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Due Diligence ReportCinnamon Training Academy13th December, 20131

Table of ContentPageIntroduction to the report03Section 01- Legal Due Diligence041.1 Purpose of Legal Due Diligence051.2 Conclusion14Section 02- Finance Due Diligence152.1 Purpose of Finance Due Diligence162.2 Conclusion28Annexure29Annexure 01- Statement of Comprehensive Income30Annexure 02- Statement of Financial Position312

Introduction to the reportErnst and Young prepares and submits the Due Diligence report to the UNIDO asper Terms of Reference (TOR), assessing the extent to which the CinnamonTraining Academy Ltd (CTA)comply with the required levels of conformitycriteria , in terms of legal and financial aspects since establishment of the CTA.Therefore, this report covers legal and financial aspects that are fundamentallyimportant in establishment and continuous operations of a public limitedorganization; identifying the requirements that ensure the sustainability of CTAin terms of legal and finance perspectives.Each area covered under the due diligence activity summarizes Ernst & Young’sobservations and remarks if any.The Due Diligence was conducted in accordance with the Company Act, InlandRevenue Act, applicable Accounting Standards and all other relevant legal andfinancial standards that are mandatory to comply with by any public limitedcompany.Our observations and conclusions are derived based on the information providedby CTA and the final draft was prepared based on the agreed upon procedureswith UNIDO.3

Section 01:Legal Due Diligence4

1.1 Purpose of legal due diligenceOur objective of carrying out legal due diligence for Cinnamon Training Academy(CTA) is to understand and evaluate whether CTA has complied with allnecessary legal requirements during its establishment, operations and otherbusiness activities.The following procedure was agreed with the client and has been used to carryout the legal due diligence and to arrive at our final conclusions.The observations and remarks presented herein are based on the documentsgiven and information gathered by the EY team during the interviews with thecompany secretary and other relevant parties.5

Key focus areasOur ObservationRemarks, if anyHas Cinnamon Training Academy (CTA) followed An application has been duly submitted forthe correct procedures mentioned in the the incorporation of CTA to the Registrar inCompany’s Act 2007 during its incorporation?the prescribed form signed by each of theinitial shareholders, together with the otherrequired documents. The following documentshave been submitted1. A declaration stating that the name ofthe company is not identical or similarto that of an existing company2. The articles of association of thecompany3. Consent from each of the initialdirectors4. Consent from the initial secretaryIs the name of Cinnamon Training Academy Ltd CTAhasobtainedtheIncorporationthere in the company register? Does it have a Certificate from the Company Registrar andunique number? Does CTA have certificate of has a unique number.incorporation in the prescribed form?Does the certificate of incorporation give a clear He incorporation certificate clearly indicatesidea as to which type of company CTA is? For that CTA is a limited liability company.example, limited company, unlimited company,private company etc.Has CTA been registered as a voluntary or CTA has been registered as a profit making Generally,servicenonprofit making organization?organization.oriented organizations ofthis nature are registeredasnonprofitmakingorganizations.6

Key focus areasOur ObservationHas CTA re-registered the Company under theCompanies Act No. 7 of 2007 and what is thenew Registration No. of CTA after reregistration?Does Cinnamon Training Academy always use“Limited” at the end of its name to reflect thelegal form of the organization?Has CTA had its company name and numberclearly stated in all its business letters of thecompany, all notices and other officialpublications, all invoices, receipts and letters ofcredit, all other documents issued or signed bythe company which creates or is evidence of alegal obligation of the company and all bills ofexchange, promissory notes, endorsements,cheques and orders for money or goods signedon behalf of the companyHas CTA its name displayed in its registeredoffice clearly?CTA has re-registered under the newCompany Act and the new number is PB 635.Does content of the Article clearly show theobjects of CTA; rights & obligations ofshareholdersofCTA;Management&administration of CTADoes Primary Objects authorize CTA to engagein growing or processing of Cinnamon?Remarks, if anyAs per our observation CTA uses its namewith “Limited” at the end of the name.As per our observation all documentsprepared and issued by the CTA carry itsname along with its company number.The company name is not displayed in the The name should beregistered office.clearly displayed in theregistered office.The article of association comprehensivelypresents CTA’s objects; rights and ion.There is no Primary Object authorizing Growing or processing ofgrowing or processing of Cinnamon by CTA.Cinnamon by CTA isoutside its scope as perthe Articles ofAssociation.7

Key focus areasOur ObservationAre there any pre-incorporation contracts that As per our observation and understandingCTA has entered in to?there is no such previous contracts entered into by the CTA before incorporation.Has CTA given duly notice to the company They have submitted the relevant documentsregistrar in the prescribed form of the number with the detailed mentioned in a prescribedof shares, company’s stated share capitalform and adhered to the provisions ofCompany Act.Has shareholders of CTA passed any Special No special resolution has been passed as perResolution and if so, then for what purpose?the meeting minutes.Has CTA issued the shares to each shareholder They have issued the shares to thenamed in the application for incorporation?shareholders whose names appeared in theapplication.Has CTA given a notice in the prescribed form of The change of registered office from Kosgodathe change of registered office to the Registrar? to Rosmead Place, Colombo 07 has beeninformed to company Registrar in writing asper the requirements in Company Act.Does CTA keep the following documents at its CTA possesses necessary documentation inregistered office?its registered office.a. The certificate of incorporation and thearticles of the companyb. minutes of all meetings and resolutions ofshareholders passed within the last tenyearsc. an interests registerd. minutes of all meetings held andresolutions of directors passed anddirectors’ committees held within the lastten years8Remarks, if any

Key focus areasOur Observatione. certificates required to be given by thedirectors as per the company actf. the register of directors and secretariesrequired to be kept as per the Actg. copies of all written communications toall shareholders during the last ten years,including annual reportsh. copies of all financial statements theshare registerHas CTA made arrangements for Inspection of All the company records are available at thecompany records by shareholders?registered office for ease access ofshareholders and the copies are withcompany secretary.Does CTA maintain a share register which The share Register is maintained and updatedincludes the followingsby the Company Secretary with shareholderdetails.a. the name and the latest known address ofeach person who is or has within the lastten years been a shareholderb. the number of shares of each shareholderwithin the last ten yearsc. the date of issue of shares, repurchase orredemption of shares, transfer of shares9Remarks, if any

Key focus areasOur ObservationHas CTA delivered to the Registrar an annualreturn in the prescribed form every year afterits incorporation?Has the CTA board of directors called an annualgeneral meeting of shareholders in eachcalendar year as per the instructions given inCompany’s Act?Has CTA appointed its auditor based on theprocedures given in the company’s act? And isthe auditor a member of the Institute ofChartered Accountants of Sri Lanka and is aregistered auditor?Has CTA board within six months after thebalance sheet date of the company, prepared anannual report on the affairs of the company?Has the CTA submitted the signed copies of theauditor’s reports to the registrar on time?Has CTA fulfilled the minimum number ofdirectors? Does the Articles of Association ofCTA stipulate qualifications for a Director? DotheDirectorsmeettherequirements/qualifications given? Is thecomposition of BOD suitable for CTA?Yes, CTA has delivered the annual returns tothe company registrar on time.Remarks, if anyCTA has had the AGM on time every yearalong with the AGM of the Spice Council.CTA has followed the guidelines given in thecompany’s act. The auditor is a member ofChartered Accountants of Sri Lanka and is aregistered auditor.Annual Reports are prepared and kept inplace.CTA has submitted the signed auditor’sreports to the Company Registrar on time.As per our observation CTA Ltd has the AlthoughCTABODminimum number of directors in the BOD.consistsofminimumnumber of directors, itNo qualification is required to become a lacks a healthy andDirector unless so fixed by CTA at a General balancedcompositionmeeting.that reflects variety ofcompetenciesandcapacitiesthatarefundamentally importantto make an educationalinstitute viable in themarket place.10

Key focus areasOur ObservationRemarks, if anyFor example expertise infinance, marketing,management of academic/ professional institution,and a governmentrepresentation.Has CTA appointed a secretary who is not CTA has appointed a secretary who meets thedisqualified under company’s act guidelines?required qualification under the company’sact.Are there any pending legal cases or any As per our observation there are no pendingcontingent liability for CTA?legal cases or contingency liabilities.Has CTA complied with the EPF and ETF Currently CTA does not have any employees At present, all CTA workregulations imposed by the Sri Lankan labour working under them.is being done by thelaw?employees of The SpiceCouncil (TSC) Sri Lanka.At a BOD meeting CTAhas agreed to make anominal fee to TSC for thework done by the TSC.However, a provision hasnot yet been made and norecords found in the finalfinancial reports.11

Key focus areasOur ObservationRemarks, if anyHas CTA entered in to any contract with anyoutside party which makes CTA binding legally?If yes, is it as per the Company’s Act of SriLanka?As per our observation CTA has entered intoan agreement with Export Development Board(SLEDB) to obtain the funds from thegovernment for the purpose of constructionof the academy. A bank guarantee amountingto Rs. 5.7 Mn has been obtained fromNational Development Bank to facilitate thistransaction.It is noted that CTA islegally bound to fulfill theconditions mentioned inNDBagreement(Offerletter)Does the Articles of Association of CTA restrict Yes. A member can transfer shares only to (a)the transfer of shares?A Director, (b) Another member, (c) Spouseor child, or (d) any other person approved bythe BOD.Does the Articles of Association limit Borrowingpowers of the BOD?Has CTA registered any charges on its assetsand if so, for purposes?Has CTA followed the correct legal proceduresduring the acquisition of the land for itsbusiness purpose? Have the correct documentsbeen submitted to the company secretary?Share held by a foreign collaborator can betransferred only to a member of CTA.There is no limit on the borrowing powers ofthe BOD.There are no charges recorded as at2013/12/13 on its assets in the ChargeRegisterCTA has followed the correct legal procedureto acquire the land and the ownership of theland has properly passed into CTA.12CTA is obliged to complywith SLEDB conditionswhen carrying out theCTA construction work.