contract and void agreement Distinction among void contract, voidable contract and illegal agreement Distinction among voidable agreement, void agreement and enforceable agreement Distinction between void agreement and illegal agreement Distinction among pledge, bailment and hypothecation Distinction between coercion and undue influence Distinction between mistake of law and mistake of fact Consequences of coercion Acceptance of offer Revocation of offer Past exam questions and answers

85 85 86 86 86 87 87 88 88

Chapter-6: 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9. 6.10.

The law of employment Express and implied terms of contract of employment Rights and duties of employers Rights and duties of employees Notice and dismissal Unfair and wrongful dismissal Health and safety regulations Rules relating to health and safety at work Social security compensation Meaning of occupational injury Civil liability for occupational injuries Past exam questions and answers

112 112 112 112 113 113 114 116 117 119 120 121

Chapter 7: 7.1. 7.2. 7.3.

Company administration and finance Definition of sole trader ship Characteristics of sole trader ship Objectives of sole trader ship

128 128 128 129

5.21. 5.22. 5.23. 5.24. 5.25. 5.26. 5.27. 5.28. 5.29.

88 89 90 90 90 91 91 91 92 92 93

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Chapter Title and Contents 7.4. 7.5. 7.6. 7.7. 7.8. 7.9. 7.10. 7.11. 7.12. 7.13. 7.14. 7.15. 7.16. 7.17. 7.18. 7.19. 7.20. 7.21. 7.22.

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Page No.

Advantages of sole trader ship Disadvantages of sole trader ship Definition of partnerships Characteristics of partnerships Advantages of partnerships Disadvantages of partnerships Definition of company Type of company Preference of private limited company Distinction between public and private companies Characteristics of companies limited by shares Advantages of companies limited by shares Procedure at the meeting Meaning of articles of association Provisions of articles of association Uses of articles of association Contents of articles of association Rights of majority shareholders Rights of minority shareholders Past exam questions and answers

130 130 131 131 132 133 133 134 135 136 136 136 137 138 138 139 139 139 140 142

Model exam question Model exam question answer

201 202


যমা঴াজ এন্ড এর঴ার্঴রেট঴

য঴বা঴মূ঵েঃ √ শ঵঴াব্ প্রস্তুিকরন √ আশর্থিক শব্ব্রিী প্রস্তুিকরন √ ইন্টারনা঱ অশেট √ টিআইএন লরশজদেলন √ শরটানি প্রস্তুিকরন √ শরটানি অনুযায়ী কর পশরদলাধ্ করা √ শরটানি োশখ঱ করা √ কর প্রোদনর প্রাশি-স্বীকারপত্র ঴িংগ্র঵ করা √ কর পশরদলাদধ্র ঴াটিিশেদকট ঴িংগ্র঵ করা √ শরটাদনির প্রিযশয়ি কশপ ঴িংগ্র঵ করা

র্বরল঳ত্বেঃ আয়কর আইনজীব্ী ঴ে঴য – ঢাকা টযাকদ঴স্ ব্ার এদ঴াশ঴দয়লন

যযাগারযারগেঃ লমা঴াজ এন্ড এদ঴াশ঴দয়ট঴ ঢাকা, ব্ািং঱াদেল। লমাব্াই঱ঃ ০১৫১১১৩৭০৩৯

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CHAPTER - 1 ETHICS AND BUSINESS

1.1. DEFINITION OF ETHICS Ethics is the discipline dealing with what is good and bad and with moral duty and obligation.

It is a set of moral principles, especially ones relating to or affirming a specified group, field, or form of conduct. It includes study of universal values such as the essential equality of all men and women, human or natural rights, obedience to the law of land, concern for health and safety and, increasingly, also for the natural environment. Ethics (sometimes called morals or moral philosophy) is concerned with fundamental principles of right and wrong and what people ought to do inform the judgments and values and help individuals decide on how to act 1.2. IMPORTANCE OF ETHICS The ethics is important because of the following: 1. Satisfying basic human needs: Being fair, honest and ethical is one the basic human needs. Every employee desires to be such himself and to work for an organization that is fair and ethical in its practices. 2. Creating credibility: An organization that is believed to be driven by moral values is respected in the society even by those who may have no information about the working and the businesses or an organization. 3. Uniting people and leadership: This goes a long way in aligning behaviors within the organization towards achievement of one common goal or mission. 4. Improving decision making: A man‘s destiny is the sum total of all the decisions that he/she takes in course of his life. The same holds true for organizations. Decisions are driven by values. 5. Long term gains: Organizations guided by ethics and values are profitable in the long run, though in the short run they may seem to lose money. 6. Securing the society: Often ethics succeeds law in safeguarding the society. The law machinery is often found acting as a mute spectator, unable to save the society and the environment. 11


1.3. BRANCHES OF ETHICS There are five branches of ethics: Normative Ethics - The largest branch, it deals with how individuals can figure out the correct moral action that they should take. Philosophers such as Socrates and John Stuart Mill are included in this branch of ethics. Meta Ethics - This branch seeks to understand the nature of ethical properties and judgments such as if truth values can be found and the theory behind moral principles. Applied Ethics - This is the study of applying theories from philosophers regarding ethics in everyday life. For example, this area of ethics asks questions such as "Is it right to have an abortion?" and "Should you turn in your friend at your workplace for taking home office supplies?" Moral Ethics - This branch questions how individuals develop their morality, why certain aspects of morality differ between cultures and why certain aspects of morality are generally universal. Descriptive Ethics - This branch is more scientific in its approach and focuses on how juman beings actually operate in the real world, rather than attempt to theorize about how they should operate. 1.4. VALUES AND ATTITUDES FOR PROFESSIONAL ACCOUNTANTS Values: In ethics, value denotes the degree of importance of some thing or action, with the aim of determining what actions are best to do or what way is best to live, or to describe the significance of different actions. It may be described as treating actions themselves as abstract objects, putting value to them. It deals with right conduct and good life, in the sense that a highly, or at least relatively highly, valuable action may be regarded as ethically "good", and an action of low in value, or somewhat relatively low in value, may be regarded as "bad". What makes an action valuable may in turn depend on the ethical values of the objects it increases, decreases or alters. An object with "ethic value" may be termed an "ethic or philosophic good". Attitudes: An attitude is a settled way of thinking or feeling about someone or something, typically one that is reflected in a person's behavior. Attitudes structure can be described in terms of three components: a) Affective component: this involves a person‘s feelings/ emotions about the attitude object. For example: ―I am scared of spiders‖. 12


b) Behavioral (or conative) component: the way the attitude we have influences how we act or behave. For example: ―I will avoid spiders and scream if I see one‖. c) Cognitive component: this involves a person‘s belief/ knowledge about an attitude object. For example: ―I believe spiders are dangerous‖. 1.5. LEGAL FRAMEWORKS FOR BUSINESS Business law is one of those things that we tend to take for granted until something goes wrong; it is part of the fabric of a successful economy. There are four key principles that are essential to a good legal environment for business. i. Aim for simplicity: The laws that govern businesses should be stringent but not complex. It argues that simpler rules governing business structures (meaning they are limited in scope and easy to understand and explain) are easier to administer and therefore do not impose a substantial cost burden on businesses. They are also more difficult to break undetected. Over the past century, though, the regulatory burden on businesses has grown significantly. It puts forward some suggestions that might help to tackle this problem. ii. Be open and transparent: The second principle is that lawmakers should be open and transparent with businesses during the development and implementation of business law. For the good of society, business needs a predictable environment in which to prosper, government should indicate as far as possible the direction in which it intends to steer the business environment to allow business to plan for the long term. In practice this means consultation with stakeholders before new business laws are implemented, and a ‗reasonable time frame‘ in which to implement new laws. iii. Behave consistently: The business law must be applied consistently and equally among business enterprises. This is important for the effective application of law – because the perception that regulation is designed exclusively for one group will dissuade others from engaging with it – and also to avoid protectionism and abuse of competition. ‗Governments should be ready to step in where it becomes clear that legitimate exploitation of competitive advantage has become an abuse, and especially so where such activity is coordinated between interests to create an impression of acceptability.‘ Governments should also take care that the application of uniform laws does not disadvantage particular groups. ‗It may well be that elements designed to deal with the affairs of large or complex businesses should be specifically disapplied for smaller businesses for which they have no direct relevance, especially where smaller businesses may not have the resources to deal with such burdens and society would derive no benefit from them.‘ iv. Prepare to be accountable: The accountability of business fosters trust, and business law should facilitate this. ‗Business should be prepared and able to explain their actions and strategies to stakeholders‘. ‗The legal framework within which business operates should be designed so as to enable that openness, and at the same time give stakeholders confidence that the disclosures presented by business are complete, comparable and reliable.‘ 13


1.6. PROFESSIONAL OVERSIGHT BOARDS FOR ACCOUNTANCY The Professional Oversight Board (POB) is a UK regulatory body specializing in the accounting, auditing, and actuarial professions. It is a part of the Financial Reporting Council (FRC), the independent regulator of corporate governance and reporting in the UK. The Board's stated purpose is to support the FRC's goal of investor and public confidence in the financial governance of business organizations. The Board provides assurance that professional accountancy bodies are properly setting standards and enforcing discipline for their members, in accordance with the Companies Act 2006 and other statutory requirements. The POB can carry out inspections on behalf of the FRC, but if any shortcomings are found, sanctions can only be imposed by the professional bodies. However, if a complaint raises concerns that a professional accountancy or actuarial body may have breached significantly its own standard procedures in the handling of a complaint about their member, the POB will normally seek the comments of the relevant body and look at papers relating to the case as appropriate. The Board will then normally write to the complainant to tell them the outcome of their consideration of the matter and whether the body proposes to take any action based on their comments. The POB does not have the power either to overturn any decision which the body has made in a case or to direct how the body should handle a case. The Board also operates an Audit Inspection Unit (AIU) that oversees auditing organizations and makes recommendations for appropriate regulatory actions by governmental and professional authorities. As part of its oversight of the actuarial profession, the Board monitors the activities of actuarial organizations with regard to the education, discipline, ethicalstandards and continuing professional development of their members. The Board also seeks to provide a framework for the evaluation of the quality and effectiveness of actuarial work. Before 5 May 2006, the Board was known as the Professional Oversight Board for Accountancy. The name change reflected the Board's additional responsibility for oversight of the actuarial profession from that date. 1.7. AUDITING PRACTICES BOARDS The Auditing Practices Board (APB) is a body constituted in 1991 to replace the Auditing Practices Committee (APC). Intended to be more independent of the auditing profession than the APC, the APB has half of its members drawn from outside practice, for example from universities and the legal profession. The Board was reconstituted in 2002–03 under the chairmanship of Richard Fleck, a specialist in corporate and regulatory law. Its objective is to establish the highest standards of auditing practice in the UK and the Republic of Ireland in such a way that the developing needs of users of financial information are met and public confidence in the auditing process is maintained. It is no longer empowered to issue Statements of Auditing Standards in its own right but continues to publish Practice Notes (PN) and Bulletins. The APB is part of the Financial Reporting Council. 14


APB supports developing a process for assessing the effectiveness of the International Standards of Auditing (ISAs) and hopes that audit regulators will be closely involved in this. Historically, changes in auditing standards in all countries have often been inspired by personal views as to what comprises desirable practice, often in response to past audit failures. While this ‗theoretical‘ approach has led to the development of a robust overall framework this may not be the best model on which to base further changes. The development of independent audit regulation, and improved international coordination of such activities, provides the opportunity of capturing actual experience of the way that the standards are applied in practice and considering changes where the standards are either ineffective or not applied in a consistent manner. Such an approach would also allow consideration of the regulatory impact of changes to be given greater emphasis in the standard setting process. Once the ‗right‘ model for working with the independent audit regulators has been developed it will be necessary to consider all the ISAs starting with those that are most important. 1.8. ROLE OF INTERNATIONAL ACCOUNTING BODIES (a) To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their world-wide acceptance and observance. (b) To work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements. 1.9. INTERNATIONAL FEDERATION OF ACCOUNTANTS IFAC is the worldwide organization for the accountancy profession. Founded in 1977, the organization is comprised of 164 members and associates in 125 countries and jurisdictions, representing more than 2.5 million accountants employed in public practice, industry and commerce, government, and academe. IFAC‘s mission is to serve the public interest by: • Contributing to the development, adoption and implementation of high-quality international standards and guidance • Contributing to the development of strong professional accountancy organizations and accounting firms, and to high-quality practices by professional accountants • Promoting the value of professional accountants worldwide • Speaking out on public interest issues where the accountancy profession‘s expertise is most relevant IFAC‘s role is threefold: to establish and promote adherence to high quality international standards, to facilitate collaboration and cooperation with member bodies, and to serve as spokesperson for the international profession on relevant public policy issues. It has long recognized that a fundamental way to protect the public interest is to develop, promote, and enforce internationally recognized standards as a means of ensuring the credibility of information upon which investors and other stakeholders depend. IFAC‘s boards set the following standards: 15


• International Standards on Auditing, Assurance Engagements and Related Services • International Standards on Quality Control • International Code of Ethics for Professional Accountants • International Education Standards • International Public Sector Accounting Standards In addition, IFAC develops benchmark guidance and promotes the sharing of resources to serve professional accountants in business. It has also established groups to address issues International Federation of Accountants An overview of IFAC, its roles, responsibilities, and services IFAC‘s Boards and Committees Compliance Advisory Panel Professional Accountancy Organization Development Committee International Accounting Education Standards Board International Auditing and Assurance Standards Board International Ethics Standards Board for Accountants International Public Sector Accounting Standards Board Nominating Committee Professional Accountants in Business Committee Small and Medium Practices Committee Transnational Auditors Committee Leading the Development of the Worldwide Accounting Profession April 2011 pertaining to small and medium practices and enterprises and developing nations, all of which play a critical role in the global economy. International firms that perform audits of financial statements that are or may be used across national borders are represented in IFAC through the Forum of Firms. Commitment to the membership obligations of the Forum contributes to raising the standards of the international practice of auditing, thus serving the public interest. 1.10. NATURE OF ETHICS AND ITS RELEVANCE TO BUSINESS AND ACCOUNTANCY PROFESSION Nature of ethics: (a) Business ethics is a code of conduct. It tells what to do and what not to do for the welfare of the society. (b) Business ethics is based on moral and social values. It contains moral and social principles (rules) for doing business. (c) Ethics give protection to different social groups such as consumers, employees, small businessmen, government, shareholders, creditors, etc. (d) It provides a basic framework for doing business. It gives the social cultural, economic, legal and other limits of business. (e) Businessmen must be given proper education and guidance before introducing business ethics. Its relevance to business and accountancy profession: Ethical behaviour can bring significant benefits to a business and accountancy profession. For example, it may: a) Attract customers to the firm‘s products, which means boosting sales and profits b) Make employees want to stay with the business, reduce labour turnover and therefore increase productivity c) Attract more employees wanting to work for the business, reduce recruitment costs and enable the company to get the most talented employees 16


d) Attract investors and keep the company‘s share price high, thereby protecting the business from takeover 1.11. RULES BASED AND FRAMEWORK APPROACHES TO ETHICS Rules based ethics: - Compliance approach - Explicitly sets out what individuals can and cannot do - Instils sense of fear - Disadvantage: Rules cannot cover every situation - Rules characterised by 3 things: earlier inside a rule or have broken it; argument over precise meaning of rules; require enforcement by objective party - Expensive, source of contention and inflexible - More difficult to monitor compliance in rule-based approach Framework approaches: - Set of principles to help individuals arrive at decisions - Advantage: applied more easily - Disadvantage: left to member to decide how best to deal 1.12. SEVEN PRINCIPLES OF PUBLIC LIFE In 1994, the UK government established a Committee on Standards in Public Life. The committee was chaired by Lord Nolan, and was tasked with making recommendations to improve standards of behaviour in public life. The first report of the committee established the seven principles of public life, also known as the ―Nolan principles‖. Seven principles are outlined below: i. Selflessness – Holders of public office should act solely in terms of the public interest. They should not do so in order to gain financial or other benefits for themselves, their family or their friends. ii. Integrity – Holders of public office should not place themselves under any financial or other obligation to outside individuals or organisations that might seek to influence them in the performance of their official duties. iii. Objectivity – In carrying out public business, including making public appointments, awarding contracts, or recommending individuals for rewards and benefits, holders of public office should make choices on merit. iv. Accountability – Holders of public office are accountable for their decisions and actions to the public and must submit themselves to whatever scrutiny is appropriate to their office.

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v. Openness – Holders of public office should be as open as possible about all the decisions and actions they take. They should give reasons for their decisions and restrict information only when the wider public interest clearly demands. vi. Honesty – Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve any conflicts arising in a way that protects the public interest. vii. Leadership – Holders of public office should promote and support these principles by leadership and example. 1.13. PERSONAL DEVELOPMENT AND LIFELONG LEARNING Personal development is the development of personal qualities such as communication, assertiveness, time management, and relationship building and lifelong learning is the concept that an individual never stops learning and should be open to new ideas, decisions, skills or behaviours. Development is not the same as training or education: it is a broad, lifelong learning process of improving your skills, knowledge and interests as way of maximising your potential. You should make time to draw up your own personal development plan, which must look at where you are now, your career goals, the development needs that are going to help you get to where you want to be, and the options for learning, which should address your learning style and the resources available both inside and outside work. You should always aim to stretch yourself intellectually. Update your professional knowledge as and when; refresh your interest and enthusiasm by exploring aspects of your work you‘d not looked at for some time. Don‘t leave things you don‘t like on one side: tackle subjects you don‘t like as well as the ones you do. Don‘t forget to maintain a log of each and every bit of development you undertake; you never know when you might need to show it to someone. A great deal of emphasis is now placed on acquiring not just formal qualifications, but also other life experiences as part of lifelong learning (LLL). LLL is best described as the acquisition of skills and knowledge through formal (courses) and informal (experiences) channels. LLL is very much part of your personal and professional development, your development as a person. 1.14. ETHICAL PRINCIPALS The fundamental ethical principles are as follows: Integrity: Integrity is the quality of being honest and having strong moral principles; moral uprightness. It is generally a personal choice to hold oneself to consistent moral and ethical standards. In 18


ethics, integrity is regarded by many people as the honesty and truthfulness or accuracy of one's actions. Objectivity: Generally, objectivity means the state or quality of being true even outside of a subject's individual biases, interpretations, feelings, and imaginings. Professional competence and due care: The principle of professional competence and due care imposes the following obligations on all professional accountants: - To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service; and - To act diligently in accordance with applicable technical and professional standards when providing professional services. Confidentiality: Confidentiality is the protection of personal information. Confidentiality means keeping a client's information between you and the client, and not telling others including co-workers, friends, family, etc. Examples of maintaining confidentiality include: individual files are locked and secured. Professional behavior: A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession. 1.15. DISCLOSURE REQUIRED BY LAW In identifying whether confidential information can be disclosed, it is necessary to consider whether any parties would be harmed by such disclosure, whether all relevant information is known and substainted and the type of disclosure and to whom it is to be made. The following are circumstances where professional accountants are or may be required to disclose confidential information or when such disclosure may be appropriate: Disclosure is permitted by law and authorised by the client or the employer Disclosure is required by law 1.16. CONCEPTS OF INDEPENDENCE, SCEPTICISM, ACCOUNTABILITY AND SOCIAL RESPONSIBILITY Independence: It is the public interest and required in CIMA‘s ‗Code of Ethics‘ that members of assurance engagement teams and their firms is to be independent of the assurance clients. Scepticism: It is generally any questioning attitude or doubt towards one or more items of putative knowledge or belief. It includes auditor‘s questioning, evaluative, attitude toward evidence: 19


Management‘s assertions without sufficient corroboration Financial trends need investigation Documents are checked for authenticity or alteration Ask questions, get answers and then verify the answers. Accountability: The concept of accountability is that of the professional accountant being responsible to someone and for something or action and being able to explain those actions. It is an important aspect of the profession and to leadership in the wider business environment. Social responsibility: Social responsibility of business deals with taking those decisions and performing those actions that benefit the society. By assuming social responsibility, the business enterprise not only respects the aspiration of society but also helps in implementing these aspirations along with their profit interest. 1.17. CIMA CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS CIMA's code of ethics is made up of five fundamental principles: (a) Integrity: Being straightforward, honest and truthful in all professional and business relationships. You should not be associated with any information that you believe contains a materially false or misleading statement, or which is misleading by omission. (b) Objectivity: Not allowing bias, conflict of interest or the influence of other people to override your professional judgement. (c) Professional competence and due care: An ongoing commitment to your level of professional knowledge and skill. Base this on current developments in practice, legislation and techniques. Those working under your authority must also have the appropriate training and supervision. (d) Confidentiality: You should not disclose professional information unless you have specific permission or a legal or professional duty to do so. (e) Professional behaviour: To comply with relevant laws and regulations. You must also avoid any action that could negatively affect the reputation of the profession. Threats Threats may be created by a broad range of relationships and circumstances. When a relationship or circumstance creates a threat, such a threat could compromise, or could be perceived to compromise, a professional accountant‘s compliance with the fundamental principles. A circumstance or relationship may create more than one threat, and a threat may affect compliance with more than one fundamental principle. Threats fall into one or more of the following categories: 20


(a) Self-interest threat – the threat that a financial or other interest will inappropriately influence the professional accountant‘s judgment or behavior; (b) Self-review threat – the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or activity or service performed by the professional accountant, or by another individual within the professional accountant‘s firm or employing organization, on which the accountant will rely when forming a judgment as part of performing a current activity or providing a current service; (c) Advocacy threat – the threat that a professional accountant will promote a client‘s or employer‘s position to the point that the professional accountant‘s objectivity is compromised; (d) Familiarity threat – the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work; and (e) Intimidation threat – the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant. Safeguards Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. They fall into two broad categories: (a) Safeguards created by the profession, legislation or regulation; and (b) Safeguards in the work environment. Safeguards created by the profession, legislation or regulation include: • Educational, training and experience requirements for entry into the profession. • Continuing professional development requirements. • Corporate governance regulations. • Professional standards. • Professional or regulatory monitoring and disciplinary procedures. • External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant. 1.18. IFAC CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS IFAC (International Federation of Accountants) is the global organization for the accountancy

profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of more than 175 members and associates in more than 130 countries and jurisdictions, representing almost 3 million accountants in public practice, education, government service, industry, and commerce. 21


IFAC‘s code of ethics is made up of following fundamental principles: Integrity: Integrity is the quality of being honest and having strong moral principles; moral uprightness. It is generally a personal choice to hold oneself to consistent moral and ethical standards. In ethics, integrity is regarded by many people as the honesty and truthfulness or accuracy of one's actions. Objectivity: Generally, objectivity means the state or quality of being true even outside of a subject's individual biases, interpretations, feelings, and imaginings. Professional competence and due care: The principle of professional competence and due care imposes the following obligations on all professional accountants: - To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service; and - To act diligently in accordance with applicable technical and professional standards when providing professional services. Confidentiality: Confidentiality is the protection of personal information. Confidentiality means keeping a client's information between you and the client, and not telling others including co-workers, friends, family, etc. Examples of maintaining confidentiality include: individual files are locked and secured. Professional behavior: A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

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PAST EXAM QUESTIONS AND ANSWERS Q-1. Explain the ethical principles of integrity, objectivity, professional competence and due care and confidentiality. CMA Adapted- December 2017 Answer. Integrity: Being straightforward, honest and truthful in all professional and business relationships. You should not be associated with any information that you believe contains a materially false or misleading statement, or which is misleading by omission. Objectivity: Not allowing bias, conflict of interest or the influence of other people to override your professional judgement. Professional competence and due care: An ongoing commitment to your level of professional knowledge and skill. Base this on current developments in practice, legislation and techniques. Those working under your authority must also have the appropriate training and supervision. Confidentiality: You should not disclose professional information unless you have specific permission or a legal or professional duty to do so. Q-2. Explain the reasons why CIMA and IFAC each have a „Code of Ethics for Professional Accountants‟. CMA Adapted- June 2017 Answer. In June 2015 IFAC published their ‗Code of Ethics for Professional Accountants‘ which was prepared by the Ethics Committee of the International Federation of Accountants. In 2006, the CIMA ‗Code of Ethics for Professional Accountants‘ was launched based on IFAC‘s Code for Professional Accountants reflecting the contribution CIMA made to the preparation of the IFAC Code. The CIMA Code reflects the standards CIMA expects of its members and students. It is aligned with global standards across the profession. CIMA and IFAC published Code of Ethics specially for following reasons: Prohibit Inappropriate Behavior Many companies use CIMA and IFAC code of ethics to prohibit inappropriate employee behavior. Inappropriate behavior can include lying to managers or clients, engaging in fraud or embezzlement, failing to meet specific operational standards or other similar conduct. A code of ethics can help employees understand why these actions are inappropriate and the reasons companies expect better behavioral performance. Companies may also limit their legal liability from poor employee performance by using a code of ethics. 23


Improve Business Relationships CIMA and IFAC code of ethics can help companies improve business relationships. Ethical values are often designed to provide guidance when working with other companies and the general public. These values dictate how businesses handle contract negotiations, customer questions and feedback or negative business situations. Hold Management Accountable Owner, director or upper-level management accountability is an important function of a company‘s code of conduct. These individuals are usually required to exhibit honesty, transparency and integrity in their daily roles. Not only do these actions set the company‘s ethical tone, it also keeps individual owners and managers accountable for their actions. Allowing an unethical manager free rein in a business capacity can create difficult business situations that overextend the company‘s resources. Considerations Companies often use refresher seminars to continually educate and inform employees about the importance of ethical behavior. The seminars may also provide information regarding new business policies or past violations of the company‘s code of ethics. This information ensures that employees have a clear understanding about the importance of ethics and why they should adhere to the company‘s policy. Companies can use an employee or third-party agency to conduct these refresher seminars or meetings. Q-3. Explain the nature of ethics and its application to business and the accountancy profession. CMA Adapted- June 2017 Answer. Nature of ethics: a) Business ethics is a code of conduct. It tells what to do and what not to do for the welfare of the society. b) Business ethics is based on moral and social values. It contains moral and social principles (rules) for doing business. c) Ethics give protection to different social groups such as consumers, employees, small businessmen, government, shareholders, creditors, etc. d) It provides a basic framework for doing business. It gives the social cultural, economic, legal and other limits of business. e) Businessmen must be given proper education and guidance before introducing business ethics. Its relevance to business and accountancy profession: Ethical behaviour can bring significant benefits to a business and accountancy profession. For example, it may: a) Attract customers to the firm‘s products, which means boosting sales and profits b) Make employees want to stay with the business, reduce labour turnover and therefore increase productivity 24


c) Attract more employees wanting to work for the business, reduce recruitment costs and enable the company to get the most talented employees d) Attract investors and keep the company‘s share price high, thereby protecting the business from takeover Q-4. Write down the values & attitudes that are essential for professional accountants. CMA Adapted- December 2016 Answer. Values: In ethics, value denotes the degree of importance of some thing or action, with the aim of determining what actions are best to do or what way is best to live, or to describe the significance of different actions. It may be described as treating actions themselves as abstract objects, putting value to them. It deals with right conduct and good life, in the sense that a highly, or at least relatively highly, valuable action may be regarded as ethically "good", and an action of low in value, or somewhat relatively low in value, may be regarded as "bad". What makes an action valuable may in turn depend on the ethical values of the objects it increases, decreases or alters. An object with "ethic value" may be termed an "ethic or philosophic good". Attitudes: An attitude is a settled way of thinking or feeling about someone or something, typically one that is reflected in a person's behavior. Attitudes structure can be described in terms of three components: a) Affective component: this involves a person‘s feelings/ emotions about the attitude object. For example: ―I am scared of spiders‖. b) Behavioral (or conative) component: the way the attitude we have influences how we act or behave. For example: ―I will avoid spiders and scream if I see one‖. c) Cognitive component: this involves a person‘s belief/ knowledge about an attitude object. For example: ―I believe spiders are dangerous‖. Q-5. “A professional accountant shall comply with the fundamental principles as per IFAC Handbook for code of Ethics for Professional Accountants”. Please expand upon this statement. Discuss the Code of Ethics of a Professional Accountant. CMA Adapted- June 2016 Answer. A professional accountant‘s responsibility is not exclusively to satisfy the needs of an individual client or employer, but to act with the fundamental principles as per IFAC Handbook for code of Ethics for Professional Accountants. Thus, the responsibility of the professional accountant is to ensure that the financial statements present information that is relevant, reliable and useful to a wide range of users who are not in a position to demand reports tailored to meet their particular information needs. 25


The code of ethics of a Professional Accountant: (a) Integrity: Being straightforward, honest and truthful in all professional and business relationships. You should not be associated with any information that you believe contains a materially false or misleading statement, or which is misleading by omission. (b) Objectivity: Not allowing bias, conflict of interest or the influence of other people to override your professional judgement. (c) Professional competence and due care: An ongoing commitment to your level of professional knowledge and skill. Base this on current developments in practice, legislation and techniques. Those working under your authority must also have the appropriate training and supervision. (d) Confidentiality: You should not disclose professional information unless you have specific permission or a legal or professional duty to do so. (e) Professional behaviour: To comply with relevant laws and regulations. You must also avoid any action that could negatively affect the reputation of the profession. Q-6. Who is a professional accountant as per Financial Reporting Act-2015? Critically discuss the Financial Reporting Act-2015 with particular emphasis on the accounting profession in Bangladesh. CMA Adapted- June 2016 Answer. Professional accountant: In Bangladesh the profession of accountancy represented by two professional bodies, the Institute of Cost & Management Accountants of Bangladesh (ICMAB) and the Institute of Chartered Accountants of Bangladesh (ICAB). Chartered Accountants complete their training in practicing firms and specialise in financial accounting, financial audit and tax. CMAs receive particular training in cost audit, management audit and management accounting, as well as general accounting and taxation. The Financial Reporting Act-2015: The Financial Reporting Act 2015 (known as FRA 2015) is an act of the Bangladesh National Assembly which has passed the act on September 6, 2015 in order to make sure the accountability and transparency in the financial reporting procedures of the country. As per the FRA 2015, all auditors and audit firms must register with the Financial Reporting Council. Without registration, no auditor and audit firm will be able to provide auditing services to any entity related with public interest. For registration, the auditor or audit firm needs to apply to the Financial Reporting Council (FRC). The FRC will review the application, and will provide the registration pursuant to the rules and guidelines. If any auditor or any audit firm violates any provision of the act or any of its rules and guidelines, the FRC may cancel or suspend the registration and may fine as well. 26


Q-7. What are the IFAC codes of ethics for Professional Accountants? CMA Adapted- December 2015 Answer. A Professional Accountant should comply with the following code of ethics: (a) Integrity: Being straightforward, honest and truthful in all professional and business relationships. You should not be associated with any information that you believe contains a materially false or misleading statement, or which is misleading by omission. (b) Objectivity: Not allowing bias, conflict of interest or the influence of other people to override your professional judgement. (c) Professional competence and due care: An ongoing commitment to your level of professional knowledge and skill. Base this on current developments in practice, legislation and techniques. Those working under your authority must also have the appropriate training and supervision. (d) Confidentiality: You should not disclose professional information unless you have specific permission or a legal or professional duty to do so. (e) Professional behaviour: To comply with relevant laws and regulations. You must also avoid any action that could negatively affect the reputation of the profession. Q-8. The Bangladesh National parliament passed the Financial Reporting Act- 2015 on September 6, 2015. Could you critically evaluate the impact of the Act on accounting profession? CMA Adapted- December 2015 Answer. The Financial Reporting Act 2015 is an act of the Bangladesh National Assembly which has passed the act on September 6, 2015 in order to make sure the accountability and transparency in the financial reporting procedures of the country. The Act may have the following impact on accounting profession: a) Financial reporting will be more fair. b) The authenticity of financial reporting will be reviewed and monitor by public interest entities. c) Practice of auditors will be monitored to maintain high standards of professional conduct. d) The Act enforces compliance with Accounting Standards/ Financial Reporting Standards and Auditing Standards, etc.

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CHAPTER - 2 ETHICAL CONFLICT

2.1. RELATIONSHIP BETWEEN ETHICS AND LAW Ethics and law are closely interrelated as they both have a focus on right and wrong, preventing immoral acts and on creating rules for trade groups such as doctors and social workers. However, ethics and law are quite different as well and ethical obligations often exceed a person's duty to the law. The law also can force people to perform what they believe to be unethical conduct. Physicians who feel that a law forces them to be unethical must work within the legal world to change the law. Of course, a physician who has been exonerated from a criminal charge in the eyes of the law may have still been guilty and been ethically irresponsible. The relationship that clearly exists between law and ethics is now being pressed by the new technology. Recent cases that have come before the courts indicate just how complex the issues are. They highlight the fact that there is a need for the establishment of suitable decision-making processes to deal with the issues and to provide for some certainty and consistency in approach. 2.2. DISTINCTION BETWEEN ETHICAL CODES AND CONTRACTS Ethical codes are adopted by organizations to assists members in understanding the difference between ‗right‘ and ‗wrong‘ and in applying that understanding to their decisions. An ethical code generally implies documents at three levels: i. Codes of business ethics, ii. Codes of conduct for employees, and iii. Codes of professional practice. When creating a contract, a negotiator is not only doing so to reach an agreement between two or more parties, but to create an agreement that is durable; whereby parties of the contract are legally bounded and committed to its promises. A legally binding contract is defined as an exchange of promises or an agreement between parties that the law will enforce and there is an underlying presumption for commercial agreements that parties intend to be legally bound. 2.3. MEANING OF UNETHICAL BEHAVIOR Unethical behavior is an action that falls outside of what is considered morally right or proper for a person, a profession or an industry. Individuals can behave unethically, as can businesses, professionals and politicians. 28


2.4. CONSEQUENCES OF UNETHICAL BEHAVIOR The sad truth is that almost every company has individuals that partake in unethical behaviour for their personal benefit or supported by the company. Unethical behaviour might be as simple as using company property and time for personal benefit to inside trading and financial fraud. Many companies sadly make it part of their operational policy to cut corners, accept and give kick-backs in order to get juicy contracts and maximize profit. In today‘s business environment, the line between right and wrong is fade. Workers with high moral standard are helpless against unethical behaviour they notice in their colleagues, and to make it worse, many unethical conducts go unpunished because of legal insignificance. An employee working for an employer or company with unethical, deceptive, and dishonest conduct will be directly affected physically and mentally, and may even come down with emotional and health related problems because of it. Workers involved in unethical practices are almost always directly or indirectly held accountable for their actions. Even though they may not be found guilty by any court of law, the physiological impact of immoral acts leads to intense mental and physical stress. When a company is found guilty of financial improprieties, the workers undergo a series of questions from investigators and if they were found to be involved, they may be blacklisted or their professional license revoked. Many workers involved in immoral behavior may not know the source of anxiety or other health issues, but the human conscience has a strong effect on our physical and mental stability. Unethical behavior in a company can also: – harm sales of goods, as customers may boycott goods produced by a company known for unethical behavior. – lead to a drop in stock price. Investors will be unwilling to buy shares from companies known to transact business dishonestly. Investing in dishonest firms will result in poor returns. Immoral dealings amongst individuals or in a company build a work atmosphere of malice and mistrust. Workers tend to go further down the drain when they are surrounded with people who practice the same. This will lead to lower productivity, promote conflict, and subsequently cripple the company. Many workers are hesitant to turn in their colleagues involved in unethical practices. It is up to the company to manage unethical practices by creating processes that stem the tide. It should be part and parcel of the company‘s policy, well documented, and new workers should be briefed on the ‗do‘s and don‘ts‘ in respect to the company‘s policy on unethical conduct. 2.5. DEFINITION OF ETHICAL DILEMMA Ethical dilemmas, also known as a moral dilemmas, are situations in which there is a choice to be made between two options, neither of which resolves the situation in an ethically acceptable fashion. In such cases, societal and personal ethical guidelines can provide no 29


satisfactory outcome for the chooser. Ethical dilemmas assume that the chooser will abide by societal norms, such as codes of law or religious teachings, in order to make the choice ethically impossible. 2.6. HOW ETHICAL DILEMMA ARISES Most people spend a great deal of their weekdays at their offices or job sites. It's not surprising, then, that employees face ethical dilemmas there. Several of these dilemmas pop up on a regular basis. With some common sense and a bit of analysis, employees can resolve common workplace dilemmas without losing their jobs or bringing harm to their employer. Conducting personal business on company time: Because employees tend to spend so much of their weekday hours on the job, they often are tempted to conduct personal business on company time. This can include setting up doctor's appointments on company phone lines, making vacation reservations using their employer's computers and Internet connections or even making phone calls for a freelance side business while on company time. At first glance, this ethical dilemma is fairly clear: It is an abuse of your employer to conduct personal business on company time. But there are shades of gray here. What if your spouse calls to tell you that your children are ill? Is it OK for you to schedule a doctor's appointment? A good rule of thumb is for an employee to check with his manager or human resources supervisors to clarify what counts as an actionable offense in the company. Taking credit for others' work: Employees often work in teams to create marketing campaigns, develop new products or finetune services, yet rarely does everyone in a group contribute equally to the final product. If three members of a five-person team did all the work, do those three members demand to receive proper credit while pointing out that two members of the team did not pull their weight? This is a thorny question. If employees single out their co-workers in a negative light, it could foment resentment. The same thing could happen, however, if all employees accept equal praise even though only a select few did the real work. The best way to resolve this ethical dilemma is to not let it happen. Team members should insist that all employees perform specific tasks to help complete a project. Harassing behavior: Employees often don't know what to do if they see one of their co-workers harassing another employee, either mentally, sexually or physically. Employees may worry for their jobs if they attempt to report a superior for harassment. They may fret that they'll be labeled a troublemaker if they report co-workers who display inappropriate behavior toward other employees. The best way to resolve this ethical dilemma rests with the staff members who develop the company's employee handbook. It is their job to include specific language that spells out that employees won't be punished for reporting the harassing behavior or inappropriate actions of their co-workers. 30


2.7. HOW TO RESOLVE ETHICAL DILEMMA Employees make decisions at all levels of a company, whether at the top, on the front line or anywhere in between. Every employee in an organization is exposed to the risk of facing an ethical dilemma at some point, and some ethical decisions can be more challenging to fully understand than others. Followings are the important procedures to resolve ethical dilemmas: i. Consult your company's code of ethics for formal guidance. This simple act may be able to resolve your dilemma immediately, depending on how comprehensive and specific your company's ethics statement is. Your code of ethics can provide a backdrop on which to weigh the pros and cons of business decisions, giving you a clearer picture of which decision is more in line with the company's ethical commitments. ii. Share your dilemma with your supervisor to take advantage of her experience. Front-line employees can face a number of ethical dilemmas in their jobs, such as deciding whether to give out a refund that does not specifically adhere to company policies or whether to report suspicions of internal theft which cannot be proven. Taking ethical questions to supervisors can keep employees out of trouble in addition to resolving conflicts. iii. Discuss your dilemma with other executives if you are at the top of your organization. Executives and company owners make some of the farthest-reaching decisions in any organization, adding weight and additional challenges to ethical dilemmas. As an executive, it is important to show your competence at solving problems on your own, but there is nothing wrong with asking for help from time to time. Other executive team members should appreciate your commitment to making the right decision and should be able to provide unique insights into your problem. iv. Speak with peers and colleagues from other companies if you can do so without divulging company secrets. If you are a sole proprietor, you may not have any other top-level managers to consult with. Seek out someone you trust from a business networking group, a previous employer or your college years to gain insight from others. Consider speaking with friends from diverse cultural backgrounds to gain an even wider range of insights. v. Read past news articles about other companies faced with your specific dilemma. Determine how others have dealt with your challenge before and take note of the outcome of their decisions. News outlets like to cover certain large company decisions, such as laying off workers, endorsing political candidates and bending accounting rules, which can have ethical impacts in society. Reading what happened to others after making their decisions can give you a glimpse into what to expect if you make a similar decision. 2.8. DEFINITION OF ETHICAL CONFLICT Ethical conflicts arise when individuals are confronted with a collision between general belief systems about morality, ethics or justice and their own personal situations. Right and wrong are not always perfectly clear and some situations involve choosing between two ―evils,‖ where, perhaps, the ethical decision might result in personal or social injury or where an 31


individual stands to gain from an unethical decision. Such conflicts could take place at the individual, professional or societal level. 2.9. MEANING OF CONFLICT OF INTEREST A conflict of interest is a situation in which a person or organization is involved in multiple interests, financial or otherwise, one of which could possibly corrupt the motivation or decision-making of that individual or organization. A widely used definition is: "A conflict of interest is a set of circumstances that creates a risk that professional judgment or actions regarding a primary interest will be unduly influenced by a secondary interest." 2.10. HOW CONFLICT OF INTEREST ARISES A conflict of interest arises in the workplace when an employee has competing interests or loyalties that either are, or potentially can be, at odds with each other. A conflict of interest causes an employee to experience a struggle between diverging interests, points of view, or allegiances. Conflicts of interest are generally forbidden in company codes of conduct and / or employee handbooks. Conflicts of interest can cause an employee to act out of interests that are divergent from those of his or her employer or coworkers. In workplaces, employees want to avoid any behavior or choices that could potentially signal a conflict of interest. They are bad news for the employee's reputation, integrity, and trustworthiness in the eyes of management. 2.11. ETHICAL CONFLICT RESOLUTION To understand ethical conflict resolution we have to consider the word conflict in isolation and consider what it means. The most likely interpretation of conflict might be that of disagreement with a professional colleague or disagreement with a customer or client. Ethical conflict resolution is only a five-step process. Step 1: Identify the source of the conflict. The more information an organisation has about the cause of the conflict, the more easily it can help to resolve it. To get the information need, the organisation can use a series of questions to identify the cause. Step 2: Look beyond the incident. Often, it is not the situation but the perspective on the situation that causes anger to fester and ultimately leads to a shouting match or other visible— and disruptive—evidence of a conflict.

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Step 3: Request solutions. After getting each party‘s viewpoint on the conflict, the next step is to get each to identify how the situation could be changed. Step 4: Identify solutions both disputants can support. Point out the merits of various ideas, not only from each other‘s perspective, but in terms of the benefits to the organization. Step 5: Agreement. The mediator needs to get the two parties to shake hands and agree to one of the alternatives identified in Step 4. Some mediators go as far as to write up a contract in which actions and time frames are specified.

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PAST EXAM QUESTIONS AND ANSWERS Q-1. Identify situations where ethical dilemmas and conflicts of interest occur. CMA Adapted- December 2017 Answer. Situations where ethical dilemmas occur: Most people spend a great deal of their weekdays at their offices or job sites. It's not surprising, then, that employees face ethical dilemmas there. Several of these dilemmas pop up on a regular basis. With some common sense and a bit of analysis, employees can resolve common workplace dilemmas without losing their jobs or bringing harm to their employer. Conducting personal business on company time: Because employees tend to spend so much of their weekday hours on the job, they often are tempted to conduct personal business on company time. This can include setting up doctor's appointments on company phone lines, making vacation reservations using their employer's computers and Internet connections or even making phone calls for a freelance side business while on company time. At first glance, this ethical dilemma is fairly clear: It is an abuse of your employer to conduct personal business on company time. But there are shades of gray here. What if your spouse calls to tell you that your children are ill? Is it OK for you to schedule a doctor's appointment? A good rule of thumb is for an employee to check with his manager or human resources supervisors to clarify what counts as an actionable offense in the company. Taking credit for others' work: Employees often work in teams to create marketing campaigns, develop new products or finetune services, yet rarely does everyone in a group contribute equally to the final product. If three members of a five-person team did all the work, do those three members demand to receive proper credit while pointing out that two members of the team did not pull their weight? This is a thorny question. If employees single out their co-workers in a negative light, it could foment resentment. The same thing could happen, however, if all employees accept equal praise even though only a select few did the real work. The best way to resolve this ethical dilemma is to not let it happen. Team members should insist that all employees perform specific tasks to help complete a project. Harassing behavior: Employees often don't know what to do if they see one of their co-workers harassing another employee, either mentally, sexually or physically. Employees may worry for their jobs if they attempt to report a superior for harassment. They may fret that they'll be labeled a troublemaker if they report co-workers who display inappropriate behavior toward other employees. The best way to resolve this ethical dilemma rests with the staff members who develop the company's employee handbook. It is their job to include specific language that spells out that employees won't be punished for reporting the harassing behavior or inappropriate actions of their co-workers. 34


Situations where conflicts of interest occur: A conflict of interest occurs in the workplace when an employee has competing interests or loyalties that either are, or potentially can be, at odds with each other. A conflict of interest causes an employee to experience a struggle between diverging interests, points of view, or allegiances. Conflicts of interest are generally forbidden in company codes of conduct and / or employee handbooks. Conflicts of interest can cause an employee to act out of interests that are divergent from those of his or her employer or coworkers. In workplaces, employees want to avoid any behavior or choices that could potentially signal a conflict of interest. They are bad news for the employee's reputation, integrity, and trustworthiness in the eyes of management. Q-2. You are a professional accountant and Finance Manager of X Company Ltd (a listed company). According to the statutory requirement, the board has decided to appoint external auditor. Finance Director has given you a short list including Z Consultants and asked for your advice to select Z Consultant. As you know the chief of Z Consultants is Finance Directorâ€&#x;s own brother, he has requested you not to disclose the relationship in the selection process. Advice your Finance Director on legal and ethical ground considering business impact, conflict of interest and professional codes. CMA Adapted- December 2017 Answer. The company should not appoint Z Consultant as external auditor because as per legal and ethical ground a person whose relative is a director or is in the employment of the company as a director or key management personnel is not eligible to get appointed as external auditor. Q-3. Describe the consequences of unethical behavior to the individual, the profession and society. CMA Adapted- June 2017 Answer. The consequences of unethical behavior: The sad truth is that almost every company has individuals that partake in unethical behaviour for their personal benefit or supported by the company. Unethical behaviour might be as simple as using company property and time for personal benefit to inside trading and financial fraud. Many companies sadly make it part of their operational policy to cut corners, accept and give kick-backs in order to get juicy contracts and maximize profit. In today‘s business environment, the line between right and wrong is fade. Workers with high moral standard are helpless against unethical behaviour they notice in their colleagues, and to make it worse, many unethical conducts go unpunished because of legal insignificance. An 35


employee working for an employer or company with unethical, deceptive, and dishonest conduct will be directly affected physically and mentally, and may even come down with emotional and health related problems because of it. Workers involved in unethical practices are almost always directly or indirectly held accountable for their actions. Even though they may not be found guilty by any court of law, the physiological impact of immoral acts leads to intense mental and physical stress. When a company is found guilty of financial improprieties, the workers undergo a series of questions from investigators and if they were found to be involved, they may be blacklisted or their professional license revoked. Many workers involved in immoral behavior may not know the source of anxiety or other health issues, but the human conscience has a strong effect on our physical and mental stability. Unethical behavior in a company can also: – harm sales of goods, as customers may boycott goods produced by a company known for unethical behavior. – lead to a drop in stock price. Investors will be unwilling to buy shares from companies known to transact business dishonestly. Investing in dishonest firms will result in poor returns. Immoral dealings amongst individuals or in a company build a work atmosphere of malice and mistrust. Workers tend to go further down the drain when they are surrounded with people who practice the same. This will lead to lower productivity, promote conflict, and subsequently cripple the company. Many workers are hesitant to turn in their colleagues involved in unethical practices. It is up to the company to manage unethical practices by creating processes that stem the tide. It should be part and parcel of the company‘s policy, well documented, and new workers should be briefed on the ‗do‘s and don‘ts‘ in respect to the company‘s policy on unethical conduct. Q-4. What is ethical dilemma? How does ethical dilemma arise? How can a professional accountant resolve ethical conflicts, explain. CMA Adapted- December 2016 Answer. Ethical dilemma: Ethical dilemmas, also known as a moral dilemmas, are situations in which there is a choice to be made between two options, neither of which resolves the situation in an ethically acceptable fashion. In such cases, societal and personal ethical guidelines can provide no satisfactory outcome for the chooser. Ethical dilemmas assume that the chooser will abide by societal norms, such as codes of law or religious teachings, in order to make the choice ethically impossible. 36


How does ethical dilemma arises: Most people spend a great deal of their weekdays at their offices or job sites. It's not surprising, then, that employees face ethical dilemmas there. Several of these dilemmas pop up on a regular basis. With some common sense and a bit of analysis, employees can resolve common workplace dilemmas without losing their jobs or bringing harm to their employer. Conducting personal business on company time: Because employees tend to spend so much of their weekday hours on the job, they often are tempted to conduct personal business on company time. This can include setting up doctor's appointments on company phone lines, making vacation reservations using their employer's computers and Internet connections or even making phone calls for a freelance side business while on company time. At first glance, this ethical dilemma is fairly clear: It is an abuse of your employer to conduct personal business on company time. But there are shades of gray here. What if your spouse calls to tell you that your children are ill? Is it OK for you to schedule a doctor's appointment? A good rule of thumb is for an employee to check with his manager or human resources supervisors to clarify what counts as an actionable offense in the company. Taking credit for others' work: Employees often work in teams to create marketing campaigns, develop new products or finetune services, yet rarely does everyone in a group contribute equally to the final product. If three members of a five-person team did all the work, do those three members demand to receive proper credit while pointing out that two members of the team did not pull their weight? This is a thorny question. If employees single out their co-workers in a negative light, it could foment resentment. The same thing could happen, however, if all employees accept equal praise even though only a select few did the real work. The best way to resolve this ethical dilemma is to not let it happen. Team members should insist that all employees perform specific tasks to help complete a project. Harassing behavior: Employees often don't know what to do if they see one of their co-workers harassing another employee, either mentally, sexually or physically. Employees may worry for their jobs if they attempt to report a superior for harassment. They may fret that they'll be labeled a troublemaker if they report co-workers who display inappropriate behavior toward other employees. The best way to resolve this ethical dilemma rests with the staff members who develop the company's employee handbook. It is their job to include specific language that spells out that employees won't be punished for reporting the harassing behavior or inappropriate actions of their co-workers. Resolving ethical conflicts: To understand ethical conflict resolution we have to consider the word conflict in isolation and consider what it means. The most likely interpretation of conflict might be that of disagreement with a professional colleague or disagreement with a customer or client. Ethical conflict resolution is only a five-step process.

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Step 1: Identify the source of the conflict. The more information an organisation has about the cause of the conflict, the more easily it can help to resolve it. To get the information need, the organisation can use a series of questions to identify the cause. Step 2: Look beyond the incident. Often, it is not the situation but the perspective on the situation that causes anger to fester and ultimately leads to a shouting match or other visible— and disruptive—evidence of a conflict. Step 3: Request solutions. After getting each party‘s viewpoint on the conflict, the next step is to get each to identify how the situation could be changed. Step 4: Identify solutions both disputants can support. Point out the merits of various ideas, not only from each other‘s perspective, but in terms of the benefits to the organization. Step 5: Agreement. The mediator needs to get the two parties to shake hands and agree to one of the alternatives identified in Step 4. Some mediators go as far as to write up a contract in which actions and time frames are specified. Q-5. Is there any relationship between ethics and the law? What is unethical behavior? Briefly describe the roots of Unethical Behavior. CMA Adapted- December 2015 Answer. The relationship between ethics and law: Ethics and law are closely interrelated as they both have a focus on right and wrong, preventing immoral acts and on creating rules for trade groups such as doctors and social workers. However, ethics and law are quite different as well and ethical obligations often exceed a person's duty to the law. The law also can force people to perform what they believe to be unethical conduct. Physicians who feel that a law forces them to be unethical must work within the legal world to change the law. Of course, a physician who has been exonerated from a criminal charge in the eyes of the law may have still been guilty and been ethically irresponsible. The relationship that clearly exists between law and ethics is now being pressed by the new technology. Recent cases that have come before the courts indicate just how complex the issues are. They highlight the fact that there is a need for the establishment of suitable decision-making processes to deal with the issues and to provide for some certainty and consistency in approach. Unethical behavior: Unethical behavior is an action that falls outside of what is considered morally right or proper for a person, a profession or an industry. Individuals can behave unethically, as can businesses, professionals and politicians. 38


The roots of unethical behavior: There are certain factors that make the employees think and act in unethical ways. Some of the influencing factors are ‗pressure to balance work and family, poor communications, poor leadership, long work hours, heavy work load, lack of management support, pressure to meet sales or profit goals, little or no recognition of achievements, company politics, personal financial worries, and insufficient resources‘. Q-6. What are the elements of organizational conflict? A conflict of interest can be actual, potential or perceived – briefly describe. CMA Adapted- December 2015 Answer. The elements of organizational conflict: Managerial expectations: It is the job of an employee to meet the expectations of his manager, but if those expectations are misunderstood, conflict can arise. Breakdown in communication: If a department requires information from another department in order to do its job, and the second department does not respond to the request for information, a conflict can arise. Some interdepartmental disagreements might trigger a nonresponsive attitude that can quickly become an internal conflict. Misunderstanding the information: Internal conflict can sometimes arise as the result of a simple misunderstanding. One person may misunderstand information, and that can trigger a series of conflicts. Lack of accountability: Organizational conflict might arise from frustration. One source of frustration is a lack of accountability. If something has gone wrong, and no one is willing to take responsibility for the problem, this lack of accountability can start to permeate throughout the entire company until the issue is resolved. A conflict of interest can be actual, potential or perceived: A conflict of interest can be actual, potential or perceived and may or may not lead to negative outcomes. An actual conflict of interest is one that has already occurred or currently exists. A potential conflict of interest is one that could possibly develop in the future. A perceived conflict of interest occurs when others perceive that a conflict of interest may influence a nurse‘s judgment.

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CHAPTER - 3 CORPORATE GOVERNANCE

3.1. DEFINITION OF CORPORATE GOVERNANCE Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. 3.2. ROLE OF CORPORATE GOVERNANCE One of the most important roles of corporate governance is to ensure that strategic decisions are made in the interest of those with a stake in successful outcomes. Boards have increasingly become more focused on corporate shareholders, but a shift may be beginning to occur. The interests of stakeholders, such as customers, potential customers and noncustomers impacted by the decisions of a company, may begin to get attention as corporate governance plays an increasingly strategic role. Policy setting: Corporate governance is the system used to direct and control organizations. One of the many important roles played by corporate boards and executive committees is to establish and enforce policies deemed necessary for the effective operation of the company. These may include codes of ethical conduct towards customers, vendors, employees and shareholders, input into the organization's structure, as well as approval of functional positions and responsibilities. This may include input into the corporate culture, or a host of subtle governance cues that affect the transparency or opaqueness of strategic decision making. Establishing corporate strategy: An organization's corporate board must be intimately involved with establishing a clear definition for the organization's purpose and desired outcomes. If a company sets the goal to become the global leader in telecom technology for the military market, for instance, then corporate objectives, strategic plans, financial allocations and measurable outcomes should all be measured against their ability to move the company toward that goal. If resources are being allocated to places that do not support this strategic goal, then the board's due diligence must identify the reason why and give input into which is off-strategy: the strategic goal itself or the resource actions that appear initially to be out-of-sync. Assurance that actions support strategic positions: A company's executive team is directly accountable to the board of directors. This requires that major corporate decisions and results tracked against the corporate goals should be 40


vetted, if not by the full board, then by the board's executive committee. Key strategic actions, such as mergers and acquisitions, major new market entries, exiting markets, closing plants, or changing the diversification mix or pricing position, are examples of decisions that require the oversight of corporate governance. Monitoring investment decisions and capital investments: It is the responsibility of the corporate board to review and understand the financial statements of the company and to guide the prudent investment of funds to maximize net income and returns. Especially since the Sarbanes-Oxley Act of 2002 which introduced new responsibilities for financial reporting, corporate boards must be vigilant regarding the strategic impact of new requirements for internal controls. Corporate boards must also review and understand product portfolio and support the executive management team, offering strategic oversight regarding adjustments to the product mix, approving or shifting capital investment to product categories with the most potential to maintain and grow revenue streams and manage expenses. At the same time, corporate board members have a difficult task: helping the executive team balance the short-term goals so desired by shareholders with the long-term investment necessary to ensure the company's future. Accountability to stakeholders: From a governance perspective, accountability, while often focused on stock shareholders, can sometimes become something heretofore unconsidered. Historically, business school curriculum has emphasized responsibility primarily for stock shareholder returns, leaving the responsibilities of a corporation to be a good corporate citizen often overlooked. As stock prices and quarterly dividends have taken center stage, long-term investments are often set aside. Critical aspects of corporate governance responsibilities, such as infrastructure investment, plant retooling, workplace safety or disaster planning, have often been ignored or delayed past safe time parameters. The Gulf oil disaster in 2010 demonstrated questionable judgment by the corporate governance of British Petroleum (BP). While the lapse was perhaps shared by many oil producers, it followed years of unprecedented revenue growth and shareholder returns. As unprecedented profits rolled in, it appeared that little to no corporate investment was designated to technology, safety inspections or deep water disaster response plans, even as oil reserves were tapped in deeper and deeper water. Surely the stakeholders in this disaster go far beyond BP shareholders and include the fishermen and small business people whose livelihoods were destroyed, the wildlife being killed by it and the people of the Gulf, whose lives would be impacted for decades to come. A corporate board that does not prepare for crisis, or consider the broad impact of their operational decisions, is not fulfilling its board mandate. 3.3. PRINCIPLES OF CORPORATE GOVERNANCE When corporate governance is done properly, it allows the corporation to work smoothly due to the existence of a clear level of accountability and communication amongst the organization, as well as people understanding what their roles and responsibilities are. To properly understand and utilize corporate governance it is important to understand and follow its most important principles. These principles help establish the roles and 41


responsibilities of the key members of the corporation. The general principles of all forms of corporate governance are generally related to the shareholders, board members, and stakeholders. In addition to this, corporate governance also places a strong emphasis on the behavior of the corporation and how much the corporation discloses to the public. Below you can find a detailed explanation of the principles that the corporate governance follows and the people that these principles have an effect on. Keep the interest of stakeholders in mind: Corporate governance acknowledges that the stakeholders in the company must be recognized in all areas of society, the market, legality, and their contracts. The stakeholders are important members of the corporation that don‘t hold any shares. Stakeholders include people such as investors, creditors, customers, suppliers, and employees. Treating shareholders equally: As a corporation, the business should not only respect shareholders and their rights, but help the shareholders when it comes to exercising their rights. The best way this is done is by allowing and encouraging shareholders to participate in the activities in the company such as meetings. Identifying the roles of the board of directors: The board of the directors is those that stand at the head of a corporation. The responsibilities of the board are diverse and it requires people needing both skill and knowledge to evaluate employee performance. In addition to this, the corporate governance helps to make sure that the board has the level of commitment and the size that it needs in order to properly run the business. Ethical behavior: Ethics and integrity are also key principles of corporate governance. The integrity of anyone placed in corporate office or in the board should have a high level of integrity. They must also follow a code of conduct and exhibit ethical behavior during the decision making process of the business. Transparency: The final principle of corporate governance is the concept of disclosure or transparency. This is the idea that the corporation should always let it be known what the responsibilities and duties are of those that work for the corporation as well as who is management in order to keep stakeholders accountable. Another aspect of transparency is disclosing material related to the corporation that should be given out in a way that promises anyone who is invested in the company can have clear access to information. 3.4. OBJECTIVES OF CORPORATE GOVERNANCE Followings are the major objectives of corporate governance: 42


Transparency and full disclosure Good corporate governance aims at ensuring a higher degree of transparency in an organization by encouraging full disclosure of transactions in the company accounts. Full disclosure includes compliance with regulations and disclosing any information important to the shareholders. For example, if a manager has close ties with suppliers or has a vested interest in a contract, it must be disclosed. Also, directors should be independent so that the oversight of the company management is unbiased. Transparency involves disclosure of all forms of conflict of interest. Accountability A corporate governance structure encourages accountability of the management to the company directors and the accountability of the directors to the shareholders. Through hiring independent directors, a company aims to create good corporate governance. The compensation of the chief executive officer has to be approved by the company directors to ensure that the compensation structure is fair and in the best interests of the shareholders. Any discrepancies in the company accounts or malfunctioning of the company is closely watched by the board of directors. The board has a right to question strategic decisions. Equitable treatment of shareholders A corporate governance structure ensures equitable treatment of all the shareholders of the company. In some organizations, a particular group of shareholders remains active due to their concentrated position and may be better able to guard their interests; such groups include high-net-worth individuals and institutions that have a substantial proportion of their portfolios invested in the company. However, all shareholders deserve equitable treatment, and this equity is ensured by a good corporate governance structure in any organization. Self-evaluation Corporate governance allows firms to evaluate their behavior before they are scrutinized by regulatory bodies. Firms with a strong corporate governance system are better able to limit their exposure to regulatory risks and fines. An active and independent board can successfully point out the loopholes in the company operations and help solve issues internally. Increasing shareholders' wealth The main objective of corporate governance is to protect the long-term interests of the shareholders. Ira Millstein, in his book, "Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets," mentions that firms with strong corporate governance structures are seen to have higher valuation premiums attached to their shares. This shows that good corporate governance is perceived by the market as an incentive for shareholders to invest in the company. 3.5. IMPORTANCE OF CORPORATE GOVERNANCE Through seeing how corporate governance works, you can tell why it is important. It helps streamline the process and gives people accountability. The point of corporate governance is to help the decision making process. As mentioned above in the principles of corporate 43


governance, one of the main goals is to clearly explain to the board, the stakeholders, and the shareholders what their duties and responsibilities are within the company. With knowing those roles and responsibilities, the people within the corporation can understand what they are held accountable for. For example, the board has the responsibility of properly evaluating the management in the company. If the company has poor management, then it is the fault of the board for not properly evaluating the manager. In this regard, the blame cannot be placed on other members of the corporation. This prevents situations in which there is no way to know who is accountable for what action. Accountability is what helps people within the company make decisions, whether it is finding out what person should be terminated from their position due to the mistakes that they‘ve made or who should be acknowledged for their good work due to doing something exceptional in their field. With good corporate governance, it‘s pretty simple to know what the key members of the business are supposed to do. Lowering risk: Another important aspect of corporate governance is mitigating or reducing the amount of risk that is involved. Through corporate governance, scandals, fraud, and criminal liability of the company can be prevented or avoided altogether. Since the people involved in the organization know what they are accountable for, the actions of one person doesn‘t mean the downfall of the entire corporation. Properly identifying what the roles in the corporation are allows decisions to be made that won‘t have a negative effect on the overall corporation, and it means that the offender can be much more quickly identified and punished instead. Corporate governance is also great because it is a form of self-policing. Before outside forces are able to do anything to a corporation, it‘s possible for the corporation to handle matters itself. With corporate governance, everyone is held to a specific standard and communication is made easier due to their being an established hierarchy and role that everyone involved in the corporation plays. This level of handling business on its own instead of being forced into making decisions outside of the company helps keep the corporation sustaining itself. Public acceptance: In terms of business, a company with corporate governance is widely accepted by the public. This is mostly due to the idea of disclosure and transparency that comes with corporate governance. With full disclosure and the ability for people who work in the business to get information, as well as the general public, there is a higher level of trust. There‘s also the fact that due to the way that corporate governance is setup, there is a lower chance of fraud and company-wide criminal activity, which helps gain the trust of the public as well. Public image: Today many corporations hold a high level of corporate governance. This is because a corporation has a public image to maintain. With corporate governance, the corporation takes 44


more responsibility for its actions, and also allows it to keep tabs on what is going on as well as helps those in charge remain more aware of the public image of the corporation. With the way that businesses are run today, it can be difficult for a corporation to become successful just by having a high level of profit. Due to the fact that a corporation is also evaluated based on its image, corporate governance is established to help ensure that image remains clean. Making sure there is a high level of awareness, ethical behavior, and understanding of what the public wants is all encompassed in corporate governance. Having a successful business: Corporate governance is an aspect of business that‘s become incredibly important in recent years, but it isn‘t the only part of business a person has to understand. If you‘ve been holding on to a business idea, but you haven‘t gotten it up off the ground then you will need to learn quite a bit. 3.6. RULES AND PRINCIPLES BASED APPROACHES TO GOVERNANCE There are two broad approaches to the regulation of corporate governance provisions: (a) Rules-based, and (b) Principles-based. In a rules-based country (jurisdiction), all provisions are legal rules, underpinned by law, transgression against which is punishable in law. Often characterised as a ‗box ticking‘ approach, full compliance is required by all companies at all times (excepting where dispensations are granted, again, under the provisions of the law). In a principles-based jurisdiction, legal force applies to the provisions of company laws but additional listing rules are enforced on a ‗comply or explain‘ basis. It is important to note that compliance is not voluntary in that the provisions can be ignored, but that provisions may not be complied with in full, usually for a limited period if the full reason for non-compliance is explained to the shareholders. This allows for the market to judge the seriousness of the non-compliance and to potentially re-appraise or revalue the company as a result. Evaluation of remark: The remark in the Geeland Code strongly argues in favour of a principles-based approach to corporate governance. In particular, it is critical of rules-based codes that would, for example, place a blanket ban on combining the roles of chairman and chief executive. In order to allow for differences between circumstances, it is arguing for flexibility and ‗common sense‘. Arguments in favour of the remark: In most cases, compliance with general principles is cheaper than compliance with a detailed ‗box ticking‘ regime. A common criticism of rules-based approaches is the expense of compliance including the establishment of information systems to meet reporting 45


requirements (for example on internal controls), consultancy costs, increased management costs and reporting costs. Where some flexibility is possible, the principles-based approach allows some ‗common sense‘ to be employed in the extent of detailed compliance. A principles-based approach is flexible and allows companies to develop their own approach, perhaps with regard to the demands of their own industry or shareholder preferences. This places the emphasis on investor needs rather than legal demands. There may be no reason, for example, why companies in lower risk industries should be constrained by the same internal control reporting requirements as companies in higher risk industries. As long as shareholders recognise and are satisfied with this, the cost advantages can be enjoyed. An example of the flexibility afforded by a principles-based approach is that it allows for transitional arrangements and unusual circumstances. Details such as the contract terms of directors may need to be varied to meet individual needs or the notice periods might similarly be varied. In the event of a sudden, unexpected change such as a death in service, a company can enter a phase of technical non-compliance but, with suitable explanation of the reason for noncompliance, most shareholders will nevertheless be satisfied. It avoids the need for expensive and inconvenient monitoring and support structures, the costs of which are ultimately borne by the companies themselves (through stock market or regulatory bodies) or by the taxpayer. The costs and inconvenience of policing compliance with rules has been shown to be material in some situations, especially in smaller companies. Similarly, the costs of a large national ‗watchdog‘ to monitor and enforce detailed compliance is considerable. Arguments against the remark: There may be confusion over what is compulsory under law and what is principles-driven under listing rules. A lack of clarity might be present, especially where compliance expertise is not available to management (such as in some smaller companies) between legally-required compliance and listing rules which are subject to comply or explain. This may confuse some management teams and cause non-compliance borne of lack of advice and information. A principles-based approach assumes that markets are capable of understanding the seriousness of any temporary or more lengthy periods of non-compliance and of revaluing the shares as a result. Non-specialist shareholders may not understand why a given provision is not complied with nor appreciate the potential consequences of the non-compliance. Cleverlyworded comply or explain statements might mislead shareholders.

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A ‗box ticking‘ approach offers the advantage of gaining full compliance at all times (i.e. all boxes are actually ticked) whereas a principles-based approach allows some bad practice to continue. A full compliance regime is likely to provide a greater overall confidence in regulation and this, in turn, will further support long-term shareholder value. A rules-based approach provides standardisation and prevents any individual companies gaining competitive or cost advantages with lower levels of compliance. This creates a ‗level playing field‘ in which all competitors in an industry understand what is required. 3.7. CORPORATE SOCIAL REPONSIBILITY Corporate Social Responsibility (CSR) is defined as the voluntary activities undertaken by a company to operate in an economic, social and environmentally sustainable manner. It is a corporation's initiatives to assess and take responsibility for the company's effects on environmental and social wellbeing. The term generally applies to efforts that go beyond what may be required by regulators or environmental protection groups. CSR may also be referred to as "corporate citizenship" and can involve incurring shortterm costs that do not provide an immediate financial benefit to the company, but instead promote positive social and environmental change. Corporate social responsibility includes six types of corporate social initiatives: i. Corporate philanthropy: company donations to charity, including cash, goods, and services, sometimes via a corporate foundation ii. Community volunteering: company-organized volunteer activities, sometimes while an employee receives pay for pro-bono work on behalf of a non-profit organization iii. Socially-responsible business practices: ethically produced products which appeal to a customer segment iv. Cause promotions: company-funded advocacy campaigns v. Cause-related marketing: donations to charity based on product sales vi. Corporate social marketing: company-funded behavior-change campaigns All six of the corporate initiatives are forms of corporate citizenship. However, only some of these CSR activities rise to the level of cause marketing, defined as "a type of corporate social responsibility (CSR) in which a company's promotional campaign has the dual purpose of increasing profitability while bettering society." Companies generally do not have a profit motive when participating in corporate philanthropy and community volunteering. On the other hand, the remaining corporate social initiatives can be examples of cause marketing, in which there is both a societal interest and profit motive. 3.8. CORPORATE GOVERNANCE CODES The Corporate governance code sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit, and relations with shareholders. 47


Listed companies are required to report on how they have applied the main principles of the code, and either to confirm that they have complied with the code's provisions or – where they have not – to provide an explanation. The main principles of the code: Leadership Every company should be headed by an effective board which is collectively responsible for the long term success of the company. There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company's business. No one individual should have unfettered powers of decision. The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role. As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy. Effectiveness The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge. The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. All directors should be submitted to re-election at regular intervals, subject to continued satisfactory performance. Accountability The board should present a fair, balanced and understandable assessment of the company's position and prospects. 48


The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems. The board should establish formal and transparent arrangement for considering how they should apply the corporate reporting, risk management and internal control principles and for maintaining an appropriate relationship with the company's auditors. Remuneration Executive director remuneration should be designed to promote long term success of the company. Performance-related elements should be transparent, stretching and rigorously applied. There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration. Relations with shareholders There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should use general meetings to communicate with investors and to encourage participation. Who must comply the code: All companies incorporated in the UK and listed on the main market of the London Stock Exchange are required under the Listing Rules to report on how they have applied the corporate governance code in their annual report and accounts. Overseas companies listed on the main market are required to disclose the significant ways in which their corporate governance practices differ from those set out in the code. 3.9. POLICIES AND PROCEDURES FOR „BEST PRACTICE‟ COMPANIES For employees working at the company: Employee Position Descriptions – Define the role of every employee, including their level of responsibility, amount of authority for decision-making, overarching goals and specific tasks. Also create methods for monitoring performance and developing employees through training. Personnel Policies – Clearly state business hours, terms of employment (hiring and termination), wages or salary (and bonuses, if any), insurance and health benefits, paid vs. unpaid vacation days, sick leave, and retirement.

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Organizational Structure – Create a chart with each person‘s name and title showing how each person fits into the structure of the organization. Disciplinary Action – Address issues of honesty, performance, safety and misconduct, and determine what constitutes a violation of company policy, as well as how employees will be disciplined if they violate certain rules. No Retaliation – Make sure to have a no retaliation policy to protect your employees and the company. Safety – Use industry best practices and relevant local, state and federal laws as guidelines to create rules detailing what safe behavior at work looks like, how to use safety equipment, how to report safety hazards, etc. Technology – Establish what‘s acceptable and what‘s not in regards to Internet, email and social media usage for personal purposes at work. For customers doing business with the company: Privacy – Protect employees, the company and your customers by establishing a policy that encourages transparency and trust with your customers. Credit – Determine the terms of opening an account and building good credit with your company. Set an acceptable amount of time for payment, and establish consequences when payment is overdue or not received. Confidentiality – Protect sensitive information, and be sure to cover relationships with vendors, customers and other suppliers.

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PAST EXAM QUESTIONS AND ANSWERS Q-1. What are the objectives of corporate governance? CMA Adapted- June 2017 Answer. Followings are the major objectives of corporate governance: Transparency and full disclosure Good corporate governance aims at ensuring a higher degree of transparency in an organization by encouraging full disclosure of transactions in the company accounts. Full disclosure includes compliance with regulations and disclosing any information important to the shareholders. For example, if a manager has close ties with suppliers or has a vested interest in a contract, it must be disclosed. Also, directors should be independent so that the oversight of the company management is unbiased. Transparency involves disclosure of all forms of conflict of interest. Accountability A corporate governance structure encourages accountability of the management to the company directors and the accountability of the directors to the shareholders. Through hiring independent directors, a company aims to create good corporate governance. The compensation of the chief executive officer has to be approved by the company directors to ensure that the compensation structure is fair and in the best interests of the shareholders. Any discrepancies in the company accounts or malfunctioning of the company is closely watched by the board of directors. The board has a right to question strategic decisions. Equitable treatment of shareholders A corporate governance structure ensures equitable treatment of all the shareholders of the company. In some organizations, a particular group of shareholders remains active due to their concentrated position and may be better able to guard their interests; such groups include high-net-worth individuals and institutions that have a substantial proportion of their portfolios invested in the company. However, all shareholders deserve equitable treatment, and this equity is ensured by a good corporate governance structure in any organization. Self-evaluation Corporate governance allows firms to evaluate their behavior before they are scrutinized by regulatory bodies. Firms with a strong corporate governance system are better able to limit their exposure to regulatory risks and fines. An active and independent board can successfully point out the loopholes in the company operations and help solve issues internally. Increasing shareholders' wealth The main objective of corporate governance is to protect the long-term interests of the shareholders. Ira Millstein, in his book, "Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets," mentions that firms with strong corporate governance structures are seen to have higher valuation premiums attached to their shares. 51


This shows that good corporate governance is perceived by the market as an incentive for shareholders to invest in the company. Q-2. Bangladesh Securities & Exchange Commission has issued some guidelines in terms of Corporate Governance, of those few are most important. Describe any two of those which really have a good implication. CMA Adapted- June 2017 Answer. Bangladesh Securities & Exchange Commission has issued some guidelines in terms of Corporate Governance, two of those which really have a good implication are as follows: - it includes provisions to ensure true independence of the board and its committees, minimum educational and professional service requirements for non-independent directors, and annual assessments of the board members. - it minimizes the lack of flexibility in the revised guidelines Q-3. Explain the qualifications, powers and duties of the company secretary. CMA Adapted- June 2017 Answer. Qualifications of the company secretary: Professional qualifications: i) The secretary must have sound knowledge about company law, labor law, income tax law, banking and insurance law and foreign exchange regulation act. ii) He must have proper knowledge about various books of accounts of the company iii) He must be capable to prepare budgets iv) He must have sound practical knowledge of secretarial practice and the different methods of filing, indexing, reports and minutes v) He must also have through knowledge of the law relating to the conduct and procedure at company meetings vi) He must possess a good command of the English language vii) He needs to have the capability of organizing the office efficiently and directing and controlling his subordinates effectively. Personal qualifications: i) A company secretary must have high sense of duty and responsibility. ii) He must have self-control, sympathy for others and a strong true sense of justice iii) He should be a man of personality, integrity and command. Powers of the company secretary: The powers of the Secretary are limited to a few powers given to him by statute and such other powers as may be delegated to him by the board of directors. 52


The Secretary has power to enter into contracts relating to the day to day administration of the company. Where the Secretary enters into contracts within his apparent or ostensible authority, his actions will bind the company even if he had no authority to act. Duties of the company secretary: Statutory Duties The majority of a Company Secretary‘s statutory duties are set out in the Companies Acts and include the following: - Signing the Annual Return; - Certifying the Financial Statements attached to the annual return; - Making a statement of affairs in a winding up or receivership; - Signing relevant application / statutory declaration when re-registering a company as a different type of company; and - Making a statutory declaration required for a public limited company before it may carry on business. A Company Secretary, as an authorised officer of a Company, can also sign tax registration forms and tax returns on behalf of the company. The taxes acts hold the Company Secretary as one of the responsible officer‘s in relation to a company‘s tax affairs and failure by the company to comply with the requirements under the taxes acts may lead to additional penalties being imposed on the Company Secretary. Duty of Disclosure The Company Secretary must disclose certain information for inclusion in the Company Register, including: - Name; - Address; - Registered office address (if the secretary is a company itself); - Interests held in shares and debentures of the company; and - Details of any shares or debentures purchased or sold in the company, its holding company, any subsidiary or any subsidiary of its holding company. Duty To Exercise Due Care, Skill and Diligence The Company Secretary must exercise due care, skill and diligence that can be reasonably expected from a person with their level of knowledge and experience. Administrative Duties Depending on the size of the company, a Company Secretary will have administrative duties which may include the following: - Keeping minutes of Board and General Meetings; - Maintaining the company registers; - Filing documents with the Registrar of Companies within the specified time frame; - Communicating with the members of the company; - Providing legal and administrative support to directors; 53


- Administering share transfers; and - Ensuring the company letterhead bears the appropriate details. Q-4. “Social Responsibility is paramount while we are dealing with all stakeholders” – give your opinion with justification. CMA Adapted- December 2016 Answer. Shareholder activism on Social Responsibility issues continues to rise, necessitating further engagement between companies and their shareholders and other stakeholders. The Social Responsibility report due to the typical breadth of information that is most relevant to stakeholders‘ interests, can be a key component of a company‘s stakeholder engagement strategy. The Social Responsibility report, for instance, may be used to inform stakeholders how a company has addressed or is addressing stakeholders‘ Social Responsibility concerns and incorporating them into the company‘s strategic decision-making processes. Therefore, Social Responsibility is paramount while we are dealing with all stakeholders. Q-5. “Corporate governance is the system by which companies are directed and controlled”, explain. CMA Adapted- December 2016 Answer. Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance Q-6. Distinguish between rule-based and principle-based approaches to governance. Whether the „Corporate Governance Notification‟ issued by Bangladesh Securities & Exchange Commission (SEC) is rule-based or principle-based, explain with logic and reference. CMA Adapted- December 2016 Answer. Distinction between rule-based and principle-based approaches to governance: In a rules-based country (jurisdiction), all provisions are legal rules, underpinned by law, transgression against which is punishable in law. Often characterised as a ‗box ticking‘ approach, full compliance is required by all companies at all times (excepting where dispensations are granted, again, under the provisions of the law).

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In a principles-based jurisdiction, legal force applies to the provisions of company laws but additional listing rules are enforced on a ‗comply or explain‘ basis. It is important to note that compliance is not voluntary in that the provisions can be ignored, but that provisions may not be complied with in full, usually for a limited period if the full reason for non-compliance is explained to the shareholders. The ‗Corporate Governance Notification‘ issued by Bangladesh Securities & Exchange Commission (SEC) is rule-based since from the definition we know that in a rules-based jurisdiction, all provisions are legal rules, underpinned by law, transgression against which is punishable in law. Q-7. Describe the qualification and disqualification of Independent Directors according to the „Corporate Governance Notification‟ for listed companies issued by SEC. CMA Adapted- December 2016 Answer. The qualification of Independent Directors: a) To hold shares not over 0.5% in paid up shares of the company, subsidiary, joint venture or any corporate with conflicting interest, by totally counting the shares held by related persons and to impose other qualifications as imposed by SEC. b) No participation in management, not being staff/employee/consultant with regular salary or control person of the company, subsidiary, joint venture or any corporate with conflicting interest, at present and past 2 years before appointment. c) No relation in bloodline or any registration as father, mother, spouse, family member and child including spouse of child with the management who is major shareholder, control person or person to be nominated into management or control person of the company or subsidiary. d) No business relation with the company, subsidiary, joint venture or any corporate with conflicting interest, at present and past 2 years before appointment in the following manner: i. No relation in the manner giving professional service, for instance, auditor, other professional service with over 2 million baht remuneration per year, such as, legal counsel, financial counsel, property appraiser, etc. ii. No relation in trade/business with its value from 20 million baht up or from 3% of total tangible assets value of the company, any amount lower. However, in the consideration of values to include with any item incurred during 6 months before the latest transaction. e) Not being a director appointed for representation of company directors, major shareholders or shareholder related with the major shareholder of the company. 55


The disqualification of Independent Directors: A person shall be disqualified for appointment as independent director of a company, if a) he is unsound mind and stands so declared by a competent court. b) he is applied to be adjudicated insolvent and his application is pending. c) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than 6 months and a period of 5 years has not elapsed from the date of expiry of the sentence: Provided that if a person has been convicted of any offense and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as an independent director of any company. d) an order disqualifying him for appointment as an independent director has been passed by a court or tribunal and the orders is in force. e) he has been convicted of the offense dealing with related party transactions under section 188 at any time during the last preceding 5 years. Q-8. Briefly describe the recent developments of corporate governance in Bangladesh. Who can be an “Independent Director”? Explain. CMA Adapted- June 2016 Answer. The recent developments of corporate governance in Bangladesh: (a) Like many other developing nations, Bangladesh has also adopted the Anglo-American shareholder model of corporate governance. (b) Analysis of behaviors of principal sectors in the Bangladeshi corporate governance scenario, using new institutionalism as a theoretical foundation, then reveals that such adoption may be promoted by exposure to legitimacy threats rather than efficiency reasons. Independent Director: An independent director is a person other than an executive officer or employee of the company. He is a director who either does not hold any share in the company or holds less than one percent share of total paid-up shares of the company and he is not a sponsor of the company and he is not connected with the company‘s any sponsor or director or shareholders who holds one percent or more shares of the total paid-up shares of the company. His family members also should not hold above mentioned shares in the company. Q-9. Critically discuss the „Corporate Governance Notification‟ for listed companies issued by the Bangladesh Securities Exchange Commission. CMA Adapted- June 2016 Answer. 56


Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Each listed company may determine its own policies, but all listed companies should address the ‗Corporate Governance Notification‘, including the following: Corporate opportunities: Employees, officers and directors should be prohibited from (a) taking for themselves personally opportunities that are discovered through the use of corporate property, information or position. Confidentiality: Employees, officers and directors should maintain the confidentiality of information entrusted to them by the listed company or its customers, except when disclosure is authorized or legally mandated. Fair dealing: Each employee, officer and director should endeavor to deal fairly with the listed company's customers, suppliers, competitors and employees. Protection and proper use of listed company assets: All employees, officers and directors should protect the listed company's assets and ensure their efficient use. Compliance with laws, rules and regulations: The listed company should proactively promote compliance with laws, rules and regulations, including insider trading laws. Encouraging the reporting of any illegal or unethical behavior: The listed company should proactively promote ethical behavior. The listed company should encourage employees to talk to supervisors, managers or other appropriate personnel when in doubt about the best course of action in a particular situation. Q-10. What is corporate governance? Briefly describe the principles of good corporate governance. CMA Adapted- December 2015 Answer. Corporate governance: Corporate governance is the system by which corporate entities are directed and controlled. The structure of corporate governance specifies the distribution of right and responsibilities among company‘s different participants such as board of directors, management, shareholders and other stakeholders. The principles of good corporate governance are described below: Fairness: Fairness refers to the equal treatment, for example, all shareholders should receive equal consideration for whatever shares they hold.

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Accountability: Corporate accountability refers to the obligation and responsibilities to give an explanation or reason for the company‘s actions that are conducted. The board should maintain sound risk management and internal control systems in this regard. Responsibility: The Board of Directors is given authority to act on behalf of the company. They should accept full responsibility for the powers that it is given and the authority that it exercises. Transparency: A principle of good governance is that stakeholders should be informed about the company‘s activities, what it plans to do in the future and any risks involved in its business activates. Q-11. Briefly describe the recent development of corporate governance in the Bangladesh with the Board size. Who would be an „Independent Director‟? CMA Adapted- December 2015 Answer. The recent development of corporate governance in the Bangladesh: i) Like many other developing nations, Bangladesh has also adopted the Anglo-American shareholder model of corporate governance. ii) Analysis of behaviors of principal sectors in the Bangladeshi corporate governance scenario, using new institutionalism as a theoretical foundation, then reveals that such adoption may be promoted by exposure to legitimacy threats rather than efficiency reasons. Independent Director: An independent director is a person other than an executive officer or employee of the company. An independent director is a director who either does not hold any share in the company or holds less than one percent share of total paid-up shares of the company and he is not a sponsor of the company and he is not connected with the company‘s any sponsor or director or shareholders who holds one percent or more shares of the total paid-up shares of the company. His family members also should not hold above mentioned shares in the company. Q-12. Company secretary is an advisor to the Board of Directors- Do you agree? How? Explain. CMA Adapted- August 2015 Answer. Yes, I agree to the statement because a secretary cum director has to play dual role. As a member of the Board he is an agent of the company and a trustee of its funds and properties. On the other hand, as secretary he is a professional and principal officer of the company to safeguard and protect the interests of the company. However, whether or not as a director, the 58


secretary also requires to play an advisory role in the company. In that case he should remember the order of preference in case of any conflict in decisioning which is that: - Management order cannot go past the Board resolution - Board resolution cannot move beyond members‘ resolution - Members resolutions cannot override the articles of association - Articles of association cannot go beyond the Companies Act or any other legislation - Any act cannot surpass the constitution of the country. Q-13. “Company Secretary is the chief compliance officer of the company”- Discuss. CMA Adapted- April 2015 Answer. The company secretary plays an important role of a company as their virtue and as per law and contract. The success of a company management usually depends on the efficiency and capability of the company secretary. In an organizational structure, the position of the company secretary is just below that of a Director. We can realize the importance of a company secretary in today‘s complex management through the following points: - Status as an employee of the company - Status as an officer or agent of the company - Status as an advisor of the company - Status as a custodian of the company - Status as a chief administration officer or chief compliance officer of the company - Status as a laison among the employees and other parties of the company. From the above discussion we can conclude that the company secretary works under the direct control and supervision of the Board of Directors. He is a spokesman of the Board of Directors. If the Board of Directors is compared to the brain of the company, he can be said to be its eyes, ears and hands that is he is an eye witness of the company. The company cannot run effectively without the company secretary. Q-14. What is code of conduct of board of directors as per corporate governance guidelines 2012 of BSEC? CMA Adapted- April 2015 Answer. Every board of director shall be bound by code of conduct of the company. The code includes the following guidelines for the board of directors. a) Support ethical standards of integrity b) Act objectively and constructively while exercising his duties c) Dedicate sufficient time and attention to his professional obligations for balanced decision making d) Not abuse his position for the purpose of indirect personal advantage or advantage for any associated person e) Assist the company in implementing the best corporate governance practices f) Safeguard the interests of all stakeholders particularly the minority shareholders 59


Q-15. Discuss the role of company secretary as a catalyst for good governance of a company CMA Adapted- August 2014 Answer. A Secretary cum Director has to play dual role. As a member of the Board, he is an agent of the company and a trustee of its funds and properties. On the other hand, as Secretary he is a professional and principal officer of the company to safeguard and protect the interests of the company. However, whether or not as a Director, the Secretary also requires to play an advisory role in the company. The other major roles of a company secretary are: i) Convene a Board or shareholders meetings in time ii) Sign notices of such meeting iii) Watch that the notices are dispatched properly and timely iv) Send the annual and half yearly accounts to shareholders. v) Prepare minutes of the meeting timely and correctly. vi) It is his role to see before execution of various deeds, contracts and agreements, where the company is a party, are properly framed. vii) If authorized, the company Secretary should be one of the signatory of such agreements or at least a knowledgeable witness. viii) It is his role to prepare the allotment list, process the share transfer instruments and make out the definitive share certificates for approval of the Board. Q-16. As a company secretary, you have been asked by the chairman of a company, as to what are the requirements of the Companies Act 1994, regarding the holding of an Annual General Meeting? You are also required to state the ordinary business of an Annual General Meeting of a company. CMA Adapted- August 2014 Answer. An annual general meeting is a general meeting that certain companies are required to hold each year: - A public limited company must hold an Annual General Meeting each year within the period of six months beginning with the date following its accounting references date, and - A private limited company is not required to hold an Annual General Meeting each year. The requirements of the Companies Act 1994, regarding the holding of an Annual General Meeting (AGM): a) Notice of an annual general meeting: The notice period required to convene an AGM depends upon the type of company: i) A private company can hold an AGM by giving notice of at least 14 days to its members. ii) A public company (not a traded company) can hold an AGM by giving 21 days notice to its members. 60


iii) A traded public company can hold an AGM by giving notice of at least 21 days to its members. b) Short notice of an AGM: It is possible to call an AGM of a private company or a non-traded public company on shorter notice if such shorter notice is agreed by the members. c) Special notice of an AGM: Special notice of an AGM is required where at that meeting there is to be proposed a resolution to: - remove a director by ordinary resolution - appoint somebody in place of director - remove an auditor from office - appoint auditor d) Quorum requirements: An AGM must satisfy the relevant quorum requirements for business to be validly transacted at the meeting. If the relevant quorum requirements are not satisfied, any business transacted will be void. In practice, quorum requirements are often set out in a company‘s articles of association. Where the articles contain no such provision, the relevant provisions will apply. In case of private company, if the number of member is less than six, the required number of member for quorum is two and if such number is more than six, the required number of member is three for the quorum. In case of public company, the number of members must be 5 for quorum irrespective of the number of members of the company. Q-17. Discuss the functions of the company secretary in a public listed company. CMA Adapted- April 2014 Answer. The functions of the company secretary in a public listed company: i) Convene a board or shareholders meeting in time ii) Sign notices of such meeting iii) Watch that the notices are dispatched properly and timely iv) Send the annual and half yearly accounts to shareholders v) Prepare minutes of the meeting timely and correctly vi) It is his function to see before execution of various deeds, contracts and agreements, where the company is a party, are properly framed vii) If authorized, the company secretary should be one of the signatory of such agreements or at least a knowledgeable witness.

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Q-18. As company secretary, please advise the chairman of your company the procedures to be followed on the followings: (a) The Board of Directors would like to declare Bonus shares against Revaluation Reserve. (b) The company wishes to go for IPO for Tk. 1000 crore. CMA Adapted- April 2014 Answer. (a) As a company secretary, I will advise the chairman of my company to follow the following procedures: i. To take steps as per relevant provisions ii. To convene a meeting of the Board of Directors iii. To issue a notice to the shareholders relating to the Annual General Meeting iv. To convene another meeting of Board of Directors to approve and pass provisional allotment list and resolution v. To give a public notice through newspapers regarding the closure of the register of members and transfer books vi. To issue allotment letters to the members along with a circular explaining how the allotment has been made. vii. To take necessary entries in the register of members viii. To prepare and issue new share certificate after obtaining signature of concerned Directors or Officers. (b) The procedures to be followed in case of IPO: i. If it is private company, to convert into public company ii. To appoint an issue manager iii. Apply to Securities and Exchange Commission for the consent of raising iv. Apply for the IPO placement determination v. Agreement with underwriter vi. To approve by SEC the issue of prospectus vii. To open subscription viii. To allotment of shares ix. Listing with DSE/CSE

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Q-19. How does a company secretary assist the chairman and the managing director in a public listed company? CMA Adapted- December 2013 Answer. One of the main tasks of the secretary is to convene and conduct meetings of the directors and shareholders. He should make ready necessary papers and documents which are likely to be needed at the meeting and arrange for other things as are incidental to it. If the chairman is to present a report at the meeting, the secretary should remind him of that in advance. If the chairman drafts the report, the secretary should supply him with all necessary references, notes information and data. Otherwise, the secretary should himself draft the chairman‘s 62


report and get it approved by him before the meeting. If it is necessary to distribute the report of the chairman among the members present, sufficient number of copies of the same should be ready beforehand for this purpose. Q-20. As a Company Secretary advise the chairman of Sonar Bangla Pharmaceuticals Limited what would be the procedures on the following: (a) The Board of Directors would like to declare Bonus shares against Revaluation reserve. (b) The company wishes to go for rights issue. CMA Adapted- December 2013 Answer. (a) Procedures of the company in case of declare bonus share: i. To take steps as per relevant provisions ii. To convene a meeting of the board of directors iii. To issue a notice to the shareholders relating to the Annual General Meeting iv. To convene another meeting of Board of Director to approve and pass provisional allotment list and resolution v. To give a public notice through newspapers regarding the closure of the register of members and transfer books vi. To issue allotment letters to the members along with a circular explaining how the allotment has been made. vii. To take necessary entries in the register of members viii. To prepare and issue new share certificate after obtaining signature of concerned directors or officers. (b) Procedures of the company in case of issue of right share: i. To take steps as per relevant provision ii. To convene a meeting of the board of directors iii. To issue a notice to the shareholders relating to the Annual General Meeting iv. To preserve provisional allotment lists of members on the basis of resolution passed in the Annual General Meeting v. To convene another meeting of Board of Directors to approve and pass provisional allotment list and resolution. vi. To dispatch letters of rights to the members along with the following form of acceptance, remuneration, acceptance by the nominee and request for additional shares vii. To make arrangement with the bankers of the company for the collection of money and acceptance forms. viii. To dispose of the shares, if no application has been received till the last date of application ix. To convene another board meeting after the expiry of the last date for receipt of application for adopting an allotment resolution x. To issue final allotment letters to the members or their nominees within 40 days from the date of closing of subscription xi. To file with the registrar a return of allotment within 60 days of allotment. xii. To take necessary entries in the register of members 63


Q-21. A company secretary is an eye witness to the Board. Do you agree with the statement? Explain in details. CMA Adapted- August 2013 Answer. The company secretary plays an important role of a company as their virtue and as per law and contract. The success of a company management usually depends on the efficiency and capability of the company secretary. In an organizational structure, the position of the company secretary is just below that of a director. We can realize the importance of a company secretary in today‘s complex management through the following points: i. Status as an employee of the company ii. Status as an officer or agent of the company iii. Status as an advisor of the company iv. Status as a custodian of the company v. Status as a chief administration officer or chief compliance officer of the company vi. Status as a laison among the employees and other parties of the company. From the above discussion we can conclude that the company secretary works under the direct control and supervision of the Board of Directors. He is a spokesman of the Board of Directors. If the Board of Directors is compared to the brain of the company, he can be said to be its eyes, ears and hands that is he is an eye witness of the company. The company cannot run effectively without the company secretary. Q-22. What are the qualifications and experience required and the duties of a company secretary of a public listed company? CMA Adapted- April 2013 Answer. The qualifications of a company secretary of a public listed company: Professional qualifications: i) The company secretary must have sound knowledge about company law, labor law, income tax law, banking and insurance law and foreign exchange regulation act. ii) He must have proper knowledge about various books of accounts of the company iii) He must be capable to prepare budgets iv) He must have sound practical knowledge of secretarial practice and the different methods of filing, indexing, reports and minutes v) He must also have through knowledge of the law relating to the conduct and procedure at company meetings vi) He must possess a good command of the English language vii) He needs to have the capability of organizing the office efficiently and directing and controlling his subordinates effectively. 64


Personal qualifications: i) A company secretary must have high sense of duty and responsibility. ii) He must have self-control, sympathy for others and a strong true sense of justice iii) He should be a man of personality, integrity and command. Q-23. What are the duties of a company secretary? CMA Adapted- April 2012 Answer. The duties of a company secretary: i. Convene a Board or shareholders meeting in time ii. Sign notices of such meeting iii. Watch that the notices are dispatched properly and timely iv. Send the annual and half yearly accounts to shareholders v. Prepare minutes of the meeting timely and correctly vi. It is his duty to see before exclusion various deeds, contracts and agreements, where the company is a party, are properly framed. vii. If authorized, the company secretary should be one of the signatory of such agreements or at least a knowledgeable witness viii. It is his duty to prepare the allotment list, process the share transfer instruments and make out the definitive share certificates for approval of the Board. Q-24. What are the rights, obligations and qualification of a company secretary as per law? CMA Adapted- April 2012 Answer. The rights of a company secretary: i. Controlling and supervising the activities of subcontractors ii. Receiving notice and attending meetings iii. Signing the documents and contract papers on which company seal is affixed iv. Exercising the powers as authorized by the Board of Directors v. Issuing testimonials to employees on behalf of the company. The obligations of a company secretary: i. The company secretary is responsible with the company for any fraud or wrong doing in the course of his employment. ii. He is responsible for maintaining secrecy of every matters of the company iii. He is responsible to file various returns in due time iv. He is responsible for the maintenance of various statutory registers also. The qualifications of company secretary: i. A sound academic background is must ii. A professional degree from ICMAB is desirable. But a degree in law or accounting / finance is also desirable. iii. He must be very conversant in the language of both Bengali and English with proficiency. 65


iv. He should be familiar with such legislations as company law, SEC laws, DSE/CSE listing regulations, etc. v. Computer literacy is must vi. He should be a man of personality, integrity and command. Q-25. What are the salient features of secretarial practices of a public Ltd. co? CMA Adapted- December 2011 Answer. The salient features of secretarial practices of a public Ltd. co. i. As a servant of the company: The secretary of a company is a servant of the company, whose duty is to act in accordance with instructions given to him by the directors. In the performance of his duties, the secretary can properly act only under the orders of the directors. A secretary is a mere servant; his position is that he is to do what he is told. ii. As an agent of the company: The secretary of a company, being the chief administrative officer of the company is also an agent of the company. As agent, he must conduct the business with reasonable care. It may be noted that he is an agent in the capacity of servant and cannot act for the company without authority from the directors except the matters covered within his administrative function. iii. As an officer of the company: The secretary is also an officer of the company. The secretary, like any other officer of the company, will be punishable with imprisonment, if he falsifies the books of the company or if he willfully and knowingly makes a material false statement in the balance sheet or in certain returns, reports or other documents or the company. Q-26. As a company secretary, advise the chairman about the procedures to be followed in the following cases: (i) The Board of directors would like to pay an interim dividend of a 25% (ii) The company wishes to go for IPO of taka 500 crores. CMA Adapted- August 2011 Answer. i) As a company secretary, I will advise the chairman to follow the following procedures in case of payment of interim dividend. a) To incorporate the recommended rate of dividend in the directors report. b) To issue notice of the closing of the share transfer books c) To obtain approval of the Board regarding all transfers received before the specified date d) To make the registrar of members up-to-date by entering in to transfer of share approved by the board. 66


e) To prepare a list of members who are entitled to receive dividend and determine how much is payable to each. f) To prepare draft in the form of dividend notice and warrant g) To call the Annual General Meeting in this regard h) To send a copy of resolution, minutes book regarding dividend to the bankers of the company along with a copy of dividend list. i) To see that the dividend warrants are dispatched to the members in time and date. j) To give notice in the newspaper within 60 days from the date of Annual General Meeting about the declaration of dividend and warrant. k) To send the necessary information to the stock exchange l) To fax the declaration matter of dividend to Securities and Exchange Commission and stock exchange within held an hour of such declaration and to publish price sensitive information in national dailies. m) To give return as to payment of dividend and other relevant information to the Securities and Exchange Commission and stock exchange. ii) The procedures to be followed in case of IPO: a) If it is private company, to convert into public company b) To appoint an issue manager c) Apply to Securities and Exchange Commission for the consent of raising capital d) Apply for the IPO placement determination e) Agreement with underwriter f) To approve by Securities and Exchange Commission the issue of prospectus g) To open subscription h) To allotment of shares i) Listing with Dhaka Stock Exchange/Chittagong Stock Exchange Q-27. What do you mean by corporate culture? CMA Adapted- April 2011 Answer. Corporate culture means the values, beliefs, norms and traditions within an organization that influence the behavior of its members. The difference in level of formality, loyalty, respect for long service, etc, may vary between firms, giving each one a distinctive ethics, which often conditions the behavior of new employees. Q-28. A company secretary is an important person in the management of a public limited company. Discuss. CMA Adapted- August 2010 Answer. The company secretary plays an important role of a company as their virtue and as per law and contract. The success of a company management usually depends on the efficiency and capability of the company secretary. In an organizational structure, the position of the company secretary is just below that of a Director. 67


We can realize the importance of a company secretary in today‘s complex management through the following points: i. Status as an employee of the company ii. Status as an officer or agent of the company iii. Status as an advisor to the company iv. Status as a custodian of the company v. Status as a chief administration officer or chief compliance officer of the company vi. Status as a laison among the employees and other parties of the company. From the above discussion we can conclude that the company secretary works under the direct control and supervision of the Board of Directors. He is a spokesman of the Board of Directors. If the Board of directors is compared to the brain of the company, he can be said to be its eyes, ears and hands that is he is an eye witness of the company. The company cannot be run effectively without the company secretary. Q-29. As per SEC notification regarding corporate governance what is the minimum and maximum number of directors to be appointed for a listed company? CMA Adapted- August 2009 Answer. Every public limited company and a private limited company which is subsidiary of a public limited company, shall have at least three directors. Every private limited company other than a private limited company which is the subsidiary of a public limited company, shall have at least two directors. The maximum numbers of directors are determined by the articles of association of a company. A company can increase or decrease the number of directors according to its requirements within the limits mentioned in the articles of association. An additional director may be appointed if necessary. According to the companies Act 1994, the directors appointed by the managing agent shall not exceed in number one third of the whole number of directors.

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CHAPTER - 4 COMPARISON OF ENGLISH LAW WITH ALTERNATIVE LEGAL SYSTEMS

4.1. CONCEPT OF CIVIL LAW Civil law is the system of law concerned with private relations between members of a community rather than criminal, military, or religious affairs. It is the set of rules that govern private rights, such as contracts, property, and family law. Civil case example: While the lawsuit against McDonald‘s made national headlines, the facts of the case regarding negligence, defective product, and breach of implied warranty make a fascinating civil case. 4.2. BRANCHES OF CIVIL LAW Civil law cases are divided into four main categories, each covering a range of issues. Contract law: Contract law deals with agreements between two or more parties, each of which is obligated to hold up their portion of the agreement. For example, two parties enter into an agreement for the lease of an apartment. The Lessor has the right to use the apartment, and the landlord receives rent money as compensation. If one party violates any of the provisions of the contract, they have committed a civil wrong known as ―breach of contract.‖ Generally speaking, contracts may be oral or written, however there are certain types of contracts that must be put in writing. Tort law: Tort law is a branch of civil law that is concerned with personal injury and civil wrongdoing. A tort is a civil wrong, done by one person or entity to another which results in injury or property damage, and frequently involves monetary compensation to the injured party. There are three categories of torts: negligence, intentional tort, and strict liability. Negligence is an unintentional tort, to which there are four elements that must be satisfied. Duty. The defendant had a duty to act in a reasonable manner Breach of Duty, meaning that the defendant failed to act reasonably Causation. The defendant‘s breach of duty must be the cause of the plaintiff‘s injury or loss Damages. Monetary, property, or other loss An intentional tort is a deliberate wrongdoing in which the defendant acted with intent to cause harm or injury. Some examples of intentional torts include: assault and battery, false imprisonment, fraud, invasion of privacy, and intentional infliction of emotional distress. 69


Strict liability is a tort that does not require actual negligence or intent to injure. It is based on an absolute or ―strict‖ duty to ensure something is safe. Strict liability frequently comes into play with hazardous activities, such as bungee jumping. The company that owns the bungee cords, or offers the activity to consumers, has an absolute duty to make sure the bungee cords are intact, hooked up correctly, and are ready to operate safely. If a consumer is injured because the cord breaks or comes undone, the company is liable for the injury under strict liability. Property law: Property law covers both personal property and real property. Personal property can be tangible, such as jewelry, animals, and merchandise, or intangible such as patents, copyrights, stocks, and bonds. Real property refers to land and anything built on it that cannot be easily removed, as well as anything under the surface of the land, such as oil and minerals. There are two types of property law torts: trespass and conversion. Trespass to chattels refers to a defendant intentionally and physically interfering with the plaintiff‘s right to possession and use of their personal property. Trespass to land occurs when a defendant enters plaintiff‘s private property without consent of the plaintiff. Conversion refers to a defendant depriving a plaintiff of their personal property without the plaintiff‘s consent, and then using the plaintiff‘s property as his own. For example, a lady sees her neighbor planting flowers in her garden, and notices she has five extra containers of flowers with no place to plant them. The lady decides she would like flowers in her garden as well, and takes the leftover containers of flowers without asking for permission from neighbor. The lady deprived the neighbor of her flowers, planting them instead in her own garden. The lady has committed conversion. Family law: Family law is the branch of civil law that deals with marriage, divorce, annulment, child custody, adoption, birth, child support, and any other issues affecting families. This branch of civil law is unique in that there is not necessarily a person who committed a civil wrong. This is particularly true in states that have no-fault divorces. The family court gets involved with dividing up property and finances after a divorce, establishing child custody, child support, and spousal support among other things. Some newer areas that fall under the family law umbrella are same-sex marriage, artificial conception, surrogate motherhood, in vitro fertilization, and palimony. 4.3. CONCEPT OF CRIMINAL LAW Criminal law is the body of law that relates to crime. It proscribes conduct perceived as threatening, harmful, or otherwise endangering to the property, health, safety, and moral welfare of people. Most criminal law is established by statute, which is to say that the laws are 70


enacted by a legislature. It includes the punishment of people who violate these laws. Criminal law varies according to jurisdiction, and differs from civil law, where emphasis is more on dispute resolution and victim compensation than on punishment. Criminal procedure is formalized official activity that authenticates the fact of commission of a crime and authorizes punitive treatment of the offender. These are at best core definitions; they do not comprehend all legal systems, all stages in the development of a legal system, or all elements within a given legal system. 4.4. PURPOSE OF CRIMINAL LAW In criminal law, specific purposes exist to enforce different degrees of crime. Criminal law, in fact, holds a distinction for having ‗uniquely serious consequences‘ for offenders who fail to abide by the laws of their jurisdiction. Modern consequences in criminal law commonly involve incarceration in jail or prison, government supervision or house arrest, fines, seizure of property and/or money from an offender. Physical punishment is prohibited in most jurisdictions around the world. Jurisdictions around the world follow five purposes to enforce criminal law punishment: retribution, rehabilitation, restoration, incapacitation, deterrence and retribution. The value of each varies between different jurisdictions. i. Retribution Retribution gives an offender a punishment equal to the crime they committed. Offenders essentially surrender their rights to take advantage of certain laws upon committing a crime. Therefore, an offender who commits a serious offense loses the right to be denied an equivalent sentencing, such as a lawful execution. ii. Deterrence Deterrence imposes a suitable penalty upon an offender with the goal of discouraging them committing criminal behavior again. This consequence has an effect on society, with the goal of discouraging others from committing the same crimes as the offender. iii. Incapacitation Incapacitation keeps offenders away from society, protecting the general public from their disordered behavior. Prison sentences are the most common form of incapacitation today. iv. Rehabilitation Rehabilitation is the act of turning an offender into a valuable member of the general public. The main goal is helping offenders learn their offending behavior was wrong, preventing further offenses in the future. v. Restoration Restoration benefits the victim. It‘s the act of repairing any injury inflicted to the victim by an offender. This form of justice is combined with other criminal law objectives to come to a conclusion for an offending suit. 71


4.5. DIFFERENCES BETWEEN CIVIL AND CRIMINAL LAW Civil law and criminal law serve different purposes in the United States legal system. The primary purpose of civil law is to resolve disputes and provide compensation for someone injured by someone else‘s acts or behavior. The primary purpose of criminal law is to prevent undesirable behavior and punish those who commit an act deemed undesirable by society. In civil law, it is the injured person who brings the lawsuit. By contrast, in criminal law, it is the government that files charges. The injured person may file a complaint, but it is the government that decides whether criminal charges should be filed. A violation of criminal law is considered a crime against the state or federal government and is a violation of public law rather than private law. Civil law cases are concerned only with private law. In some instances, a person may be entitled to file a complaint, trusting the legal system to punish the wrongdoer with prosecution, while bringing a civil lawsuit to receive compensation for the damages done by the wrongdoer. Another key difference between civil and criminal law is the standards of proof required to reach a verdict. A plaintiff need only prove his civil law case by a ―preponderance of evidence.‖ This standard requires that the plaintiff convince the court that, based on the evidence presented at trial, it is ―more likely than not‖ that the plaintiff‘s allegation is true. In contrast, the standard of proof is higher in criminal law proceedings. The state must prove their case ―beyond a reasonable doubt.‖ The reason for this higher standard is because a person‘s freedom is at stake, and the fundamental belief that convicting an innocent person is worse than allowing a guilty person to go free. Examples where civil law applies include cases of negligence or malpractice. Examples of criminal law include cases of burglary, assault, battery and cases of murder. 4.6. SOURCES OF ENGLISH LAW English law is created in four important ways, namely legislation, case (common) law, human rights law and EU law. A fifth residual way is through custom, but this is not discussed since case law and legislation have largely incorporated custom. It is recognised that Parliament is the supreme law-making authority, with exceptions for EU law as discussed later. Legislation created by Parliament starts as a Bill. Public Bills are brought by government MPs and affect the public in general. Private Bills affecting persons or a locality are brought by non-government MPs. Bills go through several stages - first and second readings, committee and report stages, and third reading before going to the House of Lords where any amendments are made. The Bill becomes law after receiving Royal Assent. Devolved legislation comes from bodies or persons authorised by Parliament to enact laws. The devolved law must come from and be consistent with a ‗parent‘ or enabling Act. An example is the Scotland Act 1998 passed by Westminster Parliament to create a Scottish 72


Parliament with legislative powers over health, education, criminal and civil law among other areas. Laws passed by the Scottish Parliament are therefore enabled by the Scotland Act. Legislation can also consolidate or codify law. Consolidation brings different statutes under one statute without change, such as the Insolvency Act 1986. Codification brings all the law under one topic inclusive of custom, common law and statute under one new statute. The preexisting law may be changed as in the Theft Act 1968. Legislation, passed in either Acts of Parliament or in devolved legislation, is also important for the sheer volume of new laws. Other sources of law do not reflect the quick change represented by passing a statute. Common law or case law is also an important part of law making. Courts can create laws by the way in which statutes are interpreted. When statutes are created by Parliament, they must cover a wide range of circumstances. This makes statute non-specific and clarification needs to be applied in circumstances before the court. Courts therefore try to interpret the will of Parliament. Additionally, courts clarify unclear language or errors made in drafting of the statute. Interpretation of statute by the court is binding through a system of judicial precedent. Principles in decided cases are followed in future cases to give consistency and accuracy in decisions, as well as a measure of predictability in the outcome of cases. There is also efficiency in quoting cases to make a point instead of re-arguing, and some flexibility in ‗development of law‘. The adherence is called stare decisis and is binding on all lower courts by appellate courts. Statutory interpretation is very important as in R v R [1992] 1 A.C. 599, the House of Lords held that rape is possible within a marriage. This was a deviation from previous precedent and reflected changing social conditions. Case law interpretation then is a way that the law reflects change and may do so quicker than Parliament, where Bills may be defeated or opposed when a vote is taken. Law is also created from human rights law. The European Communities Act 1972 was passed to recognise EU law as part of British laws. The Human Rights Act 1998 became domestic law to incorporate the European Convention on Human Rights. Higher courts can declare statute incompatible with the HRA. Parliament will be forced to change or repeal the law to avoid the incompatibility such as the Anti-terrorism, Crime and Security Act 2001 being replaced with the Prevention of Terrorism Act 2005. Another source of law originates from the Court of Justice of the European Union (ECJ). Since domestic law gives way to interpretation from the ECJ, Parliament is again bound to adopt rulings of the ECJ such as the recent decision involving voting rights for prisoners. In conclusion, while case law, EU law and human rights law have considerable influence on law making, it is clear that legislation remains the most important source of law. Written laws created by Parliament and through devolved legislation can override case law, but not vice 73


versa. In a similar manner, case law from human rights law and EU law ought to first be legislated by Parliament to reflect those rulings and become part of domestic law (part of the EU Directives). Legislation can also reflect societies‘ change much quicker and for these reasons remain the most influential source of law. 4.7. DIFFERENCES BETWEEN COMMON LAW AND EQUITY i. Common law typically refers to laws based on precedence and the rulings of judges who hear a case in a courtroom. Equity, on the other hand, refers to laws that are similarly established by court rulings but deal with judgment and justice through equitable decisions. ii. Common law is law created and upheld through the rulings of a judge or jury hearing a case. This is also sometimes called case law, and such precedents are quite important in a legal system that relies on common law. Equity, on the other hand, is judgment that deals with fairness in justice, often stemming from a sense of ―natural law.‖ iii. Common Law is a body of law based on precedent or court decisions. Equity constitutes general principles and serves as a supplement to Common Law. iv. Equity, simply put, is a form of legal relief in the event such relief cannot be found in the rules of common law. v. Equity is based on a judicial evaluation of fairness, reason, good faith and justice. Common Law entails applying the rules of common law to the issue before the court. 4.8. SYSTEM OF JUDICIAL PRECEDENT In common law legal systems, a precedent is a legal case that establishes a principle or rule. This principle or rule is then used by the court or other judicial bodies use when deciding later cases with similar issues or facts. The use of precedent provides predictability, stability, fairness, and efficiency in the law. Judicial precedent means the process whereby judges follow previously decided cases where the facts are of sufficient similarity. It is a decision of the court used as a source for future decision making. This is known as stare decisis (to stand upon decisions) and by which precedents are authoritative and binding and must be followed. In giving judgment in a case, the judge will set out the facts of the case, state the law applicable to the facts and then provide his or her decision. It is only the ratio decidendi (the legal reasoning or ground for the judicial decision) which is binding on later courts under the system of judicial precedent. 4.9. DOCTRINE OF JUDICIAL PRECEDENT Judge-made law to be found in the case law is governed by the doctrine of judicial precedent. The rule on which a case is decided is called the ratio decidendi and other statements of law not affecting the outcome of a case are termed obiter dicta. Whether one court is bound by the ratio decidendi of another court depends upon the position of the court in the hierarchy of the hierarchy of the courts. The doctrine of binding precedent is alternatively known as the doctrine of stare decisis. 74


4.10. SOURCES OF PRECEDENT LAW i. The number of judges constituting the bench and their eminence is a very important source in increasing the authority of precedent. ii. A unanimous decision carries more weight. iii. Affirmation, approval or following by other courts, especially by a higher tribunal, adds to the strength of a precedent. iv. If an Act is passed embodying the law in a precedent, the gains an added authority. 4.11. EFFECT OF PRECEDENT LAW IN LOWER COURT A lower court may not rule against a binding precedent, even if the lower court feels that the precedent is unjust; the lower court may only express the hope that a higher court or the legislature will reform the rule in question. If the court believes that developments or trends in legal reasoning render the precedent unhelpful, and wishes to evade it and help the law evolve, the court may either hold that the precedent is inconsistent with subsequent authority, or that the precedent should be distinguished by some material difference between the facts of the cases. If that judgment goes to appeal, the appellate court will have the opportunity to review both the precedent and the case under appeal, perhaps overruling the previous case law by setting a new precedent of higher authority. This may happen several times as the case works its way through successive appeals. 4.12. ESSENTIAL ELEMENTS OF TORT OF NEGLIGENCE In order to win a negligence case, the plaintiff (the person injured) must prove the following four elements to show that the defendant (the person allegedly at fault) acted negligently: i) Duty When assessing a negligence claim, the first step is to look to see whether or not the defendant owed the plaintiff a legal duty of care. In some circumstances, the relationship between the plaintiff and defendant might create a legal duty -- for instance, a doctor owes a patient a legal duty to provide him or her with competent medical care. Or, the defendant may owe the plaintiff a legal duty to act with reasonable care in a certain situation -- as is the case when one is expected to operate a motor vehicle safely and with a certain level of due care. ii) Breach of duty Next, the court will look to see whether the defendant breached this duty by doing (or not doing something) that a "reasonably prudent person" would do under similar circumstances. The term "reasonably prudent person" refers to a legal standard that represents how the average person would responsibly act in a certain situation. Stated simply, the defendant likely will be found negligent if the average person, knowing what the defendant knew at the time, would have known that someone might have been injured as a result of his or her actions -- and would have acted differently than the defendant did in that situation.

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iii) Causation The third element requires that the plaintiff show that the defendant's negligence actually caused his or her injury. Sure, someone might be acting negligently, but the plaintiff can only recover if this negligence somehow causes the injury. For example, it wouldn't be fair to sue someone who was negligently texting and driving for a totally unrelated fender bender that happened just across the street -- just because the driver was negligent. Another aspect of this element looks at whether the defendant could reasonably have foreseen that his or her actions might cause an injury. If the defendant's actions somehow caused the plaintiff injury through a random, unexpected act of nature, the injury would most likely be deemed unforeseeable -- and the defendant will not likely be found liable. iv) Damages The final element of a negligence case is damages. This element requires that the court be able to compensate the plaintiff for his or her injury -- usually through monetary compensation for expenses such as medical care or property repair. 4.13. JUDICIARY SYSTEM OF BANGLADESH The Judicial system of Bangladesh is based on the Constitution and the laws are enacted by the legislature and interpreted by the higher courts. Bangladesh Supreme Court is the highest court of Bangladesh. The jurisdiction of the Supreme Court of Bangladesh has been described in Article 94(1) of the Constitution of Bangladesh. It consists of two divisions, the High Court Division and the Appellate Division. The High court division of the Supreme Court consists of Civil courts, Criminal courts and some Special courts and tribunals. The Appellate Division is the apex court of Bangladesh. The Supreme Court of Bangladesh has two divisions namely the Appellate Division and the High Court Division (HCD). 4.14. SOURCES OF SHARIâ€&#x;AH LAW Quran: In Islam, the Quran is considered to be the most sacred source of law. Classical jurists held its textual integrity to be beyond doubt on account of it having been handed down by many people in each generation, which is known as "recurrence" or "concurrent transmission" (tawÄ tur). Only several hundred verses of the Quran have direct legal relevance, and they are concentrated in a few specific areas such as inheritance, though other passages have been used as a source for general principles whose legal ramifications were elaborated by other means. Hadith: The body of hadith provides more detailed and practical legal guidance, but it was recognized early on that not all of them were authentic. Early Islamic scholars developed a methodology for evaluating their authenticity by assessing trustworthiness of the individuals listed in their transmission chains. These criteria narrowed down the vast corpus of prophetic traditions to several thousand "sound" hadiths, which were collected in several canonical compilations. The hadiths which enjoyed concurrent transmission were deemed unquestionably authentic; 76


however, the vast majority of hadiths were handed down by only one or a few transmitters and were therefore seen to yield only probable knowledge. The uncertainty was further compounded by ambiguity of the language contained in some hadiths and Quranic passages. Disagreements on the relative merits and interpretation of the textual sources allowed legal scholars considerable leeway in formulating alternative rulings. Consensus (ijma): Could in principle elevate a ruling based on probable evidence to absolute certainty. This classical doctrine drew its authority from a series of hadiths stating that the Islamic community could never agree on an error. This form of consensus was technically defined as agreement of all competent jurists in any particular generation, acting as representatives of the community. However, the practical difficulty of obtaining and ascertaining such an agreement meant that it had little impact on legal development. A more pragmatic form of consensus, which could be determined by consulting works of prominent jurists, was used to confirm a ruling so that it could not be reopened for further discussion. The cases for which there was a consensus account for less than 1 percent of the body of classical jurisprudence. Analogical reasoning (qiyas): Qiyas is used to derive a ruling for a situation not addressed in the scripture by analogy with a scripturally based rule. In a classic example, the Quranic prohibition of drinking wine is extended to all intoxicating substances, on the basis of the "cause" (Ężilla) shared by these situations, which in this case is identified to be intoxication. Since the cause of a rule may not be apparent, its selection commonly occasioned controversy and extensive debate. Twelver Shia jurisprudence does not recognize the use of qiyas, but relies on reason (Ężaql) in its place. 4.15. FIVE PILLARS OF ISLAM 1. Shahada: It is a declaration of faith and trust that professes that there is only one God (Allah) and that Muhammad is God's messenger.

2. Salat: It is the Islamic prayer. Salat consists of five daily prayers according to the Sunna; the names are according to the prayer times: Fajr, Dhuhr, Aᚣr, Maghrib, and Isha. 3. Zakat:

It is the practice of charitable giving based on accumulated wealth. The word zakat can be defined as purification and growth because it allows an individual to achieve balance and encourages new growth. 4. Sawm: Three types of fasting (Siyam) are recognized by the Quran: Ritual fasting, fasting as compensation for repentance (both from sura Al-Baqara), and ascetic fasting (from Al-Ahzab). 5. Hajj:

The Hajj is a pilgrimage that occurs during the Islamic month of Dhu al-Hijjah to the holy city of Mecca. Every able-bodied Muslim is obliged to make the pilgrimage to Mecca at least once in their life. 77


PAST EXAM QUESTIONS AND ANSWERS Q-1. Describe the characteristics of the legal systems found in other countries. CMA Adapted- June 2017 Answer. The United States, and most other places that were once part of the British Empire, use the common law legal system, inherited from England. Most other (non-Anglophone) countries use the civil law legal system that derives from the Napoleonic code and the Roman legal system. Broadly speaking, the Common Law legal system uses inductive legal reasoning and an adversarial judicial process. Civil law systems, generally, rely on deductive legal reasoning and an inquisitorial judicial process. Common law legal reasoning arose originally by judges applying custom and common sense to resolve legal disputes. As the system developed judges began describing the facts of the cases before them and clearly articulating the basis for their decision. The doctrine of stare decisis requires that the same rules and principles of decision are applied in similar cases. So to analyze a case using common law legal reasoning, you start with the facts, and find prior decisions with similar facts, analogize the situations and apply the relevant prior decisions to the current case. Civil law legal reasoning is deductive: you start with codified black letter law and apply those general principles to the case before you. How other courts have decided a similar case is not nearly as important: the code, not prior judicial reasoning is the source of the rule of law. Q-2. What do you mean by “Tort�? Explain Tort of Negligence. CMA Adapted- June 2016 Answer. Tort: Torts are wrongdoings that are done by one party against another. As a result of the wrongdoing, the injured person may take civil action against the other party. For example, let's say while walking down the aisle of a grocery store, a man slip on a banana that had fallen from a shelf. He becomes the plaintiff, or injured party, and the grocery store is considered the tortfeasor or defendant, the negligent party. Tort of negligence: The Tort of negligence is a legal wrong that is suffered by someone at the hands of another who fails to take proper care to avoid what a reasonable person would regard as a foreseeable risk. In many cases there will be a contractual relationship (express or implied) between the parties involved, such as that of doctor and patient, employer and employee, bank and 78


customer, and until relatively recently it was necessary for such a contractual relationship to exist in order for a claim for negligence to succeed. Q-3. Discuss the benefits of international regulations for commerce and professional practice through the International Federation of Accountants (IFAC). CMA Adapted- June 2016 Answer. The benefits of international regulations for commerce and professional practice: i. Develops international education standards ii. Develops the international code of ethics for professional accountants iii. Sets International Public Sector Accounting Standards (IPSAS) for use by the public sector iv. Overseas IFAC‘s standard-setting activities, particularly with respect to auditing, assurance, ethics and independence. Q-4. Though Common Law & Equity seem identical, there are some unique features which have set out the distinctiveness. Write down the distinction between the two. CMA Adapted- June 2016 Answer. The distinction between Common Law & Equity: 1. Common Law is a body of law based on precedent or court decisions. Equity constitutes general principles and serves as a supplement to Common Law. 2. Equity, simply put, is a form of legal relief in the event such relief cannot be found in the rules of common law. 3. Equity is based on a judicial evaluation of fairness, reason, good faith and justice. Common Law entails applying the rules of common law to the issue before the court. Q-5. In business, Shari‟ah law is emerging as a good alternative to traditional law. Describe the elements of Shari‟ah law. CMA Adapted- June 2016 Answer. The elements of Shari‟ah law: a) The first and primary element of Shari‘ah law is the Quran. It is the final arbitrator and there is no other appeal. b) The second element of Shari‘ah law is known as the Sunna. The teachings of the Prophet Mohammed not explicitely found in the Quoran. The Sunna are a composite of the teachings 79


of the prophet and his work. The Sunna contain stories and anecdotes, called Hadith, to illustrate a concept. c) The third element of Shari‘ah law is known as Ijma. The mulim religion uses the term Ulama as a label for its religious scholars. These Ulamas are consulted on many matters both personal and political. When the Ulamas reach a consensus on an issue, it is interpreted as a Ijma. d) The Qiyas are a fourth element of Shari‘ah law. The Qiyas are nor explicitely found in the Quran, Sunna or given in the Ijma. The Qiyas are new cases or case law which may have already been decided by a higher judge. e) The fifth element is Shari‘ah law. It is very broad and all encompassing. This secondary body of knowledge may be ideas contained in the other written works. Legal disclosures based upon Civil Law or Common Law may be example of Shari‘ah law. Q-6. Shariah has been connected to the idea of „spiritual law‟ and system of divine law. What are primary sources of Shariah Law? CMA Adapted- December 2015 Answer. Various sources of sharia are used by Islamic jurisprudence to elucidate the body of Islamic law. The primary sources, accepted universally by all Muslims, are the Qur'an and Sunnah. The Qur'an is the holy scripture of Islam, believed by Muslims to be the direct and unaltered word of God. The Sunnah consists of the religious actions and quotations of the Islamic prophet Muhammad and narrated through his Companions and the Imams. As Islamic regulations stated in the primary sources do not explicitly deal with every conceivable eventuality, jurisprudence must refer to resources and authentic documents to find the correct course of action. According to Sunni schools of law, secondary sources of Islamic law are consensus, the exact nature of which bears no consensus itself; analogical reason; pure reason; seeking the public interest; juristic discretion; the rulings of the first generation of Muslims; and local customs. Q-7. Bangladesh Legal System is based on English law. What are the sources of English law? CMA Adapted- December 2015 Answer. The main sources of English law are as follows: Legislation (Statute Law), Common Law (Judge-made law) and European Communities Law 80


English Law was historically based on customs and social tradition. Today Custom Law is a part of Common law, notably being in cases where there was no judicial precedent but which were known to exist since time memorial (i.e. since 1189). Custom law can still be used to argue a case provided the conditions set out by law are met. It is important to remember though that ‗law never goes out of date, and it does not become obsolete because of passage of time‘.

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CHAPTER - 5 THE LAW OF CONTRACT

5.1. DEFINITION OF CONTRACT A contract is a voluntary arrangement between two or more parties that is enforceable by law as a binding legal agreement. Contract is a branch of the law of obligations in jurisdictions of the civil law tradition. Contract law concerns the rights and duties that arise from agreements. A contract arises when the parties agree that there is an agreement. Formation of a contract generally requires an offer, acceptance, consideration, and a mutual intent to be bound. Each party to a contract must have capacity to enter the agreement. Minors, intoxicated persons, and those under a mental affliction may have insufficient capacity to enter a contract. Some types of contracts may require formalities, such as a memorialization in writing. 5.2. ESSENTIAL ELEMENTS OF A VALID SIMPLE CONTRACT Offer and acceptance: There must be a lawful offer by one party and a lawful acceptance of the offer by other party or parties. Intention to create legal relationship: There must be an intention among the parties that the agreement shall create legal relations. Lawful consideration: An agreement comes into existence when one or more persons promise to another or other persons to do or not to do something. Every promise forming the consideration for each other leads to a contract. Only those considerations are valid which are lawful. Capacity of parties: The parties to an agreement must be legally capable of entering into an agreement otherwise it can not be enforceable by law. The parties must not suffer from minority, lunacy, idiocy, drunkenness and other similar factory. Free consent: In order to be enforceable by law, an agreement must by based on the free consent of all the parties. The consent is not free if the agreement is induced by coercion, undue influence, mistake, misrepresentation and fraud. Certainty: The agreement must not be vague. The meaning of the agreement must be certain otherwise it can not be enforceable by law. Writing: An oral contract is sometimes difficult to prove. Therefore important agreements should be made in writing.

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5.3. IGNORANCE OF LAW IS NO EXCUSE Ignorance of law is no excuse. The reason is that every man is presumed to know the law of his own country and if he does not know, he must suffer from such lack of knowledge. Therefore, mistake on a point of own country‘s law does not affect the contract. It is a valid contract. But mistake on a point of foreign country‘s law affects the contract and this contract can be avoided. 5.4. CONSIDERATION MAY BE PAST, PRESENT OR FUTURE Consideration may be past, present on future. Past consideration: When the consideration of one party is given before the date of promise, it is known as past consideration. For example, suppose x does some work for Y in the month of January without expecting any payment. In February Y promises to pay him some money. Here the consideration of X is past consideration. Present consideration: When consideration is given with the promise is called present consideration. For example, X buys an article from a shop and pays the price immediately. Here the consideration of X is present consideration Future consideration: When the consideration of a promise is given at a future date, it is known as future consideration. 5.5. EXPLANATION OF FRAUD The term ‗fraud‘ includes all acts committed by a person with a view to induce a man to believe that a thing is true which is false. The Contract Act states that ‗fraud‘ means and includes false statement, active concealment, intention to non-performance, omission, etc. A contract made by fraud is voidable. The aggrieved party can avoid the contract whenever inform the fraud. He can claim for damages. For example, A made an offer to B that he will sell his house for Tk. 50 lac. B accepted this offer and purchase it. But A conceal that his house is in mortgage. B can avoid this contract. 5.6. MERE SILENCE AS TO FACTS IS NOT FRAUD Mere silence as to facts is not fraud under the following circumstances: 1. The general rule is that mere silence is not fraud. For example, A and B are traders enter upon a contract. A has private information of a change in price which would affect B‘s willingness to proceed with the contract. Here, A is not bound to inform B. 2. If it is the duty of the person keeping silence. 83


3. If his silence is equivalent to speech. For example, A says to B, if you do not tell anything, I shall assume that the horse is sound. A says nothing. Here, A‘s silence is equivalent to speech. 5.7. REVOCATION REVOCATION

OF

ACCEPTANCE

AND

COMMUNICATION

OF

An acceptance can be revoked any time before the acceptance comes to the knowledge of the proposer but not afterwards. For example: X offers to sell his house to y. Y accepts the offer and sent a letter of acceptance by post. Y may revoke his acceptance any time before the letter reaches to x. The communication of revocation complete- As against the person who makes it, when it is put into a course of transmission to the person to whom it is made. - As against the person to whom it is made, when it comes to his knowledge. 5.8. UNILATERAL CONTRACT AND BILATERAL CONTRACT In certain contracts one party has to fulfill his obligations whereas the other party has already performed his obligations. Such a contract is called unilateral contract. For the purpose of making a contract, there must be at least two parties. Therefore all contracts are bilateral or multilateral 5.9. THERE CANNOT BE A CONTRACT TO MAKE A CONTRACT All contracts are made by the process of a lawful offer by one party and the lawful acceptance of the offer by other party. For example, if A says to B, will you buy my house for Tk. 50 lac? This is an offer. If B says yes, the offer is accepted and a contract is formed. An offer involves making of a proposal. When the person to whom the proposal is made signifies his assent, the proposal is said to be accepted. When a proposal is accepted becomes a promise. Offer alone and acceptance alone are powerless. When separate they can not lead to the formation of a contract. But an offer together with acceptance leads to a contract which is enforceable by law. Therefore, there can not be a contract to make a contract. 5.10. CONVERTING A PROPOSAL INTO PROMISE An offer involves making of a proposal. When one person signifies his willingness to another to do or not to do form anything with a view to obtaining the assent of that, he is said to make a proposal. The person making the proposal is called the ‗promisor‘. The person accepting the proposal is called the ‗promisee‘. When the person to whom the proposal is made signifies his 84


assent, the proposal is said to be accepted. When a proposal is accepted becomes a promise. A proposal may be removed for lack of acceptance or be revoked before acceptance. Acceptance converts the proposal into a promise and then it is too late to remove it. For example, if A says to B, will you buy my house for Tk. 50 lac? This is a proposal. If B says yes, the proposal is accepted and becomes a promise. 5.11. DIFFERENCES BETWEEN CONTINGENT CONTRACT AND WAGERING AGREEMENT Differences between contingent contract and wagering agreement: Contingent contract Wagering agreement 1. A contingent contract is a contract to do or 1. A wagering agreement is an agreement not to do something. by which money is payable by one person to another on the happening or nonhappening of a future, uncertain event 2. A contingent contract is valid 2. A wagering agreement is void 3. In a contingent contract either party or 3. In a wagering agreement the parties have both may have an interest in the subject no interest except getting or passing money matter of the contract 4. Contingent contract may not contain 4. Wagering agreement contains reciprocal reciprocal promises promises 5. For example, A agrees to pay Tk. 20 lac to 5. For example, A agrees with B, if there is B, if B‘s house is burnt. This is a contingent a rain on a certain day A will pay to B tk contract. 500. If there is no rain B will pay to A tk. 500. 5.12. PARTIES OF A CONTRACT MUST BE COMPETENT TO CONTRACT One of the essential conditions for the validity of an agreement, all the parties to it must have the capacity to enter into contracts and they must have a sound mind. A person is said to be of sound mind for the purpose of making a contract if at the time when he makes it, he is capable of understanding it and is capable of making a rational judgment. A person who is usually of unsound mind, but occasionally of sound mind, may make a contact when he is of sound mind. The contract act states that every person is capable to enter into a contact who has attained the age of majority according to the law and who is of sound mind and who is not disqualified by law for making a contract. The contract act follows that a person is not capable of entering into a contract under the following circumstances: i) If he has not attained the age of majority according to the law ii) If he is not of sound mind, i.e. if he is a lunatic or an idiot or suffering from a similar disability. iii) If he is disqualified by law for making a contract. 85


For example, A person agreed to sell a property worth Tk. 25 lac for Tk. 10 lac. His mother proved that he is an idiot and requested for cancellation of the contract. The court holds the agreement as null and void. 5.13. A STRANGER TO A CONTRACT CANNOT SUE A stranger to a contract is one who is not a party to it. A stranger to a contract cannot sue. It is a fundamental principle of law that only a person who is a party to a contract can sue on it. For example, a contract between A and B cannot be enforced by C. But a stranger to the consideration can sue to enforce it implies that he is a party to the contract. For example, a contract between A, B and C whereby A pays money to B for delivering goods to C can be enforced by C. 5.14. ESSENTIALS OF A VALID CONSIDERATION The following elements are essential of a valid consideration: 1. Desire of request of the promisor: The person making the proposal is called the promisor. For a valid consideration, desire or request of the promisor is essential. An act done without any request is voluntary act and any voluntary act does not come into the definition of consideration. For Example, A sees that B‘s house on fire and helps him. A cannot demand any payment for his services because B did not requested him to help. 2. The consideration must be real: The consideration must have some value in the eye of law. The impossible acts or nonexisting goods cannot support a contract. 3. The consideration must not be illegal, immoral or opposed to public policy 4. The consideration may be past, present or future: When the consideration of one party was given before the date of the promise, it is said to be past consideration. When the consideration moves simultaneously with the promise, it is said to be present consideration. When the consideration is to move at a future date, it is said to be future consideration. The consideration may be past, present or future. 5. Consideration may move from the promise: The person accepting the proposal is called the ‗promise‘. Consideration may move from the promise 5.15. AN INVITATION TO OFFER IS NOT AN OFFER An invitation to offer is not an offer. An offer involves making of a proposal. The offer must be one which is capable of creating a legal relationship between the parties. An invitation to play cards cannot create any legal relationship, So it is not an offer. But if A says to B, will you buy my house for Tk. 50 lac? This is an offer. Because it can creates legal relationship. 86


A quotation of prices is not an offer, but an invitation for offer. A newspaper advertisement inviting applications for a job is not an offer. A banker‘s catalogue of various charges is not an offer. A railway time-table is not an offer. Therefore, if a train does not work according to the table, the ticket holder cannot claim for breach of contract. For example, in a shopkeeper a liable on a good shows Tk. 100. It is considered as to sell the good at tk. 100. It is not an offer, but an invitation for offer. 5.16. LEGAL RULES AS TO ACCEPTANCE The legal rules as to acceptance are as follows: 1. All the terms of offer and acceptance should be specifically defined: If there is any variation between the terms of the offer and the terms of the acceptance, there is no contract. 2. Conditional acceptance: An acceptance with variation is no acceptance, it shows as a counter offer, which must be accepted by the original offer or before a contract is made. For example, X offered to sell his house for Tk. 50 lac to Y. Y said accepted for Tk.30 lac. This is not an acceptance but a counter offer. 3. The acceptance must be expressed in some reasonable manner: The offeree (the person to whom the offer in made) may express his acceptance by word of mouth, telephone, telegram or by post. An offer may also be accepted by conduct. 4. Mental acceptance or uncommunicated acceptance is no acceptance: No contract is formed if the offeree remains silent. Acceptance must be communicated to the offeror. For example, a person received an offer by letter. He accepted the offer and wrote a letter of acceptance and put the letter in his drawer. There was no contract because the other party was not informed about the acceptance. 5. The mode of acceptance: When the offeror prescribes a particular mode of acceptance, the offeree must follow the particular mode of acceptance. For example, if the offeror says, a letter of acceptance to be sent by telegram, the offeree must send a telegram. 6. Time of acceptance: If the offeror prescribes a time, the acceptance must be done within that time. If no time is prescribed, the acceptance must be done within reasonable time. What is the reasonable time depends on the facts of the case. 5.17. A CONTRACT CAN BE VOID AB-INITIO Any contract the object of which is unlawful in illegal, such contract is void ab-initio. 87


A contract is an agreement enforceable by law made between two or more persons. A contract the object of which is illegal cannot be enforceable by law and the contract which cannot be enforceable by law is void ab-intio. Therefore in a contract there must be - an agreement, and - the agreement must be enforceable by law - the object of an agreement must be legal. 5.18. LAW OF CONTRACT IS NOT WHOLE LAW OF AGREEMENT The law of contracts is not the whole law of agreement because it does not deal with all the agreement. It deals with the right and obligation of those agreements which can be enforceable by law. All agreements are not contract. An agreement enforceable by law is a contract. An agreement comes into existence when on or more persons promise to another or others, to do or not to do something. Some agreements cannot be enforceable by law, such as an agreement to go to a cinema. An agreement which cannot be enforceable by law is not a contract. The law of contract is the law of agreement which is enforceable by law. 5.19. REMEDIES OF BREACH OF CONTRACT If any party of a contract refuses or fails to perform the act of contract, it is said to be a breach of contract. A breach of contract comes into existence when it becomes impossible for any party of a contract to perform his obligation. The remedies for a breach of contract: The contract is not discharged under the following cases: Default of a third party: A contract is not discharged if it cannot be performed because of the default of a third party on whose work the promisor relied. Partial impossibility: A contract is not discharged in case of impossibility of some of the objects of the contract. Difficulty of performance: A contract is not discharged if its performance has become more difficult, more expensive or less profitable than that agreed on the date of execution of the contract. Strikes and lockouts: A contract is not discharged by strikes and lockouts. 5.20. DISTINCTION AMONG VOID CONTRACT, VOIDABLE CONTRACT AND VOID AGREEMENT 88


Distinction among void contract, voidable contract and void agreement: Void contract Voidable contract Void agreement 1. A void contract is a contract 1. A Voidable contract is a 1. An agreement which which was valid when entered contract which is cannot be enforceable by into but after that become void enforceable by law at the law is a void agreement. due to impossibility of option of one or more performance for changing of parties of a contract but not law or other reason. at the option of other or others. 2. It is void because of missing 2. It is void because the 2. It is void because of any essential element of a consent of a party is not mistake, lack of contract. face. consideration, etc.

3. It is void ab-initio.

3. It is valid until the aggrieved party refuses it. 4. It cannot be enforceable by 4. It is enforceable until any party of the contract. the aggrieved party refuse it. 5. It can never become a valid 5. On the expiry of a contract. reasonable time it may become a valid contract

3. It is void ab- initio. 4. It cannot be enforceable by law. 5. It can become a valid agreement when enforceable by law.

5.21. DISTINCTION AMONG VOID CONTRACT, VOIDABLE CONTRACT AND ILLEGAL AGREEMENT Distinction among void contract, voidable contract and illegal agreement: Void contract voidable contract Illegal agreement 1. A void contract is a 1. A voidable contract is a 1. An illegal agreement is contract which was valid contract which is one which is against a law. when entered into but after enforceable by law at the that become void due to option of one or more impossibility of performance parties of a contract but not for changing of law or other at the option of other or reason. others. 2. It is void because of 2. It is void because the 2. It is void because of missing any essential element consent of a party is not free unlawful consideration of a contract 3. It is void ab-initio 3. It is valid until the 3. It is void ab- initio. aggrieved parties refuse it. 4. It cannot be enforceable by 4. It is enforceable until the 4. It cannot be enforceable any party of the contract aggrieved parties refuse it. by law 5. It can never become a 5. On the expiry of a 5. It can become a valid valid contract reasonable time it may agreement when become a valid contract. enforceable by law. 89


6. For example, the contract of marriage become void become of death of a party of the contract.

6. For example, X coerces Y 6. For example, an into entering a contract for Agreement to murder, sale of Y‘s house to X .Then robbery, or cheating 936. contract can be avoided by Y.

5.22. DISTINCTION AMONG VOIDABLE AGREEMENT, VOID AGREEMENT AND ENFORCEABLE AGREEMENT Distinction among voidable agreement, void agreement and enforceable agreement: Voidable agreement Void agreement Enforceable agreement 1. A voidable agreement is 1. A void agreement is one 1. An enforceable one which can be avoided which cannot be enforceable agreement is one which by law can be enforceable by law and both of the parties 2. It is valid until the 2. It is void ab-initio 2. It is not void aggrieved party refuses it. 3. It is enforceable until the 3. It cannot be enforceable 3. It can be enforceable by aggrieved party refuges it. by any party of the contract law 4. On the expiry of a 4. It con never becomes a 4. It is a valid contract. reasonable time it may valid contract. become a valid contract 5.23. DISTINCTION AGREEMENT

BETWEEN

VOID

AGREEMENT

AND

ILLEGAL

Distinction between a void agreement and illegal agreement: Void agreement 1. A void agreement is one which cannot be enforceable by law 2. It cannot be enforcement by any patty of the contract. 3. It can never become a valid contract. 4. A void agreement may not be illegal

Illegal agreement 1. An illegal agreement is one which is against a law. 2. It cannot be enforceable by law 3. It can become a valid agreement when enforceable by law. 4. An illegal agreement is void.

5.24. DISTINCTION AMONG PLEDGE, BAILMENT AND HYPOTHECATION Distinction among pledge, bailment and hypothecation are as follows: Pledge

Bailment

Hypothecation 90


1. The bailment of goods as 1. A bailment is the delivery security for payment of a debt of goods by one person to is called pledge. another for some purpose, when the purpose is accomplished be returned.

2. The bailer is called the 2. The person delivering the pledge or and the bailey is goods is called the bailer called the pledge. and the person to who these are delivered is called the bailey.

1. The hypothecation is a transaction in which money is lent on the security of movable property but the property remains in the. Custody of the owner of the property. 2. The owner of goods which are hypothecated is called the hypothecated and the person to hypothecated is called the hypothecated.

5.25. DISTINCTION BETWEEN COERCION AND UNDUE INFLUENCE Distinction between coercion and undue influence: Coercion

Undue Influence

1. Coercion is the threatening any person to 1. A contract said to be induced by undue com it an act or influencing with the intention influence where one of the parties to enter in to an agreement. influence the will of the other and he influences to obtain an unfair advantage over the other 2. Generally, coercion takes place with the 2. Generally, undue influence takes place use of physical force. with the use of mental pressure. 5.26. DISTINCTION BETWEEN MISTAKE OF LAW AND MISTAKE OF FACT Distinction between mistake of law and mistake of fact: Mistake of law Mistake of fact 1. Mistake on a point of own countries law is 1. Mistake on a point of foreign countries known as mistake of law. law is known as mistake of fact 2. It does not affect the contract. 2. It affects the contract 3. It is a valid contract. 3. This contract can be avoided. 5.27. CONSEQUENCES OF COERCION A contract induced by coercion is voidable. The aggrieved party can refuse to perform it. The aggrieved party may, if heresies, abide the contract. Special cases: 1. A tract to execute: A threat to execute a contract does not constitute coercion, Undue influence, fraud, misrepresentation or mistake. 91


2. High prices and high interest vats: If is not coercion to charge high prices or high interest rates. 3. A threat to commit suicide: A threat to commit suicide is not coercion because suicide in not punishable by the law. Only the attempt to commit suicide is punishable. Therefore, suicide is not a crime. 5.28. ACCEPTANCE OF OFFER An offer involves the making of a proposal. When one person signifies his willingness to another to do any with a vice to obtaining the assent of that, he is said to make a proposal. A proposal is also called an offer. When the person to whom the proposal is made signifies his assent, the proposal is said to be accepted. A proposal when accepted becomes a promise. For example, X offers to sell his car to Y at the price of Tk. 5 lac. This is a proposal. If Y agrees to buy the car at the price stated, the proposal is accepted and Y becomes the acceptor. 5.29. REVOCATION OF OFFER An offer can be revoked under the following circumstances: 1. By notice: If the offer or gives notice of revocation to the other party, the offer comes to an end. An offer may be revoked any time before acceptance but not afterwards. For example, A proposal in sent by X to Y and is accepted by Y by letter. The proposal can be revoked any time before the letter of acceptance was posted but it cannot be revoked after the letter is posted. 2. By lapse of time: When the proposer prescribes a time within which the proposal must be accepted, the proposal lapses as soon as the time expires. 3. By expiry of reasonable time: When the proposer does not prescribe any time, the proposal lapses after the expiry of a reasonable time. What is reasonable time will depend on the circumstances of the case. 4. By death: An offer lapses by the death of the proposer, if the fact of his death comes to the knowledge of the acceptor before acceptance. 5. Counter offer: When a counter offer is given, the original offer lapse.

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PAST EXAM QUESTIONS AND ANSWER Q-1. Explain when the parties will be regarded as intending the agreement to be legally binding and how an agreement may be avoided because of misrepresentations. CMA Adapted- June 2017 Answer. A contract is a legally binding agreement. Once an offer has been accepted, there is an agreement, but not necessarily a contract. The element that converts any agreement into a true contract is "intention to create legal relations". The courts seek evidence that the parties to the agreement intended that it should be governed by, and subject to, the law of contract; so that the agreement gives rise to legal consequences. Each party thus adopts a legal obligation, and each may seek a remedy in the event of breach. Avoiding agreement due to misrepresentation: When a misrepresentation has been made and an agreement was (or at any rate appeared to be) concluded, the misrepresentee does not have to bring a halt to the deal. Misrepresentations generally do not render a contract void, as does the contractual doctrine of common mistake or frustration; it makes a contract voidable at the option of the misrepresentee. Not all contracts entered into on the strength of misrepresentations will be bad for the misrepresentee, who may choose not to void the contract. Q-2. Explain how the terms of a contract are established and their status determined. CMA Adapted- June 2017 Answer. The first step in determining the terms of a contract is to establish what the parties said or wrote. Statements made during the course of negotiations may traditionally be classed as representations or term. In establishment the parties' intentions and decide whether a statement is a term or a mere representation, the courts will consider the following four factors: Timing The court will consider the lapse of time between the making of the statement and the contract's conclusion: if the interval is short the statement is more likely to be a term. The court will consider whether the statement was omitted in a later, formal contract in writing. If the written contract does not incorporate the statement, this would suggest that the parties did not intend the statement to be a contractual term. Intermediate terms It may be impossible to classify a term neatly in advance as either a condition or a warranty. Some undertakings may occupy an intermediate position, in that the term can be assessed only in the light of the consequences of a breach. If a breach of the term results in severe loss and damage, the injured party will be entitled to repudiate the contract; where the breach involves 93


minor loss, the injured party's remedies will be restricted to damages. These intermediate terms have also become known as innominate terms. Implied terms In most contracts the primary obligations of the parties are contained in express terms. In addition there are various circumstances in which extra terms may be implied into the agreement. Terms implied by custom The terms of a contract may have been negotiated against the background of the customs of a particular locality or trade. The parties automatically assume that their contract will be subject to such customs and so do not deal specifically with the matter in their contract. Q-3. According to the „Contract Act-1872‟ what are the conditions of a valid offer. CMA Adapted- December 2016 Answer. According to the ‗Contract Act-`1872‘, the conditions of a valid offer: a) Offer must intend to create legal relations: An offer will not become a promise even after it has been accepted unless it is made with a view to create legal relationship. It is so because the purpose of entering into an agreement is to make it enforceable. Thus enforceability of a contract in court of law or inter parties primarily depends on its legal sanctity. Intention to create legal relationship is a question of fact. If A promises B to see movie and later denies, B cannot sue as intention was not to create legal relationship. b) Terms of offer must be certain, definite and not vague: No contract can be formed if the terms of the offer it is vague or uncertain; it will not be a valid contract if it is not clear as to what exactly the parties intend to do. Sometimes, the parties agree to enter into an agreement on some future date. Such agreement is not valid because the terms of the offer are uncertain and they are yet to be settled. The law does not allow making of an agreement to agree in future. c) The offer must be distinguished from a mere declaration of intention: Sometimes a person may make a statement without any intention of creating any binding obligation that he is willing to negotiate and an offer will be made or invited in future. An auctioneer advertised in a newspaper that a sale of electronic goods will be held on certain date. A person with the intention to buy such goods came from a distant place for the auction, but the auction was cancelled. He cannot file a suit against the auctioneer for his loss of time and expenses because the advertisement was merely a declaration of intention to hold auction. 94


d) Communication of offer must be made: An offer must be communicated to the person to whom it is made. An offer accepted without knowledge does not confer any legal rights on the acceptor. There can be no valid acceptance unless there is knowledge of the offer. e) Special terms and conditions in the offer must also be communicated: The offered can lay down any terms and conditions in his offer and if the other party accepts the offer then he will be bound by those terms and conditions. If there are special terms and conditions in offer, the same should also be communicated. f) Cross offer: Two offers which are similar in all respects, made by two parties to each other, in ignorance of each other's offers are known as 'Cross Offers'. Cross offer does not amount to acceptance of one's offer by the other and as such no contract is concluded. Q-4. Explain the ways of revocation of an offer. CMA Adapted- December 2016 Answer. There are a number of ways for an offer to be terminated. They are events that may occur after an offer has been made which bring it to an end so that it can no longer be accepted. An offer is terminated in the following circumstances: Revocation Revocation means an offer is withdrawn by the offerer. An offer can be revoked at any time before acceptance takes place. However, the revocation must be communicated effectively directly or indirectly to the offeree before acceptance. Rejection An offer is terminated when the offeree communicates his rejection to the offeror. Hence, the offeree making a counter-offer and introduces a new offer amounts to a rejection of the original offer. Lapse of time As it would be impracticable if an offer could be accepted after an unreasonable delay on the part of the offeree, an offer will lapse if it is open for a specific length of time and that time limit expires. Conditional offer An offer which expressly provides that it is to terminate on the occurrence of some condition cannot be accepted after that condition has occurred; and such a provision may also be implied. In other words, termination of an offer may also occur due to a condition not being met. 95


Death The death of either the offeror or the offeree will cause such termination: the right to accept an ordinary offer is not transferable. The unaccepted offer of a deceased person cannot be converted into a contract binding upon his estate. Acceptance Once the offer was accepted by the offeree, the contract is formed and brought the offer to an end. It can be made either orally, in writing, or by the implication of conduct when they are received by the offeror. Illegaility Finally, a change in the law which makes a potential contract illegal will terminate an offer, since courts will not enforce an illegal contract. Q-5. You are the Senior Finance Manager of ABC Company Ltd. The Chairman of your company had an accident on the way to the office and lost his hand bag containing important documents and Tk.5,00,000. He declared an award of Tk.50,000, if anyone can find the bag and return without any damage. Fortunately, his address was attached at the back side of the bag. Mr. Honest, without knowing the declaration, has found the bag and returned without any damage. After being informed, Mr. Honest came back and claimed the award. But, the company lawyer has advised the Chairman that there is no obligation to comply the offer. The Chairman is confused and seeking your advice on both legal and ethical ground – Advise him. CMA Adapted- December 2016 Answer. There is no obligation to comply the offer. Because, an offer must be communicated to the offeree. The person to whom the offer is made is called the offeree. A person can not accept an offer unless he knows the existence of the offer. Here, Mr. Honest is not entitled to the reward. Q-6. What do you mean by “Contract”? Briefly explain the elements of a valid contract giving relevant examples. CMA Adapted- June 2016 Answer. Contract: A contract is a voluntary arrangement between two or more parties that is enforceable at law as a binding legal agreement. A contract is like a promise between people. It is an understanding, a deal between two or more people or organisations to do certain things. 96


The essential elements of a valid simple contract: Offer and acceptance: There must be a lawful offer by one party and a lawful acceptance of the offer by other party or parties. Intention to create legal relationship: There must be an intention among the parties that the agreement shall create legal relations. Lawful consideration: An agreement comes into existence when one or more persons promise to another or other persons to do or not to do something. Every promise forming the consideration for each other leads to a contract. Only those considerations are valid which are lawful. Capacity of parties: The parties to an agreement must be legally capable of entering into an agreement otherwise it can not be enforceable by law. The parties must not suffer from minority, lunacy, idiocy, drunkenness and other similar factory. Free consent: In order to be enforceable by law, an agreement must by based on the free consent of all the parties. The consent is not free if the agreement is induced by coercion, undue influence, mistake, misrepresentation and fraud. Certainty: The agreement must not be vague. The meaning of the agreement must be certain otherwise it can not be enforceable by law. Writing: An oral contract is sometimes difficult to prove. Therefore important agreements should be made in writing. Q-7. “All contracts are agreements, but all agreements are not contracts” – Explain the statement with examples. CMA Adapted- June 2016 Answer. All agreements are not contracts but all contracts are agreements. A contract is an agreement enforceable by law made between two or more persons. An agreement enforceable by law is a contract. Therefore in a contract there must be i) an agreement, and ii) the agreement must be enforceable by law. An agreement comes into existence when one or more persons promise to other (s), to do or not to do something. Some agreements cannot be enforceable by law, such as an agreement to go to a cinema. An agreement which can not be enforceable by law is not a contract. Q-8. “No consideration, no contract” – Explain the statement with examples. CMA Adapted- June 2016 Answer. 97


A contract without consideration is not a contract. Consideration is essential for the validity of a contract. An agreement comes into existence when one or more persons promise to other less, to do or not to do something. Every promise forming the consideration for each other leads to a contract. A promise without consideration can not create a legal obligation. A promise without consideration is a gift. An agreement without consideration is not enforceable by law. And an agreement which can not enforceable by law is not a contract. Contract must be supported by consideration. Q-9. Write and discuss the key features of “Sale of Goods Act 1930” with reference to provision. CMA Adapted- June 2016 Answer. The key features of ―Sale of Goods Act 1930‖: a) Title or the seller‟s right to sell the goods: Section 12(1) implies into contracts for the sale of goods an undertaking as to title, confirming that the seller has a right to sell. Section 12(2) implies undertakings as to freedom from other claims and quiet possession. b) Description of the goods: Section 13 applies to all sales. Section 13(1) and (2) provide that where there is a contract for the sale of goods by description, there is an implied condition that the goods corresponded with the description. c) Quality of the goods: There is an implied condition that goods supplied under a contract are of satisfactory quality. The Act (section 14(2B)) identifies factors which may in appropriate cases be aspects of the quality of goods: - Fitness for all the purposes for which goods of the kind in question are commonly supplied, - Appearance and finish, - Safety, - Durability. d) Fitness of the goods: Section 14(3) implies a condition that the goods be fit for any particular purpose which the buyer expressly or by implication makes known to the seller. e) Sale by sample: Under section 15 of the Act there are requirements in a sale by sample. In the case of a contract for sale by sample there is an implied condition.

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Q-10. What is misrepresentation in terms of Contract Act 1872? How can an agreement be avoided due to misrepresentation? CMA Adapted- June 2016 Answer. Misrepresentation: A misrepresentation is a false statement of fact or law which induces the representee to enter a contract. Where a statement made during the course of negotiations is classed as a representation rather than a term an action for misrepresentation may be available where the statement turns out to be untrue. There are three types of misrepresentation: innocent misrepresentation, negligent misrepresentation and fraudulent misrepresentation. Avoiding agreement due to misrepresentation: When a misrepresentation has been made and an agreement was (or at any rate appeared to be) concluded, the misrepresentee does not have to bring a halt to the deal. Misrepresentations generally do not render a contract void, as does the contractual doctrine of common mistake or frustration; it makes a contract voidable at the option of the misrepresentee. Not all contracts entered into on the strength of misrepresentations will be bad for the misrepresentee, who may choose not to void the contract. Q-11. What is a contract? Briefly describe the essential elements of a valid simple contract. State valid reasons for non-performance of a contract. CMA Adapted- December 2015 Answer. Contract: A contract is a voluntary arrangement between two or more parties that is enforceable at law as a binding legal agreement. A contract is like a promise between people. It is an understanding, a deal between two or more people or organisations to do certain things. The essential elements of a valid simple contract: Offer and acceptance: There must be a lawful offer by one party and a lawful acceptance of the offer by other party or parties. Intention to create legal relationship: There must be an intention among the parties that the agreement shall create legal relations. Lawful consideration: An agreement comes into existence when one or more persons promise to another or other persons to do or not to do something. Every promise forming the 99


consideration for each other leads to a contract. Only those considerations are valid which are lawful. Capacity of parties: The parties to an agreement must be legally capable of entering into an agreement otherwise it can not be enforceable by law. The parties must not suffer from minority, lunacy, idiocy, drunkenness and other similar factory. Free consent: In order to be enforceable by law, an agreement must by based on the free consent of all the parties. The consent is not free if the agreement is induced by coercion, undue influence, mistake, misrepresentation and fraud. Certainty: The agreement must not be vague. The meaning of the agreement must be certain otherwise it can not be enforceable by law. Writing: An oral contract is sometimes difficult to prove. Therefore important agreements should be made in writing. Reasons for non-performance of a contract: A contract without consideration is not a contract. Consideration is essential for the validity of a contract. An agreement comes into existence when one or more persons promise to other less, to do or not to do something. Every promise forming the consideration for each other leads to a contract. A promise without consideration can not create a legal obligation. A promise without consideration is a gift. An agreement without consideration is not enforceable by law. And an agreement which can not enforceable by law is not a contract. Contract must be supported by consideration. Q-12. Mention the type of contract discharge. Describe the factors that need to be considered when discharge issue arises. CMA Adapted- December 2015 Answer. The type of contract discharge: Contract creates relation between the parties and binds them over. Termination of such contractual relations is called discharge of contract. The following are different types of contract discharge. - Discharge by Performance. - Discharge by Breach of Contract. - Discharge by Impossibility. - Discharge by Operation of Law. - Discharge by Lapse of Time. - Discharge by Mutual understanding or by Agreement. 100


The factors that need to be considered when discharge issue arises: Impossibility of Performance: The company has the right to terminate the contract in the case of an impossibility of performance. Breach of Contract: A material breach of contract allows the company to terminate the contract. Prior Agreement: A party may terminate a contract if he and the other party have a prior written agreement that calls for a contract termination because of a specific reason. Rescission: A rescission of a contract is when a contract is terminated because an individual misrepresented themselves, acted illegally or made a mistake. Completion: A contract is essentially terminated once the obligations outlined in the contract are completed. Q-13. Distinguish between a contract of sale and agreement to sell. CMA Adapted- August 2015 Answer. Distinction between sale and agreement to sale: Contract of sale

Agreement to sale

1. Where under a contract of sale if the ownership of the goods is transferred from the seller to the buyer, at the time of sale the contract is called a sale. 2. In case of contact of sale, the unpaid can resale the goods or stoppage in transit.

1. Under an agreement of sale if the ownership of the goods is transferred from the seller to the buyer at a future time, the contract is called an agreement to sale. 2. In case of agreement to sell, the seller can claim for damages for the breach of contract. 3. Agreement to sell in an executor contract. 4. Generally an agreement to sell is done for future goods.

3. Sale is an executed contract. 4. Generally a sale is done for present goods

Q-14. What is contingent contract? CMA Adapted- April 2015 Answer. 101


A contingent contact is a contract to do or not to do something. This is a valid contract. In this contract either party or both party may have an interest is the subject matter of the contract. For example, A agrees to pay Tk. 20 lac to B, if B‘s house is burnt. This is a contingent contract. Q-15. Discuss the essential elements or features of contract. CMA Adapted- April 2015 Answer. The basic elements of a valid contract are described below: Offer and acceptance: There must be a lawful offer by one party and a lawful acceptance of the offer by other party or parties. Intention to create legal relationship: There must be an intention among the parties that the agreement shall create legal relations. Lawful consideration: An agreement comes into existence when one or more persons promise to another or other persons to do or not to do something. Every promise forming the consideration for each other leads to a contract. Only those considerations are valid which are lawful. Capacity of parties: The parties to an agreement must be legally capable of entering into an agreement otherwise it can not be enforceable by law. The parties must not suffer from minority, lunacy, idiocy, drunkenness and other similar factory. Free consent: In order to be enforceable by law, an agreement must by based on the free consent of all the parties. The consent is not free if the agreement is induced by coercion, undue influence, mistake, misrepresentation and fraud. Certainty: The agreement must not be vague. The meaning of the agreement must be certain otherwise it can not be enforceable by law. Writing: An oral contract is sometimes difficult to prove. Therefore important agreements should be made in writing. Q-16. What are the essential elements of contract for sale of goods? CMA Adapted- April 2015 Answer. The essential of contract of sale are as follows: 102


Movable goods: The sale of goods act deals only with movable goods. This act does not applicable immovable goods. Money consideration: In a sale there must be money consideration. There must be a contract for the exchange of movable goods for money. An exchange of goods for goods is not sale. Two parties: Since a control of sale involves a change of ownership it follows that the buyer and the seller must be different persons. A man cannot buy from or sell goods to himself. Offer and acceptance: A contract of sale is made by an offer of by or sells goods for a price and the acceptance of such offer. Method of forming the contract: A contract of sale may be in writing or by word of mouth. But important contract should be made in writing. Q-17. “No seller can give the buyer a better title of good, than he himself has”.-Explain. Write the exceptions of this rule. CMA Adapted- April 2015 Answer. No seller can give the buyer a better title of goods than he himself has. The general rule in that only the owner of goods can sell the goods. If a person transfer goods who is not owner of that goods, the transferee gets no title. This gets no title. This rule is applicable to both movable and immovable goods. In case of movable goods they suffer from certain exceptions. In following cases a person who is not owner of the goods, can give the buyer a better title of goods: Sale by one of several joint owners: If one of several joint owners has the sole possession of goods, by permission of the coowners, the goods can be transferred to the buyer from such joint owner with a better title Sale of goods under a voidable agreement: Where the seller of goods has obtained a possession of that goods under a voidable agreement and the agreement has not been terminated at the time of sale, the buyer gets a good title of the goods. For example, X buys a ring from Y at a lower price by undue influence and sells it to Z without notice of X‘s defective title. Here, Z gets a good title and Y cannot recover the ring. An unpaid seller: An unpaid seller of goods under certain circumstances can re-sell the goods. The purchaser of such goods gets a valid title.

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Sale under the contract act: The pledge may sell the goods of pledge or if the pledge or makes a default of his dues. The purchaser under such a sale gets a goods title. Sale by an agent: Sale of goods by an agent gives the buyer a better title if it satisfied the following conditions. - The agent has the possession of goods - Such possession is agreed by the owner - The purchase has no notice that the agent had no authority to sell Q-18. “A contract without consideration is void�-Discuss. CMA Adapted- December 2014 Answer. A contract without consideration is void. Consideration is essential for the validity of a contract. An agreement comes into existence when one or more persons promise to other (s), to do or not to do something. Every promise forming the consideration for each other leads to a contract. A promise without consideration can not create a legal obligation. A promise without consideration is a gift. An agreement without consideration is not enforceable by law. And an agreement which can not been forceable by law is not a contract. Contract must be supported by consideration. Q-19. Define a contract of guarantee, Distinguish between a contract of indemnity and contract of guarantee? CMA Adapted- December 2014 Answer. The differences between contract of indemnity and contract of guarantee are as follows: Contract of indemnity 1. A contract of indemnity is a contract by which one party promises to save the other party from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. 2. In contract of indemnity, there are two parties: the indemnifier and the indemnity holder. 3. In a contract of indemnity it is necessary to have only one contract between the parties. 4. Here, the liability of the indemnifier is primary.

Contract of guarantee 1. A contract of guarantee is a contract to perform the promise of a third person in case of his default.

2. In a contract of guarantee there are three parties: the creditor, the principal debtor and the surely. 3. In a contract of guarantee it is necessary to have three contracts between the parties. 4. Here, the liability of the surety is secondary. 104


Q-20. What is a continuing guarantee- Explain with an example. How it is revoked? CMA Adapted- December 2014 Answer. A guarantee which covers a series of transactions is called continuing guarantee. For example, A is a tea dealer supplies tea to B from time to time. C guarantees the payment of B to A. Here the guarantee given by C is a continuing guarantee. A continuing guarantee can be revoked under the following circumstances. i. If the surety gives notice of revocation, the continuing guarantee will be revoked. ii. The continuing guarantee will be revoked if the surety died. iii. A continuing guarantee is terminated under the same circumstances under which a surety‘s liability is discharged. Q-21. Explain “No consideration, no contract”. CMA Adapted- April 2014 Answer. A contract without consideration is not a contract. Consideration is essential for the validity of a contract. An agreement comes into existence when one or more persons promise to other less, to do or not to do something. Every promise forming the consideration for each other leads to a contract. A promise without consideration can not create a legal obligation. A promise without consideration is a gift. An agreement without consideration is not enforceable by law. And an agreement which can not enforceable by law is not a contract. Contract must be supported by consideration. Q-22. Narrate exceptions of with examples “No consideration, no contract”. CMA Adapted- April 2014 Answer. There are some exceptional cases where a contract is enforceable by law even though there is no consideration. These are as follows: Natural love and affection: An agreement made without consideration is valid if it is done by a written document and the document is registered according to the law and the agreement is made on account of natural love and affection and the parties to the agreement hold a near relation to each other. For example, A for natural love and affection promises to give Tk. 10,000 to his son B. A puts his promise in writing to B and registers it. This is a contract.

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Voluntary compensation: An agreement made without consideration is valid if a person voluntarily done something for another person. For example, A finds B‘s money bag and gives it to him. B promises to give Tk.100 to A. This is a contract. Agency: No consideration is needed to create an agency. Q-23. “All contracts are agreement but all agreements are not contract” Discuss with a suitable example. CMA Adapted- April 2013 Answer. All agreements are not contracts but all contracts are agreements. A contract is an agreement enforceable by law made between two or more persons. An agreement enforceable by law is a contract. Therefore in a contract there must be - an agreement, and - the agreement must be enforceable by law. An agreement comes into existence when one or more persons promise to other (s), to do or not to do something. Some agreements cannot be enforceable by law, such as an agreement to go to a cinema. An agreement which can not be enforceable by law is not a contract. Q-24. Describe circumstances in which a contract would be enforceable without consideration. CMA Adapted- December 2012 Answer. There are some exceptional cases where a contract is enforceable by law even though there is no consideration. These are as follows: Natural love and affection: An agreement made without consideration is valid if it is done by a written document and the document is registered according to the law and the agreement is made on account of natural love and affection and the parties to the agreement hold a near relation to each other. Voluntary compensation: An agreement made without consideration is valid if a person voluntarily done something for another person. For example, A finds B‘s money bay and gives it to him. B promises to give Tk. 100 to A. This is a contract. Agency: No consideration is needed to create an agency. 106


Q-25. What are the rules of a valid offer? CMA Adapted- August 2012 Answer. The contract act contains various rules of a valid offer or proposal: These are stated below: a) An offer may be express or implied: An offer may be made in two ways: i. by words, spoken or written and ii. by conduct. When an offer is made by statins in words or in writings, it is called an express offer. When an offer is made by the conduct of a person, it is called an implied offer. b) An offer may be specific or general: An offer may be made to a definite person or to some definite class of persons. An offer made to a definite person or to a definite class of persons is called specific offer. An offer made to all persons is called general offer. For example: - A offers to sell his car to for Tk. 10 lac. It is a specific offer. - A transport company runs car on the road to carry passengers at the scheduled fares. It is a general offer by the company. c) The terms of the offer must be certain, definite and unambiguous. d) Legal relationship is required: The offer must be one which is capable of creating a legal relationship between the parties. An invitation to play cards can not create any legal relationship ,so it is not an offer. e) An offer must be communicated to the offeree: The person to whom the offer is made is called the offeree. A person can not accept an offer unless he knows the existence of the offer. For example, A offers a reward to anyone who returns his lost toy. B finds the toy and returns it to A without having heard the offer. Here, B is not entitled to the reward. Q-26. Differentiate between the terms misrepresentation and Fraud. CMA Adapted- August 2012 Answer. Distinction between fraud and misrepresentation: Fraud 1. The term fraud includes all acts committed by a person with a view to induce a man to believe that a thing is true which is false. 107

Misrepresentation 1. Misrepresentation arises when the representation made is inaccurate but the inaccuracy is not due to any desire to cheat the other party.


2. If the statement is dishonest, it is fraud. 3. In case of fraud, the contract is voidable

2. If the statement is honest, even though it was wrong, it is misrepresentation. 3. In case of misrepresentation the contract is not voidable

Q-27. “ Mental acceptance, is no acceptance�- Explain CMA Adapted- April 2012 Answer. A mental acceptance is no acceptance. No contract is formed, if the office remains silent and does nothing to show that he has accepted the offer. An acceptance must be communicated to the offer or shown by conduct. The offeree may expert his acceptance by word of mouth, telephone, telegram or by post. Where the offeror or prescribes a particular made of acceptance, the offeree must follow the particular mode of acceptance. For example: A person received an offer by letter. He acceptance and put it in his drawer. It helds that there was no contract because the other party was not informed the acceptance. Q-28. When a contract is said to be discharged? What are the various modes in which a contract may be discharged? CMA Adapted- April 2011 Answer. Discharge of a contract means termination of the contractual relationship between the parties of a contract. When the contractual relationship between the parties of a contract is terminated when the rights and obligation of the parties under the contract come to an end, it is said to be discharged of a contract. The various modes of discharge of a contract are as follows: By performance: When the parties of a contract perform the obligation of the contract, it is said to be discharged by performance By lack of acceptance: A contract is discharged when a promisor made an offer of performance but it has not been accepted by the promise. By lapse of time: A contract is discharged if it is not performed within a specific period of time. By mutual agreement: A contract can be discharged by mutual agreement of the parties. By death of the promisor: A contract is discharged if the promisor of the contract is died. 108


By insolvency: When a party of the contract declares himself as an insolvent, his liability is discharged from the date of insolvency. Q-29. “Insurance contract are basically wagering agreements”. - Discuss. CMA Adapted- December 2010 Answer. A wager is an agreement by which money is payable by one person to another on the happening or non-happening of a future, uncertain event. The nature of wagering is that one party is to win and the other party is to lose upon a future event, which at the time of the contract remains uncertain. Insurance contract are basically wagering agreements because it holds the following wagering characteristics: i) The consideration for the promise under an insurance agreement is to pay or get money ii) The money is payable on the happening or the non-happening of an event. iii) The agreement depends on a future and uncertain event. iv) In this agreement no party has control over the event Q-30. “Acceptance must be given by the person to whom the proposal is made”, Discuss. CMA Adapted- December 2010 Answer. A proposal can be accepted only by the person or persons for whom the proposal is made. A proposal made to a particular person can only be accepted by him because he is the only person intended to accept. A proposal made to a class of persons can be accepted by any member of that class. For example, suppose X sold his business to Y without informing the fact to his customer Z. Z sent an order to x for goods. Y received this order and sent a letter of acceptance. Here, there was no contract between Y and Z because Z never made any proposal to Y. Q-31. What do you understand for „performance of contract‟? CMA Adapted- April 2010 Answer. When the parties of the contract perform the obligation of the contract, the contract is said to be discharged by performance of contract. Q-32. What is the effect of refusal to accept performance by the promisee? CMA Adapted- April 2010 Answer. 109


When a promisor made an offer of performance but it has been refused to accept performance by the promisee, the contract is said to be discharged by attempted performance Q-33. What is meant by free consent? CMA Adapted- April 2010 Answer. When two or more persons agree the same thing in the same sense, it is known as tree consent. In order to be enforceable by law, an agreement must be based on the free consent of all the parties. The consent is not free it the agreement is induced by coercion, undue influence, mistake, misrepresentation and fraud. Q-34. Discuss the contractual liability of a minor with reference to a leading case. CMA Adapted- December 2009 Answer. The contractual liability of a minor is that the minor is not personally liable for the payment of a reasonable price for necessaries supplies to the minor. Only the minor‘s property is liable. The reasonable price is to be determined from the status and social position of the minor. The price which the trader will get is reasonable price, not the price ―agreed to‖ by the minor. For example, a trader supplies rice to a minor needed for his consumption. He can recover the price from the minor‘s property. Q-35. State the rule with regard to revocation of an acceptance. CMA Adapted- August 2009 Answer. An acceptance can be revoked any time before the acceptance comes to the knowledge of the offer or but not afterwards. The rules with regard to revocation of an acceptance are stated below: By notice: If the offeree gives notice of revelation to the offeror before the acceptance is reached, the acceptance comes to an end. For example, X offers to sell his house to Y. Y accepts the offer and a letter of acceptance is sent by post. Y then revokes his acceptance any time before the letter reaches to x.

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By lapse of time: When the proposer prescribes a time within which the acceptance must be given, the acceptance revoke as soon as the time expires. After expiry of reasonable time: If no time has been prescribed, the acceptance lapses after the expiry of a reasonable time. What is reasonable time will depend on the circumstances of the case. By death: An acceptance revoke by the death of the acceptor and if the fact of his death comes to the knowledge of the offeror before acceptance Q-36. Describe situations in which silence may constitute fraud. CMA Adapted- April 2009 Answer. Silence may constitute fraud in case of following situations: False statement A false statement willing fully made is fraud. Active concealment: Non-disclosure is not fraud where the party is not bound to disclose all facts. But active concealment is fraud. For example, A sells by action to B a horse. The horse is unfound and A knows that. Here A is not bound to disclose the fact to B. But if between A and B there is a near relationship (i.e., if B is A‘s son), it is the duty to disclose the fact to B. Intentional non-performance: A promise made without any intention to perform it, is constitutes fraud. Example: Purchase of goods without any intention of paying for it. 4. Omission: Under the act, the seller of immovable proper) is bound to disclose all material defects to the buyer. Failure to do so leads to fraud.

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CHAPTER - 6 THE LAW OF EMPLOYMENT

6.1. EXPRESS AND IMPLIED TERMS OF CONTRACT OF EMPLOYMENT All employees have an employment contract, which can be verbal, written or a combination of both. It is better to have a written contract of employment so that the conditions of employment are recorded. The contract should cover the following terms: - the main duties of the employee, - the location of the employment site, - whether the employee is casual, part-time or full-time, see casual employees, - the normal hours of work and whether the employee is entitled to payment for overtime, - the level of salary or wages including whether the employee is entitled to pay rises upon certain occurrences, including cost of living increases, national wage increases, increments for age or years of service, - whether the job is for a fixed period or is ongoing, - whether there is a probationary period and the period of probation, and - where there is a probationary period, or where the position is for a fixed period but is renewable, the form of the review process. 6.2. RIGHTS AND DUTIES OF EMPLOYERS The rights of employers: a) To determine whether the person can perform the inherent requirements of the job. b) To identify if any reasonable adjustments may be needed, either in the selection and recruitment process or in the work environment and role. c) To establish facts for entitlements such as sick leave, superannuation, workers‘ compensation and other insurance. The duties of employers: a) Provide and maintain a safe workplace, machinery and equipment. b) Prevent risks from use of any article or substance and from exposure to physical agents, noise and vibration. c) Prevent any improper conduct or behaviour likely to put the safety, health and welfare of employees at risk. d) Provide instruction and training to employees on health and safety. e) Provide protective clothing and equipment to employees (at no cost to employees). f) Appoint a competent person as the organisation‘s Safety Officer. 6.3. RIGHTS AND DUTIES OF EMPLOYEES The rights of employees: a) A safe and healthful workplace 112


b) To ask the employer to correct dangerous conditions. c) To participate in enforcement inspections. d) To not be discriminated against for exercising the health and safety rights. e) To refuse work that puts the employee in immediate danger of serious harm. f) To get information from the employer about organisation standards, worker injuries and illnesses, job hazards and workers' rights. The duties of employees: a) Obey a lawful, reasonable order within the terms of the contract of employment b) Serve faithfully c) Co-operate with the employer d) Perform duties with proper care and diligence e) Not to misuse the confidential information acquired while in service. 6.4. NOTICE AND DISMISSAL The minimum notice to which an employee is entitled will vary according the employee‘s length of service as per the Minimum Notice and Terms of Employment Acts. The Unfair Dismissals Acts protect employees from unfair dismissal where they have at least one year's service. Where the dismissal is related to trade union membership/activity or for exercising an employee right under certain employment legislation (eg maternity, parental, paternity, adoptive, carer's leave or minimum wage) there is no service threshold. 6.5. UNFAIR AND WRONGFUL DISMISSAL Unfair dismissal is when the following happens: i. An employee is dismissed and they qualify for the right to bring an Unfair Dismissal claim. ii. The employer did not have a fair reason to dismiss the employee. iii. Or, the employer did have a fair reason, but the matter was dealt with unfairly. Unfair dismissal is a statutory right as it is covered by an Act of Parliament. To qualify for unfair dismissal protection an employee must have the following: i. The employee must be working full or part-time, the actual amount of hours worked per week is irrelevant. Self-employed workers are excluded. 2. At least 1 year's continuous employment. (note that there are certain exceptions) ii. Below 65 or the normal retirement age for the job at the date of their dismissal. (note that there are certain exceptions) iii. Not of an excluded category, eg. the armed forces, police and share fishermen. Wrongful dismissal is where an employee has been dismissed without notice or an employee has not been given the right amount of notice, or the employment is terminated contrary to the contract. Wrongful dismissal is based upon the actual contract between the employer and the employee and so breaches of that contract by the employer could give the employee the right to sue for wrongful dismissal. There is no requirement to have been employed for at least one year in order to bring a claim. 113


6.6. HEALTH AND SAFETY REGULATIONS a) The management of health and safety at work regulations 1999 Also known as the 'Management Regulations', these came into effect in 1993. Main employer duties under the regulations include: - making 'assessments of risk' to the health and safety of its workforce, and to act upon risks they identify, so as to reduce them; - appointing competent persons to oversee workplace health and safety; - providing workers with information and training on occupational health and safety; and - operating a written health and safety policy. b) The workplace (health, safety and welfare) regulations 1992 The main provisions of these Regulations require employers to provide: - adequate lighting, heating, ventilation and workspace (and keep them in a clean condition); - staff facilities, including toilets, washing facilities and refreshment; and - safe passageways, i.e. to prevent slipping and tripping hazards. c) The health and safety (Display Screen Equipment) regulations 1992 The main provisions here apply to display screen equipment (DSE) 'users', defined as workers who 'habitually' use a computer as a significant part of their normal work. This includes people who are regular users of DSE equipment, or rely on it as part of their job. This covers you if you use DSE for an hour or more continuously, and/or you are making daily use of DSE. Employers are required to: - make a risk assessment of workstation use by DSE users, and reduce the risks identified; - ensure DSE users take 'adequate breaks'; - provide regular eyesight tests; - provide health and safety information; - provide adjustable furniture (e.g. desk, chair, etc.); and - demonstrate that they have adequate procedures designed to reduce risks associated with DSE work, such as repetitive strain injury (RSI). d) The personal protective equipment at work regulations 1992 The main provisions require employers to: - ensure that suitable personal protective equipment (PPE) is provided free of charge "wherever there are risks to health and safety that cannot be adequately controlled in other ways." The PPE must be 'suitable' for the risk in question, and include protective face masks and goggles, safety helmets, gloves, air filters, ear defenders, overalls and protective footwear; and - provide information, training and instruction on the use of this equipment. e) The manual handling operations regulations 1992 The main provisions of these regulations require employers to: - avoid (so far as is reasonably practicable) the need for employees to undertake any manual handling activities involving risk of injury; 114


- make assessments of manual handling risks, and try to reduce the risk of injury. The assessment should consider the task, the load and the individual's personal characteristics (physical strength, etc.); and - provide workers with information on the weight of each load. f) The provision and use of work equipment regulations 1998 The main provisions require employers to: - ensure the safety and suitability of work equipment for the purpose for which it is provided; - properly maintain the equipment, irrespective of how old it is; - provide information, instruction and training on the use of equipment; and - protect employees from dangerous parts of machinery. g) The reporting of injuries, diseases and dangerous occurrences regulations 1995 Under these regulations, employers are required to report a wide range of work-related incidents, injuries and diseases to the Health and Safety Executive (HSE), or to the nearest local authority environmental health department. The regulations require an employer to record in an accident book the date and time of the incident, details of the person(s) affected, the nature of their injury or condition, their occupation, the place where the event occurred and a brief note on what happened. The following injuries or ill health must be reported: - the death of any person; - specified injuries including fractures, amputations, eye injuries, injuries from electric shock, and acute illness requiring removal to hospital or immediate medical attention; - 'over-seven-day' injuries, which involve relieving someone of their normal work for more than seven days as a result of injury caused by an accident at work; - reportable occupational diseases, including: - cramp of the hand or forearm due to repetitive movement; - carpal tunnel syndrome, involving hand-held vibrating tools; - occupational asthma; - tendonitis or tenosynovitis (types of tendon injury); - hand-arm vibration syndrome (HAVS), including where the person‘s work involves regular use of percussive or vibrating tools; and - occupational dermatitis; - near misses (described in the Regulations as 'dangerous occurrences'). The HSE has produced a list of the kinds of incidents regarded as 'dangerous occurrences'. h) The working time regulations 1998 These regulations implement two European Union directives on the organisation of working time and the employment of young workers (under 18 years of age). The regulations cover the right to annual leave and to have rest breaks, and they limit the length of the working week. Key protections for adult workers include: - a 48-hour maximum working week. Employers have a contractual obligation not to require a worker to work more than an average 48-hour week (unless the worker has opted out of this voluntarily and in writing); 115


- minimum daily rest periods of 11 hours, unless shift-working arrangements have been made that comply with the Regulations; and - an uninterrupted 20-minute daily rest break after six hours' work, to be taken during, rather than at the start or end of the working time. Extra protection is available to young workers (workers aged 15 to 18). In particular, young workers: - are entitled to a daily uninterrupted rest break of 30 minutes after working more than 4.5 hours; - are entitled to an uninterrupted 12-hour break in each 24 hour period of work. - are entitled to weekly rest of at least 48 hours in each seven-day period (and unlike adult workers, they cannot be made to take this rest over two days averaged over two weeks); and - cannot normally work more than eight hours a day or 40 hours a week. These hours cannot be averaged out. There is no 'opt-out' for young workers. All full-time workers are entitled to 5.6 weeks' paid holiday each year, reduced pro-rata for part-timeworkers. These basic limits on the working week make a vital contribution to health and safety at work. - Employers have the right to ask their staff to enter into a written agreement to opt out of the 48-hour limit, for a specific period or indefinitely. - However, if such an agreement is opted into, a worker is entitled to bring the agreement to an end without the employer's consent. 6.7. RULES RELATING TO HEALTH AND SAFETY AT WORK The main legislation providing for the health and safety of people in the workplace are the Safety, Health and Welfare at Work Acts 2005 and 2010. They apply to all employers, employees (including fixed-term and temporary employees) and self-employed people in their workplaces. The Acts set out the rights and obligations of both employers and employees and provides for substantial fines and penalties for breaches of the health and safety legislation. Almost all of the specific health and safety laws which apply generally to all employments are contained in the Safety, Health and Welfare at Work (General Application) Regulations 2007. Employer‟s duties Under Section 8 of the Act the employer has a duty to ensure the employees‘ safety, health and welfare at work as far as is reasonably practicable. In order to prevent workplace injuries and ill health the employer is required, among other things, to: - Provide and maintain a safe workplace which uses safe plant and equipment - Prevent risks from use of any article or substance and from exposure to physical agents, noise and vibration - Prevent any improper conduct or behaviour likely to put the safety, health and welfare of employees at risk - Provide instruction and training to employees on health and safety - Provide protective clothing and equipment to employees - Appointing a competent person as the organisation‘s Safety Officer 116


Employees‟ duties The duties of employees while at work are set out in Section 13 of the Act. These include the following: - To take reasonable care to protect the health and safety of themselves and of other people in the workplace - Not to engage in improper behaviour that will endanger themselves or others - Not to be under the influence of drink or drugs in the workplace - To undergo any reasonable medical or other assessment if requested to do so by the employer - To report any defects in the place of work or equipment which might be a danger to health and safety 6.8. SOCIAL SECURITY COMPENSATION Some workers who are eligible for Social Security disability benefits may also be eligible to receive workers' compensation benefits if they have work-related illnesses or injuries. However, workers aren't able to receive the full amount of Social Security benefits and workers' compensation benefits at the same time. In most situations, Social Security requires that Social Security disability insurance (SSDI) benefits be reduced so that the total monthly amount that a disabled worker receives is no more than 80% of the amount she earned when she was fully employed. The process of Social Security reducing disability benefits to account for worker‘s compensation is called a worker‘s compensation ―offset.‖ The rules about how Social Security calculates worker‘s compensation offsets are complicated. Worker‘s compensation programs vary from state to state, and each state has different rules about things like the maximum workers' compensation that can be paid out, the different categories of benefits, and the ways a claimant can settle a worker‘s compensation case. Social security offset calculation To calculate the amount of the offset for a particular recipient, Social Security first determines what it calls the ―applicable limit,‖ or the maximum total monthly amount of combined benefits that the recipient is allowed to get under federal law. When a claimant receives more money than the applicable limit in any given month, then Social Security offsets SSDI in the amount required to bring the total back down to the applicable limit. Worker‘s compensation offsets of SSDI happen more often to those who earned lower incomes when they were working, because their applicable limits are lower and more easily exceeded once the worker starts to receive SSDI and worker‘s compensation. Applicable limit (Maximum amount of benefits) The applicable limit is the higher of either: - 80% of the worker's pre-injury income, called ―average current earnings,‖ or - the total amount of SSDI received by all of the members of the recipient's family in the first month that worker‘s compensation is received, called the ―total family benefit.‖ 117


For most SSDI recipients, the 80% of earnings figure will be higher, and Social Security will use that figure in the offset calculation. Average current earnings How does Social Security calculate average current earnings? It takes the highest one of the following three amounts. - the average monthly wage that your SSDI benefit amount is based on (the technical term for this is your ―unindexed primary insurance amount‖) - the ―high five,‖ or the average monthly earnings from the highest five years in a row, or - the ―high one,‖ or the average monthly earnings from a single calendar year, either the year the person‘s disability began or any one of the five calendar years before that year. For the vast majority of SSDI recipients, Social Security finds average current earnings by using the ―high one‖ test. Reduction of SSDI First Social Security calculates 80% of the average current earnings (or uses 100% of the total family benefit, if that is higher) to come up with the applicable limit. Then it adds the monthly SSDI benefit to the monthly worker's compensation benefit. If the benefit total exceeds the applicable limit, Social Security will reduce SSDI until it reaches the applicable limit. Social Security will offset SSDI in this manner until the recipient reaches full retirement age and begins collecting Social Security retirement benefits instead of SSDI. Reverse offsets Some states offset their worker‘s compensation benefits to account for SSDI, in the same way that Social Security offsets SSDI to account for worker‘s compensation. This is called a "reverse offset." Social Security will not offset SSDI when the state is already offsetting worker‘s compensation, as long as the state worker‘s compensation law that requires the offset was in effect before February 18, 1981. States that apply a reverse offset might not apply it to all types of worker's compensation benefits. Fifteen states have some kind of reverse offset rule, even if it does not apply to all types of worker's compensation benefits. Lump sum workers‟ compensation settlements Many worker‘s compensation claimants will settle their cases before a hearing or trial. In many cases, disabled workers give up any entitlement to monthly worker‘s compensation benefits in exchange for the employer paying an immediate lump sum payment. Social Security is wise to this fact and will offset SSDI benefits to account for a lump sum settlement. Social Security has several ways of converting a lump sum workers' comp payment into a monthly benefit for the purposes of calculating an offset, and it will take a close look at the language of the settlement document when it is offsetting a lump sum. In the most basic method, Social Security converts the lump sum to a monthly amount by dividing the lump 118


sum by the periodic worker‘s compensation payment that the person had been receiving, and then applying the SSDI offset for the resulting number of months. For example, Mr. Jones is 25 years old and had been receiving Tk.1,200 per month in worker‘s compensation payments until he entered into a lump sum settlement for Tk.24,000. Social Security will consider Mr. Jones to have received Tk.1,200 per month in worker‘s compensation benefits for 20 months (Tk.24,000/Tk.1,200) for purposes of calculating the SSDI offset. Minimizing the social security offset Worker‘s compensation attorneys often try to draft settlement agreements to minimize any offset of SSDI benefits. Social Security will look at the language of the worker‘s compensation settlement document to decide how much of the settlement is subject to offset. For example, Mr. Jones‘ attorney might specify that the Tk.24,000 is meant to be a $50 per month payment for every month until he reaches 65 (Tk.24,000/480 months). Social Security would calculate any SSDI offset based on Tk.50 per month for 480 months. Because Mr. Jones would have a lower monthly income from workers' comp, he would lose less SSDI, or might escape the offset entirely. Lawyers also will draft the settlement agreement to exclude medical and legal expenses from the lump sum that is counted for Social Security. Social Security will exclude these expenses from being used to calculate the offset if the language in the settlement document is clear. If this language is not included in the settlement agreement, Social Security may ask for documentation of medical and legal expenses before disregarding those amounts from the offset calculation. Rules about what issues can be settled and what language needs to be in a settlement agreement all come from state law, not federal law, and so they vary from state to state. If you are worried about Social Security reducing your SSDI benefits because of a workers' compensation award, you should consult a disability attorney to help you resolve your worker‘s compensation case in a way that leaves you with the most money possible each month. 6.9. MEANING OF OCCUPATIONAL INJURY An Occupational injury is any personal injury, disease or death resulting from an occupational accident; an occupational injury is therefore distinct from an occupational disease, which is a disease contracted as a result of an exposure over a period of time to risk factors arising from work activity. It is bodily damage resulting from working. The most common organs involved are the spine, hands, the head, lungs, eyes, skeleton, and skin. Occupational injuries can result from exposure to occupational hazards (physical, chemical, biological, or psychosocial), such as temperature, noise, insect or animal bites, blood-borne pathogens, aerosols, hazardous chemicals, radiation, and occupational burnout. 119


While many prevention methods are set in place, injuries may still occur due to poor ergonomics, manual handling of heavy loads, misuse or failure of equipment, exposure to general hazards, and inadequate safety training. 6.10. CIVIL LIABILITY FOR OCCUPATIONAL INJURIES Employers are responsible for assuring safe and healthful working conditions for employees, according to the Occupational Safety and Health Act of 1970. Failure to maintain a safe working environment that is free from dangerous hazards could result in citations and penalties. Employers are responsible for accidents that occur in the workplace or on company time away from the workplace, such as during training, employee travel away from work, breaks and lunches. Employers have a broad range of duties regarding workplace accidents and accident prevention. According to the Occupational Safety and Health Act, employers must eliminate hazards that are likely to cause death or serious physical harm to employees. Although employers must keep the work environment safe, employers may not always have legal liability for an accident. For example, if an employee's substance abuse contributed to a workplace accident, the employer may not be held legally responsible for the event. The employer is still responsible for ensuring that the employee receives medical treatment, however. If an event occurred due to a workplace hazard such as exposed wiring, the employer is directly responsible and possibly legally liable for failure to maintain a safe working environment.

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PAST EXAM QUESTIONS AND ANSWERS Q-1. Explain how employers and employees are affected by health and safety legislation. CMA Adapted- June 2017 Answer. The main legislation providing for the health and safety of people in the workplace are the Safety, Health and Welfare at Work Acts 2005 and 2010. They apply to all employers, employees (including fixed-term and temporary employees) and self-employed people in their workplaces. The Acts set out the rights and obligations of both employers and employees and provides for substantial fines and penalties for breaches of the health and safety legislation. Almost all of the specific health and safety laws which apply generally to all employments are contained in the Safety, Health and Welfare at Work (General Application) Regulations 2007. Employer‟s duties Under Section 8 of the Act the employer has a duty to ensure the employees‘ safety, health and welfare at work as far as is reasonably practicable. In order to prevent workplace injuries and ill health the employer is required, among other things, to: - Provide and maintain a safe workplace which uses safe plant and equipment - Prevent risks from use of any article or substance and from exposure to physical agents, noise and vibration - Prevent any improper conduct or behaviour likely to put the safety, health and welfare of employees at risk - Provide instruction and training to employees on health and safety - Provide protective clothing and equipment to employees - Appointing a competent person as the organisation‘s Safety Officer Employees‟ duties The duties of employees while at work are set out in Section 13 of the Act. These include the following: - To take reasonable care to protect the health and safety of themselves and of other people in the workplace - Not to engage in improper behaviour that will endanger themselves or others - Not to be under the influence of drink or drugs in the workplace - To undergo any reasonable medical or other assessment if requested to do so by the employer - To report any defects in the place of work or equipment which might be a danger to health and safety Q-2. Explain the distinction between dismissal and wrongful dismissal. CMA Adapted- December 2016 Answer. Distinction between dismissal and wrongful dismissal: 121


Dismissal: Dismissal is the termination of employment by an employer against the will of the employee. Though such a decision can be made by an employer for a variety of reasons, ranging from an economic downturn to performance-related problems on the part of the employee, being fired has a strong stigma in many cultures. To be dismissed, as opposed to quitting voluntarily (or being laid off), is often perceived as being the employee's fault. Finding new employment may often be difficult after being fired, particularly if there is a history of being fired from previous jobs, if the reason for firing is for some serious infraction, or the employee did not hold the job very long. Job seekers will often not mention jobs that they were fired from on their resumes; accordingly, unexplained gaps in employment are often regarded as a red flag. Wrongful dismissal: Wrongful Dismissal is where an employee has been dismissed without notice or an employee has not been given the right amount of notice, or the employment is terminated contrary to the contract. Wrongful Dismissal is based upon the actual contract between the employer and the employee and so breaches of that contract by the employer could give the employee the right to sue for Wrongful Dismissal. There is no requirement to have been employed for at least one year in order to bring a claim. Q-3. What are the legal procedures relating to the retrenchment of a worker? CMA Adapted- December 2016 Answer. Like all dismissals retrenchments must be both procedurally and substantively fair. Section 189 of the Labour Relations Act requires all consulting parties to reach consensus on the various matters specified. The Labour Relations Act requires that consultation must take place when the employer contemplates retrenchment. Section 189 (1) of the LRA provides that, before retrenching, employers must consult any person whom the employer is required to consult in terms of the collective agreement. If there is no collective agreement, meetings should be held individually with all Employees that could be affected by the retrenchment. If the employee is a member of the union, the Union must also be consulted. Section 189 (2) of the Labour Relations Act provides that the consulting parties must attempt to reach consensus on the following matters: - Avoiding the dismissal; - Appropriate measures to minimize the dismissals; - Measures to change the timing of the dismissals; - Appropriate measures to mitigate the effects of retrenchment; - The method for selecting the employees to be dismissed; - Severance Pay. Section 189 (3) of the LRA requires the employer to disclose in writing to the employees or their unions all relevant information including but not limited to:

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- The reasons for the Retrenchment; - Alternatives considered and the reasons why they were rejected; - The number of Employees likely to be affected; - Proposed method of selection; - Severance pay; - Assistance that the employer will be offering; - Possibility of future re- employment. Section 189 (7) of the LRA provides that employers may select employees to be retrenched according to the criteria they have agreed upon by the consulting parties. If no criteria have been agreed upon that the selection must be fair and objective, the LIFO (‗last in‘ – ‗first out‘) principal is often applied but is not the only principal. Notices are given to the Employees who are to be retrenched after the consultation process has been completed. Employees are entitled to severance pay only if they are retrenched for operational requirements. The requirements regarding severance pay are set out in section 41 of the BCEA. Section 41 provides that an employer must pay an employee dismissed for operational requirements ―severance pay equal to at least one week‘s remuneration for each completed year of service with that employer. The employer must pay the retrenched employee the following payments: - Severance pay; - Any outstanding leave to be paid out; and - Notice pay. Q-4. You are the Senior Finance Manager of XYZ Garments Ltd. Your company retrenched 20 workers from Sewing Department at the beginning of the year as there was insufficient work order and the company was making loss. Now, after 6 months, the business environment has changed and there is enough work order to profitability run the company. The Board has decided to employ 15 new workers for Sewing Department and other 15 for different departments. Having been informed of the new appointment circular, the retrenched workers are demanding for their re-appointment. The Board seeks your advice. Advice the board on legal ground. CMA Adapted- December 2016 Answer. They were not reappointed in any post and were retrenched. Three engineers referred their complaint to the Labour Court. The Labour Court agreed that the company was entitled to proceed with its plan for filling posts with suitably qualified employees who had applied for the posts. However, the Labour Court ruled that the substantive unfairness arose because the company did not reappoint the three engineers to their existing posts within the new structure, 123


and although the 3 did not apply for any posts at all, the Labour Court felt that the employer should still have considered them for other posts for which they might have been suitable. In other words, although it is common practice among employers to say to employees "you must re-apply for your job (or for another post within the organization) but if your application is unsuccessful you will be retrenched," the Labour Court does not agree with this approach at least they did not agree with it in the case mentioned. It seems to be that the intention of the Labour Court in this judgment is to say that employers must consider whether employees may be suitably qualified for a post other than those that they applied for, or even other than those that they did not apply for, or consider whether they should be kept on within the new structure in their present posts, even if they did not re-apply for their present posts. Q-5. Write short notes on Civil Liability for Occupational Injuries. CMA Adapted- June 2016 Answer. Workers often sustain an injury or contract a disease arising out of their employment. Workemen's Compensation Act 1923 states that employers must pay a certain amount of money into a central fund each month for occupational injuries. The amount depends on how dangerous the industry is, how many workers are employed in the company and the wages paid to the workers. This fund is called the Compensation Fund. If workers are injured at work or get a disease caused by their work (occupational disease), they get paid out of this fund. It is not always necessary for the worker to be able to identify a specific event or date of injury for the claim to be compensable. This is because some injuries are not easily identifiable. For example, a person who works in a coal mine, cement factory, foundry, or motor vehicle manufacturing plant, and as a result of the dirty, dusty, oily air, contracts a lung disease would never be able to identify a specific traumatic event that caused the condition, or a specific date of injury or disease. Q-6. What are the prevailing rules for health & safety at work? What are the remedies to employees if not complied by employers? CMA Adapted- June 2016 Answer. The prevailing rules for health & safety at work: Health and Safety at Work Act 1974 make provisions for securing the health, safety and welfare of persons at work, for protecting others against risks to health or safety in connection with the activities of persons at work, for controlling the keeping and use and preventing the unlawful acquisition, possession and use of dangerous substances, and for controlling certain emissions into the atmosphere. The prevailing rules of health and safety at work are pointed below: a) It shall be the duty of every employer to ensure, so far as is reasonably practicable, the health, safety and welfare at work of all his employees. 124


b) Without prejudice to the generality of an employer‘s duty under the Act, the matters to which that duty extends include in particular— i) the provision and maintenance of plant and systems of work that are, so far as is reasonably practicable, safe and without risks to health; ii) arrangements for ensuring, so far as is reasonably practicable, safety and absence of risks to health in connection with the use, handling, storage and transport of articles and substances; iii) the provision of such information, instruction, training and supervision as is necessary to ensure, so far as is reasonably practicable, the health and safety at work of his employees; iv) so far as is reasonably practicable as regards any place of work under the employer‘s control, the maintenance of it in a condition that is safe and without risks to health and the provision and maintenance of means of access to and egress from it that are safe and without such risks; v) the provision and maintenance of a working environment for his employees that is, so far as is reasonably practicable, safe, without risks to health, and adequate as regards facilities and arrangements for their welfare at work. The remedies to employees if not complied by employers: If the employers not ensure the health and safety at workplace the employees should be demotivated employee. They feel lack of security during the working hour and it will leads to less productivity and labour unrest. Q-7. Write short notes on: (a) Unfair and wrongful Dismissal of Employee; (b) Independent Contractor; (c) Quasi Contract. CMA Adapted- June 2016 Answer. (a) Unfair and wrongful Dismissal of Employee: Unfair dismissal is when an employee is dismissed from their job in a harsh, unjust or unreasonable manner. The Fair Work Commission (the Commission) decides on cases of unfair dismissal. Wrongful dismissal, also called wrongful termination or wrongful discharge, is a legal phrase, describing a situation in which an employee's contract of employment has been terminated by the employer, if the termination breaches one or more terms of the contract of employment, or a statute provision in employment law. (b) Independent Contractor: An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when required, during which time he or she may be subject to law of agency. Independent contractors are usually paid on a freelance basis. Contractors 125


often work through a limited company or franchise, which they themselves own, or may work through an umbrella company. (c) Quasi Contract: A quasi contract is an agreement between two parties without previous obligations to one another that has been created and legally recognized by the court system. Under a quasicontract, neither involved party is expected to create such an agreement; this contract is arranged and imposed by a judge to correct a circumstance in which one party acquires something at the expense of the other party. Q-8. Write short note on i) Dismissal ii) Social Security Compensation CMA Adapted- December 2015 Answer. i) Dismissal: Dismissal (referred to informally as firing or sacking) is the termination of employment by an employer against the will of the employee. Such a decision can be made by an employer for a variety of reasons, ranging from an economic downturn to performance related problems on the part of the employee. At the time of dismissal, the employer must show a valid reason that can be justified. To be dismissed, as opposed to quitting voluntarily (or being laid off), is often perceived as being the employee's fault. ii) Social Security Compensation: Social Security Compensation is paid out monthly to retired workers and their spouses who have, during their working years, paid into the Social Security system. Social Security Compensation is also available to qualifying individuals who are completely and permanently disabled, and are determined by a specific and rigid set of criteria issued by the Social Security Administration. Q-9. Distinguish between an employee and an independent contractor. CMA Adapted- December 2015 Answer. Distinction between an employee and an independent contractor: Employee Independent contractor 1. Performs work, under the direction and 1. Has a high level of control in how the control of their employer, on an ongoing work is done. basis. 2. Generally works standard or set hours. 2. Under agreement, decides what hours to work to complete the specific task. 3. Usually has an ongoing expectation of 3. Usually engaged for a specific task. work. 126


4. Bears no financial risk.

4. Bears the risk for making a profit or loss on each task. 5. Tools and equipment are generally 5. Uses their own tools and equipment . provided by the employer, or a tool allowance is provided.

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CHAPTER - 7 COMPANY ADMINISTRATION AND FINANCE

7.1. DEFINITION OF SOLE TRADER SHIP The sole trader ship is the simplest business form under which one can operate a business. The sole trader ship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. A sole trader ship can operate under the name of its owner or it can do business under a fictitious name, such as Nurun Salon. The fictitious name is simply a trade name. It does not create a legal entity separate from the sole proprietor owner. 7.2. CHARACTERISTICS OF SOLE TRADER SHIP Individual initiative: This business is started by the initiative of a single person. He prepares the blue prints of the venture and arranges various factors of production. He may employ other person for assistance but ultimate authority and responsibility lies with him. All the profits and losses are taken by the single individual. Unlimited liability: In sole trade business liability is unlimited. The proprietor is responsible for all losses arising from the business. The liability is not limited only to his investments in the business but his private property is also liable for business obligations. Management and control: The proprietor manages the whole business himself. He prepares various plans and executes them under his own supervision. There may be some persons to help him but ultimate control lies with the owner. Motivation: One person is the sole owner of the business. He takes all profits and bears losses, if any. There is a direct relationship between efforts and reward. If he works more, he will earn more. He is motivated to expand his business activities. He will not like to enter speculative business because the risk involved is more. Secrecy: All important decisions are taken by the owner himself. He keeps all the business secrets only to himself. Business secrets are very important for small business. By retaining business secrets he avoids competitors entering the same business. Proprietor and proprietorship are one: Legally, the sole trader and his business are not separate entities. Loss in his business is his loss and liabilities of the business are his liabilities. 128


Owners and business exist together: In sole-trade business there is no separate existence of the business with the owner. The business and owner exist together. The business is dissolved if the owner dies, becomes insolvent or is removed from the scene. Limited area of operations: A sole-trade business has generally a limited area of operations, the reason being the limited resources and managerial abilities of the sole trader. He can arrange limited funds only and will be able to supervise a small business. Since all decisions are to be taken by the proprietors, so the area of business will be limited with his management abilities. Free from legal formalities: A sole trade business can be started without performing any legal formalities. It does not require any formation or registration. Discretionary start and end: A sole trader can start the business as per his will and similarly can dissolve it as per his discretion. Freedom in selection of trade: A sole trader is free to decide the type of business activity he wants to start. He is not supposed to consult anybody for taking such decisions. Distribution of profits: A sole trader is the single owner of the business, he takes all the profits himself. He puts all his efforts into the business and takes all the fruits of his labour. 7.3. OBJECTIVES OF SOLE TRADER SHIP A sole-trade business is set up by one person with his own resources. This form of organisation is set up for the following objectives: Channelise individual funds: Individuals have small surplus funds with them. These funds are not enough to set up big business. People may not like to risk their funds in those businesses where they have no say and control. It is better to set up a small business instead of keeping the funds idle. So soletrade business provides a channel to make productive use of individual funds. Strengthen distribution channel: Sole-Trade business is generally on a small scale basis. People set up small retail outlets under sole-proprietary organisation. A retailer is an important link in the chain of distribution. He is in direct contact with the consumers. No distribution channel from the producer to the consumer can be successful without the active involvement of sole-traders.

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Serve consumers: A small trader comes in direct contact with the consumers. A consumer wants to buy his dayto-day requirements from the nearest place. Sole-traders set up their shops wherever the consumers are available. A consumer saves time by purchasing daily necessities from the nearest retail outlet. Create self-employment opportunities: By setting up a sole trade business, the owner has created an employment for himself. Instead of looking for jobs outside, this is a form of organisation which helps people to create work for themselves. Avoid concentration of wealth: In order to avoid concentration of wealth in a few funds, sole trade business helps in its distribution among large number of people. When large number of people enter into different businesses, may be at a small scale, it helps in distribution of economic wealth. Help large business: The success of large-scale business is also linked to the help provided by small business units. Small units provide ancillary service to big units. Large units require a number of small components from small units. So sole-trade business provides service to large units by providing them all those things which they do not want to manufacture themselves. In Japan, all large scale units depend upon the supplies from small units. 7.4. ADVANTAGES OF SOLE TRADER SHIP Sole traders benefit from the following advantages: Control – Sole traders maintain full control of their business. Running it how they please without the interference of others. Profit retention – Sole traders retain all the profits of their business. Private data – Information about sole traders is kept private, unlike that of limited companies which is necessarily made public after registration with Companies House. Specialist – Often a small business, sole traders can offer a more personal service with local roots and ties. This can be more appealing to potential customers in the local community. Personal – Because there is no need to confer with other decision makers, sole traders can make decisions quickly and act on them swiftly, providing for the needs of their customers. 7.5. DISADVANTAGES OF SOLE TRADER SHIP Just like any other form of business, being a sole trader can also have its disadvantages. 130


Liability – sole traders are not seen as a separate entity by the law. Therefore, they are subject to unlimited liability. This means if the business gets into debt, the business owner is liable. In the worst case, this may mean a person risks their home, personal savings and any other assets they have both in and outside of the business. Finance – sole traders often find it difficult to raise finance to fund their business. They may struggle with expansion in the future. Reverse economies of scale – sole traders will be unable to take advantage of economies of scale in the same way as limited companies and larger corporations, who can afford to buy in bulk. This might mean that they have to charge higher prices for their products or services in order to cover the costs. Decision making – all decisions must be made by the sole trader. There is no room for help by others. So the success or failure of the business rests on one person. 7.6. DEFINITION OF PARTNERSHIPS A partnership is an arrangement in which two or more individuals share the profits and liabilities of a business venture. Various arrangements are possible: all partners might share liabilities and profits equally, or some partners may have limited liability. Not every partner is necessarily involved in the management and day-to-day operations of the venture. In some jurisdictions, partnerships enjoy favorable tax treatment relative to corporations. 7.7. CHARACTERISTICS OF PARTNERSHIPS Existence of an agreement: Partnership is the outcome of an agreement between two or more persons to carry on business. This agreement may be oral or in writing. The Partnership Act, 1932 (Section 5) clearly states that ―the relation of partnership arises from contract and not from status.‖ Existence of business: Partnership is formed to carry on a business. As stated earlier, the Partnership Act, 1932 [Section 2 (6)] states that a ―Business‖ includes every trade, occupation, and profession. Business, of course, must be lawful. Sharing of profits: The purpose of partnership should be to earn profits and to share it. In the absence of any agreement, the partner should share profits (and losses as well) in equal proportions. Agency relationship: The partnership business may be carried on by all or any of them acting for all. Thus, the law of partnership is a branch of the law of Agency. To the outside public, each partner is a principal, while to the other partners he is an agent. It must, however, be noted that a partner must function within the limits of authority conferred on him. 131


Membership: The minimum number of persons required to constitute a partnership is two. The Act, however, does not mention the upper limit. For this a recourse has to be taken to the Companies Act, 1956 [Section 11 (1) & (2)]. It states that the maximum number of persons is ten, in case of a banking business and twenty, in case of any other business. Nature of liability: The nature of liability of partners is the same as in case of sole proprietorship. The liability of partners is both individual and collective. The creditors have a right to recover the firm‘s debts from the private property of one or all partners, where firm‘s assets are insufficient. Fusion of ownership and control: In the eyes of law, the identity of partners is not different from the identity of partnership firm. As such, the right of management and control vests with the owners (i.e., partners). Non-transferability of interest: No partner can assign or transfer his partnership share to any other person so as to make him a partner in the business without the consent of all other partners. Registration of firm: Registration of a partnership firm is not compulsory under the Act. The only document or even an oral agreement among partners required is the ‗partnership deed‘ to bring the partnership into existence. 7.8. ADVANTAGES OF PARTNERSHIPS Capital – Due to the nature of the business, the partners will fund the business with start up capital. This means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth. It also means more potential profit, which will be equally shared between the partners. Flexibility – A partnership is generally easier to form, manage and run. They are less strictly regulated than companies, in terms of the laws governing the formation and because the partners have the only say in the way the business is run (without interference by shareholders) they are far more flexible in terms of management, as long as all the partners can agree. Shared responsibility – Partners can share the responsibility of the running of the business. This will allow them to make the most of their abilities. Rather than splitting the management and taking an equal share of each business task, they might well split the work according to their skills. So if one partner is good with figures, they might deal with the book keeping and accounts, while the other partner might have a flare for sales and therefore be the main sales person for the business.

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Decision making – Partners share the decision making and can help each other out when they need to. More partners means more brains that can be picked for business ideas and for the solving of problems that the business encounters. 7.9. DISADVANTAGES OF PARTNERSHIPS Disagreements – One of the most obvious disadvantages of partnership is the danger of disagreements between the partners. Obviously people are likely to have different ideas on how the business should be run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. This is why it is always advisable to draft a deed of partnership during the formation period to ensure that everyone is aware of what procedures will be in place in case of disagreement and what will happen if the partnership is dissolved. Agreement – Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done. This means that in some circumstances there are less freedoms with regards to the management of the business. Especially compared to sole traders. However, there is still more flexibility than with limited companies where the directors must bow to the will of the members (shareholders). Liability – Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. Which can be off putting for some people. This can be countered by the formation of a limited liability partnership, which benefits from the advantages of limited liability granted to limited companies, while still taking advantage of the flexibility of the partnership model. Taxation – One of the major disadvantages of partnership, taxation laws mean that partners must pay tax in the same way as sole traders, each submitting a Self Assessmenttax return each year. They are also required to register as self employed with HM Revenue & Customs. The current laws mean that if the partnership (and the partners) bring in more than a certain level, then they are subject to greater levels of personal taxation than they would be in a limited company. This means that in most cases setting up a limited company would be more beneficial as the taxation laws are more favourable (see our article on the Advantages and Disadvantages of a Limited Company). Profit Sharing – Partners share the profits equally. This can lead to inconsistency where one or more partners aren‘t putting a fair share of effort into the running or management of the business, but still reaping the rewards. 7.10. DEFINITION OF COMPANY A company is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise. Company members share a common purpose, and unite in order to focus their various talents and organize their 133


collectively available skills or resources to achieve specific, declared goals. Companies take various forms, such as: - voluntary associations, which may include nonprofit organizations - business entities with an aim of gaining a profit - financial entities and banks 7.11. TYPES OF COMPANY Common types of companies are as follows: A company limited by guarantee. Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise they have no economic rights in relation to the company. This type of company is common in Bangladesh. A company limited by guarantee may be with or without having share capital. A company limited by shares. The most common form of company used for business ventures. Specifically, a limited company is a "company in which the liability of each shareholder is limited to the amount individually invested" with corporations being "the most common example of a limited company." This type of company is common in Bangladesh and many English-speaking countries. A company limited by shares may be a - public limited company or a - private limited company. A company limited by guarantee with a share capital. A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return. This type of company may no longer be formed in the Bangladesh, although provisions still exist in law for them to exist. A limited liability company. "A company—statutorily authorized in certain states—that is characterized by limited liability, management by members or managers, and limitations on ownership transfer". Limited liability company structure has been called "hybrid" in that it "combines the characteristics of a corporation and of a partnership or sole proprietorship". Like a corporation, it has limited liability for members of the company, and like a partnership it has "flow-through taxation to the members" and must be "dissolved upon the death or bankruptcy of a member". An unlimited company with or without a share capital. A hybrid entity, a company where the liability of members or shareholders for the debts (if any) of the company are not limited. In this case doctrine of veil of incorporation does not apply. 134


Less common types of companies are: Companies formed by letters patent. Most corporations by letters patent are corporations sole and not companies as the term is commonly understood today. Charter corporations. Before the passing of modern companies legislation, these were the only types of companies. Now they are relatively rare, except for very old companies that still survive (of which there are still many, particularly many British banks), or modern societies that fulfill a quasi regulatory function (for example, the Bank of England is a corporation formed by a modern charter). Statutory companies. Relatively rare today, certain companies have been formed by a private statute passed in the relevant jurisdiction. 7.12. PREFERANCE OF PRIVATE LIMITED COMPANY Entrepreneurs prefer private limited company for the following reasons: Separate legal entity: A private limited company has its own legal identity, separate from its shareholders and its directors. It can acquire assets, go into debt, enter into contracts, sue or be sued in its own name. Limited liability: The liability of the shareholders to contribute to the debts of the company is limited to the amount that they each agreed to contribute as capital to the company. Perpetual succession: The Company‘s existence does not depend on the continued membership of any of its shareholders. Ease of transfer of shares or changes in shareholders ensures that company continues to exist even in the event of death, resignation, or insolvency of shareholders or directors. Ease of raising capital: You can raise capital for expansion or other purposes by bringing in new shareholders or issuing more shares to existing shareholders. Investors are more likely to purchase shares in a company where there usually is a separation between personal and business assets. Also, most banks prefer to lend money to limited companies. Credible image: As an incorporated business entity, it commands a better image than a sole proprietorship or a partnership firm, and investors will be more willing to become part of the company as it demonstrates a vision to grow and expand. As a private limited company, your business will be taken more seriously by your potential clients, suppliers, bankers, and other professionals you will be dealing with. Easier transfer of ownership: Ownership of a company may be transferred, either wholly or partially, without disrupting operations or the need for complex legal documentation. This can 135


be done through the selling of all or part of its total shares, or through the issue of new shares to additional investors. 7.13. DISTINCTION BETWEEN PUBLIC AND PRIVATE COMPANIES Differentiation between a private and a public company: Public company 1. According to the Companies Act 1994, public company means a company incorporated under this Act or under any law at any time in force before the commencement of this Act and which is not a private company 2. Minimum number of members are seven and maximum number of members are limited by the number of shareholders 3. Its share is transferable 4. It can issue debenture 5. Its minimum number of director is 3 6. It can publish prospectus 7. It is obligated to call statutory meeting

Private company 1. According to the Companies Act 1994, private company means a company which by its articles limit the right to transfer of share (if any) and limit the number of its members excluding the persons who are in its employment 2. Minimum number of members are two and maximum number of members are fifty 3. Its share in not transferable 4. It cannot issue debenture 5. Its minimum number of director is 2. 6. It cannot publish prospectus 7. It is not obligated to call statutory meeting.

7.14. CHARACTERISTICS OF COMPANIES LIMITED BY SHARES - Private Limited Company with shares – minimum 1 share, maximum unlimited - Suitable for any normal commercial trading purposes - Objects are usually unrestricted - Suitable for the vast majority of businesses in the UK - Can undertake any nature of business - Can operate anywhere in the world - Members have limited liability - Can have a sole director and sole shareholder - Can have corporate officers - Limited companies are often advantageous for their shareholders regarding taxation - Incorporated usually in less than 3 hours and full documents despatched within 24 hours - Own choice of name subject to ―sensitive names‖ and ―same as‖ rules 7.15. ADVANTAGES OF COMPANIES LIMITED BY SHARES i. Limited financial liability. Shareholders‘ personal finances are protected and they are only responsible for company debts up to the value of their shares.

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ii. Incorporated status will greatly improve your professional image and business profile. Limited companies are often more appealing to prospective clients and investors, giving the impression of a well-organised, established and reputable business. iii. Another company can be a shareholder or director in a limited company. However, there must always be at least one natural (human) director. iv. Ownership of a limited company can be passed on. As the company exists as a separate legal entity from the individual, the company can continue to exist even in the event of the owners‘ death – unlike a sole proprietorship. v. When you register a company name, it is protected and cannot be used by any other limited company or LLP, nor can another company register a name that is similar to your own company name. vi. Companies limited by shares allow for strategic financial planning with regards to tax. Profits can be distributed by way of salary and dividends, and this can make it a very tax effective structure. 7.16. PROCEDURE AT THE MEETING Determine objective and audience Set an objective for the meeting, and make it brief and clearly stated. For example, create a short list of bullet points describing specific goals. The goal of your meeting might be to communicate important information, make decisions, resolve problems or assign actions. A concise and to-the-point objective helps the meeting organizer determine who should participate in the meeting. Build out a list of invitees by aligning each goal with team members whose presence will make it possible to actually meet the goal. Set the agenda Set the meeting‘s agenda based on each goal in the objective. If a goal is to communicate the start of a project, set an agenda item that identifies who will present that information and how the information will be shared, such as by PowerPoint presentation. If the goal is to assign actions, set an agenda item that describes how assignments will be made. Every goal should have one or more agenda items aligned directly with it. Select the date and time Select a meeting date and time based on the availability of the meeting leader and the most critical invitees. The larger the list of invitees, the harder it is to find a day and time when everyone is available. Accept a time that fits as many schedules as possible. Before setting the time, give thought to time zones. If some invitees will participate by phone or the Internet, consider their working hours as well as your own. A 1 p.m. meeting in Eastern Standard Time is a lunch-hour meeting in Central Standard Time. That same meeting is at 2 a.m. in Tokyo.

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Choose the location Find a conference room that will make it possible to achieve all agenda items. Choose a room large or small enough to comfortably fit the number of people expected to attend. A room that seats 40 is a poor choice for a meeting with 10 people. Likewise, you don‘t want a crowd squeezing in so tight it‘s necessary to bring in extra chairs. Arrange for materials and incidentals If presentations are expected, make sure that the room is equipped with a projector. If not, make arrangements to bring a projector with you -- also make sure you have something to project onto, such as a screen or a white wall. Don‘t forget to consider the availability of other incidentals, such as white boards with dry erase markers, flip charts and speaker phones for off-site participants. For multi-hour meetings, arrange for food and beverages so participants stay focused on the topic rather than their stomachs. Notify invitees Notify invitees of the meeting objectives, date, time and location well enough in advance so they can prepare properly. In most cases, at least a week‘s notice is preferable. Use the workplace‘s calendar software to send a meeting appointment to all invitees. Many programs will alert invitees a few minutes or a few days before the meeting, or customize the alerts to your needs. 7.17. MEANING OF ARTICLES OF ASSOCIATION The Articles of Association are the legal document that along with the memorandum of association serves as the constitution of the company. It is comprised of rules and regulations that govern the company‘s internal affairs. The articles of association are concerned with the internal management of the company and aims at carrying out the objectives as mentioned in the memorandum. These define the company‘s purpose and lay out the guidelines of how the task is to be carried out within the organization. The articles of association cover the information related to the board of directors, general meetings, voting rights, board proceedings, etc. The articles of association are the contracts between the shareholders and the organization and among the shareholder themselves. This document often defines the manner in which the shares are to be issued, dividend to be paid, the financial records to be audited and the power to be given to the shareholders with the voting rights. 7.18. PROVISIONS OF ARTICLES OF ASSOCIATION The articles of association is comprised of following provisions: - Share capital, call of share, forfeiture of share, conversion of share into stock, transfer of shares, share warrant, surrender of shares, etc. - Directors, their qualifications, appointment, remuneration, powers, and proceedings of the board of directors meetings. 138


- Voting rights of shareholders, by poll or proxies and proceeding of shareholders general meetings. - Dividends and reserves, accounts and audits, borrowing powers and winding up. 7.19. USES OF ARTICLES OF ASSOCIATION It is mandatory for the following types of companies to have their own articles: Unlimited companies: The article must state the number of members with which the company is to be registered along with the amount of share capital, if any. Companies limited by guarantee: The article must define the number of members with which the company is to be registered. Private companies limited by shares: The private company having the share capital, then the article must contain the provision that, restricts the right to transfer shares, limit the number of members to 50, prohibits the invitation to the public for the further subscription of shares in the form of shares or debentures. 7.20. CONTENTS OF ARTICLES OF ASSOCIATION The Articles can cover a medley of topics, not all of which is required in a country's law. Although all terms are not discussed, they may cover: - The issuing of shares (also called stock), different voting rights attached to different classes of shares - Valuation of intellectual rights, say, the valuations of the IPR of one partner and, in a similar way as how we value real estate of another partner - The appointments of directors - which shows whether a shareholder dominates or shares equality with all of the contributors - Directors meetings - the quorum and percentage of vote - Management decisions - whether the board manages or a founder - Transferability of shares - assignment rights of the founders or other members of the company do - Special voting rights of a Chairman, and his/her mode of election - The dividend policy - a percentage of profits to be declared when there is profit or otherwise - Winding up - the conditions, notice to members - Confidentiality of know-how and the founders' agreement and penalties for disclosure - First right of refusal - purchase rights and counter-bid by a founder 7.21. RIGHTS OF MAJORITY SHAREHOLDERS The majority shareholder is the individual who owns most of a company‘s shares. A majority shareholder generally own more than 50 percent share of a company. They are those people who have bought interests in a company that makes them partial owners of the company. They can generate more power rather than the other combine shareholders. He or she has the power to do things that other shareholders do not have the authority to do. Such situations are usually more common with private companies than with public companies. 139


They may have the right to participate in annual meetings, veto power and vote on matters regarding operations. Participation in annual meeting: This will depend on what the shareholder has in mind and what the other shareholders, who constitute the majority, are agreeable to. Majority shareholders have the right to participate in annual board meetings, as well as general meetings. Besides this, the others having or taking over control of the company may have created expectations regarding the level of success that is assured. Such rights can be acquired through entering into a contractual agreement with the other shareholders. For this, rights can be formed which are not otherwise accessible on the basis of the Memorandum and Articles of Association. Veto power: Majority shareholders have the veto power on all decisions. Whilst such a condition would empower the director concerned, it could inhibit decision-making and may sometimes not be in the best interest of the company. Many crucial and important decisions have to be made in general meetings. General meetings fall under the category of Annual General Meeting and Extraordinary General Meeting. Annual General Meetings are a requirement of the law where certain matters must be dealt with annually. If an annual general meeting is not held, there is a breach of the Act. All other matters can be dealt with at Extraordinary General Meetings. Such meetings are not by law mandatory but are required to be held for other business to be dealt with. It would be permissible for such a shareholder to give himself the rights as are discussed in the context of directors meeting with regard to an Extraordinary General Meeting. 7.22. RIGHTS OF MINORITY SHAREHOLDERS A minority shareholder has the right to disagree to (a) the alteration of the corporate articles to revise the provisions concerning to the issuance or shift of shares, or to modify or take away any constraint on the business the corporation may carry on; (b) the merging of the corporation with a corporation that is not an additional or parent; (c) the maintenance of the corporation in another jurisdiction; or (d) the corporation selling, hiring or exchanging all or significantly all of its property. If a minority shareholder feels that the business of the corporation has been carried on with purpose to deceive any person, or the powers of the directors have been exercised in a way that is oppressive, unfairly injurious, or that unlawfully disregards the minority shareholder's interest, he/she may apply to the Court for a perfect solution. In such cases, the Court has widespread powers to accurate the wrong, including - limiting the conduct complained of, - pointing or replacing directors, - directing the corporation or any other person to buy the complainants shares; - appointing a receiver-manager, 140


- requiring the company to construct financial statements or an accounting, xi) compensating the aggrieved person, - directing modification of the company's records, - liquidating and dissolving the corporation, - moneys paid by the accuser for his shares, - adjusting the articles or bylaws of the company (even if such amendments would break the provisions of a unanimous shareholder's agreement); - directing an matter or replace of shares; - directing the corporation to pay dividends to its shareholders or a class of shareholders, - setting aside a transaction or contract to which the company is a party, - directing an investigation of the affairs of the corporation.

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PAST EXAM QUESTIONS AND ANSWERS Q-1. Describe two reasons supporting why a company (corporate) form of business is superior to other forms of business. CMA Adapted- June 2017 Answer. Company (corporate) form of business is superior to other forms of business, because (i) Companies operating as an incorporated business may find it easier to raise money. Incorporating allows a company to issue stock in an effort to raise money, allowing a company to issue multiple classes of stock. This provides greater opportunity for a company to grow and expand by taking on more investors. (ii) A business organized in corporate form has unlimited life. This means the corporation may be in existence well beyond the lifespan of its original owners. Q-2. “There are two types of companies: private limited companies and public limited companies” Mr. Karim mentioned in his presentation to the MANCOM of High Growth Company. He added that “all public limited companies are listed and all private limited companies are not listed with bourses”. As a future Management Accountant, do you agree with these statements? Provide explanations in support of your answers. CMA Adapted- June 2017 Answer. I agree with this agreement. There are two types of companies: private limited companies and public limited companies. According to the Companies Act 1994, private limited company means a company which by its articles limits the right to transfer of share (if any) and limit the number of its members excluding the persons who are in its employment. According to the Companies Act 1994, public limited company means a company incorporated under this Act or under any law at any time in force before the commencement of this Act and which is not a private company All public limited companies are listed and all private limited companies are not listed with bourses. I disagree with this statement because all listed companies are public companies but not the vice-versa. As per listing regulation, only the public limited company can be listed with the Stock Exchange. As per Companies Act 1994, securities of a private limited company are prohibited for transfer and it cannot be sold publicly. So, the Stock Exchange deals with those securities which are transferable. So, no private limited company is eligible for listing with any Stock Exchange but in case of a public limited company it is not mandatory to be listed. 142


Q-3. Explain the rights of majority and minority shareholders. CMA Adapted- June 2017 Answer. The rights of majority shareholders: The majority shareholder is the individual who owns most of a company‘s shares. A majority shareholder generally own more than 50 percent share of a company. They are those people who have bought interests in a company that makes them partial owners of the company. They can generate more power rather than the other combine shareholders. He or she has the power to do things that other shareholders do not have the authority to do. Such situations are usually more common with private companies than with public companies. They may have the right to participate in annual meetings, veto power and vote on matters regarding operations. Participation in annual meeting: This will depend on what the shareholder has in mind and what the other shareholders, who constitute the majority, are agreeable to. Majority shareholders have the right to participate in annual board meetings, as well as general meetings. Besides this, the others having or taking over control of the company may have created expectations regarding the level of success that is assured. Such rights can be acquired through entering into a contractual agreement with the other shareholders. For this, rights can be formed which are not otherwise accessible on the basis of the Memorandum and Articles of Association. Veto power: Majority shareholders have the veto power on all decisions. Whilst such a condition would empower the director concerned, it could inhibit decision-making and may sometimes not be in the best interest of the company. Many crucial and important decisions have to be made in general meetings. General meetings fall under the category of Annual General Meeting and Extraordinary General Meeting. Annual General Meetings are a requirement of the law where certain matters must be dealt with annually. If an annual general meeting is not held, there is a breach of the Act. All other matters can be dealt with at Extraordinary General Meetings. Such meetings are not by law mandatory but are required to be held for other business to be dealt with. It would be permissible for such a shareholder to give himself the rights as are discussed in the context of directors meeting with regard to an Extraordinary General Meeting. The rights of minority shareholders: A minority shareholder has the right to disagree to (a) the alteration of the corporate articles to revise the provisions concerning to the issuance or shift of shares, or to modify or take away any constraint on the business the corporation may carry on; (b) the merging of the corporation with a corporation that is not an additional or parent; (c) the maintenance of the corporation in another jurisdiction; or (d) the corporation selling, hiring or exchanging all or significantly all of its property. 143


If a minority shareholder feels that the business of the corporation has been carried on with purpose to deceive any person, or the powers of the directors have been exercised in a way that is oppressive, unfairly injurious, or that unlawfully disregards the minority shareholder's interest, he/she may apply to the Court for a perfect solution. In such cases, the Court has widespread powers to accurate the wrong, including - limiting the conduct complained of, - pointing or replacing directors, - directing the corporation or any other person to buy the complainants shares; - appointing a receiver-manager, - requiring the company to construct financial statements or an accounting, xi) compensating the aggrieved person, - directing modification of the company's records, - liquidating and dissolving the corporation, - moneys paid by the accuser for his shares, - adjusting the articles or bylaws of the company (even if such amendments would break the provisions of a unanimous shareholder's agreement); - directing an matter or replace of shares; - directing the corporation to pay dividends to its shareholders or a class of shareholders, - setting aside a transaction or contract to which the company is a party, - directing an investigation of the affairs of the corporation. Q-4. The issued capital can be less than the authorized share capital but it cannot be more than that – Do you agree with the statement? Explain. CMA Adapted- December 2016 Answer. The issued capital can be less than the authorized share capital but it cannot be more than that – I agree with this statement. Issued capital is nothing but just the part of authorized capital for which shares have been issued. Issued capital can be fully paid up and partly paid up also. For example: company can issue shares of Tk.10 of which Tk.10 is paid by shareholder is fully paid up and if Tk.5 is paid out of Tk.10 is known as partly paid up shares. Issued capital cannot be more than authorized capital. It can only be equal or less than to authorized capital. It is mandatory for the company to issue shares of amount equivalent to amount decided as issued capital during incorporation, within 60 days of incorporation of the company. A company has both options to issue the shares and to buy back its shares subject to terms and conditions. Q-5. Explain with financial consequences – (a) Right issue (b) Bonus issue (c) Dividend. CMA Adapted- December 2016 Answer. (a) Financial consequences of right issue: i. Offering the existing shareholder of the equity shares of the company irrespective of class. 144


ii. Offer is to be made by notice within a time limit not less than 15 days from the date of offer. iii. Shareholders have the right to revoke such offer within the prescribed time limit. iv. Directors have the power to dispose of the unaccepted shares in such manner as they may think most beneficial to the company. (b) Financial consequences of bonus issue: i. Call the board meeting. ii. Issue notice of at least 7 days for calling meeting of Board of Directors. iii. Hold the board meeting. iv. Pass board resolution for issue of bonus shares. v. Decide the ratio of shares offering to shareholders. vi. Fixing the date, time, and venue of the general meeting and authorizing a director or any other person to send the notice for the same to the members. vii. Issue notice of EGM at least 21 days before the actual date of the EGM. Viii. The notice shall specify the place, date, day and time of the meeting and contain a statement on the business to be transacted at the EGM. ix. Pass Board Resolution for allotment of shares. (c) Financial consequences of dividend: i. It is to be declared at the general meeting of the company by the directors ii. Dividend once declared must be paid and disbursed within 2 months from the date of declaration iii. No dividend shall exceed the amount recommended by the directors iv. No dividend shall be paid otherwise than out of profits of the year or any other undistributed profit of the company. Q-6. A and B are the shareholders of XYZ (Pvt.) Ltd. Company. The company wants to raise more capital to increase the size of the company and expand its business. Give answer of the following questions: (i) What options does XYZ (Pvt.) Ltd. Company have to raise more fund for the business? (ii) Explain the above if XYZ is a publicly listed company. CMA Adapted- December 2016 Answer. (i) Raising funds in the private markets is generally a more restricted process. Many of the same difficulty occurs when raising private capital. The private firm will also have to develop a compelling story around the business, furnishing potential investors with marketing materials, financials, and a professionally prepared business plan or Private Placement Memorandum (PPM). By complying with SEC registration exemption, issuers may raise capital from the private placement of securities by only accepting investments from accredited investors. This is much more restrictive then the public markets in which firms can sell to the general public. As such, the investor pool for private capital raises is restricted. 145


Private companies have only a few select options in raising capital. The firm can hire an investment bank or placement agent whose goal is to market the opportunity and acquire qualified investors. Another source of capital is provided by private equity firms, whose main goal is to invest in promising private companies with the goal to realize gains in an existing opportunity. Many startups rely on venture funding to fuel growth and propel business to the next level. In exchange for an equity position, venture firms provide guidance and capital to the startup with the goal of capitalizing on that equity in a future IPO or M&A event. (ii) In order to raise funds on a publicly traded exchange, a company often hire an investment bank to help in constructing an investment package, strategize on an initial public offering (IPO) price, find buyers, and go on a roadshow to pitch prospective investors. This is an expensive process. The expertise needs experienced professionals in accounting, legal, finance and operations in the build up to become a public company. The company will have to develop a compelling story around its future and current financials, the strategy to capture market share, and its ability to comply with the regulatory environment and market competition. As the company strategizes around an IPO, it must first draft a prospectus and registration statements which the SEC will review. The SEC will comment on all aspects of the documents including items pertaining to legal, business, accounting, and financial reporting. These items must be addressed and approved before the company can go on a roadshow and pitch the opportunity to investors. Investors will have transparent access to information about the company, including annual and quarterly financials, and will be provided updates on material events within the organization. All of this reporting and auditing can be costly and burdensome, but usually worth the cost to reap the benefits of being publicly traded. The initial capital injection of an IPO can provide a company with a clear path to expansion and profitability. Barriers to raising additional capital after going public are significantly lower because a company can issue more outstanding shares and take both institutional and retail investor capital, enhancing the firms‘ total liquidity profile. Q-7. Write down the rights & responsibilities of Directors & Shareholders separately. CMA Adapted- December 2016 Answer. The rights of Directors: Rights can be categorized into individual rights and collective rights. Individual rights are such right to inspect books of accounts, right to receive notices of board meetings, right to participate in proceedings and cast vote in favour or against resolutions, right to receive circular resolutions proposed to be passed, right to inspect minutes of board meetings.

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Collective rights are as follows:Right to refuse to transfer shares: Directors of private companies and deemed public companies are entitled to refuse registration of transfer of shares to a person whom they do not approve. ¡ Right to elect a Chairman: The directors are entitled to elect a Chairman for the board meetings. Right to appoint a Managing Director: The Board has the right to appoint a Managing Director/ Manager of the company. ¡ Right to recommend dividend: The Board is entitled to decide whether dividend is to be paid or not. Shareholders cannot compel the directors to pay dividend. However they can reduce the rate of recommended dividend. Payment of dividend is the prerogative of the board. The responsibilities of Directors: (i) to file the company's annual accounts and annual return on time; (ii) to ensure that company details are up to date; (iii) to act in good faith in the best interests of the company and for a proper purpose; (iv) to exercise care and diligence; (v) to avoid conflicts between the interests of the company and their personal interests; (vi) to prevent the company trading while insolvent (i.e. while it is unable to pay its debts and when they fall due); (vii) if the company is being wound up, to - report to the liquidator on the affairs of the company; - help the liquidator (e.g. by giving the liquidator the company books and records that you may have in their possession). The rights of Shareholders: The most important rights that all common shareholders possess include the right to share in the company's profitability, income and assets, a degree of control and influence over company management selection, pre-emptive rights to newly issued shares, and general meeting voting rights. The right to share in profitability: As partial owners of the company, common shareholders have the right to participate in a company's profitability for as long as they own the shares. Division of profits is based on the number of shares owned by a shareholder, and gains can be substantial to shareholders over time. The right to control over management: Common shareholders also have the right to influence company management through the election of a company's board of directors. In smaller companies, the President or Chairperson 147


of the board is typically the individual who owns the largest share of common stock. Larger companies may have greater diversity in the common shareholder investor pool. The right to buy new shares Common shareholders also have pre-emptive rights. If the company issues new shares to the public, current shareholders have the right to buy a specific number of shares before the stock is offered to new potential shareholders. Pre-emptive rights can be valuable to common shareholders, as they are often provided at a subscribed price on a per-share basis. The right to vote Arguably, the greatest right for common shareholders is the ability to cast votes in a company's annual or general meeting. Major shifts within a publicly traded company must be voted on before changes can take place, and common shareholders hold the right to vote either in person or via proxy. Most common shareholder voting rights equate to one vote per share owned, resulting in greater influence from shareholders who own a larger number of shares. The responsibilities of Shareholders: i. To appoint the right people as directors: The board as a whole needs to contain a mix of expertise and show a balance between executive management and independent non-executive directors. ii. To remove those directors they do not want: No limitations have been imposed on removal of directors and conspicously missing is the unwritten requirement for Directors‘ resignation letters and affidavits which we had become the norm. It remains to be seen if these will still be required by the Companies Registrar. iii. To ensure information: To ensure that the information they receive is properly assembled and adequate. Q-8. What are the procedures to arrange a General Meeting and what are the legal consequences of failure to hold AGM? CMA Adapted- December 2016 Answer. Procedures to arrange a General Meeting: Determine objective and audience Set an objective for the meeting, and make it brief and clearly stated. For example, create a short list of bullet points describing specific goals. The goal of your meeting might be to communicate important information, make decisions, resolve problems or assign actions. A concise and to-the-point objective helps the meeting organizer determine who should participate in the meeting. Build out a list of invitees by aligning each goal with team members whose presence will make it possible to actually meet the goal. 148


Set the agenda Set the meeting‘s agenda based on each goal in the objective. If a goal is to communicate the start of a project, set an agenda item that identifies who will present that information and how the information will be shared, such as by PowerPoint presentation. If the goal is to assign actions, set an agenda item that describes how assignments will be made. Every goal should have one or more agenda items aligned directly with it. Select the date and time Select a meeting date and time based on the availability of the meeting leader and the most critical invitees. The larger the list of invitees, the harder it is to find a day and time when everyone is available. Accept a time that fits as many schedules as possible. Before setting the time, give thought to time zones. If some invitees will participate by phone or the Internet, consider their working hours as well as your own. A 1 p.m. meeting in Eastern Standard Time is a lunch-hour meeting in Central Standard Time. That same meeting is at 2 a.m. in Tokyo. Choose the location Find a conference room that will make it possible to achieve all agenda items. Choose a room large or small enough to comfortably fit the number of people expected to attend. A room that seats 40 is a poor choice for a meeting with 10 people. Likewise, you don‘t want a crowd squeezing in so tight it‘s necessary to bring in extra chairs. Arrange for materials and incidentals If presentations are expected, make sure that the room is equipped with a projector. If not, make arrangements to bring a projector with you -- also make sure you have something to project onto, such as a screen or a white wall. Don‘t forget to consider the availability of other incidentals, such as white boards with dry erase markers, flip charts and speaker phones for off-site participants. For multi-hour meetings, arrange for food and beverages so participants stay focused on the topic rather than their stomachs. Notify invitees Notify invitees of the meeting objectives, date, time and location well enough in advance so they can prepare properly. In most cases, at least a week‘s notice is preferable. Use the workplace‘s calendar software to send a meeting appointment to all invitees. Many programs will alert invitees a few minutes or a few days before the meeting, or customize the alerts to your needs. Legal consequences of failure to hold AGM: The meeting of the shareholders which is held once a year is called AGM. The first AGM must be held within 18 months from the date of its incorporation and there after at least once in every calendar year and not more than 15 months after holding of the last preceding AGM. If default is made in holding an AGM in accordance with the provision, the company and every officer of the company is at responsible, shall be liable to a fine which may extend to Tk 10,000 and in case of a continuing default, with a further fine may be up to Tk 250 per day during which the default continues. 149


Q-9. What are the different types of shares that can form capital and what are the rights that attach with each class of shares. CMA Adapted- December 2015 Answer. The different types of shares that can form capital and their rights: Ordinary shares: This is the most commonly issued share type, essentially the same as common shares. They carry voting rights but not usually any special rights beyond that. Ordinary shares may be subdivided into different classes such as A or B and have different share prices. Preference shares: This is a slightly less preferred share type. Preference shareholders have the right to be paid dividends prior to dividends being paid for other share types. Preference shares do not typically carry voting rights. Cumulative preference shares: This share type roughly corresponds to preferred shares. Like preferred stock shares, they come with the stipulation that any scheduled dividends that cannot be paid when due are carried forward and must be paid before the company can pay out ordinary share dividends. Redeemable shares: As the name implies, redeemable shares are issued with the shareholder agreeing that the shares can be redeemed – bought back by the company – either after a certain time period or on a given date. Redeemable shares can vary according to which party, either the company or the shareholder, has the option to exercise the company buyback provision. Bearer shares: Bearer shares are most commonly in the form of warrants - a legal document certifying that the bearer is entitled to own the shares designated in the warrant. The warrants usually come with vouchers enabling the bearer to claim any due dividends. Warrants are completely transferable. Q-10. Draft a comparison statement (in terms of essential factors) on sole-tradership, partnership & companies limited by shares. CMA Adapted- December 2015 Answer. Ownership: A sole-tradership is a business that has a single owner who is responsible for making decisions for the company. A partnership consists of two or more individuals who share the responsibility of running the company. A company limited by shares is one of the most recognizable business structures and has a separate identity from the owners of the company. One or more owners may participate as shareholders of a corporation. 150


Formation: Sole-tradership begins automatically when a single business owner decides to open a business. A partnership business automatically begins when two or more people decide to go into business. A company limited by share is required to file articles of incorporation. Documents: There are no documents to file to begin a sole-tradership or a partnership. However, companies limited by shares are required to file articles of incorporation, also known as a certificate of formation. Liability: Sole-tradership and partnership business have unlimited liability for all debts and liabilities. But companies limited by shares have limited liability for all debts and liabilities. Q-11. How do you distinguish between Ordinary Resolution and Special Resolution? CMA Adapted- December 2015 Answer. Ordinary Resolution: Company resolution that is not extraordinary or special resolution is known as ordinary resolution. Such as, resolution for approval of accounts. Ordinary resolution require only ordinary or simple majority (over half of the votes of shareholders or their proxies) to be adopt or passed and may not require any notice of their proposal. Special Resolution: This is passed in a meeting by the three-fourth majority of the members present in person or by proxy of which 21 days notice has been given. Special resolutions are necessary: - to change the name of the company - to alter the memorandum - to alter the articles Q-12. What restrictions are there in payment of dividend under the Financial Institutions Act 1993? CMA Adapted- August 2015 Answer. As per the Financial Institutions Act 1993: 1. No banking company except new and special banks shall pay any dividend on its shares unlessa) all its capitalized expenses including preliminary expenses, organization expenses, commission for share selling and brokerage, losses and other items have been completely written off, or b) it manages to maintain paid-up capital and reserve fund 151


2. Any banking company may pay dividends on its shares without writing off under the following circumstances: a) in any case where the depreciation of its investments in approved securities has not actually been capitalized b) in any case where adequate value of its investments in shares, debentures or bonds had been made to the satisfaction of the auditor of the banking company c) in any case where adequate provision for bad debt had been made to the satisfaction of the auditor of the banking company Q-13. Mention for what reasons the license of a non-banking financial institution can be cancelled as per Financial Institutions Act 1993? CMA Adapted- August 2015 Answer. The license of a non-banking financial institution can be cancelled for the following reasons: i) To cease the business for which it has been established ii) For suspension of the business iii) If furnished false information or document for obtaining license iv) If carry on business to miscalled the interest of its depositors v) Holds insufficient assets to cover the liabilities of its depositors vi) Carrying on business while paid-up capital is less than the minimum capital vii) If done any activities out of the conditions of license viii) For any offense of its director Q-14. Discuss the various returns to be filed to different authority every year by a Public Limited Company. CMA Adapted- August 2015 Answer. Companies Act 1994 requires certain returns to be filed with the Registrar. It is the duty of the Secretary to see that these returns are filed property. The followings are the various returns to be filed: i) Annual return ii) Return as to allotment iii) Return of directors iv) Return as to alternation of memorandum v) Return as to alteration of share capital vi) Return as to reduction of capital vii) Return by foreign companies

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Penalties for non-compliance of such returns: i) Annual return: For non-compliance of such return, the company and every responsible officer of the company shall be liable to a penalty of Tk. 100 for every day during which the default continues. ii) Return as to allotment: If default is made in filing such return, every officer responsible for the default shall be liable to a fine not exceeding Tk. 100 for every day during which the default continues. iii) Return of directors: The Director and every officer of the company who is willing in default shall be liable to a fine of Tk. 500 iv) Return as to alteration of memorandum: If this return is not filed in time, the alteration and all proceedings connected with this shall become null and void. v) Return as to alteration of share capital: If a company and every officer made default in filing the return with Registrar, it shall be liable to a fine not exceeding Tk. 200 for every day during which the default continues. vi) Return for foreign companies: If the company and every officer fails to file return with the Registrar, shall be liable to fine not exceeding Tk. 1,000 and in case of continuing offence additional Tk. 500 shall be applicable for every day during which the default continues. Q-15. Narrate the circumstances under which Bangladesh Bank can dissolve the Board of Directors of a banking company. CMA Adapted- August 2015 Answer. As per the Banking Companies Act 1991, power of the Bangladesh Bank to dissolve the Board of Directors of a banking company are as follows: a) Where the Bangladesh Bank has reasonable grounds to believe that the Board of Directors of a banking company conducts its activities in a manner contradict to the interest of the banking company or its depositors; can dismiss that Board of directors after giving its occasions in writing. The Board of Directors shall dismiss by a direction and the direction to dismiss that Board of Directors shall come into effect form such date and be in force for such period as mention therein. b) A Board of Directors being dismissed, the person appointed on this behalf from the Bangladesh Bank shall have all the powers and functions and accomplish all the duties of the board. 153


Q-16. What are the consequences when Director acts without acquiring his qualification shares? CMA Adapted- August 2015 Answer. The Articles of Association of a company usually fix a minimum number of shares which every Director must subscribe in order to become a Director. This minimum number is known as the qualification shares of Director‘s. It is the duty of every Director to hold a specific number of shares for qualification and who has not already qualified himself accordingly, to obtain his qualification shares within two months after his appointment or such shorter time as may be fixed by the Articles of Association. If after the expiration of the period mentioned above any such unqualified person acts as a Director of the company, he shall be liable to a fine not exceeding two hundred taka for every day between the expiration of the said period and the last day on which it is proved that he acted as a Director (both days inclusive). Q-17. What is a debenture? CMA Adapted- August 2015 Answer. A debenture is a document which shows on the face of it that the company has borrowed a sum of money from the holder thereof upon certain terms and conditions. According to the Companies Act, 1994, debenture includes debenture stock, bonds and any other securities of a company whether or not constituting a charge on the assets of company. Q-18. No dividend can be paid by a company except out of profit - comment. CMA Adapted- April 2015 Answer. Dividend is paid out of profit of the company. But the Companies Act 1994, has not mentioned anything about the composition of profit, i.e., capital profit or revenue profit. The dividend can be paid out of capital profit if the profit is realized. But the dividend must not be paid out of capital profit which reduces the capital and the company will not be able to maintain its financial strength for continuity. But dividend may be paid out of profit acquired by the company after making all adequate provisions as required by the policy and regulations. Generally dividends are paid from the revenue profit for the year. But in some cases dividend can be paid out of capital profit if it is realized in full. Q-19. Critically examine the following statements: Dividends once declared become debts of the company. CMA Adapted- April 2015 Answer. 154


When a dividend is declared it becomes debt arising out of the contract payable by the company to the shareholders who are on the register of members when the dividend is declared. The company is obligated to send dividend warrants or checks to the registered addresses of the shareholders. Once the dividend is paid out, the liability on company‘s part is discharged. If a shareholder fails to collect the money from the company‘s account, for whatever reasons, it is a lapse of his part. It is to be noted that the company is in no way expected to hold the dividends as a trustee for the shareholders. Q-20. What do you understand by the principle of majority rule? Who can act as remedy if there is an ambiguity? CMA Adapted- April 2015 Answer. The majority shareholder is the individual who owns most of a company‘s shares. A majority shareholder generally own more than 50 percent share of a company. They are those people who have bought interests in a company that makes them partial owners of the company. They can generate more power rather than the other combine shareholders. He or she has the power to do things that other shareholders do not have the authority to do. Such situations are usually more common with private companies than with public companies. They may have the right to attend annual meetings, bring resolutions, and vote on matters regarding operations. Participation in annual meeting: This will depend on what the shareholder has in mind and what the other shareholders, who constitute the majority, are agreeable to. Majority shareholders have the right to participate in annual board meetings, as well as general meetings. Besides this, the others having or taking over control of the company may have created expectations regarding the level of success that is assured. Such rights can be acquired through entering into a contractual agreement with the other shareholders. For this, rights can be formed which are not otherwise accessible on the basis of the Memorandum and Articles of Association. Veto power: Majority shareholders have the veto power on all decisions. Whilst such a condition would empower the director concerned, it could inhibit decision-making and may sometimes not be in the best interest of the company. Many crucial and important decisions have to be made in general meetings. General meetings fall under the category of Annual General Meeting and Extraordinary General Meeting. Annual general meetings are a requirement of the law where certain matters must be dealt with annually. If an annual general meeting is not held, there is a breach of the Act. All other matters can be dealt with at extraordinary general meetings. Such meetings are not by law mandatory but are required to be held for other business to be dealt with. It would be permissible for such a shareholder to give himself the rights as are discussed in the context of directors meeting with regard to an extraordinary general meeting. 155


Q-21. Explain the legal personality of a company. CMA Adapted- April 2015 Answer. According to the company law, a registered company is a legal person in its own right and quite distinct from its members. This fact is that a company has a separate entity from its directors and shareholders. For this reason anybody cannot wish to wind up the company without the rules of company law. So, if all the members are died, the company can continue its entity by its own name and seal. A company makes liable itself to others and also makes others liable to company. Even, a company can purchase and sale assets in its own mane. Q-22. Is it lawful for a public limited company to appoint a person as its Managing Director who is also the Managing Director of another public limited company? CMA Adapted- April 2015 Answer. As per Companies Act 1994, no public limited company or no private limited company which is subsidiary of a public limited company shall after the commencement of this act, appoint any person as a Managing Director, if he is a Managing Director or Manager of any other company. Provided that no appointment shall be made to any person as Managing Director of the company without the consent of the shareholders in general meeting Q-23. How a company is dissolved? What are the preferential claims at the time of dissolution of a company? CMA Adapted- April 2015 Answer. According to the Companies Act, 1994, a company may be dissolved by the following ways(a) Compulsory winding up under the order of the court or government; (b) Voluntary winding up by members or creditors; (c) Winding up subject to the supervision of the court. a) Compulsory winding up under the order of the court or government: Compulsory winding up takes place when a company is directed to be wound up by an order of the court or government. A company may be wound up by the court under the following circumstances: i. Default to hold the statutory meeting and to file the statutory report; ii. Fail to commence business within a year of its incorporation; iii. Reduction of number of members to below seven in case of public limited company and below two in case of private limited company; iv. Unable to pay its debts; v. On equitable opinion of court. 156


Procedures for compulsory winding up: i. Application or petition for winding up to the court by the company, creditors, members, contributories or authorized person by Govt. ii. Hearing of application in a certain date and taking decision for further activities. iii. Commencement of wingding up by court at the time of the presentation of petition. iv. Appointment of winding up and order of winding up. v. Preparation of the list of the contributories. vi. Collection of documents and assets of the company. vii. Proof of claim and payment of due. viii. Declaration of dissolution of the company and reporting it to the Registrar by the official liquidator within 15 days. b) Voluntary winding up by members or creditors: Voluntary winding up means winding up by the creditors or members themselves without the intervention of the court. A company may be wound up voluntarily under the following circumstances: i. When the period is fixed for the duration of the company by its articles that the company is to be dissolved and the company in general meeting has passed an ordinary resolution; ii. If the company wishes to resolve by special resolution; iii. It the company fails to continue its business then by passing an extra-ordinary resolution. Procedures for voluntary winding up by members or creditors: i. Declaration of financial insolvency; ii. Submission of this declaration to the Registrar; iii. Adoption of decision for winding up in the general meeting. iv. Notification of decision within 10 days by passing the resolution in the general meeting; v. Calling of general meeting if the winding up event continues for more than 01 year; vi. Final meeting & dissolution; vii. Submission of documents to the registrar within 01 week of this meeting. c) Winding up subject to the supervision of the court: After passing a resolution for winding up the company, if the winding up is completed voluntarily on the application of the shareholders or creditors or both of the parties but with the supervision of the court, it is called winding up of a company subject to supervision of the court. The objective of such winding up is to protect the interests of the creditors and contributors. A company may be winding up subject to the supervision of the court, Ifi. The liquidator under voluntary liquidation is negligent in collecting the assets; ii. The rules relating to winding up are not followed; iii. The resolution for winding up was obtained by fraud. Preferential claims at the time of dissolution of a company: According to the Companies Act 1994, a company has to pay the creditors in preferential claims which are as follows: 157


i. All revenues, taxes, rates whether payable to the government or a local authority. ii. All wages and salary of any clerk and other servant and any labor or workman up to Tk.1,000 or Tk.500 each respectively. iii. Compensation of any officer or employee of the company in respect of the death or disablement which is payable under the Workmen‘s Compensation Act, 1923. iv. All sums due to any employee from a provident fund, a pension fund and gratuity fund or any other fund for the welfare of the employee maintained by the company. v. The expenses of any investigation held in pursuance of the Act. Q-24. Draft a notice of a statutory meeting. CMA Adapted- April 2015 Answer. Notice of the statutory meeting ABC Company Limited (Registered office address) Date:.......

Notice is hereby given that in pursuance of the provision of the Companies Act, 1994, the statutory meeting of the ABC Company Limited will be held at it‘s registered office on the day of ---/---/2018 at --- a.m/p.m to transact the following business: - To read the notice convening the meeting - To welcome the members - To consider and adopt the statutory report - Any other matters that may be considered at this statutory meeting. By order of the Board of Directors Sd/Secretary Q-25. Mention the financial and non-financial benefits of an investor for investing in share market. CMA Adapted- April 2015 Answer. The financial benefits of an investor for investing in share market: a) One of the primary benefits of investing in share market is investment gain. Over time, the stock market tends to rise in value, resulting in a profit even some of individual stocks lose value. b) Some stocks provide income in the form of a dividend c) Most investors intend to buy low and then sell high. d) If the investor needs cash in a hurry, he can sell his stock at any time. 158


The non-financial benefits of an investor: a) Buying shares of a company means taking ownership of that company. This means that investing in share market also brings benefits of being a business owner. b) Investing in share market has the benefits of providing diversification. c) For investors who put money into different types of shares, minimizes the risk. Q-26. What are the differences between extra ordinary resolution and special resolution? CMA Adapted- December 2014 Answer. Differences between extra ordinary resolution and special resolution: Extra ordinary resolution: This is passed by the three-fourth majority vote at general meeting of which 14 days notice has been given. The notice must specify the intention to propose the resolution as an extra ordinary resolution. Such resolution is necessary when a company is sought to be wound-up voluntarily on the ground that it cannot continue its business on account of its liabilities and also for a number of other reasons. Special resolution: This is passed in a meeting by the three-fourth majority of the members present in person or by proxy of which 21 days notice has been given. Special resolutions are necessary - to change the name of the company - to alter the memorandum - to alter the articles Q-27. Draft a notice of an AGM of X & Y limited mentioning hypothetical date, time & place of the meeting. CMA Adapted- December 2014 Answer. X & Y Limited 9, Motijheel C/A, Dhaka

Date: August 20, 2017 Notice of Annual General Meeting All concerned of the company are hereby notified that the 20th annual general meeting of X & Y Limited is going to be held on Wednesday, September 20, 2017 at 10.00 am in the head office of the company. You are specially requested to remain present in that meeting in time. 159


By order of the Board M Company Secretary Agenda: - Reading out and approval of the director‘s report - Declaration of dividend - Filling-up the vacant post of director - Increasing the tenure of the company auditor - To approve the appointment of the independent directors Q-28. Mention the agenda of the meeting. CMA Adapted- December 2014 Answer. The agenda of the meeting i. Reading out the notice by the secretary ii. Drawing attention of the members as to whether the report of directors will be read out or not iii. Approval of the directors‘ report iv. Reading out the auditors‘ report v. Declaration of dividend vi. Filling up the vacant post of director vii. Increasing the tenure of auditor viii. President‘s speech and closing the meeting. Q-29. What are the most important documents required for the formation of the public limited company and what their salient features? CMA Adapted- December 2014 Answer. There are several most important documents required for the formation of a public limited company. They are pointed below with their salient features: Memorandum of association: It is a principal document of a company. It includes name, address, objective and capital of the company Articles of association: The articles of association are the domestic regulation of the company and govern its internal administration. Directors schedule: The name of the agreed persons as director is to be enclosed with the application for registration. 160


Letter of agreement: Submit the agreement letter of directors signed by them. Agreement of qualification shares: Submit the director‘s qualification shares. Include the word `Limitedâ€&#x;: The word `Limited‘ should be added at the end of the name of the company Letter of declaration: A declaration by an advocate of high court or by a person named in the articles of association as a director, manager or secretary of the company compliance with all of the said requirements shall be filed with the registrar. Collection of certificate of incorporation: If the registrar is satisfied on the above documents, he listed the name of company and issues a certificate of incorporation. Q-30. How a Public Limited Company is formed and registered? CMA Adapted- December 2014 Answer. They are several stages of forming a public limited company. These are as follows: Taking initiative: At first one or more persons develop the idea of forming a company. Then 2 persons in case of forming a private limited company and 7 persons in case of forming a public limited company are required for this purpose. Preparation and submission of documents: In this stage, the promoters prepare at least two important documents, namely memorandum of association and articles of association. A memorandum of association includes name, nature whether limited or unlimited, objects, liabilities of the members and the proposed approximate capital of the company, etc. Articles of association govern internal administration of the company. After preparing all the documents, they are required to be sent to the office of registration with the payment of fees prescribed. Registration or incorporation: After the submission of document, the registrar shall register the documents within 30 days from the date of receipt upon his satisfaction and in case of refusal the grounds to be communicated within 10 days after that period. Capital subscription: A private limited company raises capital personally, where a public limited company raises capital by issuing prospectus and performing other necessary activities. 161


Obtaining the certificate of commencement of business: A private limited company can commence its business immediately after registration but a public limited company must for commencing its business obtain a certificate of commencement by fulfilling specific conditions and submitting the necessary document to the office of Registrar. Q-31. What are the differences between Double Insurance and Reinsurance? CMA Adapted- August 2014 Answer. Differences between double insurance and reinsurance: When the same risk and same subject matter is insured with more than one insurer, there is said to be double insurance. For example, Mr. X, owner of a house, insures it against fire for Tk.1 million with Mr. Y and Tk.0.5 million with Mr. Z. This is a double insurance. Reinsurance means the transfer of a part of the risk by the insurers. For example, suppose that a ship has been insured for Tk.100 million. They may feel that the risk is too heavy to be borne by him alone. If so, he can transfer a part of the risk to another insurer, this is known as reinsurance. Q-32. Discuss the business at a Board Meeting can be validly transacted only if there is a quorum. CMA Adapted- August 2014 Answer. The term ‗quorum‘ refers to the minimum number of people who must be present at a meeting. By this minimum number means the number of members whose presence is must to make the meeting valid. The business at a Board Meeting can be validly transacted only if there is a quorum. In case of private limited company, if the number of member is less than 6, the require number of member for quorum is 2 and if such number is more than 6, the required number of member be 3 for the quorum. In case of public limited company, the number of members must be 5 for quorum irrespective of the number of members of the company Q-33. What are the reasons for which a listed company can be delisted or suspended by the Dhaka Stock Exchange as per its listing regulations in force? CMA Adapted- August 2014 Answer. A listed company may be delisted or suspended for any of the following reasons: 162


i. If its securities are quoted below 50% of face value for a continuous period of their calendar years. ii. Failed to declare dividend or bonus: for 5 years form last dividend for 5 years from commencement of business for 5 years from the date of commercial operation iii. Failed to hold AGM for a continuous period of three years iv. Gone into liquidation v. Failed to pay listing fees or penalty for two years vi. Failed to comply any provision of the regulations. Q-34. What is price sensitive information? Mention the events or transactions which will be considered as price sensitive information. CMA Adapted- August 2014 Answer. Price sensitive information means any such information which, if published may influence market price of the concerned security. The events or transactions which will be considered as price sensitive information are as follows: i) Report in respect of financial condition of the company or any basic information in respect there of ii) Information relation to dividend iii) Decision of giving right, bonus shares to the shareholders iv) Decision of buying or selling immovable asset v) Basic change of activities of the company vi) Any others as determined by the commission Q-35. Draft specimen resolutions for transacting the following items indicating the kind if meeting at which the resolutions are to be passed and the types of resolution required: (i) To open a branch office of the company. (ii) To change registered office of the company from one city to another. (iii) To close register of members or debenture holders. (iv) To change the name of the company. CMA Adapted- April 2014 Answer. (i) Resolution to open a branch office of the company. Resolution as an ordinary resolution passed in the general meeting that a branch office of the company would be opened at 16, Motijheel C/A, Dhaka on 15th September, 2017. Resolved further that a press release to this effect should be made for the notification of all concerned.

163


(ii) Resolution to change registered office of the company. Resolved as a special resolution passed in the AGM that registered office of the company is hereby changed from Dhaka to Chittagong. (iii) Resolution to close register of members or debenture holders: Resolved as a director‘s resolution passed in of members or debenture holders and the share transfer book of the company shall remain closed with effect from September 01 to September 22, 2017 (both days inclusive). During this period no transfer of shares will be affected. (iv) Resolution to change the name of the company: Resolved as a special resolution passed in the AGM that the name of the company is hereby changed by altering the name clause of Memorandum of Association of the company in substitution for and to the exclusion of the existing name of the company. Q-36. A company cannot issue right share as when they like - Discuss. CMA Adapted- April 2014 Answer. A company cannot issue right share as when they like. To issue right shares following conditions are to be fulfilled: i. Such right issue and price thereof have been approved by the shareholders in a general meeting. ii. The proceed of previous public offering or right issue has been utilized fully iii. AGM has been held regularly iv. The right issue has been fully underwritten on a firm commitment basis by the underwriter. v. The financial statement of the company is prepared as per IAS as applicable in Bangladesh and audited as per ISA as applicable in Bangladesh vi. The issuer or any of its director is not a bank defaulter vii. The issuer has been credit rated by a credit rating company if the offer is made at a premium. Q-37. What are the object clauses of the Memorandum of Association of a public limited company? Is there any scope for doing business beyond object clause? CMA Adapted- April 2014 Answer. The object clauses of the memorandum of association provide the objects for which the company is incorporated. The all possible functions of a company are mentioned in this clause. The company cannot do any business beyond the object clause. Anything, done beyond the object clause of memorandum is ultra vires. 164


A company is allowed to select any object for the company, except - Anything illegal, i.e., formation of company for gambling - Against the public policy, i.e., trading with enemies According to the Companies Act 1994, the object clauses of the memorandum of association are as follows: Name clause: In this clause, the name of a company with the word `Limited‘, at the end of the name in case of public company and private company must be contained. To select the name of a company, certain prohibited names need to be avoided: - Name which is similar to that of the company already exists. - Any name of UN/WHO/ Red Cross/ Subsidiary body, etc. Registered office clause: It states the place where the registered office of the company is situated. Full and permanent address of the registered office must be communicated to the Registrar within 28 days from its incorporation or from the date of commencement of business. Liability clause: It mentions the limited liability of shareholders. It should be clearly mentioned whether it is limited by share or by guarantee Capital clause: It mentions the total amount of share capital with which the company propose to register. The company cannot issue more shares that are authorized by the memorandum. This clause is to be omitted in case of the company limited by guarantee having no share capital or in case of an unlimited company. Subscription clause: In this clause, the members state that they are desired to form a company and agree to take shares stated against their names. The memorandum shall be signed by each subscriber who shall add his address and description in the presence of at least two witnesses. Q-38. ABC is a Private Limited Company. They like to raise capital by issuing shares to the public. Describe the steps required for the purpose. CMA Adapted- April 2014 Answer. The steps to be taken to raise capital by issuing shares to the public: a) Adoption of special resolution and alteration of articles: At first, a private limited company needs to be altered its articles of association by taking special resolution. 165


The following items of articles of association of private limited company are to be changed: i. The right to transfer of share is limited. ii. The company cannot invite to sell its share or securities. iii. The total membership of the shareholder should not exceed fifty. The following item are to be replaced on exchange of the above items: i. The share of the company is transferable ii. The share or debenture of the company is issuable iii. Minimum numbers of members are seven and maximum numbers are limited by the number of shareholders. b) Submission of prospectus: Submitting a new prospectus or a statement in lieu of prospectus to the registrar within 30 days from the changing date of articles of association. c) Enhancement of the number of directors: The number of directors of converted public limited company is to be increased at least three and the new schedule to be submitted to the Registrar. d) Rectification of name: If the word ‗private‘ exists at the end of the name of the previous private company, it should be deleted. e) Submission of documents: All the documents need to be submitted to the registrar. After that the private limited company will be converted into a public limited company and can raise capital by issuing shares to the public. Q-39. Critically examine the following statement: Managing Director cannot be appointed for more than five years. CMA Adapted- December 2013 Answer. As per Companies Act 1994, - No company shall, after the commencement of this act, appoint or employ any individual as its managing director for a term exceeding five years at a time. - The office of a managing director in a company shall, unless his term expires earlier, be deemed to have vacated immediately on the expiry of five years from the commencement of this act. - The re-appointment, re-employment or the extension of the term of office of a managing director shall not exceed five years on each occasion. 166


Provided that any such re-appointment, re-employment or the extension shall not be sanctioned earlier than two years from the date on which it is to come into force. These rules shall not apply to a private company unless it is a subsidiary of a public company. Q-40. Critically examine the following statement: On winding up a company it ceases to be a legal entity. CMA Adapted- December 2013 Answer. The winding up or liquidation of a company means the termination of the legal existence of a company by stopping its business, collecting its assets and distributing the assets among creditors and shareholders in the manner laid down in the act and in the articles of the company. An administrator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights. Q-41. Is a prospectus is mandatory to offer shares of a public limited company to the public? If so when and why a statement in lieu of prospectus is needed? CMA Adapted- December 2013 Answer. A prospectus is mandatory to offer shares of a public limited company to the public for the following reasons: i) To collect capital from public ii) To provide incentives to investment and to create confidence among shareholders iii) To express the means of financial soundness Though a prospectus is mandatory, there are some exceptions: i) When a company offers its shares or debentures to its present shareholders or debenture holders rather than public to purchase. ii) If it is invited the underwriter to take liabilities of shares or debentures. A statement in lieu of prospectus is needed when promoters of public limited company procure their capital from private arrangement and when minimum subscription is not collected from directors. Q-42. Draft a Notice of the First Meeting of Board of Directors of BRIGHTLIFE ELECTRONICS LIMITED. CMA Adapted- December 2013 Answer. BRIGHTLIFE ELECTRONICS LIMITED Dhaka 167


Date: ..............

Subject: Notice of the meeting of Board of Directors.

Dear Sir, Being authorized, I am informing you that a meeting has been called on September 20, 2017 at 10.00 am in the Head Office, 33 Motijheel C/A, Dhaka of the Company. You are earnestly requested to be present in that meeting in time.

Sincerely Yours, M Company Secretary Agenda: - Reading out and approval of the minutes of last meeting - Reviewing bank account and progress of the company - Discussing on importing raw materials from abroad - Setting up new factory - Fixing the time, date and venue of next meeting - Thanks giving Q-43. Draft Minutes of the First Meeting of Board of Directors of BRIGHTLIFE ELECTRONICS LIMITED. CMA Adapted- December 2013 Answer. BRIGHTLIFE ELECTRONICS LIMITED Dhaka Minutes of the first Board meeting Minutes of the first Board Meeting will be held on September 24, 2017 at 10:00 am in the Head Office, 33 Motijheel C/A, Dhaka of the Company. Present Mr. A Mr. B Mr. C Mr. D Mr. F

President MD Director Director Director and Company Secretary 168


Si. No. Heading 01 Electing the Chairperson of the meeting of the company 02 Presenting certificate of commencement and incorporation, memorandum and articles of association 03 Appointment of MD, Director, Auditor, Secretary, etc. 04 Approving prospectus 05 Determining the quorum of the board meetings 06 Deciding about the date and time of the next meeting 07 Closing the meeting Signature Secretary

Description

Signature President

Q-44. Draft a notice for the forthcoming Annual General Meeting of a Public Limited Company with common agendas. CMA Adapted- August 2013 Answer. X & Y Limited 9, Motijheel C/A, Dhaka Date: August 20, 2017 Notice of Annual General Meeting All concerned of the company are hereby notified that the 20th annual general meeting of X & Y Limited is going to be held on Wednesday, September 20, 2017 at 10.00 am in the Head Office, 9 Motijheel C/A, Dhaka of the Company. You are specially requested to remain present on that meeting in time.

By order of the Board, M Company secretary Agenda: - Reading out and approval of the director‘s report - Declaration of dividend - Filling-up the vacant post of Director - Increasing the tenure of the company auditor - To approve the appointment of the independent directors 169


Q-45. “A company is an artificial person created by law with a perpetual succession and a common seal�. Explain this statement and point out the basic features of a company registered with RJSC. CMA Adapted- August 2013 Answer. According to the Company Law, a registered company is a legal person in its own right and quite distinct from its members. This fact is that a company has a separate entity from its director and shareholder. For this reason anybody cannot wish to wind up the company without the rules of Company Law. So, if all the members are died, the company can continue its entity by its own name and seal. A company makes liable itself to others and also make others liable to company. Even, a company can purchase and sale assets in its own name. The management and director are distinct from the ownership of the company by the law. Since the owners and entity of the company are quite separate, so the company and owners are not liable to each other for their own function. The basic features of a company: 1. It is considered as an artificial legal person which can run business in its own name. 2. The liability of the members may be either limited by shares or by guarantee as provided by the memorandum of the company 3. A company has a separate legal entity which is not affected by the death, insolvency or exit of any shareholder 4. As, a company is an artificial person, it has a common seal 5. The numbers of shareholders are 2 to 50 in case of private company and 7 to unlimited in case of public company. 6. The shares are easily transferable in case of public company and closely restricted in case of private company. Q-46. Who are considered to be related party? What disclosures are required in the Annual Report of a listed company regarding related party transactions? CMA Adapted- August 2013 Answer. An affiliated company, a principal owner of the client company or any other party with which the client deals, where one of the parties can influence the management or operating policies of the other are considered to be related party. The following disclosures are required in the Annual Report of a listed company regarding related party transaction: 1. The nature of the relationship between the entity and these related parties 2. The identity of the entity‘s related parties including charges from the prior period 170


3. Review shareholder records to determine the name of principal shareholder from the share register. 4. Review minutes of the meeting of shareholders and other related statutory record. 5. Enquire auditors currently involved in the audit. 6. Review the entity‘s income tax returns and other information supplied to regulatory agencies Q-47. What are the procedures to offer right shares of a public limited company? CMA Adapted- August 2013 Answer. A right offer is an option to buy a security to the existing shareholders at a specified price during a designated period (60 to 90 days). It is a special offer, the number of which is determined by the company, such shares are transferable. The procedures to offer right shares of a limited company: 1. Offering the existing shareholder of the equity shares of the company irrespective of class. 2. Offer to be made by notice within a time limit not less than 15 days from the date of offer. 3. Shareholders have the right to revoke the such offer within the prescribed time limit. 4. Directors have the power to dispose of the unaccepted shares in such manner as they may think most beneficial to the company. Q-48. A Companyâ€&#x;s object is of fundamental importance not only to members but also to non-members. Explain this statement. CMA Adapted- August 2013 Answer. The object clauses of the memorandum of association provide the objects for which the company is incorporated. The all possible functions of a company are mentioned in this clause. The company cannot do any business beyond the object clause. Anything, done beyond the object clause of memorandum is ultra-vires. A company‘s object clause is fundamental important not only to members but also to non-members because: - Memorandum defines the limitations on the powers of the company established under the act. - The whole structure of the company is built upon memorandum. - It explains the scope of activities of the company. - The investors knows where their money will be spent and outsiders also know the nature of activities the company is authorized to take up. - It is a basic document of the company with regard to its constitution. - It is a charter of the company which sets out its written goals. Q-49. What are the restrictions imposed on the borrowing powers of the Board of Directors? CMA Adapted- August 2013 171


Answer. The Board of Directors cannot borrow money on the security of its books of accounts because such books are required to be kept in the registered office and these are open to inspection. Also, they cannot borrow money on the security of the reserve capital. Other restrictions are: 1. Restriction as contained in the Memorandum of Association or Articles is ultra-vires borrowing 2. Restrictions of borrowing before obtaining the certificate of commencement in case of public limited company and certificate of incorporation in case of private limited company. 3. Borrowed amount cannot exceed the amount of issued share capital without sanction of the company in the general meeting. 4. Borrow only in the name of the company. Q-50. What are the contents of a prospectus? CMA Adapted- April 2013 Answer. According to the Companies Act 1994, following particulars are necessary to have in a prospectus: 1. Name and address of the company and issuing date of the prospectus 2. The main objects of the company with the name, occupation and address of the directors and signatories to the memorandum and number of shares subscribed by them and their remuneration. 3. The numbers and classes of shares and debentures and the interest of the shareholders in the profit and property of the company 4. Dividend policy and expected dividend to be declared by the company 5. Name and address of auditors and their reports 6. Voting power and obligations of shareholders 7. Name and address of vendors 8. The underwriting commission 9. Amount of preliminary expenses Q-51. What are the contents of the notice of an AGM? When it is to be published in the Newspaper? CMA Adapted- April 2013 Answer. The written message which is served for inviting the members to attend the meeting on specific time, date, place and occasionally agenda is called a notice. The notice must contain the following contents: i) The date, time, place of holding the meeting must be clearly mentioned ii) It must be signed by the proper authority 172


iii) The objects of the meeting should be mentioned iv) It must contain the agenda of the meeting v) It should contain the voting rights of the members whether by person or by proxy vi) Official pad and seal must be used in the notice The notice is to be circulated and published in the newspaper by the proper authority within the legal time. The rules regarding publishing in the newspaper are as follows: i) It must be published by the legal authority ii) It should be served to the legal persons within specified time and date iii) It should be duly signed by the legal authority at its concluding stage iv) Using appropriate media to send it and also following organizational rules Q-52. Explain the function of various Board Committees, excluding the Audit Committee. CMA Adapted- April 2013 Answer. Committee is the smaller body of the Board and may comprise of one or more members. The Directors may delegate their powers to different committees. These committees may be temporary or permanent, like management committee, budget committee, recruitment committee, etc. or adhoc such as project committee, tender committee, inquiry committee, etc. Such a committee often includes non-director to assist the directors. The functions of such committees must be within the scope of articles of the company. The functions are: - Meeting together - Electing their respective chairman - Transacting their specific business according to their conveniences. - Reporting to the Board of Directors Q-53. What are the contents of an Annual Report of a public listed company? CMA Adapted- April 2013 Answer. An annual report is comprise of the audited account of the company with auditor‘s report, directors report and any other presentation on the result, funds and activities of the company such as the cash flow statement, etc. Such report is to be produced before the AGM within 9 months from the date of the balance sheet of the company concerned. According to the Companies Act 1994, the annual report must contain the followings: - Auditor‘s appointment - Company‘s future plan - Company‘s progress Q-54. Why and how are Alternate Directors appointed? CMA Adapted- April 2013 173


Answer. An alternate director is appointed by somebody to act as his alternate if such arrangement is provided in the articles of association of the company or authorized by the company in general meeting. According to the law, to appoint an alternate, the director is supposed to be: - away from the meeting place - away for at least three months - such appointment should be approved by the board The appointment of an alternate director will automatically terminated when the appointing director returns to the place where board meeting normally takes place. Also on resignation, retirement or other reasons when the appointing director ceases to hold office, his alternate will vacate the office at once. Q-55. When does the resignation of a director become effective? CMA Adapted- December 2012 Answer. The Company Act does not provide provision for resignation of a director. But the articles of a company may express provision for it. The resignation of a director is effective only when it is accepted by the Board of Directors of the company. If a director parts his qualification shares he has to vacate his office. If it is voluntary, then parting his qualification shares is equivalent to resignation. Rules regarding the resignation of a director are as follows: 1. Resignation is to be made as per the articles of the company. 2. Resignation must be in written. But oral resignation is also effective if it is accepted in a meeting of the company. 3. As an agent of a company, director can resign his office by giving a reasonable notice. 4. Intention of resignation is to be made clearly 5. A resignation cannot be withdrawn without the consent of the board of directors of the company. Q-56. Write a procedure for appointment of an Independent Director. CMA Adapted- December 2012 Answer. The procedures for appointment of an independent director: 1. The independent director shall be appointed by the board of directors and approved by the shareholders in the Annual General Meeting. 174


2. The post of independent director cannot remain vacant for more than 90 days. 3. The board shall lay down a code of conduct of all board members 4. The tenure of office of an independent director shall be for a period of three years which may be extended for one term only. 5. An individual can only be appointed as independent director maximum for three listed companies. Q-57. “A promoter is not a trustee or agent of the company but he stands in a fiduciary position towards it.� Comment. CMA Adapted- December 2012 Answer. A promoter is people who builds a company or take initiative to build a company. They undertake all steps to prepare the necessary document. The legal position of a promoter is as follows: 1. Promoters are not an agent: Since the legal entity of the company does not exist as artificial person before incorporation, so the promoters cannot be an agent of the company which he formed. 2. Promoters are not a trustee: Promoters are not trustee either before or after formation of the company. 3. Fiduciary position: A fiduciary relationship exists between the company and promoter. Any secret profit obtained by the promoters in course of promotion of a company is prohibited. For such profit, promoter should inform to the authority. Authorities are the board of directors and existing shareholders. So, a promoter has fiduciary position in the company which he formed but he is not an agent or trustee of the company before or after incorporation. Q-58. The Board of Directors of Golden Star Limited met only three times in the previous year. A fourth meeting was adjourned twice for lack of quorum. Discuss whether provisions of the Companies Act have been contravened. CMA Adapted- December 2012 Answer. The meeting may adjourn from time to time for various reasons, i.e., lack of quorum, lack of time, difference in opinion, external interruptions, etc. and a resolution may be passed at any such adjourned meeting if notice has been provided on the matter duly. Generally, the Chairman of the meeting declares the adjournment. The adjourned meeting shall have the same power as an original meeting. 175


If the quorum is not present within 5 minutes of the stipulated time, the meeting is adjourned to next week, same day and same time. If at the adjourned meeting, there is no quorum also, the members present will form the quorum. Q-59. Can the Board of Directors grant leave of absence to a Director for any number of consecutive meetings? Explain. CMA Adapted- December 2012 Answer. The board of directors can grant leave of absence if a director is unable to attend the meeting. But a long and continuous absence may cut out him to remain a director where the articles provide that to remain a director‘s office will be vacated on absenting himself (either voluntarily or non-voluntarily) from the board meeting for a certain period. If the director has reasonable ground to be absent then he does not automatically vacate his office of director. Reasonable grounds may be illness, accident or such other ground beyond the control of the director. In such a situation, the board will grant him leave of absence from attending consecutive meetings which will protect his position as a director. Q-60. What is „floating charge‟? When does it crystallize? What is effect of crystallization of a floating charge? CMA Adapted- August 2012 Answer. A charge is said to be floating when it does not attach any specific property. In this case, the company is allowed to dispose of its property without consulting the holders of the charge. Generally, debentures are secured by a floating charge on the assets of the company in such a position where it is allowed to deal with its property until the charge is crystallized. A floating charge is crystallized or converted into a fixed charge under the following events: 1. On the liquidation of the company willingly or compulsory. 2. When the debenture holders take steps to enforce their rights in case of default of the company to pay the principle amount or interest. 3. When the company is barred to carry on its business Q-61. What is meant by “ultra-vires”? Discuss the effects of ultra vires transaction as far as the company and its directors are concerned. CMA Adapted- August 2012 Answer. The term ―ultra-vires‖ derives from two words, ―ultra‖ which means beyond and ―vires‖ which means power. So ultra-vires means to do any act which is beyond the power. A company is incorporated only for the objects and purposes expressed in the memorandum. The effect of ultra-vires transaction as far as the company is concerned: 176


1. Injunction: Any member is entitled to get an injunction to restrain the company from further proceeding. 2. Ultra-vires acquired property: If the directors spend money ultra-vires in purchasing property, the company has the right to protect its property. 3. Litigation for indemnity against directors: In a company, directors are personally responsible for ultra-vires payment. The litigation can be made against directors for such payment. 4. Ultra-vires contracts: In case of ultra-vires contract, the company is not liable to sue and be sued. Even it cannot be made ultra-vires by using the principle of estoppels. The defects of ultra vires transactions as far as its directors are concerned: 1. Ultra -ires loan of directors: If the ultra-vires loans of directors are approved by the shareholders in the general meeting, it is legal and the company is responsible for such. If not so, the general agency law will be applied and the directors will be responsible. 2. Power of the directors to accept loan: If the loan is given by knowing the credit limit of directors, such loan will be void. In this case the company or directors are not liable for such. 3. Breach of warranty of authority: Being an agent of company, a director must act within the act of his authority. But if a director breaches the warranty of authority and does any ultra-vires act including the third party, he will be liable to that third party for his loss. Q-62. Articles of Association of a company reserved the powers for calling the annual general meeting. The Managing Director of the company, without reference to the Board, called an annual general meeting. Is the annual meeting validly called? If not, what should be done to make it valid? Discuss with reference to case law, if any. CMA Adapted- August 2012 Answer. A meeting or AGM without reference to the Board is invalid. To make a meeting valid, the following pre-requisites should be maintained: 1. There should be a right of convening authority, i.e., board of directors, directors, court, etc. who will call a meeting and a chairman must be selected for the meeting if any chairman is not selected earlier. 2. Notice must be properly issued to all the members and proper communication must be used and proper date, time, place must be mentioned in the notice. 177


3. The purpose of convening meeting must be legal. 4. The meeting must full-fill a quorum 5. Authorized persons should present in the meeting. 6. The meeting must confined to agenda 7. The meeting must have voting, polling and adopting a resolution. 8. Decision of the meeting should be written in the minute‘s book. Q-63. What are the matters to be stated in Memorandum of Association and Articles of Association of a public company limited by shares? CMA Adapted- August 2012 Answer. According to the Companies Act 1994, the following matters should be stated in memorandum of association: i) The name of the company with the word ‗Limited‘ at the end of the name in case of public company and private company must be contained. ii) The place where the registered office of the company is situated. iii) To state that the liability is limited. iv) The total amount of share capital with which the company proposes to register. v) The members desire to form a company and agree to take shares must be stated against their names. According to the Companies Act 1994, the following matters should be stated in articles of association: i) Share capital, rights of shareholders, payment of commission, share certificates. ii) Calls on shares iii) Transfer and transmission of shares iv) Conversion of shares into stock v) Alteration of shares vi) General meeting and voting rights of member. vii) Appointment, remuneration of directors, board of directors, managers and secretary. viii) Dividends and reserves ix) Capitalization of profits x) Winding-up Q-64. Draft specimen resolutions along with necessary explanatory statements, wherever required for transacting the following items of business indicating the kind of meeting at which each resolution is to be passed and the type of resolution required for: (i) EDXL Ltd. has authorized share capital of Tk. 20 crore (2 crore shares of Tk.10 cach). The company decides to increase its authorized capital to Tk. 25 crore by adding 50 lakh new shares of Tk.10 cach. (ii) X was a director of ABC Ltd. all on a sudden X expired. The company decides to appoint Y to till that casual Vacancy. CMA Adapted- August 2012 Answer. 178


(i) Resolution to increase authorized capital: Resolved unanimously as a special resolution passed in the AGM that be and is hereby exchanged from existing Tk.20 crore (2 crore equity shares of Tk.10 each) to Tk.25 crore by adding 50 lakh new shares of Tk.10 each and the capital clause of the memorandum of association and articles of association of the company be and is hereby amended to read as follows: ― The share capital of the company is Tk.25 crore divided into 2.50 crore equity shares of Tk.10 each.‖ (ii) Resolution to appoint alternate director to fill the casual vacancy: Resolved unanimously that ABC Ltd‘s Board of Directors be and are hereby declared by special resolution passed in the AGM appointment of Y as an alternate director on the expiry of existing director X of the company to hold the office for not more than 3 executive months Q-65. Draft a notice to be published in the newspaper regarding forthcoming annual general meeting of your company. CMA Adapted- August 2012 Answer. Notice of the 14th Annual General Meeting Notice is hereby given to the members of ABC Company Ltd. that the 14th Annual General Meeting of the company will be held at 30, Motijheel C/A, Dhaka- 1000, Bangladesh on Wednesday, 20th September 2017 at 11.00 a.m. to transact the business mentioned in the notice covering the said meeting, which is being sent to the members on 5th September 2017, along with the Annual Report for the year ended 31st March 2017. For, ABC Company Ltd. Date: 7th September 2017 Place: Dhaka

Y Managing Director

Q-66. State the procedure to increase the number of directors beyond the maximum limit fixed by the articles of association. CMA Adapted- August 2012 Answer. A director is a person who takes the responsibility to direct, manage and control the affairs of the company on behalf of the Shareholders. Every public company shall have at least three directors and in case of all other companies, the minimum number of directors are two. The number (whether maximum or minimum) of directors may be fixed by the articles of association of the company. The company has the right to increase or decrease the number of directors by a resolution passed in a general meeting of the company.

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No one is eligible to hold the position of director in more than 20 companies at a time. The directors appointed by the AGM shall not exceed in number one third of the whole number of directors. Q-67. What are the contents of a prospectus? Distinguish between „Prospectus‟ and a „Statement In-lieu of Prospectus‟. CMA Adapted- August 2012 Answer. The contents of a prospectus: According to the Companies Act 1994, following particulars are necessary to have in a prospectus: 1. Name and address of the company and issuing date of the prospectus 2. The main objects of the company with the name, occupation and address of the directors and signatories to the memorandum and number of shares subscribed by them and their remuneration. 3. The numbers and classes of shares and debentures and the interest of the shareholders in the profit and property of the company 4. Dividend policy and expected dividend to be declared by the company 5. Name and address of auditors and their reports 6. Voting power and obligations of shareholders 7. Name and address of vendors 8. The underwriting commission 9. Amount of preliminary expenses Distinction between prospectus and a statement in lieu of prospectus: Prospectus Statement in lieu of prospectus 1. Prospectus is an invitation, notice or 1. When promoters of a public limited co. advertisement to the public to subscribe the procure their capital from private share capital or debenture of a company. arrangement, a statement in lieu of prospectus is issued. 2. Prospectus is issued for offering sale of 2. A statement in lieu of prospectus is issued shares or debentures in the absence of prospectus. 3. Any public limited co. can publish 3. When minimum subscription is not prospectus collected, the public limited co. prepares a statement in lieu of prospectus 4. It can invite public for subscription or 4. It cannot invite public for purchase of any purchase of any share or debenture. share or debenture. Q-68. “ A Limited company can be formed without the word “ Limited” as the last word of its name” Explain. CMA Adapted- April 2012 Answer.

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The name of a company with the word ‗Limited‘ at the end of the name in case of public company and private company must be contained. But where it is in the satisfaction of the government that a company has been formed for the purpose of promoting commerce, art, science, religion, charity or any other useful object then the government may issue a license to drop the word ‗Limited‘ at the end of name of the company. Q-69. Who is an Independent Director of a PLC? How he is appointed? CMA Adapted- April 2012 Answer. Independent director: An independent director is a person other than an executive officer or employee of the company. An independent director is a director who either does not hold any share in the company or holds less than one percent share of total paid-up shares of the company and he is not a sponsor of the company and he is not connected with the company‘s any sponsor or director or shareholders who holds one percent or more shares of the total paid-up shares of the company. His family members also should not hold above mentioned shares in the company. Procedures for appointment of independent director: 1. The independent director shall be appointed by the board of directors and approved by the shareholders in the Annual General Meeting. 2. The post of independent director cannot remain vacant for more than 90 days. 3. The board shall lay down a code of conduct for all board members. 4. The tenure of office of an independent director shall be for a period of three years which may be extended for one term only. 5. An individual can only be appointed as independent director maximum for three listed companies. Q-70. Draft an appointment letter of an Independent Director. CMA Adapted- April 2012 Answer. Draft letter of appointment for independent Director Date: To Mr./Mrs. …............ ................................. ................................. 181


Dear Sir/ Madam, On behalf of all the Board Members of X Limited, I would like to express my gratitude to appoint you as independent director on the Board of Director of the Company with effect from––––. This letter of appointment set out the terms and conditions which are as follows: 1. Appointment: 1.1.Your appointment is subject to approval of shareholders in the general Meeting 1.2.You are appointed for a period of––––––– up to –––––––. 2. Status of appointment: You will not be an employee of the company and this letter shall not constitute a contract of employment. 3. Commitment: As an independent director you are expected to bring objectivity and independence of view to the Board‘s discussions. 4. Code of conduct: It will be expected to perform your duties with efficient and diligent manner. 5. Liabilities: As an independent director you will be liable only such acts which had occurred with your knowledge. If you are willing to accept these terms of appointment, kindly confirm your acceptance by signing and returning to us the enclosed copy of this letter. Yours sincerely, For X Limited Y Managing Director Q-71. Who are the Independent Directors? Why they are appointed? CMA Adapted- December 2011 Answer. Independent directors: An independent director is a person other than an exclusive officer of employee of the company. An independent director is a director who either does not hold any share in the company or holds less than one percent share of total paid-up shares of the company and he is not a sponsor of the company and he is not connected with the company‘s any sponsor or director or shareholders who holders one percent or more shares of the total paid-up shares of the company. His family members also should not hold above mentioned shares in the company. Reasons for appointment: All companies shall appoint independent directors on their Board of Directors so that the Board, as a group, includes core competencies considered relevant in the context of each 182


company. All independent directors is comprised of people who totally have no material interest in the company other than their directorship. Q-72. The object clause of a Public Ltd. Co. is to manufacture cement. The company started to produce paint in addition to cement. Whether it is permitted under law. Discuss. CMA Adapted- December 2011 Answer. The object clauses of the memorandum of association provide the objects for which the company is incorporated. The all possible functions of a company are mentioned in this clause. The company cannot do any business beyond the object clause. Anything, done beyond the object clause of memorandum is ultra vires. A company is allowed to select any object for the company, excepti) Anything illegal, i.e., formation of company for gambling ii) Against the public policy, i.e., trading with enemies According to the Companies Act 1994, the object clauses of the memorandum of association are as follows: 1. Name clause: In this clause, the name of a company with the word `Limited‘, at the end of the name in case of public company and private company must be contained. To select the name of a company, certain prohibited names to be avoided: i) Name which is similar to that of the company already exists. ii) Any name of UN/WHO/ Red Cross/ Subsidiary body, etc. 2. Registered office clause: It states the place where the registered office of the company is situated full and permanent address of the registered office must be communicated to the Registrar within 28 days its incorporation or from the date of commencement of business. 3. Liability clause: It mentions the limited liability of shareholders. It should be clearly mentioned whether it is limited by share or by guarantee 4. Capital clause: It mentions the total amount of share capital with which the company propose to register. The company cannot issue more shares than are authorized by the memorandum. This clause is to be omitted in case of the company limited by guarantee having no share capital or in case of an unlimited company. 183


5. Subscription clause: In this clause, the members state that they are desired to form a company and agree to take shares stated against their names. The memorandum shall be signed by each subscriber who shall add his address and description in the presence of at least two witnesses. Q-73. Explain the procedures of borrowing working capital from a commercial bank by pledging, hypothecation and mortgaging its fixed and floating assets. CMA Adapted- August 2011 Answer. The procedures of borrowing working capital from a commercial bank by pledging, hypothecation and mortgaging its fixed and floating assets are briefly explained below: 1. Taking decision by the directors of the company. 2. Passing of resolution at a board meeting 3. Determining the amount of money to be issued which shall not exceed the aggregate of the share capital 4. Applying for the money to the authority. 5. Determining the methods of borrowing money, such as pledge, hypothecation or mortgage by using the fixed or floating assets 6. Issuing certificate of debenture within 90 days of allotment of debentures after sanctioning the amount by the authority 7. No return as to allotment of debentures is required to be filed with the RJSC. Q-74. What are the duties and powers of the inspection committee in respect of compulsory winding up? CMA Adapted- December 2010 Answer. The inspection committee is a joint committee of creditors and contributors consisting of not more than 5 persons. The duties and powers of the inspector committee are as follows: a) To keep a general watch over the acts of the liquidator for the protection of the interest of creditors and contributors. b) Right to inspect the accounts of the liquidator for all reasonable times. c) Power to call a meeting. Q-75. State the provisions of the Companies Act-1994 regarding appointment of Managing Director. CMA Adapted- December 2010 Answer.

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According to the Companies Act 1994, Managing Director is a director who is entrusted with any substantial powers of management of the company. He is a member of the Board of Directors. He is also a whole time director and chief executive of the company. Managing Director may be appointed in the following provisions: a) By an agreement with the company b) By a resolution passed in the general meeting of the company. c) By the provisions of the memorandum or articles of the company d) By the government Q-76. State the proper date & time for holding different kinds of meeting in the case of a newly registered public limited company. CMA Adapted- December 2010 Answer. Proper date & time for holding different kinds of meeting: 1. The meeting of shareholders: a) Statutory meeting: Every public company limited by shares or guarantee and having a share capital shall within a period of not less than 30 days and not more than 180 days from the date at which the company is entitled to commence its business, must hold such meeting. This is held only once during the life time of the company. b) Annual General Meeting (AGM): The first AGM must be held within 18 months from the date of its incorporation and thereafter at least once in every calendar year and not more than 15 months after holding of the last preceding AGM. c) Extra-ordinary General Meeting (EGM): This meeting of the shareholders is generally held to consider a particular matter of urgent important business which cannot be deferred till the next AGM. For this type of meeting, 21 days‘ notice in writing is required to serve to all the concerned parties. 2. The meetings of Board of Directors: a) Board meeting: A notice in writing is required to send the directors for which no specific time period in the provision. b) Committee meeting: Committee is the smaller part of the board and may be consisted of only one member. Such committee may be budget committee, inquiry committee, monitoring committee, etc.

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Q-77. What are the consequences for the following defaults? (i) Default in holding AGM within the stipulated time (ii) Default in holding statutory meeting and forwarding statutory report to the members and registrar. Who are responsible for the above defaults? CMA Adapted- December 2010 Answer. i) The consequences for the default in holding AGM within the stipulated time: The meeting of the shareholders which is held once every year is called AGM. The 1st AGM must be held within 18 months from the date of its incorporation and thereafter at least once in every calendar year and not more than 15 months after holding of the last preceding AGM. If default is made in holding an AGM in accordance with the provision, the company and every officer of the company is at responsible, shall be liable to a fine which may extend to Tk.10,000 and in case of a continuing default, with a further fine may be up to Tk.250 per day during which the default continues. ii) The consequences for the default in holding statutory meeting and forwarding statutory report to the members and registrar: Statutory meeting is the first meeting of the shareholders of a public limited company. It is not required for a private limited company. Every public company limited by shares or guarantee shall within a period of not less than 30 days and not more than 180 days from the date at which the company is entitled to commence its business, must hold such meeting. This is held only once during the lifetime of the company. If default is made in holding such a meeting, the directors or the defaulting officer may be fined up to Tk.5,000. The court may even wind up the company if default is made in filing the statutory report to the registrar or in holding such meeting. Q-78. Under what circumstances a company may be wound up by court or voluntarily? CMA Adapted- December 2010 Answer. A company may be wound up by the court under the following circumstances: a) Default to hold the statutory meeting and to file the statutory report; b) Fail to commence business within a year of its incorporation or suspends its business for a whole year; c) Reduction of no. of members to below 7 in case of public and below 2 in case of private ltd. co; d) Unable to pay its debts; e) On just and equitable opinion of court. 186


A company may be wound up voluntarily under the following circumstances: i. When the period is fixed for the duration of the company by its articles that the company is to be dissolved and the company in general meeting has passed an ordinary resolution; ii. If the company resolve by special resolution; iii. It the company fails to continue its business then by passing an extra-ordinary resolution. Q-79. How and why a Director can be removed? CMA Adapted- December 2010 Answer. A director can be removed by an extraordinary meeting for the following reasons: 1. Failure to obtain qualification shares within two months from his appointment 2. Founding to be of unsound mind, 3. Failure to pay calls made on him within six months from the date of such calls being made. 4. Holding any office or secret profit without the sanction of the company in general meeting 5. Absence from three consecutive meetings of the directors without approval from the Board of Directors 6. Getting loan from the company by means of illegal ways. 7. In case of penalty and fraud. Q-80. Briefly comment on the following statement: Act done outside the objects and outside the articles of the company are ultra-vires. CMA Adapted- August 2010 Answer. The term ultra-vires derives from two words, ―ultra‖ which means beyond and ―vires‖ which means power. So, ultra-vires means to do any act which is beyond the power. A company is incorporated only for the objects and purposes expressed in the memorandum. Whenever, a company does any act which is not authorized by the object clause of its memorandum or when it practices in excess of object clause it is ultra-vires, i.e., doctrine of ultra-vires. Q-81. What do you mean by statutory meeting? When does a company hold statutory meeting? CMA Adapted- August 2010 Answer. Statutory meeting is the first meeting of the shareholders of a public limited company. It is not required for a private limited company. Every public company limited by shares or guarantee and having a share capital, shall within a period of not less than 30 days and not more than 180 days from the date at which the company is entitled to commence its business, must hold such meeting. This is held only once during the lifetime of the company. A notice is required to be sent to every member of the 187


company at least 21 days before the meeting. A statutory report is also required to send along with the notice and after such report shall be delivered to the RJSC. Q-82. What are the contents of statutory meeting? CMA Adapted- August 2010 Answer. The statutory meeting contains the following information: 1. The total number of shares allotted whether fully or partially paid-up 2. The total amount of cash received by the company in respect of all the shares allotted. 3. The names, occupations and address of all the directors, managers and secretary of the company. 4. The particulars of any contracts, modification of contracts or proposed modification of contracts. 5. The details of arrears (if any) 6. Due from directors, managers, etc. 7. The particulars of any commission or brokerage paid or to be paid. Q-83. What are the preferential payments in the case of dissolution of a company? CMA Adapted- August 2010 Answer. According to the Companies Act 1994, a company has to pay the creditors in preferential claims which are as follows: 1. All revenues, taxes, rates whether payable to the government or a local authority. 2. All wages and salary of any clerk and other servant and any labor or workman up to Tk.1,000 or Tk.500 each respectively. 3. Compensation of any officer or employee of the company in respect of the death or disablement which is payable under the Workmen‘s Compensation Act, 1923. 4. All sums due to any employee from a provident fund, a pension fund and gratuity fund or any other fund for the welfare of the employee maintained by the company. 5. The expenses of any investigation held in pursuance of the act. Q-84. How and why is a company dissolved? CMA Adapted- August 2010 Answer. According to the Companies Act 1994, a company may be wound up by the following ways1. Compulsory winding up under order of the Court or, Government: Compulsory winding up takes place when a company is directed to be wound up by an order of the court.

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2. Voluntary winding up by members or creditors: Voluntary winding up means winding up by the creditors or members themselves without the intervention of the court. 3. Winding up subject to the supervision of the court: After passing a resolution for winding up the company, if the winding up is completed voluntarily on the application of the shareholders or creditors or both of the parties but with the supervision of the court, it is called winding up of a company subject to supervision of the court. The object of such winding up is to protect the interests of the creditors and contributors. A company is dissolved for the following reasons: a) Default in holding statutory meeting b) Failure to commence business within the time prescribed by law. c) Failure to pay its debts d) Carrying with illegal or ultra-vires acts e) Completion of such specific purpose for which it was not established f) Meeting with any situation for which it becomes bound to dissolve. Q-85. Briefly comment on the following statement: All listed companies are public companies but not the vice-versa. CMA Adapted- August 2010 Answer. As per listing regulation, only the public limited company can be listed with the Stock Exchanges. As per Companies Act 1994, securities of a private limited company are prohibited for transfer and it cannot be sold publicly. So, the Stock Exchanges deal with those securities which are transferable. So, no private limited company is eligible for listing with any Stock Exchange but a public limited company is not mandatory to be listed. So, it can be said that ―all listed companies are public companies but not the vice-versa‖ Q-86. Discuss the qualifications of a director of a company. CMA Adapted- April 2010 Answer. Directors must contain the following qualifications: 1. He must obtain qualification share 2. He must be of sound mind 3. He must be solvent 4. He must pay the call money if demanded to him 5. He must be a major 6. He must be a person of high morality 7. He must be a natural person, i.e., not an artificial person such as association, firm or any other juristic person. 189


Apart from the above mentioned qualifications, directors must contain some additional qualifications. Which are: i) A person who must give a written consent to act as a director which shall be signed and filed with the Registrar. ii) Directors must obtain qualification shares within a period of 60 days after his appointment. Q-87. Directors are trustees as well as agents of the company- Discuss. CMA Adapted- April 2010 Answer. Since, a company is only a legal existence, it cannot act by itself. In the absence of any provision, Directors are sometimes termed as trustees as well as agents and sometimes as managing partners. Directors as trustees: Directors are considered to be trustees of the company‘s money and property. They must apply the property in good faith and for the specified purpose. Any miss-application of such property will be considered as breach of trust. Directors as agent: The relationship between the company and the directors is somewhat similar to the principal and agent relationship. As agent the directors must exercise their power with reasonable care. If they act within the scope of their authority, they will incur no personal liability. But if they act ultra-vires and exercise such powers which are not authorized by the memorandum and articles of association, they shall be liable for breach of warranty of authority. Directors as officers or managing partners or employees: Directors may also term as officers of the company. When they act as directors they may be held liability for non-compliance with the provisions of the Companies Act. Q-88. What are the duties of the Directors in relation to inspection of Books of Account? CMA Adapted- April 2010 Answer. The books of account and other books and papers of every company shall be open to inspection by any director during business hours. The branch office, if any, must keep and maintain their own books of account and must send an updated return to the registered or head office not later than 3 months. Such inspection may be made without giving any notice thereof. Duties of the Directors in relation to inspection of books of accounts are as follows: i) It is the duty of every director, officer and employee of the company to produce such books, furnish with statement, information or explanation within such time and place as required by the person making the inspection ii) Duty to give all assistance for the inspection to the Registrar. 190


Q-89. What are the penalties for failure of the Directors in relation to inspection of Books of Account? CMA Adapted- April 2010 Answer. The Managing Agent, Managing Director or Director or officers are entrusted with the take of maintaining proper books of account. For failure of inspection of the books of account, he or they shall be liable to a fine not exceeding Tk.500 or, 6 months imprisonment or both. If a defaulting director or officer is convicted, he shall be deemed to have vacated the office. He shall also be disqualified for holding such office in any company for a certain period from such date. Q-90. What are the formalities to be observed in transforming a public limited company form a private limited company? CMA Adapted- April 2010 Answer. According to the Companies Act 1994, the transformations of private limited company into public limited company are as follows: 1. Adoption of special resolution and alteration of articles: At first, a private limited company needs to be altered its articles of association by taking special resolution. The following items of articles of association of private limited company are to be changed: i) The right to transfer of share is limited. ii) The company cannot invite to sell its share or securities. iii) The total membership of the shareholder should not exceed fifty. The following item are to be replaced on exchange of the above items: i) The share of the company is transferable ii) The share or debenture of the company is issuable iii) Minimum numbers of members are seven and maximum numbers are limited by the number of shareholders. 2. Submission of prospectus: Submitting a new prospectus or a statement in lieu of prospectus to the Registrar within 30 days from the changing date of articles of association. 3. Enhancement of the no. of directors: The number of directors of converted public limited company is to be increased at least three and the new schedule is to be submitted to the Registrar.

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4. Rectification of name: If the word ‗private‘ exists at the end of the name of the previous private company, it should be deleted. 5. Submission of documents: All documents need to be submitted to the Registrar. After that the private limited company will be converted into a public limited company. Q-91. Define subsidiary company. CMA Adapted- April 2010 Answer. A company which is controlled by the holding company is known as subsidiary company. Holding company is the company which can control the policies of another company through the ownership of its shares or through control over the composition of its Board of Directors. A subsidiary company holds less than 50% shares of that and has less than 50 voting power. Q-92. Outline the rules governing the issue of notice for a companyâ€&#x;s General Meeting. CMA Adapted- April 2010 Answer. The written message which is served for inviting the members to attend a meeting on specific time, date, place and occasionally agenda is called a notice. The notice must contain the following contents: i) The date, time, place of holding the meeting must be clearly mentioned ii) It must be signed by the proper authority iii) The objects of the meeting should be mentioned iv) It must contain the agenda of the meeting v) It should contain the voting rights of the members whether by person or by proxy vi) Official pad and seal must be used in the notice The notice is to be circulated and published in the newspaper by the proper authority within the legal time. The rules regarding publishing in the newspaper are as follows: i) It must be published by the legal authority ii) It should be served to the legal persons within specified time and date iii) It should be duly signed by the legal authority at its concluding stage iv) Using appropriate media to send it and also following organizational rules Q-93. What are the pre-requisites of a valid meeting? CMA Adapted- April 2010 Answer. 192


A meeting without reference to the Board is invalid. To make a meeting valid, the following pre-requisites should be maintained: 1. There should be a right of convening authority, i.e., board of directors, directors, court, etc. who will call a meeting and a chairman must be selected for the meeting if any chairman is not selected carrier. 2. Notice must be properly issued to all the members and proper communication must be used and proper date, time, place must be mentioned in the notice. 3. The purpose of convening meeting must be legal. 4. The meeting must full-fill a quorum 5. Authorized persons should present in the meeting. 6. The meeting must confined to agenda 7. The meeting must have voting, polling and adopting a resolution. 8. Decision of the meeting should be written in the minute‘s book. Q-94. Draft a notice for the forthcoming Annual General Meeting of the end containing items that are normally included in an Annual General Meeting for members approval. Point out which of the above items would be included in the Directors Report. CMA Adapted- April 2010 Answer. X & Y Limited 9, Motijheel C/A, Dhaka Date: August 20, 2017 Notice of Annual General Meeting All concerned of the company are hereby notified that the 20th Annual General Meeting of X & Y Limited is going to be held on Wednesday, September 20, 2017 at 10.00 am in the head office of the company. You are specially requested to remain present in that meeting in time. By order of the Board M Company Secretary Agenda: 1. Reading out and approval of the director‘s report 2. Declaration of dividend 3. Filling-up the vacant post of director 4. Increasing the tenure of the company auditor 5. To approve the appointment of the independent directors Items that would be included in the Directors Report are pointed below: i. Name of the persons who were directors in the financial year. ii. The principal activities of the company. iii. Significant changes in the company iv. Information relating to issuance of share, if any share is issued during the financial year v. A statement of each director 193


Q-95. When and how is special resolution passed by a company? CMA Adapted- April 2010 Answer. Special resolution is passed by a company for the following cases: - To change the name of the company - To alter its articles - To reduce share capital - To remove director - To remove auditor before expiry of time - To made directors liability unclaimed - On court winding up - On voluntary winding up Special resolution is to be passed by a majority of not less than three fourth (i.e, 75%) of the members present and vote in person or by proxy. The resolution to be carried as a special resolution must be clearly spelled out in the notice and must be notified at least 21 clear days before the meeting. Q-96. What are the powers of the Registrar of Joint Stock Companies and Firms with respect to inspection of Books of Account? CMA Adapted- April 2010 Answer. The powers of the Registrar of Joint Stock Companies and Firms with respect to inspection of Books of Account are as follows: 1. Power to serve written order upon the company and any of its directors or officers to furnish any information, explanation or document (if necessary) within a specified time. 2. Power to give penalty or fine not exceeding Tk.500 in case of any refusal or negligence of officers to furnish such information or explanation 3. Power to apply to the court for getting such information or explanation for the inspection. 4. Power to inspect and take the copies of additional information or explanation by the register as original document 5. Power to report to the government if document does not disclose a full and fair statement of affairs. Q-97. In what circumstances a company calls for an EGM? CMA Adapted- December 2009 Answer. Any meeting of the shareholders other than the statutory and annual general meeting is called an Extra-ordinary General meeting (EGM). This meeting of the shareholders is generally held to consider a particular matter of urgent important business which cannot be deferred till the 194


holding of the next annual general meeting. Where it is necessary to pass a special or extra ordinary resolution, an extraordinary general meeting has to be called. Q-98. Suppose you have purchased shares based on a prospectus, which was eventually proved to be false and misleading. What remedies are available to you as per the Companies Act 1994? CMA Adapted- December 2009 Answer. The consequences and remedies for false, misleading or concealment of fact in the prospectus: 1. If there is any fraudulent misrepresentation in the prospectus, the aggrieved party can recover damages from the company. Fraud is proved when it is shown that a false statement has been made knowingly. 2. An aggrieved shareholder is entitled to apply for the removal of his name from the register of members. 3. Once the miss-statement in the prospectus is proved, the directors or promoters are liable to pay compensation and the aggrieved subscriber needs not to prove fraud to claim damage for miss-representation. 4. Concealment of certain items will render the following consequences: - persons concerned in issuing prospectus be punishable with Tk.5,000 - entitled to recover damages 5. The aggrieved shareholder may bring an action against the company. 6. Every person who is authorized to the issue of prospectus shall be punishable with imprisonment for a term which extends to 2 years or with fine, which may extends to Tk.5,000 or both. But a person shall not be liable if the offence is not proved. Q-99. How a company can be listed with and de-listed from stock exchange? CMA Adapted- December 2009 Answer. Listing of a company: Application for listing shall be made by the applicant company in the prescribed form and will be accompanied by the fees, specified in the regulations. Following documents and papers are to be submitted to the stock Exchange for listing of any company: i. Application for listing in prescribed form as per Form-1 ii. Memorandum and Articles of Association iii. A copy of certificate of incorporation iv. A copy of Certificate of commencement of business v. Registration of the Board of Investment vi. Copies of material contract with suppliers, financial institutions vii. Copies of L/C for plant and machinery viii. Draft prospectus ix. Auditors certificate for the amount subscribed by the promoters. 195


De-listing of a company: A listed company may be de-listed or suspended for any of the following reasons: i. If its securities are quoted below 50% of face value for a continuous period of their calendar years. ii. Failed to declare dividend or bonus: - for 5 years form last dividend - for 5 years from commencement of business - for 5 years from the date of commercial operation iii. Failed to hold AGM for a continuous period of three years iv. Gone into liquidation v. Failed to pay listing fees for two years vi. Failed to pay penalty vii. Failed to comply any provision of the regulations. Q-100. What is a prospectus? When should a statement in lieu of prospectus be issued? CMA Adapted- December 2009 Answer. According to the Companies Act 1994, ―Document containing order of shares or debentures for sale is to be deemed as prospectus‖. Prospectus is an invitation, notice, circular or advertisement to the public to subscribe the share capital or debenture of a company. When a prospectus is not issued, a statement in lieu of prospectus is to be issued. When promoters of a public limited company procure their capital from private arrangement, a statement in lieu of prospectus is issued. When minimum subscription is not collected, the public limited company prepares a statement in lieu of prospectus. Q-101. Differentiate between a private and a public company. CMA Adapted- December 2009 Answer. Differentiation between a private and a public company: Private company Public company 1. According to the Companies Act 1994, 1. According to the Companies Act 1994, private company means a company which public company means a company by its articles limit the right to transfer of incorporated under this act or under any law share (if any) and limit the number of its at any time in force before the members excluding the persons who are in commencement of this act and which is not its employment a private company 2. Minimum number of members are two 2. Minimum number of members are seven and maximum number of members are fifty and maximum number of members are 196


limited by the number of shareholders 3. Its share in not transferable 3. Its share is transferable 4. It cannot issue debenture 4. It can issue debenture 5. Its minimum number of director is 2. 5. Its minimum number of director is 3 6. It cannot publish prospectus 6. It can publish prospectus 7. It is not obligated to call statutory 7. It is obligated to call statutory meeting meeting. Q-102. Who authorizes the financial statements of a company to be issued? CMA Adapted- August 2009 Answer. The financial statements with auditor‘s report duly approved by the board of directors or shareholders as the case may be which is to be placed in the AGM shall be published in prescribed manner. The financial statements will be authorized by the Managing Director or CEO and by three Directors of the company. Q-103. When a company has to conduct Annual General Meeting? What is the consequence of default in holding Annual General Meeting? CMA Adapted- August 2009 Answer. The first Annual General Meeting (AGM) must be held within 18 months from the date of its incorporation and thereafter at least once in every calendar year and not more than 15 months after holding of the last preceding AGM. For calling an AGM, a 14 days notice in writing is mandatory to serve the members. However, the meeting may be called with a shorter notice, if the shareholders and members are entitled to vote and give consent to this effect. The period of notice cannot be reduced by the articles of association. The consequences of default in holding AGM: If default is made in holding an AGM in accordance with the provision, the company and every officer of the company is at responsible, shall be liable to a fine which may extend to Tk.10,000 and in case of a continuing default, with a further fine may be up to Tk.250 per day during which the default continues. Q-104. Discuss the issue of Protection of Minority Interest, as envisaged in the Companies Act, 1994 CMA Adapted- August 2009 Answer.

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The issue of protection of minority interest: 1. Any member or debenture holder of a company may either individually or jointly bring to the notice of the court by application thata) the affairs of the company are being conducted or the powers of the directors are being exercised in a manner prejudicial to one or more of its members or debenture holders; or b) the company is acting or is likely to act in a manner which differentiate or is likely to differentiate the interest of any member or debenture holder c) a resolution of the members, debenture holders or any class of them has been passed or is likely to be passed which is discriminates 2. The court shall on receipt of an application send a copy thereof to the Board and fix a date for hearing the application 3. If after hearing, the court is of opinion that the interest of the applicant is likely to be affected for reasons specified in the application, it may make such order, includinga) to cancel or modify any resolution or transaction b) to amend any provision of the memorandum and articles of the company Q-105. The office of an alternate director is vacated as soon as the original director returns to Bangladesh, is it correct? Discuss the authority of alternate director in the light of Companies Act-1994. CMA Adapted- August 2009 Answer. The office of an alternate director is vacated as soon as the original director returns to Bangladesh - yes it is correct. An alternate director is appointed by somebody to act as his alternate if such arrangement is provided in the articles of association of the company or authorized by the company in general meeting. According to the law, to appoint an alternate, the director is supposed to be: - away from the meeting place - away for at least three months Such appointment should be approved by the board. The appointment of an alternate director will automatically terminated when the appointing director returns to the place where board meeting normally takes place. Also on resignation, retirement or other reasons when the appointing director ceases to hold office, his alternate will vacate the office at once. 198


Q-106. What are the qualifications and disqualifications of Directors under the Companies Act, 1994? Is there any restriction as regards borrowing by the Directors? CMA Adapted- April 2009 Answer. The qualification of Directors: Directors must contain the following qualifications: 1. He must obtain qualification share 2. He must be of sound mind 3. He must be solvent 4. He must pay the call money if demanded to him 5. He must be a major 6. He must be a person of high morality 7. He must be a natural person, i.e., not an artificial person such as association, firm or any other juristic person. Apart from the above mentioned qualifications directors must contain some additional qualifications. Which are: i) A person must give a written consent to act as a director which shall be signed and filed with the Registrar. ii) Directors must obtain qualification shares within a period of 60 days after his appointment. The disqualifications of directors: 1. Failure of obtaining qualification shares within two months from his appointment 2. Founding to be of unsound mind, 3. Failure to pay calls made on him within six months from the date of such calls being made 4. Holding any office or secret profit without the sanction of the company in general meeting 5. Absence from three consecutive meetings of the directors without grant a leave of absence from the Board of Directors 6. Getting loan from the company by means of illegal ways 7. In case of penalty and fraud Loans to directors: Since directors are in-charge of management of the company, a question may arise as to whether directors can borrow money from the company. The Companies Act 1994 section 103(1) prohibits any loan to any director of the company or to a firm of which such director is a partner or to a subsidiary private company of which such director is a member is punishable. However, it is not applicable to a banking company or to a non-subsidiary private company. Q-107. What do you mean by statutory meeting and statutory Report? CMA Adapted- April 2009 Answer.

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Statutory meeting. A statutory meeting is not required for a private company. Every company limited by shares and every public company limited by guarantee and having a share capital shall, within a period of not less than 30 days, nor more than 180 days from the date at which the company is entitled to commence business, hold a general meeting with the members of the company, called the statutory meeting. Statutory report: A formal report prepared and submitted as required according to the provision of the Company Act 1994 is called statutory report, i.e., directors report, auditors report, etc. The Board of Directors shall prepare such report at least 21 days before the day on which the statutory meeting is to be held. To make the meeting effective, the shareholders with the progress and prospects of the company shall forward the report to every member of the company. It contains: - Total number of shares allotted whether fully or partially paid-up - Names, addresses and occupations of the directors, managers and secretary. - The details of arrears (if any) Q-108. What are the issues to be considered for taking dividend decisions? CMA Adapted- April 2009 Answer. Dividend is the share of profit payable to the shareholders. It is a portion of the divisible profit of the company which is distributed among the members in proportion to the paid-up value of their shares. The following issues or factors to be considered for taking dividend decisions: i) It is to be declared at the general meeting of the company by the directors ii) Dividend once declared must be paid and disbursed within 2 months from the date of declaration iii) No dividend shall exceed the amount recommended by the directors iv) No dividend shall be paid otherwise than out of profits of the year or any other undistributed profit of the company.

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MODEL EXAM QUESTION SUBJECT: GE 05. FUNDAMENTALS OF ETHICS, CORPORATE GOVERNANCE AND BUSINESS LAW Time: Three hours * All questions are to be attempted. * Show computations, where necessary. * Answer must be brief, relevant, neat and clean. * Start answering each question from a fresh sheet

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Q. No. 1. Briefly explain the term ethics. What are the fundamental ethical principles? [Marks: 15] Q. No. 2. How conflict of interest arises at the workplace? What are the steps to be followed to resolve the conflict of interest? [Marks: 10] Q. No. 3. As company secretary, please advise the chairman of your company the procedures to be followed on the followings: (a) The Board of Directors would like to declare Bonus shares against Revaluation Reserve. (b) The company wishes to go for IPO for Tk. 1000 crore. [Marks: (5+5) = 10] Q. No. 4. What is tort of negligence? What are the essential elements of tort of negligence? [Marks: 10] Q. No. 5. (a) Explain ―No consideration, no contract‖. (b) You are the Senior Finance Manager of ABC Company Ltd. The Chairman of your company had an accident on the way to the office and lost his hand bag containing important documents and Tk.5,00,000. He declared an award of Tk.50,000, if anyone can find the bag and return without any damage. Fortunately, his address was attached at the back side of the bag. Mr. Honest, without knowing the declaration, has found the bag and returned without any damage. After being informed, Mr. Honest came back and claimed the award. But, the company lawyer has advised the Chairman that there is no obligation to comply the offer. The Chairman is confused and seeking your advice on both legal and ethical ground – Advise him. [Marks: (10+10) = 20] Q. No. 6. Explain the legislation providing for the health and safety of people in the workplace. [Marks: 10] Q. No. 7. (a) Write the qualifications and disqualifications of Directors under the Companies Act, 1994? (b) According to the Companies Act 1994, how a company is dissolved? [Marks: (10+15) = 25] Page 1 of 1 201


MODEL EXAM QUESTION SOLUTION

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Ans. to the Q. No. 1 Definition of ethics: Ethics is the discipline dealing with what is good and bad and with moral duty and obligation.

It is a set of moral principles, especially ones relating to or affirming a specified group, field, or form of conduct. It includes study of universal values such as the essential equality of all men and women, human or natural rights, obedience to the law of land, concern for health and safety and, increasingly, also for the natural environment. Ethics (sometimes called morals or moral philosophy) is concerned with fundamental principles of right and wrong and what people ought to do inform the judgments and values and help individuals decide on how to act

The fundamental ethical principles are as follows: Integrity: Integrity is the quality of being honest and having strong moral principles; moral uprightness. It is generally a personal choice to hold oneself to consistent moral and ethical standards. In ethics, integrity is regarded by many people as the honesty and truthfulness or accuracy of one's actions. Objectivity: Generally, objectivity means the state or quality of being true even outside of a subject's individual biases, interpretations, feelings, and imaginings. Professional competence and due care: The principle of professional competence and due care imposes the following obligations on all professional accountants: - To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service; and - To act diligently in accordance with applicable technical and professional standards when providing professional services. Confidentiality: Confidentiality is the protection of personal information. Confidentiality means keeping a client's information between you and the client, and not telling others including co-workers, friends, family, etc. Examples of maintaining confidentiality include: individual files are locked and secured. Professional behavior: A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession. 203


Ans. to the Q. No. 2

How conflict of interest arises: A conflict of interest arises in the workplace when an employee has competing interests or loyalties that either are, or potentially can be, at odds with each other. A conflict of interest causes an employee to experience a struggle between diverging interests, points of view, or allegiances. Conflicts of interest are generally forbidden in company codes of conduct and / or employee handbooks. Conflicts of interest can cause an employee to act out of interests that are divergent from those of his or her employer or coworkers. In workplaces, employees want to avoid any behavior or choices that could potentially signal a conflict of interest. They are bad news for the employee's reputation, integrity, and trustworthiness in the eyes of management.

Conflict of interest resolution: To understand ethical conflict resolution we have to consider the word conflict in isolation and consider what it means. The most likely interpretation of conflict might be that of disagreement with a professional colleague or disagreement with a customer or client. Ethical conflict resolution is only a five-step process. Step 1: Identify the source of the conflict. The more information an organisation has about the cause of the conflict, the more easily it can help to resolve it. To get the information need, the organisation can use a series of questions to identify the cause. Step 2: Look beyond the incident. Often, it is not the situation but the perspective on the situation that causes anger to fester and ultimately leads to a shouting match or other visible— and disruptive—evidence of a conflict. Step 3: Request solutions. After getting each party‘s viewpoint on the conflict, the next step is to get each to identify how the situation could be changed. Step 4: Identify solutions both disputants can support. Point out the merits of various ideas, not only from each other‘s perspective, but in terms of the benefits to the organization. Step 5: Agreement. The mediator needs to get the two parties to shake hands and agree to one of the alternatives identified in Step 4. Some mediators go as far as to write up a contract in which actions and time frames are specified. 204


Ans. to the Q. No. 3

(a) As a company secretary, I will advise the chairman of my company to follow the following procedures: i. To take steps as per the relevant provisions ii. To convene a meeting of the Board of Directors iii. To issue a notice to the shareholders relating to the Annual General Meeting iv. To convene another meeting of Board of Directors to approve and pass provisional allotment list and resolution v. To give a public notice through newspapers regarding the closure of the register of members and transfer books vi. To issue allotment letters to the members along with a circular explaining how the allotment has been made. vii. To take necessary entries in the register of members viii. To prepare and issue new share certificate after obtaining signature of concerned Directors or Officers.

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(b) The procedures to be followed in case of IPO: i. If it is private company, to convert into public company ii. To appoint an issue manager iii. Apply to Securities and Exchange Commission for the consent of raising

capital

iv. Apply for the IPO placement determination v. Agreement with underwriter vi. To approve by SEC the issue of prospectus vii. To open subscription viii. To allotment of shares ix. Listing with DSE/CSE

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Ans. to the Q. No. 4

Tort of negligence: The tort of negligence is a legal wrong that is suffered by someone at the hands of another who fails to take proper care to avoid what a reasonable person would regard as a foreseeable risk. In many cases there will be a contractual relationship (express or implied) between the parties involved, such as that of doctor and patient, employer and employee, bank and customer, and until relatively recently it was necessary for such a contractual relationship to exist in order for a claim for negligence to succeed.

Essential elements of tort of negligence: In order to win a negligence case, the plaintiff (the person injured) must prove the following four elements to show that the defendant (the person allegedly at fault) acted negligently: i) Duty When assessing a negligence claim, the first step is to look to see whether or not the defendant owed the plaintiff a legal duty of care. In some circumstances, the relationship between the plaintiff and defendant might create a legal duty -- for instance, a doctor owes a patient a legal duty to provide him or her with competent medical care. ii) Breach of duty Next, the court will look to see whether the defendant breached this duty by doing (or not doing something) that a "reasonably prudent person" would do under similar circumstances. Stated simply, the defendant likely will be found negligent if the average person, knowing what the defendant knew at the time, would have known that someone might have been injured as a result of his or her actions -- and would have acted differently than the defendant did in that situation. iii) Causation The third element requires that the plaintiff show that the defendant's negligence actually caused his or her injury. Sure, someone might be acting negligently, but the plaintiff can only recover if this negligence somehow causes the injury. iv) Damages The final element of a negligence case is damages. This element requires that the court be able to compensate the plaintiff for his or her injury -- usually through monetary compensation for expenses such as medical care or property repair.

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Ans. to the Q. No. 5

(a) A contract without consideration is not a contract. Consideration is essential for the validity of a contract. An agreement comes into existence when one or more persons promise to other less, to do or not to do something. Every promise forming the consideration for each other leads to a contract. A promise without consideration can not create a legal obligation. A promise without consideration is a gift. An agreement without consideration is not enforceable by law. And an agreement which can not enforceable by law is not a contract. Contract must be supported by consideration.

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(b) There is no obligation to comply the offer. Because, an offer must be communicated to the offeree. The person to whom the offer is made is called the offeree. A person can not accept an offer unless he knows the existence of the offer. Here, Mr. Honest is not entitled to the reward.

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Ans. to the Q. No. 6

The main legislation providing for the health and safety of people in the workplace are the Safety, Health and Welfare at Work Acts 2005 and 2010. They apply to all employers, employees and self-employed people in their workplaces. The Acts set out the rights and obligations of both employers and employees and provides for substantial fines and penalties for breaches of the health and safety legislation. Almost all of the specific health and safety laws which apply generally to all employments are contained in the Safety, Health and Welfare at Work Regulations 2007. Employer‟s duties Under Section 8 of the Act the employer has a duty to ensure the employees‘ safety, health and welfare at work as far as is reasonably practicable. In order to prevent workplace injuries and ill health the employer is required, among other things, to: - Provide and maintain a safe workplace which uses safe plant and equipment - Prevent risks from use of any article or substance and from exposure to physical agents, noise and vibration - Prevent any improper conduct or behaviour likely to put the safety, health and welfare of employees at risk - Provide instruction and training to employees on health and safety - Provide protective clothing and equipment to employees - Appointing a competent person as the organisation‘s Safety Officer Employees‟ duties The duties of employees while at work are set out in Section 13 of the Act. These include the following: - To take reasonable care to protect the health and safety of themselves and of other people in the workplace - Not to engage in improper behaviour that will endanger themselves or others - Not to be under the influence of drink or drugs in the workplace - To undergo any reasonable medical or other assessment if requested to do so by the employer - To report any defects in the place of work or equipment which might be a danger to health and safety

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Ans. to the Q. No. 7 (a) The qualification of Directors Directors must contain the following qualifications: 1. He must obtain qualification share 2. He must be of sound mind 3. He must be solvent 4. He must pay the call money if demanded to him 5. He must be a major 6. He must be a person of high morality 7. He must be a natural person, i.e., not an artificial person such as association, firm or any other juristic person. Apart from the above mentioned qualifications directors must contain some additional qualifications. Which are: i) A person must give a written consent to ace as a director which shall be signed and filed with the Registrar. ii) Directors must obtain qualification shares within a period of 60 days after his appointment.

The disqualifications of directors: 1. Failure of obtaining qualification shares within two months from their appointment 2. Founding to be of unsound mind, 3. Failure to pay calls made on him within six months from the date of such calls being made. 4. Holding any office or secret profit without the sanction of the company in general meeting 5. Absence from three consecutive meetings of the directors without of absence from the Board of directors 6. Getting loan from the company by means of illegal was. 7. In case of penalty and frond.

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(b) According to the Companies Act, 1994, a company may be wound up by the following waysa) Compulsory winding up under order of the Court or, Government; b) Voluntary winding up by members or creditors; c) Winding up subject to the supervision of the court. a) Compulsory winding up under order of the court: Compulsory winding up takes place when a company is directed to be wound up by an order of the Court. A company may be wound up by the court under the following circumstance: i. Default to hold the statutory meeting and to file the statutory report; ii. Fail to commence business within a year of its incorporation; iii. Reduction of number of members to below 7 in case of public ltd. co. and below 2 in case of private ltd. co.; iv. Unable to pay its debts; v. On just & equitable opinion of court. Procedures for compulsory winding up: i. Application or petition for winding up to the court by the company, creditors, members, contributories or authorized person by Govt. ii. Hearing of application in a certain date and taking decision for further activities. iii. Commencement of wingding up by court at the time of the presentation of petition. iv. Appointment of winding up & order of winding up v. Preparation of the list of the contributories. vi. Collection of documents & assets of company vii. Proof of claim and payment of due viii. Declaration of dissolution of company and reporting it to the Registrar by the official liquidator within 15 days. b) Voluntary winding up by members or creditors: Voluntary winding up means winding up by the creditors or members themselves without the intervention of the court. A company may be wound up voluntarily under the following circumstances: i. When the period fixed for the duration of the company by the articles that the company is to be dissolved and the company in general meeting has passed an ordinary resolution; ii. If the company wishes to resolve by special resolution; iii. It the company fails to continue its business then by passing an extra-ordinary resolution. Procedures for voluntary winding up by members or creditors: i. Declaration of financial solvency; ii. Submission of this declaration to the Registrar; iii. Adoption of decision for winding up in the general meeting. 212


iv. Notification of decision within 10 days by passing the resolution in the general meeting; v. Calling of general meeting if the winding up event continues for more than 01 year; vi. Final meeting & dissolution; vii. Submission of documents to the registrar within 01 week of this meeting. c) Winding up subject to supervision of the court: After passing the resolution for winding up the company, if the winding up is completed voluntarily on the application of the shareholders or creditors or both of the parties but with the supervision of the court, it is called winding up of a company subject to supervision of the court. The object of such winding up is to protect the interests of the creditors and contributors. A company may be winding up subject to the supervision of the court, Ifi. The liquidator under voluntary liquidation is partial or is negligent collecting the assets; ii. The rules relating to winding up are not being observed; iii. The resolution for winding up was obtained by fraud.

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Fundamentals of Ethics, Corporate Governance and Business Law  

According to the following syllabus: CMA (Business Level), ICMAB

Fundamentals of Ethics, Corporate Governance and Business Law  

According to the following syllabus: CMA (Business Level), ICMAB

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