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Trading on joint accounts was curried out through partnerships and later the
chartered companies .The first form of business association was known as
COMEDAS AND SOCIOETAS.
The Comedas allowed sleeping partners where one person provided money and
others provided skill and time. The comedas were not so popular in the UK but
very popular in the rest of Europe and sometimes they traded overseas.
The socioetas were a more solid association and were forerunners of the modern
partnership sand hereunder, the partner was an agent of all others and all partners
were vicariously liable for all the debts incurred in the part of the partnership i.e
all risks and rewards were shared equally notwithstanding the extent of ones
participation or default.
(Refer to MusisiPg 30)
The other form of business structure in this period was the CHARTTERED
COMPANY. These were formed under the royal charter and the process of forming
the company led to incorporation. These companies were first used by merchants
and adventurers abroad e.g. to India or America.
Chartered companies were formed in the form of an international guild in the
sense that they were genuine associations of people for a common purpose of
trading with individual stock and capital.
The chartered companies only provided a framework for the collective action eg by
providing rules and regulations and premises. The crown benefited a lot from the
actions of the chartered companies by controlling and regulating overseas trade.
During the 17th Century, it became apparent that the chartered companies could
pool their goods or stock instead of trading as individuals and this led to what was
referred to as JOINT STOCK COMPANIES, a name still persisting to date
although in a different form. Joint stock companies like East India Company and
North Eastern Pacific company were formed and by 1692, individual overseas
trading had been declared illegal.
Under the joint stock trading, the risk and reward of trading were standard ie
shared in terms of ones contribution or proportion to the respective investment.
COMPANY STRUCTURES AND PERSONALITIES
During the 2nd half of the 17th century, joint stock companies were now registered
under seal. These registered corporations would exist in perpetuity and it would
also sue outsiders and its own members but the idea of limited liability was never
emphasized at the time, in fact, according to Gower, it was realized as an
afterthought.
Even after incorporated companies became common, the bulk of trading was still
done by sole proprietors and partners. Soon later, wealthy individuals loaned
capital to traders in return for profit or they bought shares and became sleeping
partners . They were however liable for the acts of the active members and this
discouraged investment since the investors wanted to make profits from their
money at no cost.
Despite the risk of personal liability, unincorporated partnerships were also
common. At the end of the 17th century, a distinction between the acts of the
company and those of the members involved. The formal company was for the first
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time recognized as owning property and able to sue in its own name for the first
tome.
This development was necessary to compel business structures under mercantilism
and the company started to develop characteristics of of indefinite existence even
after te existence of its founders and owners hence evolving the idea of perpetual
existence.
Furthermore, companies became liable for their own liability and debts and by
necessary implication, members; liability became limited, i.e. the concept of
limited liability. Accordingly, in cases of insolvency, the respective creditors or
claimants against the company had access to the company assets and not
individual owners although this did not work in practice as the members of the
company were always called upon to settle the debts and creditors therefore found
a way of suing members directly.
The unwillingness to allow the limited liability was the fact that it was likely to be
abused by spectators eg those who are not skilled in the business could hide
behind this exercise.
RISE OF COMPANY LAW IN EAST AFRICA.
(Refer to Musisi)
As soon as colonialism had been completed and imperialism was in control, there
was surplus capital in Europe which had to be remitted to the colonies and the
proper means of channeling this capital was through corporations.
Before colonialism Africans did not have any associations similar to the modern
day companies structures and accordingly the companies structure in East Africa
has its foundation rooted I the colonialism era.
I the few societies which attempted a state structure, some form of commercial
activity was carried out but in a primitive nature through barter trade and the
village acted as the market place. The only form of commercial activity at the time
equivalent to the European guilds was that of the clans e.g., In BunyoroKitara
kingdom, clans had monopoly over iron making and smelting
and divided
themselves into two groups, i.e., that of smelter and the other for the black smiths
and they were trading with the Baganda.
It must be noted that the law relating to company structures in East Africa as they
operate today is not indigenous in the area. This is not to say that a structure
equivalent to companies in Europe would not have evolved, the stage of
development was hijacked.
In Uganda for example, the earliest legislation was the Indian Companies act of
1882 governing companies, which legislation itself was a replica of the English
companies act.
The act remained in operation for about 40 years until it was repealed by the
companys ordinance of 1922.
In 1935, a new legislation, the companys ordinance of 1935 was enacted and it
operated up to 1958 when the present companies act replaced it. The economic
base of the region was firmly integrated with that of the British to the extent that
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non of them could develop its own legislation. The statute therefore became very
difficult to understand by an ordinary businessman because it was not developed
basing on the circumstances in Uganda.
FORMATION OF A COMPANY
The process is referred to as incorporation and the process involves a number of
steps from the initial meeting of promoters, then drafting of the relevant
documents, organizing and payment of the relevant fees and then actual
registration of the company.
It should be ascertained whether the proposed company is to be a private or a
public company. The law specifically states that any association, either partnership
or a company, for the purposes of currying out any business with an object of gain
has to be registered in accordance with the companys act.
S 4 (1) Any one or more persons may for a lawful purpose form a company
by subscribing their names to a memorandum of association and otherwise
complying with the requirements of the act in respect of the registration,
form an incorporated company, with or without limited liability.
(2) Such a company may be either
(a) a company having the liability of its members limited by the
memorandum to the amount, if any, unpaid on the shares respectively held
by them (in this Act termed a company limited by shares);
(b) a company having the liability of its members limited by the
memorandum to such amount as the members may respectively thereby
undertake to contribute to the assets of the company in the event of its
being wound up (in this Act termed a company limited by guarantee); or
(c) a company not having any limit on the liability of its members (in this
Act termed an unlimited company
(d) private or public
It follows therefore that for a private company, the membership is fixed to a
minimum of 1 person and a maximum of 100 whereas for a public company, the
minimum membership is 7 members. There is no limit for the membership of a
public company but for a private company, the maximum membership is limited to
100 members.
A public company or publicly traded company is a company that offers its
securities (stock/shares, bonds/loans, etc.) for sale to the general public, typically
through a stock exchange, or through market makers operating in over the counter
markets. This is not to be confused with a Government-owned corporation which
might be described as a publicly-owned company.
The definition of a private company is laid down under section 5 of the Companies
Act as a company that; restricts the right to transfer its shares, limits the number
of its members to one hundred, not including persons, who are in the employment
of the company and persons who having been formerly in the employment of the
company, were while in that employment, and have continued after the
determination of that employment to be, members of the Company; and prohibits
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any invitation to the public to subscribe for any shares or debentures of the
company.
Accordingly, in private companies, transferability of shares and raising of company
capital has some restrictions and the law prohibits inviting the public to subscribe
for shares (s.5 (1) c).
For a public company, the presumption is that one is free to transfer the shares
subscribed at any time without any restrictions. The restriction on private
companies is meant to avoid a situation where an individual or a new comer in the
company may disturb the operations of the company.
The commencement of business is effective form the date of issuance of. a
certificate of incorporation by the registrar for a private company (s.22 CA)
Before issuing the certificate, the registrar has to ascertain first that specific issues
have been fulfilled;
For public companies, incorporation and registration per say is not sufficient as
one should satisfy other processes. Before commencement of business you must as
a public company issue a prospectus inviting the public to subscribe for shares and
must obtain fro the registrar of companies a certificate of commencement of
business.
There is a statutory meeting every public company must hold within three months
from the date it is supposed to commence business and 14 days before the
meeting, all the members entitled to attend and vote in the meeting must be given
a statutory report which must be signed by at least 3 directors giving the details of
the status of the company(s.137. CA).
Failure to comply with the requirement of the statutory meeting makes one liable
to payment of a fine. For a private company, the statutory meeting may not be held
and the statutory report may not be issued.
A private company must have at least one director but for a public company, the
minimum of directors is 2 directors (s.185 CA). For a private company, if it has
only one director, he can not act as the secretary at the same time.(s.187 CA). It is
a requirement that the registrar is furnished with the particulars of Directors and
the company secretary.
For public companies, there are fixed qualifications for one to be a director and
they must be contained in the articles of association for instance, a provision may
be that of holding shares or having substantial shareholding in the company.
For public companies, members must sign and deliver for registration consent in
writing an undertaking to act as a director and showing that the director has either
signed the memorandum of association undertaking to pay the qualification shares
or has actually paid the qualification shares. These provisions however do not
apply to private companies.
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Its also important that after determining whether the company is to either be
private or public, it should be determined whether the company should have
limited or unlimited liability of its members. As a general requirement, members of
a limited liability company are not liable for the company debts beyond the amount
which is still unpaid on the share he or she holds.
There are situations where a company can have unlimited liability and in such
situations, such members become liable for the company debts if its assets can no
sufficiently pay off the creditors, liabilities (s.4 (2) c).
MEMORINDUM OF ASSOCIATION
Every company incorporated by registration with the Registrar of Companies must
have a memorandum. The memorandum contains the fundamental conditions upon
which alone the company is allowed to be incorporated. These are the conditions
introduced for the benefit of the creditors, and the outside public, as well as of the
shareholders.. These include S. 7CA provides that every company must have a
memorandum of association which must state the name of the company and also
whether the company is limited by share or by guarantee and the word limited
must appear at the end of the name of all limited companies. However this
requirement may be dispensed with if the minister is satisfied upon application
that the company is being promoted for promoting commerce, art, science
education, religion charity or any other essential object which that company
intends to promote and apply its profits to promote such plans and to prohibit
payment of any dividends to its members. Such companies also enjoy such
privileges and rights of limited companies and are also subject to the obligations of
limited companies. It is an offence for a company to omit the word limited at the
end without any prior exemption by the minister.
The memorandum of association must indicate the registered office, its location
and it must indicate the objects for which the company is being formed and this is
most important. The memorandum must state the share capital and the nominal
value of the share in their fixed amount. It must be dated and signed by all the
share holders indicating their full names, occupations and addresses and it must
be witnessed and such witness mist state their occupation and address. Where
there is a conflict between the memorandum and the Articles, the memorandum
prevails
The Memorandum of Association commands a paramount echelon in the process of
establishment and development of a company especially in the regard of the
delegation and demarcation of authorities to respective individuals who are
connected with the company some way or the other. In other words, it is meant to
be a company charter that encloses in itself the essential conditions based on
which the company could be conveniently commenced and incorporated. It
highlights the major elements that constitute the foundation of the company and
adumbrates its scope beyond which the company could not go.
As for the purpose of the Memorandum, it is of two dimensions. The first
dimension comprises the shareholder where it tells the shareholder the field and
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scope of the company and with the help of that the shareholder decides the
suitability of his investment in the company. The second dimension involves
any stakeholder of the company. The Memorandum tells these companies and
entities whether the objectives that the respective stakeholder aims to accomplish
with the help of the company are within the realm of the company's objectives or
not.
The memorandum must be dated and sugned by each subscriber in the presence of
atleast one attesting witness (s.8). Alteration of the memorandum is allowed
provided its done in accordance with the companies act and pursuant to a special
resolution of the company to that effect(s 9 and 10)
ARTICLES OF ASSOCIATION (s 11-16)
The articles of association are the regulations governing the companys internal
management where a company limited by shares has no registered articles or, if
articles are registered, in so far as they do not exclude or modify Table A, that
Table (so far as applicable, and in force at the date of the companys registration)
constitutes the companys articles, in the same manner and to the same extent as if
articles in the form of that Table had been duly registered. Articles of association
are not only a contract between the company and its members but they also
constitute a contract between the members to regulate their rights inter se.
All companies limited by guarantee or companies with unlimited liability must
register a document called the articles of association but for private companies
limited by share, there is no mandatory requirement to register the articles of
association.
For private companies, they must at the time of registration of the articles adopt
and incorporate into their articles the provisions of the code of corporate
governance contained in Table F.(S 14).
It is not mandatory however for a private company to adopt Table F as it is for a
public company. And a company that adopts table F must annex a printed copy of
the same to its articles and must annually file a statement of compliance with the
registrar and the capital markets authority.
Articles of association must be in English and signed by all the subscribers of the
memorandum of association and they must indicate their postal addresses and
occupations. It must be attested by a witness who must also indicate their
addresses and occupation.
RELATIONSHIP OF ARTICLES WITH MEMORANDUM OF ASSOCIATION
The Memorandum and Articles of Association together constitute the contract
between each member, each of whom contracts with other of them that each would
be governed by the provisions of the Memorandum and Articles of Association.
Sarbjit Singh AndOrs. vs All India Fine Arts & Crafts Soclety And Ors: ILR
1989 Delhi 585
The provisions of the articles are binding on the company with reference to
members and vice versa to the extent they have signed the contract. But the
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question arises whether any provision in the articles which is violative of the
provisions of any statute can be enforced.
The memorandum must prevail where its object is clear and the articles should
not be so construed as to nullify a provision in the memorandum. Bye-laws of a
company are framed in order to carry out the provisions contained in the articles
of association themselves. Bye-laws are subordinate to the articles of association
and the articles of association are subordinate to the memorandum.
Memorandum and articles of association are statutory terms of a contract
governing the relationship between the company and the shareholders. However,
the articles of association or the memorandum have no force of law and will not be
binding on every member of the society. Articles of association are essential for
internal management of the company and the memorandum defines the powers of
the company as well as those of the directors.
In view of this, it is very clear that if any provision of the articles or the
memorandum is contrary to any provisions of any law, it will be invalid ab initio.[4]
Moreover, in Co-operative. Central Bank Ltd. v. Additional Industrial
Tribunal [[1970] 40 Comp Cas206 ; AIR 1970 SC 245, it has been held that
bye-laws that can be framed by co-operative societies, under the Co-operative
Societies Act are similar in nature to the articles of association of a company
incorporated under the Companies Act and such articles of association have never
been held to have force of law or statute.
The memorandum of a company sets forth the objects to be achieved by the
working of the company during its life time. It does not usually provide for what is
to happen during its winding up. Parts I to Vi of the Companies Act contain
provisions regulating the formation and the management of companies. Part Vii
relates to the winding up of companies. Similarly, the majority of the articles of
association concern with the formation and working of the company.
Memorandum of Association is the basic constitution of the company whereas
Articles of Association provides for rules of indoor management. The Articles of
Association, therefore, are subordinate to Memorandum of Association. If any
article is found repugnant to the provisions of Memorandum of Association, the
particular article is void ab initio. Bhagyodayam Co. Ltd. vs Income-Tax Officer
1993 45 ITD 524 Coch
If the articles are read literally and it runs counter to the objects Clause of the
Memorandum of Association and as such it is an invalid article and cannot take
effect. It is not unknown principle of interpretation that any construction more
favourable to the object can be adopted in the event of ambiguity in the language
employed in the article. Such an interpretation besides advancing the cause for
which the trust was formed will also avoid the conflict between the Memorandum
of Association and Articles of Association of the company.
A.P. State Civil Supplies Corpn.vs Income-Tax Officer 1991 37 ITD 1 a Hyd
The memorandum is the more fundamental of the two documents and is the one to
which the original parties forming the company will subscribe their names. These
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subscribers agree to take a certain number of shares in the company and become
its first members. The memorandum is the more fundamental both because of its
content and because, if conflict arises between the terms of the memorandum and
the articles, the memorandum takes precedence.
Further, the articles cannot modify any of the contents of the memorandum. There
was, historically, always a greater reluctance to allow the clauses of the
memorandum to be alterable, whereas that was not the case with the articles. Thus
the Memorandum of Association of a corporate entity provides the entire business
structure for the corporate entity as relating to the scope of business activities, the
related activities that can be undertaken by the corporate entity to achieve its core
business and the maximum amount the corporate entity can raise by way of share
capital.
While the Memorandum of Association provides the business structure for the
corporate entity, the Articles of Association provides for the management and
terms and conditions of shareholding in the corporate entity. In other words the
Articles of Association of a corporate entity generally incorporates the provisions
for transfer of shares, composition of the Board of Directors, management of the
corporate entity, the powers of the Board of Directors etc. amongst others.
The Articles of Association of a corporate entity is the basis for the functioning of
the corporate entity including the terms of shareholding and therefore becomes a
binding contract between the members/shareholders and the corporate entity. A
member being a shareholder of a corporate entity can enforce the Articles against
the corporate entity and vice versa.
The contractual force of the Articles is however limited to matters arising out of
the relationship of the members with the corporate entity and vice versa and does
not extend beyond the membership in the corporate entity. The Memorandum and
Articles of Association when registered binds the corporate entity and its members
to the same extent as if they respectively had been signed by each member and the
corporate entity.
The memorandum is the more fundamental of the two documents and is the one to
which the original parties forming the company will subscribe their names. These
subscribers agree to take a certain number of shares in the company and become
its first members.
The memorandum is the more fundamental both because of its content and
because, if conflict arises between the terms of the memorandum and the articles,
the memorandum takes precedence.
COMPANY NAME
In the process of incorporation, is important to consider the name with which the
company is to be registered. In the first place, its a requirement of the law that a
company must reserve its business name prior to incorporation. The reservation is
valid for 30 days or not exceeding 60 days in case of any special circumstances as
may be determined by the registrar. Upon completion of the process of
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registration, a limited liability company must add the word LIMITED at the end
of its reserved name.(S.36)
The name must be reserved on a written application to the registrar inquiring
whether the proposed name is available and the registrar by searching his register,
ascertains whether the name is available or not and if its valid, then ones
reservation of the name remains valid for a period of 30 days but this period may
be extended by the registrar.
Mere choice of a name and its reservation wit the registrar is not sufficient to
ensure that such a name will be allowed by the law. The registrar has wider powers
to refuse the registration of any name which in his opinion is undesirable ( s.36
(2)CA).
Accordingly, any name which is similar or identical to that already registered, or
that which has any connotations or referring to any government company,
commonwealth country or centrally to the law or morality shall not be registered.
The registrar on his own motion or upon application may refuse to register a name
but the aggrieved party has an alternative remedy in the courts of law and may
seek an injunction prohibiting the registrar from registering such a name or may
seek damages(s. 14 and 16 Business names registration act)
London Oversea Trading Co. VsRaleigh
Bass Vs Nicholson & Sons Limited .
The rationale behind prohibition of registration of identical business names is to
protect the public from being deceived and to protect the investments of
established businesses
East African Electric company vs Registrar of companies (1952)1 KLR
Where the Supreme Court of Kenya observed that as long as the aggrieved party
shows that there is a likelihood of an injury to his business as a result of the
defendants registration, of the name, its immaterial whether or not the defendant
intended to injure the Plaintiffs business and that the protection is extended to
local and foreign incorporated companies. It must be noted that court has to look
at the particular circumstances of each particular case.
Under s.40 CA, a company may change its name but to do so, the registrar must
be informed and all company proprietors must agree. However, it must be noted
that he change of name shall not relieve the company of its past liabilities and
obligations.
Esso Vs Shell
A company may by special resolution and with the written approval of the registrar
change its name and upon completion of the process of change of name, a
certificate of change of name is issued by the registrar and the new name is
entered in the place of the old name. However, change of name does not in any
way affect any rights and or obligations of the company. (S.40)
MEMBERSHIP OF THE COMPANY
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S..47 CA provides that all persons who may have subscribed to the memorandum
of the company shall be taken to have agreed to be member of the company and
when the company is registered, the names shall be entered on the register of the
members.
From the reading osS 47, a subscriber to the memorandum and articles of
association does not become a member of the company before he or she is entered
on to the list of members. Likewise, any other person who agrees to become a
member becomes a member upon being registered in the register of members of
that company. Therefore, payment for shares par se does not make one a member
of the company automatically but only makes one entitled to be a shareholder.
(S.47(2))
Apart from subscribers to the memorandum, the companies act provides for two
other categories of people who can be deemed members of the company, the first
category includes directors of the company who are supposed to take up
qualification shares(s.193 CA) and the other category is that of individuals who
have paid up for share and upon allotment and upon subscription.
It must be noted that courts have been a little bit relaxed when it comes to
enforcement of
s.47 CA, In Mawogola Farmers VsKayanjawhere the
respondent had contributed money on an understanding that when the company is
registered, they will be allotted shares in the company. After the incorporation,
they were never allotted shares and they sued the company for the allotment.
In the trial and appellate court, the company sought to rely on S.27 that for one to
be a member of a company there must have been an agreement to that effect and
his name must have been entered on the company register and that these two were
cumulative.
Court unanimously held for the respondent and they quoted Buckley on the
Company Act that The register of the company is most important but not
conclusive
Nampeera Trading Co.Vs Yusuf Ssemwanje
CORPORATE PERSONALITY
The most important legal characteristic of registered companies is that they
are Incorporated and so have what is known os Legal personality. The
principle requirements for registration are among others that the
memorandum and articles of incorporation must be signed by the
subscribers and thereafter presented to the registrar of companies for
registration and upon which a certificate of incorporation is issued
describing the company as incorporated means that it is a corporate body.
(See S 18(3), 22)
From the date of incorporation, the subscribers to the memorandum and all
such other persons as may become members shall be a body corporate
capable of excising all the powers of an incorporated company with powers
to own property, perpetual succession and a common seal but with such
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Lord Macnagten
The company is at law a different person altogether from the subscribers
and though it may be that after incorporation the business is precisely the
same as it was before, and the same persons are managers, and the same
hands receive the profits, the company is not in law the agent of the
subscribers or trustee for them. Nor are the subscribers, as members liable
in any shape or form, except to the extent and in the manner provided by
the Act.
Lord Herschell
The creditor has notice that he is dealing with the company, the liability of
members of which is limited and the register of shareholders informs him
how the shares are held and that they are substantially in the hands of one
person if this be the fact. The creditors in the present case gave credit to
and contracted with a limited company.
Lord Halsbury
Either the limited company was a legal entity or it was not. If it was, the
business belonged to it and not to Mr. Salomon. If it was not, there was no
person and no thing to be an agent at all and it is impossible to say at the
same time that there is a company and there is not.
The case only goes to show that a company formed in compliance with the
regulations of the Companies Acts is in law, a separate person and not per
se the agent or trustee of its controller.
Gower Pg 99 states that the decision in the Salomon case permitted the
trader not only to limit his liability to the money he put into the company
but also to avoid any serious risk by subscribing for debentures rather than
shares. He goes on to state that the only justification for the decision is that
the public the public deals with a ;limited liability company at their own
peril and at least should know what to expect.
Gower is unhappy with the law that it does not protect the little man who
grants credit to the company or the unemployed workman who would like to
work for the company .
Gower states that although searches of the company file at the registry to
show the details to do with the charges made to the company assets and its
balance sheets together with heprofits and loss accounts, such documents
are not easy to be appreciated by every person. But for the experienced
businessman there will actually be no problem. It is therefore the little man
whom the law should particularly be protecting who runs into the risk
when he grants credit to the company and the same applies to an
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In Re. Air Safaris [1969]EA 595, It was held that a company can enter
into a valid and effective contract with one of its members even if such a
member is a principle shareholder or even the MD. This in itself does not
invalidate the contract entered into as long as its within the company
objects.
KintuVsKyoteraCofee Growers [9176]Hcb 336
SentamuVsUcb [1982hcb59
COMPANY PROPERTY
A company owns its own property the
this or any share of it. A person who no
company is only entitled to whatever
shareholder has no legal interest in the
insure it against theft, damage, etc.
It was held that the company was a legal entity irrespective of the motive of
its promoters. Once its formed under the provisions of the law, the rules
governing it must be followed. That the company property is clearly
distinguishable from that of its members and members have no direct or
proprietary interest /right to company property but only entitled to shares.
Accordingly, the Plaintiff could not be said to own the tractor bought by the
company in which he was a shareholder. That the tractor belonged to the
company and not the individual (in other wards, he ought to have sued in
the name of the company and not in his own name.)
In SsentamuVs UCB &Ors, the Plaintiff obtained a loan of 250,000/= as
the MD Bunyoro stationers and printers limited. The loan was for the
company and he negotiated with he bank in his capacity as the MD. In July
and august, the defendant wrote 3 threatening letters to the plaintiff to the
effect that the plaintiff would be arrested by military personnel unless the
loan was paid. The 2nd defendant knew tha the company was a limited
Liability Company. The plaintiff was arrested and locked up on the orders of
the servants of the first defendant. He was released after the debt was paid
up by a friend. He sued the defendant.
The issues was whether the plaintiff was liable to pay the company debt as
an individual
It was held that a limited liability company is a separate entity from ts
directors, shareholders and members and its individual members are not
liable for the company debts . Even as the MD, the Plaintiff could not be
personally hel liable for the company debts and that the 2 nd defendants
actions in holding the plaintiff so liable was therefore unjustifiable and
unlawful.
Eriya Milling Project Limited Vs Adams
FerrahVsGarmy Limited (1888)40 Ch.D 395
A company can be convicted of a crime, regardless of whether its directors
are also convicted. There are however, some limitations to this rule, which
include:
(a) It has been held that a company cannot be convicted of a crime which
requires the physical act of driving a vehicle. Richmond-on-Thames
Borough Council v Pinn& Wheeler Ltd (1989)
(b) A company cannot be convicted of any crime for which the only available
sentence is imprisonment. There are particular problems with crimes which
require mensrea (a guilty mind) most common law crimes require
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respondent alleged that the petitioner had collected various sums of money
from the debtors of the company and that he failed to account for those
sums. The respondent had taken the matter to the central native court
which ruled in his favour.
On a fourth appeal by the petitioner to the high court, the issue was
whether a limited liability company can be a party to a civil suit in a native
court.
The high court observed that a limited liability company is a corporation
and as such it has the existence which is distinct from that of its
shareholders. That being a distinct legal entity and abstract un nature, its
not capable of having racial attributes and accordingly, the native court had
no jurisdiction.
Tesco Supermarkets Ltd v Nattrass (1971)
Tesco Supermarkets was offering a discount on flash packs of Radiant
washing powder, advertised on posters in its stores. Once they ran out of
the lower priced stock, they replaced it with the regularly priced ones, and
the manager had failed to take down the posters. One Mr. Coane was
charged the higher price and complained to the Inspector of Weights and
Measures. Tesco Supermarkets was charged under Section 11(2) Trade
Descriptions Act 1968 for falsely advertising the price of washing powder,
and in its defence, Tesco Supermarkets argued that the manager had taken
all reasonable precautions and all due diligence, and that the conduct of the
manager could not attach liability to the corporation.
The House of Lords accepted this defence and held that the managers
conduct was not attributable to that of the corporation. Lord Morris
There was no delegation of the duty of taking precautions and exercising
diligence. There was no such delegation to the manager of a particular
store. He did not function as the directing mind or will of the company. His
duties as the manager of one store did not involve managing the company.
He was one who was being directed.
Viscount Dilhorne
...shop managers in a business such as that conducted by the Appellants...
cannot properly be regarded as part of the Appellants directing mind and
will...
R v P&O European Ferries (Dover) Ltd (1991)
The ferry company along with five of its managers was indicted for
manslaughter after a ferry services ran by them caused the loss of 192 lives
when a ferry capsized in 1987.
Page | 19
The judge held that the indictment was valid, saying Where a corporation
through the controlling mind of one of its agents does an act which fulfills
the prerequisite of the crime of manslaughter, it is properly indictable for
the crime of manslaughter.
R v Kite and OLL Ltd (1994)
OLL Ltd was a company specialised in organising outdoor activities. On a
canoeing trip organized by OLL Ltd, four 6th year students drowned after
their group drifted off to sea and their canoes became swamped. Evidence
showed that the company did not employ qualified instructors and had given
no training to them.
The company was accordingly convicted of manslaughter and was fined
60,000. The Managing Director, Peter Kite, who had total control of the
company was sentenced to 3 years imprisonment. OLL Ltd was the first
company in English law to be convicted of corporate manslaughter, but it
should be noted that the company was very small and Peter Kite was one of
only two directors, making it relatively easy for the Prosecution to show that
he was the controlling mind behind the company.
Transco plc v Her Majestys Advocate (No 1) (2004)
An explosion in Larkhall resulted in the death of a family of four, and the
complete destruction of their house. Following investigation by the police
and the Health and Safety Executive, Transco plc, a corporate body
responsible for gas distribution, was charged with culpable homicide.
false
false
and defines the limits of the powers of the company. Likewise, there is no
comprehensive definition for the Article of Association but still its like a
charter defining all the rights and duties, privileges and powers of the
governing bodies and individuals.
The memorandum of association can be conveniently referred to as the
constitution of the company fro which the company derives its powers to
carry out the purpose for which it was formed.
PRICE Vs KELSALL
The above cases provide that pre-incorporation contracts can not bind
companies yet the act binds this company on such contracts.
Hickman Vs Kent [1915]1 CH 881
THE
RELATIONSHIP
BETWEEN
THE
MEMORUNDUM
ASSOCIATION AND THE ARTICLES OF ASSOCIATION
OF
Since the two documents are contemporaries, it appears that they are to be
read together such that the ambiguities in one can be cleared by reading
the other.
But in all matters required by statute, it is only the memorandum that can
be resorted to as the authority as it contains the fundamental conditions
upon which the company is incorporated while the articles of association
only regulate the internal affairs of the company.
In Guinness Vs Land Corporation of Ireland,
it was held that
notwithstanding the suggestion that the fundamental conditions of the
memorandum and articles of Association are concurrently construed, for
anything the act requires, one must look at the memorandum alone. That
where the legislation provides for one document to be dominant over the
other, one can not turn to the instrument
for assistance as
that would amount to modification of the major document.
However, the articles usually give effect to the provision that the
memorandum
EFFECTS
OF
ASSOCIATION.
THE
MEMORUNDUM
AND
ARTICLES
OF
Page | 22
members and the company and thus formed a contract between the
company and the members but the defendant had contracted in his
private capacity hence the requirement for the companys articles were
inapplicable.
3. The shareholders may sue to prevent any alteration of the
articles if this will amount to fraudulent infringement of his
interest.
In Brown Vs British Abrasive wheel Co. [1919] 1 Ch.D 290 it was
held that the proposed alteration of the articles was not just just and
equitable or for the benefit of the company but was simply for the
benefit of the majority shareholders and thus they could not enforce it
against the minority shareholders even in the absence of malafide.
4. The shareholders may bring an action to force the company to
be registered as a shareholder and obtain a share certificate
thereof.
In Moodievs Shepard [1949]2 All E.R. 1044 IT was held that a
shareholder may sue for a declaration that he be registered as a
shareholder to enforce delivery of a share certificate in accordance with
the articles.
5. Enforcement of members rights to vote.
In Pender VSLushington, it was held that under the articles, a person
whose name was in the register of shareholders which reflected the
rights of the members to vote at a general meeting and the no vote of
properly qualified members could be rejected because shares had been
obtained by transfer ..
6. Prevent directors from holding office in breach of articles.
Inn Catesby VsBumell, the articles of association of the company
provided that a member should not be qualified to be elected director
unless a written notice was given to the company not less than 14 days
before he date of voting. Notice was given but the sitting director
rejected it. A meeting was held and new directors were appointed
pursuant to the notice. The shareholders sued for an injunction
restraining the former directors from acting as such. It was held that the
notice was in compliance with the articles of association and the first two
persons elected as directors in lue of the defendant who had retired
were duly elected and the injunction ought to be granted.
7. To enforce members rights in respect to transfer of shares and
the right to vote.
In MisangoVsMusige, it was held that a though courts rarely interfere
with the inherent powers and management of a company , a member can
sue when the acts complained of injure him or are either fraudulent or
ultra vires.
Page | 24
or
to
he
be
Page | 25
Ross J. stated that the contract under S.21 was of the most sacred
character since its upon its reliance that the shareholders advance
money to protect individual shareholders as well as to make the
company answerable to such shareholders for its activities thus a
number of doctrines like ultra vires are referred to the contract.
Gower states that the section no longer means what it says be cause of
the numerous judicial opinions expressed on it and that its rephrasing is
overdue. That courts have however settled any doubts.
PROMOTERS
Before a Company is incorporated, or in the process of incorporation, it is
common for someone lay the groundwork of the Company.In practice, one
does not always wait to receive the Certificate of Incorporation before
commencing business.Negotiations for the purchase of material or land
would already have commenced. The people who take the responsibility of
starting
the
Company
are
referred
to
as
Promoters.
In Tengku Abdullah v MohdLatiff bin Shah Mohd,[1996] 2 MLJ 265
Gopal Sri Ram JCA said:
"A promoter is one who starts off a venture-any venture-not solely
for
himself,
but for others, but of whom, he may be one."
However the most cited case in this regard is Twycross v Grant where CJ
Cockburn
said,
" One who undertakes to form a company with reference to a given
subject
and
to
set it going and who takes all the necessary steps to accomplish that
purpose.'
The promoter lays the foundations for a Company in terms of negotiations,
registration of the Company, obtaining directors and shareholders and
preparing
all
the
paperwork.
However, because the Promoter is such an important person in the
formation of the company, the law places several responsibilities on him.
These
are
known
as
fiduciary
duties.
THE FIDUCIARY DUTIES
Page | 26
The following are some of the fiduciary duties that the Courts will insist that
a
Company
promoter
has
to
observe.
1.Top of the list is not to make a secret profit at the expense of the company.
In Erlanger Vs New Sombrero, court observed that it was the duty of the
promoters to ensure that a company had an independent board of directors
and that there was good disclosure to them. Court further observed that the
promoters of a company were in a fiduciary relationship with the company
being promoted.
2.A duty to account to the company for the benefit for any property he
might
purchase with the intent of selling the property to Company for a pfofit
later. Kololo Curing Co. Ltd v West Mengo Cooperative Union Ltd
3.a duty not to defraud the Company by active concealment of any affairs
relating
to
the company
4. a duty not to disclose confidential information to outsiders
5. a duty not to hide his personal interests through a nominee.
A Promoter is in a fiduciary relationship with the Company he promotes and
as such he owes fiduciary duties towards it.This means that he is in a
position of trust and must at all times act honestly and in good faith for the
Company
as
a
whole.
However, the most important aspect of his duty is not to make a secret
profit at the expense of the Company. In the case of Fairview Schools Sdn.
Bhd
v
Indrani
a/p
Rajaratnam
(No1)[1998]
1
MLJ
110MahadevShanker JCA said,
" Promoters have a legal duty not to make a secret profit out of the
promotion
of
the Company without the Company's consent and also to disclose to
the Company any interests the promoters have in any transaction
proposed
to
be
entered
into
by
the Company"
Page | 27
There are many cases where Promoters did not remain true to their
fiduciary duties. The bottomline requirement from Promoters is that they
must be transparent in their dealings with the Company
There are three remedies in situations where the Promoters have breached
the
Fiduciary
Duties.
1. Rescission 2. Recovery of the Secret Profit.
3. Damages for breach of FD or deceit
RESCISSION
If the Company has entered into a Contract with the promoter and it is later
discovered there had been no transparency, the Company is entitled to
rescind the contract.It is irrelevant that the promoter has made no profit
from the contract.S17 Contracts Act states that non-disclosure amounts to a
fraud
and
by
Sect
19
the
Contract
becomes
viodable.
Under Sect 34(1) Specific relief Act 1950 the Company can apply to the
Court to rescined the contract.Once the contract is rescinded, restitution
has to take place. This is where the Company has to return whatever it
received from the Promoter and the Promoter has to return all monies
received from the company.
ERLANGER
v
NEW
SOMBRERO
PHOSPHATE
CO.
(1878)
In this case, Erlanger bought an island containing phospates for 55,000
pounds.Later, Erlanger promoted a Company and sold the property to it for
110,000 pounds.All the Directors of that Company were nominees of
Erlanger annd two of them were directly under his control.Later the old
board was replaced by a new board which brought an action to rescind the
contract with Erlanger.
INTRODUCTION
Often promoters of companies try to enter into contracts on behalf of
proposed corporations in order to secure the contract before the time for
incorporation or to confirm the contracts for the corporation before the
expense of incorporation is incurred. Normally the promoter does not have
any intention of being personally liable on the contracts.
In some cases the promoter is aware that the corporation has not been
incorporated but the person dealt with is not aware that the corporation has
not been incorporated. In other cases neither the promoter nor the person
the promoter deals with is aware that the corporation has not been
incorporated. In some cases the corporation is never actually incorporated.
In other cases the corporation in incorporated and purports to ratify
contracts entered into on its behalf before it was incorporated. In some
cases the corporation that is purporting to ratify the contract is insolvent.
The third party may be left to bear a loss if the promoter is relieved of
personal liability and the third partys claim is solely against the insolvent
corporation. The questions that typically arise are whether the promoter
can be personally liable on the contract and whether the corporation can
ratify the contract.
A BRIEF REVIEW OF RATIFICATION
Since a pre-incorporation contract involves a situation in which the
corporation has yet to be incorporated, a person who purports to act on
behalf of the corporation cannot have any authority as an agent for the
corporation (the corporation would have to exist first before the steps could
be taken to grant a person authority as an agent). Could a corporation ratify
a contract that was entered into on its behalf before it was incorporated? To
assess this, and to understand the problems that arose with the common
law position, it is important to review the circumstances in which a
principal can ratify a contract that a promoter purported to enter into on
behalf of the corporation. A person
can ratify a contract entered into by another person on his or her behalf if:
(i) the other person purported to act on behalf of the person who seeks to
ratify;
(ii) the person who seeks to ratify must have been in existence and
ascertainable at the time the other person purported to act on his or her
behalf; and
(iii) the person who seeks to ratify must have the capacity to do the act both
at the time the other person acted and at the time of the ratification.
Conditions (ii) and (iii) above make it impossible for a corporation to ratify a
preincorporation contract. The corporation would not have been in
existence at the time the person act on behalf of the corporation and the
Page | 30
corporation would not have had the capacity to do the act (enter into the
contract) at the time the other person purported to act on its behalf.
THE COMMON LAW POSITION
S. 54(1) A contract which purports to be made on behalf of the company
before the company is formed has effect, as one made with the person
purporting to act for the company.
This part reviews several cases that set out the common law position on preincorporation contracts.
Kelner v. Baxter (1866), L.R. 2 C.P. 174
In Kelner v. Baxter (1866), L.R. 2 C.P. 174 (Common Pleas) the plaintiff and
the defendants were promoters of the Gravesend Royal Alexandra Hotel
Company, Limited. The plaintiff was to be the manager of the hotel under
the new company. Before the company was incorporated the plaintiff offered
to sell a stock of wine to the proposed company for 900 which was
accepted by the defendants on January 27th, 1866 on behalf of the
Gravesend Royal Alexandra Hotel Company Limited. On February 1st the
directors of the Gravesend Royal Alexandra Hotel Company Limited ratified
the agreement. However, the promoters did not receive a certificate of
incorporation for the
Gravesend Royal Alexandra Hotel Company Limited until February 20,
1866. The directors then purported to ratify the agreement again on April
11, 1866 just days before the company made an assignment in bankruptcy.
The court held that the ratification of February 1, 1866 was not a valid
ratification because the company was not in existence at the time. The
ratification on April 11 was also held not to be a valid ratificiation because
of the requirement that a ratification can only be done by a principal having
capacity to contract at the time the contract was entered into as well as at
the time of the ratification. It was also not valid on the basis that the
company was not in existence at the time of the promoters purported to act
on its behalf. The court nonetheless still felt there was clearly an intended
contract and the only way in which there could be a valid contract was if the
defendants were the other contracting parties. They thus held that there
was a valid contract in which the plaintiff was one party and the defendants
were the other parties.
Kelner v. Baxter thus confirmed that a company cannot ratify a contract, or
purported contract, entered into on its behalf if the company was not in
existence at the time a person purported to enter into a contract on its
behalf. Kelner v. Baxter also highlighted the potential for promoters to be
liable on contracts they purport to enter into on behalf of an as yet
unincorporated entity. What was not clear after Kelner v. Baxter was
Page | 31
Summary
The following points can be derived from the agency law on ratification and
the cases noted above:
(i) A corporation cannot ratify a contract that a promoter purported to enter
into on behalf of the corporation before the corporation came into existence
(Kelner v. Baxter).
(ii) A promoter can be liable on a pre-incorporation contract but only if it
can be said that it was intended in the circumstances that the promoter be a
party to the contract (Kelner v. Baxter as interpreted by Newborne v.
Sensolid Ltd., Black v.Smallwood, and Wickberg v. Shatsky).
(iii) Where the promoter purported to act on behalf of a corporation before
it cameinto existence the promoter can be liable for a breach of warranty of
authority (Black v. Smallwood and Wickberg v. Shatsky). However, the
damages may be nominal where the corporation, or the business which it
was intended would be carried on by the corporation, is now insolvent
(Wickberg v. Shatsky).
NB:Ratification, adoption, and novation have similar, but not identical
meanings in contract law. Adoption of a contract is accepting it as your
own, where it was entered into by someone acting for you. Ratification
differs in that the contract was entered by someone who lacked authority to
act for you. A novation is the substitution of a new contract instead of an
existing one between parties, or the substitution of a new party in an
existing contract.
PROBLEMS WITH THE COMMON LAW
The common law position created a risk for both the promoter and the third
party that there would be no enforceable contract. Black v. Smallwood and
Wickberg v. Shatskyinvolved cases in which the third party could not
enforce the contract against the company. Newborne v. Sendolid Ltd.
involved a situation in which the neither the promoter nor the company
could enforce the purported contract.
This creates a risk that reliance on the purported contract will be defeated
along with the potential for an unjust enrichment of promoters at the
expense of third parties or third parties at the expense of promoters. For
instance, had the court not found the promoters liable in Kelner v. Baxter
Kelner would have borne the entire loss on the wines that he supplied for
the hotel company rather than having that loss shared amongst all the
promoters (including Kelner as a co-promoter). A similar problem could
arise if promoters performed the purported contract but could not enforce
the contract against the third party.
The common law position also creates unnecessary costs. To deal with the
risk of a potentially unenforceable contract both parties will have to take
Page | 35
Page | 38
S. 20.
The High Court may, where a company or its directors are involved in
acts including tax evasion, fraud or where, save for a singlemember
company, the membership of a company falls below the
statutory minimum, lift the corporate veil.
MEMBERSHIP.s. 20, 49
Under S. 20CA ,he veil of a company may be lifted if members or members
continued to act as members after the reduction of the membership below
the statutory minimum. The section imposes liability o members for any
company debts which are contracted during the period after the expiry of 6
months after the company membership has been reduced below the
statutory minimum.
Accordingly, any person aware of the reduction of the membership below
the statutory minimum for a period exceeding 6 months wilbe personally
held liable for the company debts. It must be noted that the doctrine of
membership does not in itself automatically lead to termination of the
company in the eyes of the law and not until the expiry of the six months ca
the veil be lifted. Section 20 and 49 only covers members who have
remained as such after the expiry of the six month and it only covers
liquidated demands and not obligations like general damages. And the
knowledge of the members about the reduction in membership is of
significant importance.
The justification behind the membership requirementwas to protect the
creditors of the company fro m dealing with a company which no longer
complies with the law and prevent its members from hiding behind the veil
of incorporation.
Fraud
The Companies Act, Section 20 still provides for lifting the veil of
incorporation where the company business has been operated fraudulently.
The particular provision may also apply if during the winding up of the
company its discovered that the company business has been carried out
with an intent to defraud the creditors or for any other fraudulent purpose.
In such a situation, the liquidator or the receiver may apply to court to
declare any person was knowingly a party to the fraud personally liable for
such debts and obligations.
The section covers a wider range of people as long as one is aware that the
fraudulent activities were gping on. It also goes beyond liquidated debts to
cover all company liabilities that are affected by such fraud. However an
Page | 40
application under this section has a heavier burden of proof since fraud is
involved and must be proved strictly.
In Re : Maimgstone, court observed that a company secretary who was
also the financial advisor of the company was ot a party to the fraudulent
carrying out of business just because he omitted to give advice to the
company.
English courts would allege fraud where its owners of a corporation merely
used it as a window dressing to evade either fiduciary or legal obligations.
This will most notably be the case where the company owner intentionally
used it to deny the creditors pre-existing legal rights. These were the facts
in issue in the case of Re Edelsten ex parte Donnelly(Unreported, Federal
Court, Northrop J, 11 September 1992), even though the court could not
ascertain fraud on a company owner who had apparently denied his
obligations towards his creditors on the grounds of limited liability. The
court was faced with the question of ascertaining whether the company was
incorporated and then used for the purpose of evading a legal obligation or
perpetrating a fraud, as argued by the trustee. The court ruled thus.
"The argument of fraud is, of course circular. It can only
succeed if the argument of sham succeeds, because if no
property was acquired by, or devolved upon, Edelsten, no
duty capable of being evaded could arise under the Act
The submission that the VIP Group had been used to
perpetrate a fraud was coincident, and stood, or fell, with
the submissions which sought to have the transactions, by
which the VIP Group acquired property, treated as
shams."
In other words, the court could not ascertain fraud for the reason that the
corporation had not been created out of sham, and had merely taken
adequate steps to ensure that any property acquired after bankruptcy did
not fall into the hands of any of the trustee in bankruptcy.
It has been said that the more conspicuous the sham, the more likely it
would be for the Anglo-Saxon courts to ascertain that fraud had been
perpetrated. In the 1997 Australian case of Re Neo: (Unreported,
Immigration Review Tribunal, Metledge M, 30 July 1997)., the Immigration
Review Tribunal took this view in a case where a decision to refuse an
application for a visa by an employee, where sponsorship had been
arranged by a company formed on the same day that the application was
lodged, and interestingly, the company never carried out any business.
The Australian Immigration Review Tribunal ruled thus:
Page | 41
It has been remarked that Anglo-Saxon courts are generally less prepared
to pierce the separate legal status, in the case of very small companies,
such as the one business. In the case of small businesses, they are rather
more prepared to apply agency principles. This is particularly the case
where control was absolute, that is where the business was an integral part
of it's owner, such that the company itself can properly be seen as a mere
agent for the shareholder. Hence in Ampol Petroleum Pty Ltd v
Findlay(Unreported, Fullagar J, Supreme Court of Victoria, 30 October
1986),Fullagar J. was only willing to pierce the veil, only after the owner of
a small private company sought the lifting of the veil himself to demonstrate
that the losses of the company were in fact his losses. The learned judge
stated:
"If the defendant does embark on establishing loss of
profits (or capital or goodwill) at an enquiry as to
damages, I consider on the present state of the evidence
that the "corporate veil" may be pierced for these
purposes, that is to say, I consider that the defendant will
be entitled to include losses to his company or companies
flowing from the breach, provided he establishes (in
addition to causation) that the loss to the company was
his loss. The evidence presently before me strongly
suggests that the defendant wholly controlled the
relevant companies and their monies and other assets,
and dealt with the monies and assets as though they were
his own."
In a nutshell, it can be said that the main reason while Anglo-Saxon courts
in he case of small companies tend to prefer agency principles is because
they want to reduce the severity of a penalty as a consequence of piercing
the corporate veil.
In Re F.G Films Limited [1916]1WLR 483, a company was incorporated
in the U.K. with a purpose of making and producing fils . Its share capital
was 100 and was incorporated by American investors but had no physical
place of business apart from the registered offices and it did not employ any
staff.
Court held that the company was an agent of the American company and
sought to employ the privileges which would not have been open to it
because it was a foreign company.
In Smith, Stone and Knight Limited Vs Birmingham Corporation, the
Defendant was asked to compensate the Plaintiff Company for the
compulsory acquisition of the subsidiary company. The Defendant said that
one can own a company because its a distinct entity.
Page | 44
Page | 46
and defines the limits of the powers of the company. Likewise, there is no
comprehensive definition for the Article of Association but still its like a
charter defining all the rights and duties, privileges and powers of the
governing bodies and individuals.
The memorandum of association can be conveniently referred to as the
constitution of the company fro which the company derives its powers to
carry out the purpose for which it was formed.
PRICE Vs KELSALL
The above cases provide that pre-incorporation contracts can not bind
companies yet the act binds this company on such contracts.
Hickman VsKent [1915]1 CH 881
THE
RELATIONSHIP
BETWEEN
THE
MEMORUNDUM
ASSOCIATION AND THE ARTICLES OF ASSOCIATION
OF
Since the two documents are contemporaries, it appears that they are to be
read together such that the ambiguities in one can be cleared by reading
the other.
But in all matters required by statute, it is only the memorandum that can
be resorted to as the authority as it contains the fundamental conditions
upon which the company is incorporated while the articles of association
only regulate the internal affairs of the company.
In Guinness Vs Land Corporation of Ireland,
it was held that
notwithstanding the suggestion that the fundamental conditions of the
memorandum and articles of Association are concurrently construed, for
anything the act requires, one must look at the memorandum alone. That
where the legislation provides for one document to be dominant over the
other, one can not turn to the instrument
for assistance as
that would amount to modification of the major document.
However, the articles usually give effect to the provision that the
memorandum
EFFECTS
OF
ASSOCIATION.
THE
MEMORUNDUM
AND
ARTICLES
OF
Page | 49
members and the company and thus formed a contract between the
company and the members but the defendant had contracted in his
private capacity hence the requirement for the companys articles were
inapplicable.
11.
The shareholders may sue to prevent any alteration of the
articles if this will amount to fraudulent infringement of his
interest.
In Brown Vs British Abrasive wheel Co. [1919] 1 Ch.D 290 it was
held that the proposed alteration of the articles was not just just and
equitable or for the benefit of the company but was simply for the
benefit of the majority shareholders and thus they could not enforce it
against the minority shareholders even in the absence of malafide.
12.
The shareholders may bring an action to force the
company to be registered as a shareholder and obtain a share
certificate thereof.
In Moodievs Shepard [1949]2 All E.R. 1044 IT was held that a
shareholder may sue for a declaration that he be registered as a
shareholder to enforce delivery of a share certificate in accordance with
the articles.
13.
Enforcement of members rights to vote.
In Pender VSLushington, it was held that under the articles, a person
whose name was in the register of shareholders which reflected the
rights of the members to vote at a general meeting and the no vote of
properly qualified members could be rejected because shares had been
obtained by transfer ..
14.
Prevent directors from holding office in breach of articles.
Inn Catesby VsBumell, the articles of association of the company
provided that a member should not be qualified to be elected director
unless a written notice was given to the company not less than 14 days
before he date of voting. Notice was given but the sitting director
rejected it. A meeting was held and new directors were appointed
pursuant to the notice. The shareholders sued for an injunction
restraining the former directors from acting as such. It was held that the
notice was in compliance with the articles of association and the first two
persons elected as directors in lue of the defendant who had retired
were duly elected and the injunction ought to be granted.
15.
To enforce members rights in respect to transfer of shares
and the right to vote.
In MisangoVsMusige, it was held that a though courts rarely interfere
with the inherent powers and management of a company , a member can
sue when the acts complained of injure him or are either fraudulent or
ultra vires.
Page | 51
16.
To prevent infringement on fundermental rights,
MisangoVsMusige,
The contract made under S21 can only be enforced by a member
against a member in his capacity as a member and according
Hickman Vs Kent it was held that there was no right given by
articles to a member in that capacity other than that of a member can
enforced against the company.
or
to
he
be
Page | 52
Ross J. stated that the contract under S.21 was of the most sacred
character since its upon its reliance that the shareholders advance
money to protect individual shareholders as well as to make the
company answerable to such shareholders for its activities thus a
number of doctrines like ultra vires are referred to the contract.
Gower states that the section no longer means what it says be cause of
the numerous judicial opinions expressed on it and that its rephrasing is
overdue. That courts have however settled any doubts.
Page | 53
3. If the contract was partially performed, and the performance was held
to be insufficient to bring the doctrine of estoppel into play, a suit for
quasi contract for recovery of benefits conferred was available.
4. If an agent of the corporation committed a tort within the scope of his
or her employment, the corporation could not defend on the ground
the act was ultra vires.
ORIGIN AND DEVELOPMENT
Doctrine of ultra vires has been developed to protect the investors and
creditors of the company. The doctrine of ultra vires could not be
established firmly until 1875 when the Directors, &C., of the Ashbury
Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75)
L.R. 7 H.L. 653 was decided by the House of Lords. A company called The
Ashbury Railway Carriage and Iron Company, was incorporated under the
Companies Act, 1862. Its objects, as stated in the Memorandum of
Association, were to make, and sell, or lend on hire, railway carriages and
waggons, and all kinds of railway plant, fittings, machinery, and rollingstock; to carry on the business of mechanical engineers and general
contractors ; to purchase, lease, work, and sell mines, minerals, land, and
buildings; to purchase and sell, as merchants, timber, coal, metals, or other
materials, and to buy and sell any such materials on commission or as
agents. The directors agreed to purchase a concession for making a
railway in a foreign country, and afterwards (on account of difficulties
existing by the law of that country), agreed to assign the concession to a
Socit Anonyme formed in that country, which socit was to supply the
materials for the construction of the railway, and to receive periodical
payments from the English company.
The objects of this company, as stated in the Memorandum of Association,
were to supply and sell the materials required to construct railways, but not
to undertake their construction. The contract here was to construct a
railway. That was contrary to the memorandum of association; what was
done by the directors in entering into that contract was therefore in direct
contravention of the provisions of the Company Act, 1862
It was held that this contract, being of a nature not included in the
Memorandum of Association, was ultra vires not only of the directors but of
the whole company, so that even the subsequent assent of the whole body of
shareholders would have no power to ratify it. The shareholders might have
passed a resolution sanctioning the release, or altering the terms in the
articles of association upon which releases might be granted. If they had
sanctioned what had been done without the formality of a resolution, that
would have been perfectly sufficient. Thus, the contract entered into by the
company was not a voidable contract merely, but being in violation of the
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(c) Neither within the main purpose nor the special powers expressly given
by the statute but incidental to or consequential upon the main purpose and
a thing reasonably done for
effectuating the main purpose.
The doctrine of ultra vires played an important role in the development of
corporate powers. Though largely obsolete in modern private corporation
law, the doctrine remains in full force for government entities. An ultra vires
act is one beyond the purposes or powers of a corporation. The earliest
legal view was that such acts were void. Under this approach a corporation
was formed only for limited purposes and could do only what it was
authorized to do in its corporate charter.
This early view proved unworkable and unfair. It permitted a corporation to
accept the benefits of a contract and then refuse to perform its obligations
on the ground that the contract was ultra vires. The doctrine also impaired
the security of title to property in fully executed transactions in which a
corporation participated. Therefore, the courts adopted the view that such
acts were voidable rather than void and that the facts should dictate
whether a corporate act should have effect.
Over time a body of principles developed that prevented the application of
the ultra vires doctrine. These principles included the ability of
shareholders to ratify an ultra vires transaction; the application of the
doctrine of estoppel, which prevented the defense of ultra vires when the
transaction was fully performed by one party; and the prohibition against
asserting ultra vires when both parties had fully performed the contract.
The law also held that if an agent of a corporation committed a tort within
the scope of the agent's employment, the corporation could not defend on
the ground that the act was ultra vires.
Despite these principles the ultra vires doctrine was applied inconsistently
and erratically. Accordingly, modern corporation law has sought to remove
the possibility that ultra vires acts may occur. Most importantly, multiple
purposes clauses and general clauses that permit corporations to engage in
any lawful business are now included in the articles of incorporation. In
addition, purposes clauses can now be easily amended if the corporation
seeks to do business in new areas. For example, under traditional ultra vires
doctrine, a corporation that had as its purpose the manufacturing of shoes
could not, under its charter, manufacture motorcycles. Under modern
corporate law, the purposes clause would either be so general as to allow
the corporation to go into the motorcycle business, or the corporation would
amend its purposes clause to reflect the new venture.
State laws in almost every jurisdiction have also sharply reduced the
importance of the ultra vires doctrine. For example, section 3.04(a) of the
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Revised Model Business Corporation Act, drafted in 1984, states that "the
validity of corporate action may not be challenged on the ground that the
corporation lacks or lacked power to act." There are three exceptions to this
prohibition: it may be asserted by the corporation or its shareholders
against the present or former officers or directors of the corporation for
exceeding their authority, by the attorney general of the state in a
proceeding to dissolve the corporation or to enjoin it from the transaction of
unauthorized business, or by shareholders against the corporation to enjoin
the commission of an ultra vires act or the ultra vires transfer of real or
personal property.
Government entities created by a state are public corporations governed by
municipal charters and other statutorily imposed grants of power. These
grants of authority are analogous to a private corporation's articles of
incorporation. Historically, the ultra vires concept has been used to
construe the powers of a government entity narrowly. Failure to observe the
statutory limits has been characterized as ultra vires.
In the case of a private business entity, the act of an employee who is not
authorized to act on the entity's behalf may, nevertheless, bind the entity
contractually if such an employee would normally be expected to have that
authority. With a government entity, however, to prevent a contract from
being voided as ultra vires, it is normally necessary to prove that the
employee actually had authority to act. Where a government employee
exceeds her authority, the government entity may seek to rescind the
contract based on an ultra vires claim.
EFFECT OF SECTION 51 ON ULTRA VIRES TRANSACTIONS
Previously, a contract beyond the objects clause of the companys
memorandum is an ultra vires contract and cannot be enforced by or
against the company as was decided in the cases of In Re, Jon Beaufore
(London) Ltd ., (1953) Ch. 131, In S. Sivashanmugham And Others v.
Butterfly Marketing PrivateLtd., (2001) 105 Comp. Cas Mad 763, A
borrowing beyond the power of the company (i.e. beyond the objects clause
of the memorandum of the company) is called ultra vires borrowing.
However, Section 51 provides that;
(1)The validity of an act done by a company shall not be called into
question on the ground of lack of capacity by reason of anything
contained in the companys memorandum.
(2)A member of a company may bring proceedings to restrain the doing
of an act which but for subsection (1) would be beyond the companys
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2. An act which is intra vires the company but done in an irregular manner,
may be validated by the consent of the shareholders. The law, however, does
not require that the consent of all the shareholders should be obtained at
the same place and in the same meeting.
3. If the company has acquired any property through an investment, which
is ultra vires, the companys right over such a property shall still be
secured.
4. While applying doctrine of ultra vires, the effects which are incidental or
consequential to the act shall not be invalid unless they are expressly
prohibited by the Companys Act.
5. There are certain acts under the company law, which though not
expressly stated in the memorandum, are deemed impliedly within the
authority of the company and therefore they are not deemed ultra vires. For
example, a business company can raise its capital by borrowing.
6. If an act of the company is ultra vires the articles of association, the
company can alter its articles in order to validate the act.
CASE NOTES:
Eley v The Positive Government Security Life Assurance Company,
Limited, (1875-76) L.R. 1 Ex. D. 88
It was held that the articles of association were a matter between the
shareholders inter se, or the shareholders and the directors, and did not
create any contract between the plaintiff and the company and article is
either a stipulation which would bind the members, or else a mandate to the
directors. In either case it is a matter between the directors and
shareholders, and not between them and the plaintiff.
The Directors, &C., of the Ashbury Railway Carriage and Iron
Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653.
The objects of this company, as stated in the Memorandum of Association,
were to supply and sell the materials required to construct railways, but not
to undertake their construction. The contract here was to construct a
railway. That was contrary to the memorandum of association; what was
done by the directors in entering into that contract was therefore in direct
contravention of the provisions of the Company Act, 1862
It was held that this contract, being of a nature not included in the
Memorandum of Association, was ultra vires not only of the directors but of
the whole company, so that even the subsequent assent of the whole body of
shareholders would have no power to ratify it. The shareholders might have
passed a resolution sanctioning the release, or altering the terms in the
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the contract, if any, between the plaintiff and the company contained
in the articles in their original form was subject to the statutory power
of alteration and
if the alteration was bona fide for the benefit of the company it was
valid and there was no breach of that contract;
there was no ground for saying that the alteration could not
reasonably be considered for the benefit of the company;
the provisions were, on the directors being employed and accepting office
on the footing of them, embodied in the contract between the company and
the directors; that the remuneration was not due to the directors in their
character of members, but under the contract so embodying the provisions;
and that, in the winding-up of the company, the directors were entitled to
rank as ordinary creditors in respect of the remuneration due to them at the
commencement of the winding-up.
Rayfield v Hands and Others, [1957 R. No. 603.]
Field-Davis Ltd. was a private company carrying on business as builders and
contractors, incorporated in 1941 under the Companies Act, 1929 , as a
company limited by shares, having a share capital of 4,000, divided into
4,000 ordinary shares of 1 each, of which 2,900 fully-paid shares had been
issued. The plaintiff, Frank Leslie Rayfield, was the registered holder of 725
of those shares, and the defendants, Gordon Wyndham Hands, Alfred
William Scales and Donald Davies were at all material times the sole
directors of the company. The plaintiff was a shareholder in a company.
Article 11 of the articles of association of the company required to inform
the directors of his intention to transfer shares in the company, and which
provided that the directors will take the said shares equally between them
at a fair value. In accordance with this the plaintiff so notified the
directors, who contended that they need not take and pay for the plaintiffs
shares, on the ground that the articles imposed no such liability upon them.
The plaintiffs claimed for the determination of the fair value of his shares,
and for an order that the directors should purchase such shares at a fair
value. It was found that the true construction of the articles required the
directors to purchase the plaintiffs shares at a fair price. Article 11 is
concerned with the relationship between the plaintiff as a member and the
defendants, not as directors, but as members of the company.
Guinness v Land Corporation of Ireland,(1883) L.R. 22 Ch. D. 349
The Land Corporation of Ireland, Limited , was incorporated under the
Companies Act on the 12th of July, 1882, as a company limited by shares. By
the memorandum of association of a company limited by shares it was
stated that the objects of the company were, the cultivation of lands in
Ireland , and other similar purposes there specified, and to do all such other
things as the company might deem incidental or conducive to the
attainment of any of those objects.
The 8th clause of the articles of association, provided that the capital
produced by the issue of B shares shall, so far as is necessary, be applied in
making good to the holders of A shares the preferential dividend of 5 per
cent., which they are to receive on the amounts paid up on their shares.
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