The Association of Chartered Certified Accountants

　　Section B – ALL FIVE questions are compulsory and MUST be attempted

　　Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.

　　1Mr Dong, the majority shareholder of Lide Company, provided his residential house as a mortgage for a loanagreement between Lide Company and the Bank. Both parties appropriately registered the loan agreement and themortgage agreement with the relevant government agent.

　　Before the loan agreement matured, Mr Dong intended to sell the mortgaged house to Ms Lee and disclosed to Ms Lee the fact that the house had been mortgaged. Mr Dong also notified the Bank with respect to the transactionbetween Ms Lee and himself. Mr Dong and Ms Lee entered into a sales contract of real estate to proceed with thetransaction. However, their application for registration was denied by the relevant government authority, because theBank did not give consent in writing to this transaction.

　　Required:

　　In accordance with the relevant provisions of the Property Law:

　　(a)State whether the real estate contract was a valid one if the Bank disagrees with the transaction betweenMr Dong and Ms Lee.(2 marks)

　　(b) Explain whether the government authority should register the contract if Ms Lee promises to repay theoutstanding amount of the loan, even though the Bank did not give consent to this transaction.(2 marks)

　　(c)State whether the government authority should register the contract if Ms Lee repaid the outstanding amountof the loan, even though the Bank refused to give consent to this transaction.(2 marks)

　　(6 marks)

　　2Food Shop sent a fax to Sanyi Farm to inquire about the price of tomatoes as follows: ‘100,000 kg of tomatoes isurgently needed. Reply as soon as possible.’

　　Upon receipt of the fax, Sanyi Farm shipped 100,000 kg of tomatoes to Food Shop. The latter took delivery of thegoods without any objection. On selling the goods Food Shop found that the quality of tomatoes did not meet thestandard required and had to sell the goods at a 20% discount. Food Shop considered that there was no contractbetween the two parties, since its fax to Sanyi Farm did not contain the price, which was one of the essential factorsto be an effective offer.

　　Required:

　　In accordance with the Contract Law:

　　(a)Explain the legal nature of the fax sent by Food Shop.(2 marks)

　　(b) Describe the legal nature of the act to take delivery of the goods by Food Shop.(2 marks)

　　(c)Explain whether there was a contract between the two parties.(2 marks)

　　(6 marks)

　　3Zhao, Qian, Sun and Lee were four shareholders of a limited liability company specialising in bio-technology, eachholding 25% of the shares of the company.

　　Several months later Qian intended to transfer his shares to a listed company for profit and sent notices to the otherthree shareholders asking for their consent. Zhao agreed and also expressed his willingness to buy Qian’s shares ifthe price was reasonable. Sun disagreed and claimed his right of priority to buy Qian’s shares. However, Zhao andSun could not reach an agreement as to the proportion of shares to buy. Lee kept silent upon receipt of the notice. Since Sun offered a price lower than that of the listed company, Qian entered into a contract to sell his shares to thelisted company, which caused a dispute among the four shareholders. Under such circumstances, Lee decided toleave the company and requested the company to purchase his shares.

　　Required:

　　In accordance with the relevant provisions of the Company Law:

　　(a)State how Zhao and Sun’s failure to reach an agreement on the proportion of shares to purchase should bedealt with. (2 marks)

　　(b) State whether Lee’s request for the company to purchase his shares should be upheld if the dispute wasbrought to court. (2 marks)

　　(c)State whether Qian was entitled to transfer his shares to the listed company.(2 marks)

　　(6 marks)

　　4Stine, the owner of an office building, and Mering concluded a three-year leasing agreement in January 2012. Meringwould use the first floor to open a restaurant. The annual rental should be paid on the first of each month.In 2013 Stine and Mering entered into a service agreement, by which Mering would provide meals to the employeesof Stine. The service fees would be paid on a quarterly basis.

　　In June 2014, Mering was declared bankrupt by a court which designated a bankruptcy administrator responsible forthe liquidation. The bankruptcy administrator found that Mering had failed to pay the rental for 2014. Stine claimedthe rental due for the year of 2014 as his credit and requested to offset the meal service fees for the first and secondquarters of 2014. Stine also declared dissolution of the leasing agreement between the two parties.

　　Required:

　　In accordance with the Enterprise Bankruptcy Law:

　　(a)State whether Stine’s request to offset the meal service fees was in conformity with the law.(2 marks)

　　(b) State how to deal with Stine’s request to dissolve the leasing contract.(2 marks)

　　(c)State what benefit Stine could have if its request to offset was accepted.(2 marks)

　　(6 marks)

　　5Ms Huang, a shareholder of the Daqing Limited Liability Company (Daqing), found that the general manager, Mr Ding,had accepted bribes from several suppliers, which materially caused losses to Daqing, and adversely affected theinterests of all shareholders.

　　Further examination, through a Certified Public Accountant firm, disclosed that there were a lot of affiliatedtransactions between Daqing and Everbright Co, which was the majority shareholder of Daqing. Mr Ding wasrecommended by Everbright Co and appointed by Daqing’s board of directors, which was substantially influenced byEverbright Co. With a series of such transactions Daqing transferred huge profits to Everbright Co and adverselyaffected Daqing.

　　Required:

　　(a)State whether Ms Huang was entitled to take legal action against Mr Ding for his illegal behaviour ofaccepting bribes which adversely affected all the shareholders.(2 marks)

　　(b) State TWO different legal actions Ms Huang was entitled to take to protect the rights of Daqing and itsshareholders due to the affiliated transactions with Everbright Co.(4 marks)

　　Answers

　　Fundamentals Level – Skills Module, Paper F4 (CHN)

　　Corporate and Business Law (China)June 2015 Answers

　　Section B

　　1(a)The real estate contract was a valid one even if the Bank disagrees with the transaction between Mr Dong and Ms Lee.According to the Property Law, if a contract to create, modify, assign and terminate rights in immovables, it shall take effectupon conclusion of the contract; the fact that no registration has been made shall not affect the validity of such contract.

　　(b)The relevant government authority could lawfully refuse to register the real estate contract, even though Ms Lee promised torepay the outstanding amount of the loan. According to the Property Law, if a mortgagor transfers the mortgaged propertyduring the mortgage term, it shall receive the consent of the mortgagee or the transferee pays off the debts. Since the Bankrefused to give consent and Ms Lee merely promised to pay off the debts, the conditions to transfer a mortgaged propertywere not satisfied.

　　(c)Since Ms Lee repaid the outstanding amount of the loan and extinguished the mortgage, the government authority shouldregister the contract, as the conditions to transfer the mortgaged property have been satisfied.

　　2(a)The legal nature of the fax sent by Food Shop was an invitation to offer, not an effective offer, since this fax contained onlythe name and quantity of the goods, lacking the essential and necessary factor for an effective offer, i.e. the price of the goods.Hence, it was only an invitation to offer.

　　(b)The legal nature of taking delivery of the goods by Food Shop was an acceptance. Since the delivery of the goods by SanyiFarm indicated its expression to enter into a contract with Food Shop in the way of action, it constituted an offer. Accordingto the Contract Law, an offeree may take various ways to accept the offer, such as written form, oral form or action. In thiscase Food Shop took delivery of the goods; it was an acceptance in the form of action.

　　(c)There was a contract between Sanyi Farm and Food Shop. According to relevant provisions of the Contract Law, the formationof a contract takes place by way of offer and acceptance. Where an acceptance made by the offeree reaches the offeror, acontract is formed. In this case Sanyi Farm delivered the goods, which was an offer. Food Shop, as an offeree, took over thegoods and resold the goods. This meant Food Shop accepted the offer by Sanyi Farm. Therefore, a contract was formed.

　　3(a)According to the Company Law, when a shareholder intends to transfer their shares, under equal conditions the othershareholders shall have priority to purchase. Where two or more shareholders fail to reach an agreement as to the respectiveproportion of purchase, they shall exercise the priority in proportion to their respective shares. Hence, Zhao and Sun wouldshare the shares from Qian 50% each.

　　(b)According to Article 75 of the Company Law, any shareholder of a limited liability company may require the company topurchase their shares with a reasonable price if they meet any one of the circumstances as set. Since Lee’s request did notfall within any circumstance prescribed by the Law, his request should not be upheld by the court if he brought a law suit.

　　(c)Qian was entitled to transfer his shares. Zhao agreed with transfer; Lee failed to give a reply within 30 days upon receipt ofthe notice, which should be deemed as a consent to the transfer. Sun intended to exercise his right of priority but offered alower price than that of the listed company. Therefore, Qian has met all the conditions to transfer his shares to the listedcompany.

　　4(a)According to the Enterprise Bankruptcy Law, where a creditor is indebted with their debtor before the bankruptcy applicationis accepted by the court, they may claim for debts’ offset to the bankruptcy administrator. Since the rental for the year of 2014was due and the two quarters of service fees occurred before the acceptance of the application by the court, Stine’s debtmight be offset from his credit.

　　(b)According to the law, after the court accepts a bankruptcy application, the bankruptcy administrator shall decide to terminateor continue to perform the contract and notify the decision to the other parties concerned. Mering was declared bankrupt andlost its capacity, so it would be impossible to continue the leasing contract. Therefore the request of Stine to terminate theleasing contract was in conformity with the law.

　　(c)By way of offsetting, Stine might reduce his losses in the liquidation process. Since Mering was unable to settle its debts due,it meant that the credits of all creditors could not be repaid fully at the end of liquidation. Therefore the debts owed to Meringshould be settled in full by Stine.

　　5(a)Mr Ding’s act of accepting bribery violated the criminal law and the relevant rules of the Company Law as well. Besides thecriminal charges, he should be liable for his fraudulent behaviour of damaging the interests of Daqing and its shareholders.Therefore, Ms Huang was entitled to bring a law suit against general manager Mr Ding on the ground that his acts causedher loss of interests.

　　(b)With respect to Daqing’s damage, Ms Huang should first request the board of directors or supervisory board to take legalaction against Everbright Co. Where these two bodies refuse to take reasonable actions, Ms Huang might, in her own namebut for the interests of the company, bring a shareholder representative litigation against Everbright Co. On the other hand,she might also bring a direct litigation against Everbright Co on the ground that the connected transactions caused indirectdamage to the shareholder’s interests.

　　Fundamentals Level – Skills Module, Paper F4 (CHN)

　　Corporate and Business Law (China)June 2015 Marking Scheme

　　Section B

　　1(a)1 mark for the correct conclusion and 1 mark for the reasons.

　　(b)1 mark for the correct conclusion and 1 mark for the reasons for the denial of the government to register the contract.

　　(c)1 mark for the correct conclusion and 1 mark for the reasons.

　　2(a)1 mark for the correct conclusion as to the legal nature of the fax sent by Food Shop, 1 mark for the reasons.

　　(b)1 mark for the correct conclusion, 1 mark for the reasons to explain the conclusion.

　　(c)1 mark for the correct conclusion as to the formation of the contract, 1 mark for the reasons that a contract was formed byway of offer and acceptance.

　　3(a)1 mark for the correct conclusion, 1 mark for the reasons to explain such a conclusion.

　　(b)1 mark for the correct conclusion, 1 mark for the reasons. The conditions for a shareholder to request the company topurchase their shares are not needed.

　　(c)1 mark for the correct conclusion, 1 mark for the reasons.

　　4(a)1 mark for the correct conclusion, 1 mark for the reasons.

　　(b)1 mark for the correct conclusion, 1 mark for the reasons.

　　(c)1 mark for the correct conclusion, 1 mark for the reasons to explain the reasons why offset should be in Stine’s interests.

　　5(a)1 mark for the correct conclusion, 1 mark for the reasons.

　　(b)2 marks for the shareholder’s representative litigation in Ms Huang’s own name but for the interests of the company and 2 marks for the direct litigation in Ms Huang’s own name for her own interests.