CAF-4 · Chapter 24
Investments and disclosure of interest MCQs with Answers
5 multiple-choice questions on Investments and disclosure of interest for CAF-4 Business Law Dynamics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Byzantium Limited (BL) is the holding company of Purple Limited (PL). BL transfers ten shares of PL into the names of two of its directors. What is the most likely legal reason for this transfer?
- A) To allow the directors to claim personal dividends.
- B) To avoid paying corporate tax on those specific shares.
- C) To ensure that the number of PL's members shall be in accordance with the statutory limit.
- D) To hide the true ownership of the subsidiary from the SECP.
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Answer: C) To ensure that the number of PL's members shall be in accordance with the statutory limit.
A holding company may transfer a nominal number of shares of its wholly-owned subsidiary to its nominees (like directors) to ensure the subsidiary meets the minimum statutory requirement for the number of members.
Question 2
Holding Company (HC) wishes to make a significant financial investment in its Associated Company (AC). What is the primary legal requirement for HC to authorize this investment?
- A) Approval of the board of directors only.
- B) An ordinary resolution passed at the AGM.
- C) A special resolution passed by the members.
- D) Prior approval from the High Court.
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Answer: C) A special resolution passed by the members.
A company can only make an investment in an associated company under the authority of a special resolution which indicates the nature, period, amount of investment, and terms attached.
Question 3
Zakir is a director in Company A. He has been newly appointed as a director in Company B. Because of Zakir's common directorship, Company A and Company B are now legally defined as:
- A) Holding and Subsidiary Companies
- B) Associated Companies
- C) Merged Entities
- D) Joint Ventures
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Answer: B) Associated Companies
Entities become associated companies or associated undertakings if they have common directorship (i.e., a person is a director in both), meaning they are under common management or control.
Question 4
A financial institution nominated Mr. Kamal as a director on the board of Zenith Textiles due to a major loan agreement. Does this nomination automatically make Zenith Textiles an 'associated company' of the financial institution?
- A) Yes, because there is a common director.
- B) Yes, because the bank controls the loan.
- C) No, a person's directorship nominated by a financial institution is specifically excluded when determining associated status.
- D) No, unless Mr. Kamal also owns 10% shares.
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Answer: C) No, a person's directorship nominated by a financial institution is specifically excluded when determining associated status.
The law provides specific exceptions: directorships resulting from nominations by creditors (like financial institutions) or the government do not make the entities associated companies.
Question 5
Director Ahmed discovers that his company is about to enter into a large supply contract with a vendor owned by his wife. What is Ahmed's legal duty regarding this contract?
- A) He must resign from the board immediately.
- B) He must disclose his interest to the board and obtain prior approval before the contract is signed.
- C) He can sign the contract first and inform the board at the next meeting.
- D) He has no duty since the vendor is legally a separate entity.
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Answer: B) He must disclose his interest to the board and obtain prior approval before the contract is signed.
A director who is directly or indirectly interested in a contract must disclose the nature of their interest to the board. The contract requires prior approval from the board without the interested director's participation.