LAW, ETHICS AND CORPORATE GOVERNANCE

Transcription

1 LAW, ETHICS AND CORPORATE GOVERNANCE SECTION A Question 1 (a) Pursuant to an application for a banking licence, the promoters of Tofruan Bank Plc deposited the sum of N2.5million with the CBN in accordance with the provisions of S.3(2) of BOFIA. What can the CBN do with the money while considering whether or not to grant the licence? In the event that the application is refused what can the CBN do with the deposit? (b) State exhaustively the provisions of the Banks and Other Financial Institutions Act on the publication of annual accounts of banks in Nigeria. (a)(i) The CBN may invest the money in treasury bills or such other securities until such a time as the Governor may decide whether or not to grant the licence. S.4 BOFIA. Where the licence is not granted the CBN shall repay the sum deposited to the applicant together with the investment income after deducting administrative expenses and tax on the income. (b) Under S.27 of BOFIA, a bank shall not later than 4 months after the end of its financial year (i) cause to be published in a daily newspaper printed and circulating in Nigeria and approved by the CBN. exhibit in a conspicuous position in each of its offices and branches in Nigeria, and (iii) forward to the bank copies of the bank balance sheet and profit and loss account duly signed. The opening question in this examination as in past examinations is based on the provisions of the Banks and Other Financial Institution Act. Precisely, the question is based on what the CBN can do with the money deposited with application for banking licence. The (b) part on the publication of annual accounts. Notwithstanding that the question is no longer compulsory; it was attempted by more than 90% of the candidates. More 1

2 than half of those who attempted the question passed. It is an indication that the past advice and admonition to potential candidates to read, study and understand the BOFID was heeded by the candidates. It is hoped that the trend will continue progressively. Question 2 (a) Who appoints the Director of Banking Supervision AND what are his statutory functions under the Banks and Other Financial Institutions Act.? (b) Write short BUT comprehensive note on the revocation power of the Governor under S.13 and 14 of the Banks and Other Financial Institutions Act. (a) The Director of Banking Supervision is appointed by the Governor of CBN under S.21 of BOFIA. The statutory function is primarily to carry out supervisory duties in respect of banks and other financial institutions and shall: Under conditions of confidentiality examine periodically the books and affairs of each bank; Have a right of access to the books, accounts and vouchers of banks; Have powers to require from Directors, managers and officers of the bank such information and explanation as he deems necessary for the performance of his duties. (b) S.13 of BOFIA expects all banks to maintain at all times such amount in ratio to all its assets or its liabilities known as minimum capital ratio. It also provides punishment for failure to maintain the minimum capital ratio among which is the revocation of the licence of such erring bank. However under S.14(2) it is provided that where the CBN proposes to revoke the licence of a bank, it shall give notice of its intention and the bank shall within 30 days make representation if any to the CBN in respect thereof. This is the second question based on the BOFID. A total of 197 candidates attempted the question out of which 86 scored the pass mark. Candidates performed creditably in the (a) part of the question. The average performance in the (b) part was below average. The candidates were 2

3 unable to differentiate between the revocation provision of S.12 of BOFID as opposed to the provision of S.13 and 14 of the Act. S.12 contains the general provision on revocation but S.13 and 14 relates to revocation as a punishment for a bank that fails to meet the capital ratio requirement specified by the Central Bank of Nigeria from time to time. Question 3 (a) What do you understand as Ultra Vires doctrine? Discuss its effect or consequences in the operation of a company. (b) Perky Limited was incorporated on the 2 nd of May, Its main object provides that the company should carry on the business of pig farming. The company had applied for a loan of N50,000,000 from Kingsway Bank Plc to establish petrol dispensing stations all over the country. Discuss the legal validity of the proposal for which the loan is required. In the event that your answer is in the negative, advise the company on what to do. (a) Ultra vires doctrine provides that where a company engages in business or activity that is not provided in its object clause as contained in its memorandum of association, it is outside the powers of the company. Ashbury Railway Carriage Co v. Richie, S.39(1) CAMA. (b)(i) Perky Limited was established to carry on the business of pig farming. Therefore, the proposal to establish petrol dispensing stations all over the country, if successful will be ultra vires the company and will not be binding on the company. Notwithstanding that the company may have the capacity to borrow, it was established that such power must be subordinate to the main powers of the company and the borrowing powers must be limited to its proper objects. Introduction v. National Provincial Bank. The company is advised to pass a special resolution pursuant to Section 46(i)to alter its object clause to include the proposed business. This is the only question on Company Law based on the principle of ultra viires. The question was attempted by over 184 candidates out of which about 80 passed. The poor performance is rather a surprise due to the popularity and familiarity of the topic in company law. Candidates should 3

4 take note of the need for a resolution to be passed where a company intends to change it object clause by amending its memorandum of association. Question 4 (a) Royal Bank Ltd holds a guarantee by Mr. Yakubu for the indebtedness of its customer, Mr. Paul. Mr. Paul failed to make repayment as agreed. The bank made claim upon Mr. Yakubu only to find that he died 2 months ago. Advise the bank on the position of the law. (b) (i) What do you understand as subrogation in the laws of guarantee? Discuss the condition for its effectiveness. Is a contract of guarantee a contract uberima fides? (Contract of good faith) discuss fully. (a) The issue in the question is the impact of the death of a guarantor on the guarantee and the outstanding debt of the principal debtor. As a general rule, a guarantee will be revoked by notice of the guarantor s death if consideration for the guarantee is supplied from time to time. When it is so revoked, it only affects the future transactions of the principal debtor and the personal representatives will remain liable in respect of past transactions of the principal debtor. Therefore the bank is informed that the death of Mr. Yakubu terminates the guarantee up to the time of his death. Until notice of revocation is received from his representatives the latter shall be liable for future transactions of Mr. Paul. (b) In the laws of guarantee, subrogation is the right of the guarantor to receive the benefits accruing to the lender at the end of the guarantee. The only condition attached to a valid demand for subrogation is that the guarantor must pay all outstanding sum debited against the primary debtor. A contract of guarantee, unlike for example a contract of insurance is not a contract of extreme good faith (uberima fides). Hence there is no general obligation on the lender or the creditor to disclose any information to each other. Cooper v National Provincial Bank Ltd. The bank is nonetheless under a duty to disclose information if what is known to the guarantor is so incomplete as to be misleading or if it is 4

5 apparent to the bank that the guarantor totally misapprehends the debtor s situation. Also generally where the guarantor demands, the bank is obliged to disclose such information in full. This is a 3-part question based purely on the laws of guarantee. The (a) part tested candidates on the effect of the death of a guarantor. The (b) part is on the principle of subrogation whilst the (c) part touched on guarantee and good faith. On the (a) part the solution above adequately provides the answer, so also is the (b) and (c) parts. Fewer candidates attempted it and the failure rate was high. It is of utmost regret that a topic such as guarantee was avoided like a plaque. It is a core-banking topic that should have aroused the interest of candidates. Question 5 (a) What do you understand as the Concept of Ownership and Possession? (b) State and discuss how ownership may be acquired and how it could be lost. (c) Explain what you understand as: Whole Debt Clause in a Contract of Guarantee. Debenture. Bill of Sale. (a) (b) (c) Ownership is the highest right that can be exercised on anything that is capable of being owned. It is an absolute right unlimited by time or space except as may be provided by the general law. It allows any person upon whom it is conferred to determine what to do with the thing in his life time and thereafter. Possession on the other hand, is the right of mere possession and usage for a particular determinable time and purpose subject to the payment of consideration. It is an inferior right to ownership. Ownership may be acquired by way of credition of a thing (copyright) purchase of land, goods, inheritance, and receipt as a gift and by conquest. It is lost where it is lost, sold, destroyed, given out to someone else as a gift or compulsorily acquired by government. Whole debt clause is one of the clauses in guarantee that exposes the guarantor to all claims against him by the creditor. Debenture is an 5

6 acknowledgement of indebtedness by a company from a group of creditor creating a charge over the assets of the company. Bill of Sale: Is a document under seal for consideration, transfers the title to personal chattels from one person to another. The essence of a bill of sale is the transfer of ownership without possession. This is a combined question on different areas of the syllabus. The (a) and (b) parts were based on the principle of ownership and possession whilst the (c) part was on law of securities. The performance was very poor. Out of the.. candidates that attempted the question, only.. passed. The failure was largely recorded from the (c) part. Question 6 Messrs A,B,C and D are partners in the firm of Relevant Associates engaged in the provision of auditing accounting and tax services. The partners require your advice in respect of the following within the context of appropriate laws: (i) (iii) (iv) (v) Registration of the name of the firm. The basic distinction between the firm and a limited liability company. The expulsion of a partner from the firm. The Bankruptcy of the wife of Mr. A as it affects the partnership. The death of Mr. D and the proposal by his wife to step into his shoes in the partnership. (i) The registration of the name of a firm of partnership is governed by S.656 of the Companies and Allied Matters Act. Subsection 1(a) provides that Every firm having a place of business in Nigeria and carrying on business where the name does not consist of the true surnames of all partners without any addition other than the true forenames of the individual partners or the initials of such forenames shall be registered. (iii) The basic distinction between a firm and a limited liability company is the concept of incorporation which confers corporate personality on the limited liability company after formation. Under S.25 of the Partnership Act, unless the Partnership agreement provides to the contrary, no majority partner can expel any partner unless the power is expressly vested in the partnership agreement. 6

7 (iv) (v) The bankruptcy of Mrs. A has no effect whatsoever on the partnership since she is not. Under S.33, unless it is provided contrary the death of a partner may lead to the dissolution of the partnership. The wife of Mr. D can only replace him if the partnership survives and allows the replacement. This is question solely devoted to the principles and laws of partnership. In all 148 candidates attempted the question with 71 hitting the pass mark. The below average performance was due to multiple factors as could be observed from the pattern and context of the scripts assessed. One point is the presence of confusion on the exact advice to give on (i). The candidates were giving advice on registration of a limited liability company rather than firm of partnership. Secondly, rather than state the basic distinction between a partnership and a company, most of the candidates discussed the consequences of incorporation. A complete lack of basic knowledge was displayed on the (iii), (iv), and (v) sub-sections. SECTION B Question 7 In the concept of corporate governance explain the role of the external company auditors, paying particular regard to the following issues:- (i) (iii) their qualification their powers. their duties. 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 spelt out the rules and procedure for making decisions on corporate affairs. Auditors have an extremely important role to play in that regard as they are appointed to ensure that the aspirations of shareholders are met. The law reporting to auditors is to be found in Sections of the Companies and Allied Matters Act. Section 358 provides that a person shall not be qualified for appointment as an auditor, unless he is a member of a body of accountants in Nigeria established from time to time by an Act. 7

8 The powers of the Auditor as spelt out in S.360(i) empowers him to form an opinion on whether: proper accounting standard have been kept by the company and proper returns adequate for their audit have been received from branches not visited by them. the company s balance sheet and its profit and loss account are in agreement with accounting records and returns to report directly to the board to request for any information on staff to demand for any book, record or document to query any staff or management on matters related to its functions. This is the first time corporate governance will be examined fully in the new syllabus for all candidates who registered for this paper. This question attempted to stretch corporate governance on external auditors of companies as provided by CAMA. 112 candidates attempted the question. Only 33 passed. The answers were completely far away from target as candidates displayed absolute ignorance. Question 8 (a) Explain what you understand as corporate social responsibility. (b) Give five (5) examples of corporate social responsibility. The concept of corporate social responsibility is often expressed as the voluntary assumption of responsibilities that go beyond the purely economic and legal responsibilities of business firms. In some cases, it is regarded as the selection of corporate goals and the evaluation of outcomes not solely by the criteria of profitability and organization well-being but by ethical standards and judgments of social desirability. This implies a willingness to forego a certain measure of profit in order to achieve non economic ends. Five(5) examples of corporate social responsibilities are: (i) Chosen to operate at a much higher ethical levels; Making contribution to civic and charitable organization and non-profit making institutions. (iii) Providing benefits for employees and improving quality of life in the workplace beyond legal and economic requirements. (iv) Taking advantage of an economic judgment and opportunity that is less profitable but more socially desirable. 8

9 (v) Using corporate resources to operate a programme that addresses some major social problems. This is the most attractive question to most candidates in this subject. It was attempted by 272 candidates. 149 candidates passed. This was largely due to the liberal approach for grading of the second part of the question. Candidates are to take particular note of the answer as stated above. Question 9 Edward joins a local bank as an Internal Auditor. His brother-in-law, Patrick is a branch manager of the same bank. One day he receives an anonymous letter alleging a possible fraud within the bank. The letter explains that a Senior Officer of the bank at a branch has approved an application for a personal loan submitted by his immediate family member. As it transpired, Edward discovered that the officer in question was Patrick who approved a loan request submitted by his wife Anna. He also discovers that some of the documentation is forged. As an Ethical Officer in the bank, identify the critical issues involved as it relates to Edward only. Proffer suggestions on how the issues should be treated. Candidates are expected to identify the following issues: (i) Fiduciary responsibilities of Edward as the internal auditor of the bank. Edward s reaction to the report and subsequent discovery that the unauthorized approval of loan to a Branch Manager s wife. (iii) Possible conflict of interest of Patrick against the interest of the bank. (iv) The criminal dimension as a result of forged documents with which the loan was applied for. This is a unique question on law, ethics and corporate governance. The critical issues ranged from the integrity and professionalism expected of an internal auditor of a bank, his duty to his employers to the criminal aspect of forging documents which should be promptly reported to the appropriate government agency. 9