Principles of Trust and Company Law
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1 Subject no. 53A Certificate in Offshore Finance and Administration Principles of Trust and Company Law Sample questions and answers This practice material consists of three sample Section B and three sample Section C questions, together with their suggested answers. These sample questions and answers are provided as practice material for students taking examinations on the revised COFA syllabus and are based on the recommended ICSA Publishing text. Please note: The assessment format for the Certificate in Offshore Finance and Administration examinations is not changing and will retain the three section structure of: Section A answer all parts of Question 1. Section B answer all five questions. Section C answer two questions only. ICSA, 2012 Page 1 of 9
2 Section B Sample questions 1. In the context of trust creation, outline the differences between common law and civil law jurisdictions. 2. Explain the purpose and use of a blind trust. 3. In the context of the veil of incorporation, explain the significance of Adams v Cape Industries plc (1991). Section C Sample questions 4. You are consulted by Sandy, the managing director and majority shareholder of a small limited company. The company is not trading well and she is concerned that it soon may have to cease business. In this context, explain to Sandy the difference between voluntary and compulsory liquidation procedures. 5. You are consulted by Caroline, an inventor. She has developed a product which she wishes to market. It has been suggested to her that she form a company to assist in this. Outline to her the various steps necessary to incorporate a company. 6. You are consulted by Geoff, who is considering placing some of his assets into a trust. He understands that, for a trust to be valid, a number of conditions must be satisfied. Explain to him what these conditions are. ICSA, 2012 Page 2 of 9
3 The answers follow on the next page. ICSA, 2012 Page 3 of 9
4 s Important notice When reading these suggested answers, please note that the answers are intended as an indication of what is required rather than a definitive right answer. In many cases, there are several possible answers/approaches to a question. Please be aware also that the length of the suggested answers given here may be somewhat exaggerated compared with what might be achieved in the reality of an unseen, time-constrained examination. Section B Sample questions and answers 1. In the context of trust creation, outline the differences between common law and civil law jurisdictions. Offshore jurisdictions can either be civil law jurisdictions or common law jurisdictions. The civil law jurisdictions generally have a system of law which has been developed from and is based on Roman law. The civil law system is a codified system in which laws are comprehensively set out in detail in a statutory code. The judges in the courts that implement the law regard the code only, and need not regard the outcome of previous cases as the doctrine of judicial precedent does not form a part of the system. The laws of civil law jurisdictions do not generally recognise the division between legal and equitable ownership, and it is not usually possible to create a trust in such jurisdictions. The concept of a trust is therefore not as widely understood in civil law jurisdictions and it does not always appeal to clients who have dealings with such jurisdictions. Trusts are mostly administered in common law jurisdictions where there is certainty about their recognition and the way that they are treated in law. The law in such jurisdictions will allow for their creation and the provisions of the trust will be recognised and enforced by the courts of those jurisdictions. ICSA, 2012 Page 4 of 9
5 2. Explain the purpose and use of a blind trust. With a blind trust, the trust instrument is created with only a well-known charity identified as a beneficiary. Often, the Red Cross was the named charity and blind trusts are very often referred to as Red Cross trusts. It was not usually anticipated that the named charity would in fact benefit. The practice was that, after the trust had been established with a charity as the beneficiary, the trustee would exercise a power under the trust instrument to add the person who the settlor intended would benefit as a beneficiary. This could be done many years after the creation of the trust. The identity of the beneficiaries was concealed and not connected to the trust in any paperwork. Blind trusts of this nature were historically very commonly created in offshore centres. While it is no longer common for trusts to be created in this manner today, there are still many such trusts in existence. 3. In the context of the veil of incorporation, explain the significance of Adams v Cape Industries plc (1991). The separation of the legal personality of the company from its owners and directors is referred to as the veil of incorporation (the corporate veil). There are instances where the court will lift the veil of incorporation. The court will do so, for example, if the company is a sham or a party to a fraud, and there are occasions where the court will make the directors liable for the company s debts for example, if the directors are guilty of fraudulent trading. In general, however, the court is extremely reluctant to lift the veil of incorporation, upholding the concept of separate legal personality. Adams v Cape Industries plc (1991): In this case, which also dealt with the concept of the separate legal personality, a claim was brought against a South African subsidiary of Cape Industries plc for negligence. The claim was successful and as a result, the South African company went into insolvent liquidation. The court held that the corporate veil could not be lifted to allow the South African litigants to recover the funds from the parent company, Cape Industries plc, whether or not it was desirable to do so. This case established the fact that a company that operates through a group including subsidiaries is entitled to organise its affairs in this manner, for its own protection, if it chooses to do so. ICSA, 2012 Page 5 of 9
6 Section C Sample questions and answers 4. You are consulted by Sandy, the managing director and majority shareholder of a small limited company. The company is not trading well and she is concerned that it soon may have to cease business. In this context, explain to Sandy the difference between voluntary and compulsory liquidation procedures. A voluntary liquidation may be either a members voluntary liquidation or a creditors voluntary liquidation. The members of a company may decide to wind-up the company when it is no longer required. The steps involved with a members voluntary liquidation are as follows: Firstly, the directors make a statutory declaration of solvency. This means that having made a full inquiry into the company s affairs, they are of the opinion that the company will be able to pay its debts in full within 12 months from the commencement of the winding-up. The members then pass a special resolution to commence a voluntary liquidation. A copy of the special resolution is delivered to the Gazette or Registrar. A liquidator is appointed to wind-up the affairs of the company. On the appointment of a liquidator, all the powers of the directors cease, except so far as the company in general meeting or the liquidator sanctions their continuance. When a company cannot pay its debts, a creditors voluntary liquidation is necessary. A special resolution of the members is required. A board meeting to resolve to convene a creditors meeting is then held. The directors prepare a statement of affairs for review at the creditors meeting. The liquidator should be appointed and the appointment notified to the Gazette or Registrar. The liquidator should be provided with the statement of affairs and is required to send it to the registrar within seven days of the creditors meeting. Following the creditors meeting, the liquidator is required to prepare accounts for delivery to the Registrar of receipts and payments over the first twelve months in liquidation. After that, a liquidator s report must be sent every twelve months until the winding-up is complete. A compulsory liquidation of a company occurs when the company is ordered to wind- up by the court. Companies may be wound-up by the court in various circumstances. Examples are as follows: A company registered as a public company has not been issued with a trading certificate more than a year after it was registered. A public company has fewer than two members. ICSA, 2012 Page 6 of 9
7 The company is unable to pay debts of over 750. The court is of the opinion that the company should be wound-up on just and equitable grounds. With a compulsory winding-up of a company, a petition (which must be advertised) to wind up the company, is made to the court. If it is successful, a court order is granted. An official receiver is then appointed as the liquidator. The official receiver has a duty to investigate the company s affairs and the causes of its failure. The official receiver may call a meeting of creditors to appoint a liquidator in the receiver s place. Upon receipt of a notice from the liquidator of the final meeting of the creditors or notice from the receiver that the winding-up is complete, the registrar will register it. 5. You are consulted by Caroline, an inventor. She has developed a product which she wishes to market. It has been suggested to her that she form a company to assist in this. Outline to her the various steps necessary to incorporate a company. A company is formed under the Companies Act 2006 by one or more persons subscribing their names to a memorandum of association and complying with the requirements of the Companies Act 2006 as to registration. The first step towards incorporating a company is to check the availability and acceptability of the company name with Companies House. The Registrar will refuse to register a company with a name in certain circumstances, for example, if there is an existing company with the same name or a very similar name. Most offshore jurisdictions allow company names to be reserved for a maximum period. The process of forming (incorporating) a company then involves delivering the following documentation to Companies House: The application form for the incorporation of a company: The application form contains information required by the registrar in order to form the company. It must state information such as: - the company s proposed name; - the address of the registered office; - whether the liability of the members of the company is to be limited, and if so, whether it is to be limited by shares or by guarantee. The registration of the memorandum of association. A memorandum of association is a short document that evidences the subscribers intention to form a company under the Companies Act 2006 and that they agree to become members of the company. ICSA, 2012 Page 7 of 9
8 In the case of a company that will have a share capital, the memorandum records their agreement to take at least one share each. The Companies Act 2006 provides that unless a company s articles specifically restrict the objects of the company, its objects are unrestricted. A copy of the articles of association, if the company has not accepted the model articles. A company must have articles of association. The articles are sometimes referred to as the internal regulations of the company and are concerned with how the company should be managed. If the company does not adopt model articles, it must register articles of association. The articles must be contained in a single document and be divided into paragraphs numbered consecutively. Section 33 of the Companies Act 2006 states that the company s constitution binds the company and its members as though they had individually covenanted to obey their provisions. The articles of association therefore constitute a contract between the company and its members, and between the members themselves. A statement of compliance; and The relevant fee. If the documentation is deemed to be acceptable, the registrar will proceed to incorporate the company and will issue a certificate of incorporation. 6. You are consulted by Geoff, who is considering placing some of his assets into a trust. He understands that, for a trust to be valid, a number of conditions must be satisfied. Explain to him what these conditions are. In order for a trust to be valid, several conditions must be met. In particular: The settlor must have legal capacity to transfer the assets to the trustee. The settlor must have owned the assets themselves at the time that they purported to have passed ownership to the trustee. The trust must be completely constituted. That is, the settlor must have properly vested legal ownership of the assets with the trustee. This means that firstly, they must have actually transferred the assets to the trustee and secondly, they must have transferred them in the correct manner. The three certainties must be satisfied. It was established in the case known as Knight v Knight (1840) that in order to create a valid trust, three conditions (or certainties) must be satisfied. The conditions are that there must be certainty of intent, object and subject. ICSA, 2012 Page 8 of 9
9 The settlor must have clearly intended to create a trust, which is known as certainty of intent. A trust instrument with unambiguous wording would demonstrate that the intention was present. With the exception of charitable trusts or purpose trusts, there must be certainty about the persons who are the beneficiaries of the trust. This is known as certainty of object. The object is the person for whose benefit the trust fund is held. Broad statements such as for the benefit of the people that I like would not be sufficiently certain. Very often the objects (beneficiaries) of the trust, despite having been established with certainty, are not obvious from the trust instrument. The fact that it is difficult to tell the identity of the beneficiary from the trust documentation will not in itself invalidate a trust. What is important is that there is certainty about who they are (i.e. they can be established). Certainty of object must be present throughout the trust period for the trust to remain in existence. If a once valid trust should find itself without any beneficiaries (for example, if the sole beneficiary became deceased), the trust will fail for lack of objects. This is one historical reason for the inclusion of a charity such as the Red Cross to be included in the class of beneficiaries, despite there being no real intention on the part of the settlor that they will benefit. There must be certainty about the property that will be held upon trust. This is referred to as certainty of subject. A broad statement such as I settle most of my assets upon trust would be too uncertain. The trust instrument usually describes the assets that will be held upon trust for the beneficiaries. It is usual that the instrument merely records a nominal amount (e.g. 100) which constitutes the trust fund. This nominal amount is referred to as the initial settled funds. This practice means that the assets are clearly identifiable and certain from the trust documentation. The practice of recording only the initial settled funds within the trust instrument also enhances confidentiality. While the trust instrument is usually a private document, there are occasions where parties with whom the trustee wishes to contract with (e.g. bankers) do insist upon sight of a copy of the trust deed. Those who view the trust instrument would not learn the true value of the trust fund as it is very common for additional settled funds to be accepted into the trust after its creation. Funds settled into the trust after the initial creation are referred to as additional settled funds or property. Certainty of subject must remain throughout the trust period. A trust which does not have assets no longer exists. It is important that administrators understand this. It would not, for example, be acceptable to empty a trust s bank account (where there are no other assets) and then allow the settlor to settle funds into the dormant account some time later, as if the trust had existed throughout the dormant period. The scenarios included here, except where expressly identified, are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental. ICSA, 2012 Page 9 of 9
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