Legal aspects of business Management July 2017 Past Examination Question Paper – KNEC
This Past Paper examination was examined by the Kenya National Examination Council (KNEC) and it applies to the following courses:
Diploma in Business Management
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THE KENYA NATIONAL EXAMINATIONS COUNCIL
DIPLOMA IN BUSINESS MANAGEMENT
LEGAL ASPECTS OF BUSINESS MANAGEMENT
Time: 3 hours
SECTION A (40 marks)
Read the passage below and answer the questions that follow.
Exen was incorporated in the early 2008 by James Wetu as a private real estate company. James intended to capitalize on the opportunity engendered by a heightened appetite for property driven by a growing middle class. The phenomenon of more disposable income among the middle class led to an increased uptake of mortga8es and related products. Exen seized the opportunity of the housing gap and provided the much needed service of buying and selling land as well as houses.
The firm expanded easily as demand for its services soared. In a few years, Exen was fully engaged in all aspects of real estate. It build houses for sale, bought and sold land in all parts of the country, managed houses and estates for landlords, etc.
Maiwaither and Associates, a reputable law firm, was hired to ensure that contracts and sales agreements were properly drafted with the interests of Exen in mind. The law firm was under instructions to ensure that Exen had agreements that could not be challenged in court even if they detrimented the other parties.
On the advice of their lawyers, Exen applied for re-registration as a building society. This enabled the management to receive money from clients as share contribution with the promise.of giving them loans to acquire properties.
The response by clients was impressive and this served as an incentive to open a sister institution and apply for registration as a micro finance under the Banking Act. After a rigorous process, the minister in charge approved the application for the registration of the micro finance.
With a ready source of credit for its customers, Exen experienced an insatiable demand for its products. Within a few years of its establishment, the company became a major player in the real esmte sector. It had branches in county headquarters and in most other vibrant towns in the country. The firm had more than 10,000 employees and an almost equal number of commission agents. Employees’ contracts of employment had a clause prohibiting them from operating a similar business after leaving or working for competitor firms at least for five years after they left Exen. Some employees threatened to challenge this prohibition in court but have succumbed to intimidation by the firm.
In addition to the members’ deposits, bank loans were used to finance real estate projects. To fuel rapid expansion, the management introduced an incentive scheme that delivered huge rewards to executives for stellar performance in initiating and running the projects. In turn, the executives gave large commissions to salesmen and other employees in their department. As a result, many different projects ran concurrently as the staff worked hard to improve their remuneration. Because of the monetary incentive, projects were initiated without adequate feasibility and environmental impact studies.
Exen was expanding at a rate that outran its ability to setup appropriate and adequate administrative systems and controls. Most of the projects failed but such facts were never made public. In an effort to maintain a positive public image, Exen opened a home for destitute children with branches all over the country. In addition to soliciting donations, the children’s home was used as a guise through which building materials were imported without paying import duty.
Despite the internal rot, Exen was still able to attract large sums of capital to Fund its questionable business model. Exen audit firm, James Watu, helped to conceal the firms true performance in return for a hefty annual fee. Audit reports always affirmed the performance and financial position that the management wished to portray. The audit firm was keen to retain the annual free and ensure reappointment at Annual General Meetings.
The Chief Executive Officers’ (CEOs’) focus on rapid growth devoid of adequate controls created a totally dysfunctional organisation. Analysts have started predicting its downfall but in the meantime, business is good.
(a) Assuming that the import tax evasion at Exen was uncovered, explain the ways in which the commissioner of tax is empowered to collect the tax. (10 marks)
b) Explain the factors that the minister took into consideration before granting Exen a banking business licence. (10 marks)
c) One of the clients at Exen wishes to use the defence of misrepresentation to avoid a contract to purchase a house. Outline the requirements that the misrepresentation should satisfy to be actionable. (10 mans)
(d) Explain the arguments that Exen lawyers would put forward in defence of the restrictive clauses contained in the employees contract of employment. (10 marks)
SECTION B (60 marks)
Answer THREE questions from this section.
2. (a) Mr. Trumpet, a trader, has been sued for selling a defective product. Explain the arguments that Trumpet may raise in his own defence in court. (10 marks)
(b) Explain five differences between the Memorandum of Association and the Articles of Association. (10 marks)
3. (a) Explain five methods that the Kenya Revenue Authority may use to collect income tax. (10 marks)
(b) Explain five remedies available in a claim for copyright infringement. (10 marks)
4. (a) In relation to the Trade Description Act, outline four circumstances under which a trader may be guilty of misleading price indications. (8 marks)
(b) (i) Outline three ways in which the crime of forgery may arise. (6 marks)
(ii) Outline three penalties for the offence of forgery. (6 marks)
5. (a) Fraud is a major reason for defective contracts in international transactions. Explain five ways in which entrepreneurs may protect their companies from such fraudulent contracts. (10 marks)
(b) Explain five reasons that make it necessary to keep records of land dealings at the land registry. (10 mans)
6. (a) Bioko was employed by Upando Uniforms as a tailor. Under the contract of employment, Bioko had agreed that in the event of leaving employment, he would not start a competing business within a radius of 10 miles from his employer’s business establishment. After retirement, Bioko started a tailoring business within 10 miles of his former employer’s business premises. Upando is aggrieved and intends to take legal action against Bioko. Explain legal action against Bioko. Explain the legal principles applicable in this case. (10 marks)
(b) Explain five remedies available to a tenant where the landlord is in breach of the lease agreement. (10 marks)