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STEP Diploma in International Trust Management

Company Law and Practice


Specimen Paper 1 Solutions
Section A: Answers to Multiple Choice Questions

Questions Answers

1. B
2. C
3. D
4. B
5. A
6. D
7. C
8. A
9. C
10. A
11. D
12. B
13. A
14. A
15. A
16. C
17. C
18. C
19. D
20. C
21. B
22. D
23. B
24. A
25. D

Diploma in International Trust Management: Company Law and Practice


Specimen Examination Paper 1 Solutions
Page 1
Section B

These points-to-note identify the major issues raised in Section B of this specimen examination
paper. They are provided in order to assist in your final preparation for the STEP Examination.
They are not intended to be model answers, but are a study aid. Cross references are to the
Course Manual (Seventh edition, 2010).

Question 1

1.1 A Notice that complies with Art 11.1 is illustrated in Module 9, section 5.3.2.

1.2 Notice should be served upon all shareholders and directors etc. in
accordance with Art 27.5. Service should be effected personally, by post or fax in
accordance with Art 27.1 and 27.2.

1.3 Failure to give proper notice usually invalidates the meeting and any business
transacted. However, the Articles may excuse an accidental error in service. Art
11.3 comes into play to validate the meeting following accidental failure to give
proper notice.

1.4 The quorum for a members meeting under Art 12.2 is two shareholders
personally present. Accordingly, if only C attends, the meeting is inquorate and
should be adjourned in accordance with Art 12.3.

1.5 On a show of hands D and E can vote out C. However, in accordance with Art 12.6, C
can demand a poll in which case his 70% of the votes constitutes a super-majority,
sufficient to pass the special resolution.

1.6 Any shareholder can be appointed as chairman in accordance with Art 12.4. His
typical duties include those listed in Module 9, section 2.6

Diploma in International Trust Management: Company Law and Practice


Specimen Examination Paper 1 Solutions
Page 2
Section B

Question 2

This is an academic essay in two parts.

Candidates are expected to review the historical development of company law in England as
described in Mod 2, section 2 before reviewing the evolution of offshore companies legislation in a
jurisdiction of choice (which is probably inspired by The Companies Act, 1948 see the
examples in Module 2, section 3).

Advantages of a company structure over a partnership, include the:

separation of ownership and control;

ability to raise capital from the public;

transferability of ownership without it affecting management of the business;

limited liability and reduction of investment risk;

separate legal personality, separating the liability of the shareholders to pay taxes
and other liabilities from the liability of the corporate entity itself; and

self governing nature of the management of the corporate structure.

Drawbacks of a corporate structure include:

the requirement to file particulars with the registrar arguably erodes


confidentiality; and

long-winded, time-consuming corporate procedures, designed to protect


creditors of the company and minority shareholders candidates are
expected to give examples.

Diploma in International Trust Management: Company Law and Practice


Specimen Examination Paper 1 Solutions
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Section B

Question 3

3.1 An English company may incur tax liability according to the residence principle and the
source principle of international taxation on a number of bases. Firstly, under the
residence principle:

On the basis of the so-called place of incorporation test (Module 10, section
3.1.2(i)), the company is liable to pay corporation tax to HM Revenue and
Customs on its net profits from all worldwide sources (including the bank
interest, dividend income and realised gains and the rental income).

Further or alternatively, on the basis of the management and control test, the
company may have to pay taxes to the revenue authorities where it is
managed and controlled (Module 10, section 3.1.2(ii)). A Double Tax
Agreement (DTA), typically based upon the OECD model, confers relief against
double tax claims.

Secondly, an English company may incur tax liability under the source principle:

Under the source principle (Module 10, section 3.2) the company may become
obligated to pay corporation taxes to the Source-State where its earnings
originate, namely the State to which it has economic ties, but only upon profits
earned in the Source-State. There must be significant business operations in the
Source-State to give rise to a tax liability under this principle. Accordingly, the
commercial real estate located in Brazil will give rise to a tax liability in Brazil
based upon the Brazilian source profits under the so-called source principle.

Further, the UK company will also bear withholding taxes in the US upon
dividends declared by the NYSE listed companies under the US classical system of
taxation Module 10, section 4.1.

3.2 The company does not incur any tax liability in the Bahamas as this is a nil-tax
jurisdiction that does not impose corporate taxation. However, the company could
still be taxed onshore under the management and control test and/or the source test,
and will bear withholding tax on its dividend income from the NYSE stocks (see
answer to question 3.1 above). Furthermore, the US has sophisticated anti tax
avoidance provisions. Under the Qualified Intermediary (QI) Rules the brokerage firm
through which AB Co. Ltd. holds the NYSE stocks must disclose the identity of the
beneficial owner of the account to the IRS on Form W-9. Then, under Controlled Foreign
Company (CFC) anti tax avoidance rules, the IRS would tax the beneficial owner as if
he were the recipient of all of the companys earnings.

Diploma in International Trust Management: Company Law and Practice


Specimen Examination Paper 1 Solutions
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Section B

3.3 There is no tax liability in respect of the deposit interest, although the company may
incur a tax liability in Brazil under the source test, and in the US for withholding tax.
However, the US settlor will not incur any US tax liability as the structure described is
neither a grantor trust (as defined), nor a simple trust for US tax and QI purposes. The
trustee is therefore treated as the beneficial owner of the companys brokerage account
and does not incur a US tax liability. Nor do the foreign, non-US class of beneficiaries
incur a tax liability unless and until a distribution is made to them.

Diploma in International Trust Management: Company Law and Practice


Specimen Examination Paper 1 Solutions
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Section B

Question 4

4.1 The typical division of power within a corporate structure is between ownership
and control: the shareholders passively own the company; the directors control day-to-
day management of its business. This apportionment of power is confirmed by Art
19.1 (which is modelled upon Table A of the English Companies Act, 1948). The power
to run the business of the company is conferred upon the directors insofar as such
powers are not, by the Articles, required to be exercised by the shareholders there are
no powers of management expressly conferred upon the shareholders by the articles
under scrutiny and, therefore, Art 19.1 simply codifies the typical division.

When both the board of directors and the body of shareholders are provided by one
and the same management company, the division of power is often regarded as
academic. However, the shareholders are controlled by the beneficial owner,
whereas the directors are not. Directors owe independent duties of care, etc. to the
company. Accordingly, which arm of the service provider is making a decision
nominee shareholders or directors may be of importance on occasions when a
particular course of action is favourable to the beneficial owner but against the general
interests of the company. It should be noted that a shareholder can decide matters in
his own favour whereas a director must always act in the best interests of the
company as a whole.
4.2 Removal of a director is undertaken by ordinary (simple-majority) resolution of the
shareholders (Art 15.3). This can, therefore, be carried out by the sole shareholder,
namely the trustee of the Redhouse Trust. Replacement of a director is also undertaken
by an ordinary (simple-majority) resolution of shareholders (Art 15.4).
4.3 A written resolution of the directors of the company is required see the precedent (with
suitable changes) found in Module 9, section 5.11(1).

Diploma in International Trust Management: Company Law and Practice


Specimen Examination Paper 1 Solutions
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Section B

4.4 Change of registered office: as is typical for a managed company, this can be undertaken by
a resolution of directors (Art 1, Registered Office). The procedural requirements (in
respect of which see Module 4, section 2.2) include

directors meet and pass an appropriate board resolution (or waive a meeting
and pass a written resolution)

notify Registrar

notify bankers etc., if necessary

amend corporate stationery, if necessary

physically transfer the companys statutory records and registers to the new
registered office address.

Change of nationality: under typical offshore statutory migration provisions this is


undertaken by a continuance procedure initiated by a special resolution of
shareholders whenever the company is solvent. Particulars of the statutory
requirements and procedures can be found at Mod 3, section 5.2.1. Delegates are
expected to give jurisdiction-specific details. It should be noted that certain jurisdictions
have not modernised their company legislation to permit a change of nationality.

Diploma in International Trust Management: Company Law and Practice


Specimen Examination Paper 1 Solutions
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Section B

Question 5

This is, again, an academic essay in two parts.

In the first part candidates are expected to review the responsibilities of a director, the
performance of which earns him remuneration, but he can also be held personally liable to the
company for breach of duty and to creditors for fraudulent/wrongful trading.

Responsibilities include the fiduciary duties owed to the company (Module 7,


section 2.1) and the duty to exercise their powers with appropriate and
reasonable care and skill (Module 7, section 2.2).

Remuneration is typically a matter for the shareholders in general meeting


(see, for example, Art 18).

Breach of duty: the company, but not individual shareholders, may


commence a lawsuit against an errant director for breach of his duty to
manage with appropriate standards of reasonable care and skill (Foss -v- Harbottle,
Module 7, section 2.2 and section 4). The commencement of a lawsuit by
the company against a director requires a resolution of shareholders in general
meeting. The majority of shareholders can therefore waive a negligent, but not
a fraudulent, breach of directors duty.

Fraudulent/wrongful trading furthermore, a director can be held personally


liable to pay debts incurred by the company in circumstances when the director
allows the company to continue to trade, and thus incur liabilities, when the
company is insolvent and he knows (for fraudulent trading) or ought reasonably
to know (for wrongful trading) that the company is and will be unable to pay. See
Module 7, section 6.

The second part of the essay requires candidates to state how and to what extent a director
can reduce his exposure to risk by, for example:

obtaining shareholder approval;

exculpatory provisions in the articles, provided lawful in the jurisdiction under


scrutiny;

indemnity provisions in the Company Management Agreement;

Directors indemnity insurance.

See generally Module 7, section 5, 5.1 through 5.4.

Diploma in International Trust Management: Company Law and Practice


Specimen Examination Paper 1 Solutions
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