Company Law Guide

COMPANY LAW
DEFINITION
Section 2 of the Companies Act defines a
company
as an association of people for a common object
or
objects. Thus unlike a Partnership which is an
association of persons who come together for
business with a view of profit, the objects of a
company extend beyond profit making.
A company is different from a partnership in
that in a partnership, each partner is liable for
COMPANIES AND
PARTNERSHIPS
the debts and liabilities of the firm without
limits, except for limited partnerships. Second, a
partnership has no separate existence from the
partners; third, a partnership has no perpetual
succession unlike a company, so that the death,
retirement or bankruptcy of a partner ends it.
it. Section 389 of the Companies Act provides
COMPANIES AND
PARTNERHIPS
that no association or partnership consisting of
more than 20 persons may be formed for the
purposes of carrying on any business for the
acquisition of gains unless it is registered under
the
Companies Act, or is formed pursuant to some
other statute.
Section 2 of the Companies Act 2015 provides
that
a company is a company formed and registered
under the Act or an existing company. It also

provides that one natural person may incorporate a
company.
Companies may be statutory companies which are
formed either by specific Acts of Parliament such as
Kenya Ports Authority Act, Kenya Railways
Corporation Act, etc, (statutory corporations), or
State corporations (parastatals) which are formed
TYPES OF COMPANIES
under the State Corporations Act which gives
the president power to constitute any company
into a state corporation.
The objects of statutory companies are set out
either in the Act of Parliament or the legal
instrument Kenya Gazette-by which they are
created under the State Corporations Act. It can
only carry out the objects for which it was
STATUTORY COMPANIES
created. The capital of a statutory company is
raised
by borrowing guaranteed by treasury, while its
profits and gains are injected back employ it in
an
endeavour, and share the profit into the
company.
When it is indebted it can be sued, and even its
property attached, but it cannot be wound up for
indebtedness.
REGISTERED COMPANIES
Companies may also be registered. These are
companies that are incorporated under Companies
Act. The Companies Act 2015 provides for several
types of companies. First, limited companies.
Section 5 of the Companies Act 2015 provides that
a company is a limited company if it is limited by
shares of guarantee. Section 6 provides that a
company is limited by shares if the liability of its
COMPANIES LIMITED BY
SHARES
members is limited by the companys articles to any
amount unpaid on the shares held by the members.
The members in these companies contribute
money into a joint stock (capital) and share profits
arising from the venture. The proportion of the
capital to which each member is entitled is his
shares. The liability of the members for the debts of
the company is limited to the extent that they have
COMPANIES LIMITED BY GUARANTEE

not fully paid up for their shares. Obviously these
are the most suitable companies for industry and
commerce because they raise their working funds,
other than by borrowing or earning, by the issue of
shares.
Section 7 of the Companies Act 2015 provides for
company limited by guarantee, which has three
characteristics: First, it does not have a share
COMPANIES LIMITED BY GUARANTEE

capital. However companies limited by
guarantee that were formed and registered
before the Act are not prohibited from having a
share capital. Second, the liability of the
members is limited by the companys articles to
the amount the member has undertaken to
contribute to the assets of the company in the
event of its liquidation. Third, the certificate of
UNLIMITED COMPANY
incorporation of the company states that it is a
company limited by guarantee.
Section 8 provides that an unlimited company is
a company characterised by first, there being no
limit on the liability of its members; and second,
its certificate of incorporation states that the
liability of its members is unlimited.
A private company is described in section 9 as a
PRIVATE COMPANY
company :(i) whose articles (a) restricts the right of
members to transfer shares, (b) limits the number
of members to fifty excluding present and past
employees who acquired their shares while they
were employees and still retain them, and (c)
prohibits invitation to the public to subscribe for
shares or debentures; (ii) is not a company limited
by guarantee; and (iii) its certificate of
PUBLIC COMPANY
incorporation states that it is a private company.
A public company is described by section 10 as a
company in which, first, the articles allows its
members the right to transfer their shares in the
company, and does not prohibit invitations to the
public to subscribe for shares and debentures of the
company; second, its certificate of incorporation
states that it is a public company.
REGISTRATION OF
COMPANIES
A person who wishes to register a company is
required to lodge with the Registrar of Companies:
1. an application for registration of the company,
section 13(1)(a). The application must state the
name of the company, the proposed location of the
registered office of the company, whether the
liability of the members is to be limited, and if so
whether by shares or guarantee, and whether the
REGISTRATION OF
COMPANIES
company is a private or public company. If the
application is submitted by an agent the name
and address of the agent must also be set out: s.
13(3).
The application must be accompanied by: (i) a
statement of capital and initial shareholding where
the company is to have a share capital. Section 14
requires that the statement must state the total
REGISTRATION OF
COMPANIES
number of shares to be taken on formation by the
subscribers to the memorandum and articles, the
aggregate nominal value of the shares, and for each
class of shares, the particulars of the rights attached
to the shares, the total number of shares of that
class, the nominal value of shares of that class and
the amount to be paid up, and the amount to be
unpaid for each share. The statement must also
REGISTRATION OF
COMPANIES
state, with respect to each subscriber to the
memorandum, the nominal value of each share,
etc; (ii) if it is a company that is to be limited by
guarantee, a statement of guarantee; and (iii) a
statement of the companys proposed officers. The
statement of the companys officers must state
the
persons to be the first directors of the company,
and the person to be appointed as first secretary
or
REGISTRATION OF
COMPANIES
joint secretary in the case of a public
company,
and any person who is appointed as an
authorised signatory of the company in
the
same particulars to be stated in the
companys
register of directors, secretaries and
authorised
signatories. Each of the persons must
REGISTRATION OF
COMPANIES
2. A memorandum of association of the company:
s. 13(1)(b). The memorandum of association must
state that the subscribers wish to form a company
under the Act, and agree to become members of
the company, and in the case of a company that is
to have a share capital, to take at least one share
each: s. 12. It must also be in the prescribed form,
and authenticated by each subscriber: s. 12(2).
REGISTRATION OF
COMPANIES
3. A copy of the Articles of Association is also
required by section 13(1)(c) to be submitted.
However when the articles are not registered, or
are registered but do not exclude or modify the
model articles prescribed for the kind of companies,
the relevant model is deemed to form part of the
companys articles as if it had been duly registered:
s. 21 .
REGISTRATION OF
COMPANIES
The articles are required to be contained in a
single
document, be printed, divided into paragraphs
numbered consecutively, dated and signed by
each
subscriber to the articles. The subscribers
signatures must be attested by a witness.
Section 17 provides that when the Registrar is
satisfied that the application complies with the
requirements of the Act he registers the company
REGISTRATION OF
COMPANIES
and allocates it a unique identifying number. The
Registrar then issues it with a certificate of
incorporation signed by him and authenticated by
the official seal which states; a. the name of the
company and its unique identifying number; b. the
date of incorporation; c. whether the liability of the
members is limited or unlimited, and in the former
case, by shares or guarantee; d. whether the
EFFECTS OF REGISTRATION
company is a private or public company.
Section 19 of the Companies Act, 2015 provides
that from the date when the company is
registered; first, the subscribers to the
memorandum and all such other persons as may
from time to time become members become a
body corporate by the name stated in the
certificate of incorporation. The registered
company is a body corporate meaning that it is a
legal person separate and distinct from its
members. In Salomon v. Salomon & Co.[1897]A.C.
22 Salomon carried on business as a boot
manufacturer and leather trader. He formed a
company limited by shares in which he and his wife,
daughter and four sons each held one share. He
then sold the business to the company for the price
of 39,000, on terms approved by all the
shareholders that he would be paid 9,000 in cash,
allotted 20,000 fully paid up shares of 1 each,
while the rest of the price would be a loan, and for
this the company gave him debentures secured by a
charge on the companys assets. After a depression
the company went into liquidation. The assets were
sufficient to satisfy the debentures, but the
unsecured
creditors
with
debts
amounting to
7,000 received nothing.
The creditors challenged the payment
of
Salomons debt arguing that Salomon
and the
company were one and the same, and
the
payment was a fraud on the creditors.
creditor Salomon was entitled to payment in
priority to the other creditors.
Similarly in Macaura v. Northern Assurance Co.
[1925]A.C. 619 Macaura owned the Killymoon
estate in Ireland, and had insured some timber on
the estate. Subsequently he transferred the estate
and timber to a company in return for shares but
did not apparently have the insurance reissued in
the name of the company. The timber was
substantially destroyed by fire. The insurance
company successfully resisted his claim on the
policy arguing that the company was a separate
legal person from him, and since the timber was
not his to insure, he lacked insurable interest in
the timber.
See also in Lee v. Lees Air Farming [1961]A.C. 12
One effect as appears from Macaura is that the
property of the company belongs to the
company itself and not to the individual
shareholders, so that even the largest
shareholder does not have insurable interest in
the property of the company. A managing
director of the company, even if he owns all
shares except one cannot lawfully pay
cheques to the company into his own banking
account or draw cheques for his own purposes
upon the companys banking account: A.L.
Underwood Ltd v. Bank of Liverpool & Martins Ltd
1924 1 K.B. 775.
It also denotes that the companies debts are the
responsibility of the company alone and normally
cannot be enforced against the members, however
many shares they own. The liability of the
members of a limited company is also limited to
the amount if any unpaid on its shares.
A registered company can forthwith exercise all
the functions of an incorporated company: it can
hold property, it can sue and be sued, it can
enter into contracts, except that in the case of a
public company it cannot commence business
Second, the company can do all of the things than
an incorporated company can do; third, the
registered office of the company is as stated in the
application for registration; fourth, the status of the
company is as stated in its certificate of
incorporation; fifth, in the case of a company having
a share capital, the subscribers to the
memorandum holders of the shares specified in the
statement of capital and initial
shareholdings;
and sixth, the persons named in the
statement
of proposed officers as directors of the
company, secretary or joint secretary
in the case
of
a
public
company,
and
authenticated
signatory became holders of such
LEGAL EFFECTS OF CONSTITUTION

OF COMPANY
that the companys constitution binds the
company and its members to the same extent
as
if the company and its members had
covenanted and agreed with each other to
observe the constitution. The legal effect is
similar to section 22 of the old Companies Act.
The implication of the provision is three-fold;

OF COMPANY
First, the constitution forms a contract binding the
members to the company. In Hickman v. Kent or
Romney Marsh Sheep-Breeders Association [1915]1
Ch. 881 the articles provided that any differences
between the company and any of the members
should be referred to arbitration. H. a shareholder
brought an action against the company in
connection with a dispute as to his expulsion from

OF COMPANY
the company. It was held that the company was
entitled to have the action stayed as the articles
constituted a contract between the company and
its members in respect of their ordinary rights as
members. Astbury J. stated at p.900: articles
regulating the rights and obligations of the
members generally as such do create rights and
obligations between them and the company

OF COMPANY
respectively. The courts will for this purpose imply
terms into the articles where the meaning
encompasses what the instrument conveys to a
reasonable person having all the background which
would reasonably be available to the audience to
whom the instrument is addressed. Thus in
Equitable Life Assurance Society v. Hyman [2002]1
AC 408 (HL), the relevant article gave the directors a

OF COMPANY
wide discretionary power to pay bonuses on its
members life assurance policies, and in exercise
of this power the directors paid some policy
holders a larger bonus than others. This was
contrary to guarantees which had been given
when certain of the members took out their
policies. Lord Steyn stated that the articles
should be read as containing an implied term

OF COMPANY
that the directors would not exercise their
discretion in a manner which deprived the
guarantee of any substantial value. Similarly in
Cream Holdings Ltd v. Stuart Davenport [2010]
EWHC 3096 (Ch.) the Defendant was removed as a
director, and pursuant to the articles the removal
brought about the deemed service of a transfer
notice in respect of his shareholding, that is,

OF COMPANY
deeming his intention to sell his
shareholding.
The articles then provided procedures
for the
valuation and transfer of the shares
including
the appointment of a third party valuer
where
the parties could not agree. The
defendant

OF COMPANY
and a requirement not to withhold consent
unreasonably to the nominated appointment.
These implied terms were necessaryand
represent the minimum machinery necessary to
make these articles work, the court asserted
[85].
The articles cannot however be supplemented by
additional terms implied from extrinsic

OF COMPANY
circumstances. In Bratton Seymour Service Co. v.
Oxborough [1992] BCLC 693 (CA) the company was
set up to manage the commercial aspects of a
development consisting of a number of flats, the
shares being held by the flat owners. The question
for the court was whether it was possible to imply
into the companys articles a term that the
members should make contributions for the upkeep

OF COMPANY
of the garden, the swimming pool and other
communal amenity areas of development. Steyn
L.J. remarked: the Companies Actprovides that
the memorandum and articles, when registered,
bind the company and its members to the same
extent as if they respectively had been signed and
sealed by each member. By virtue of [the
provision] the articles of association become, upon

OF COMPANY
registration, a contract between a company and
members. It is, however, a statutory contract of a
special nature with its own distinctive features. It
derives its binding force not from a bargain struck
between parties but from the terms of a statute. It
is binding only insofar as it affects the rights and
obligations between the company and the
members acting in their capacity as members. If it

OF COMPANY
confers provisions conferring rights and
obligations on outsiders, then those provisions
do not bite as part of the contract between the
company and the members, even if the
outsiders is coincidentally a member...Similarly
if
the provisions are not truly referable to the
rights and obligations of members as such it
does not operate as a contract. Moreover, the

OF COMPANY
contract can be altered by a special resolution
without the consent of all the contracting parties. It
is also, unlike an ordinary contract, not defeasible
on the grounds of misrepresentation, common law
mistake, mistake in equity, undue influence or
duress. Moreoverit cannot be rectified on the
ground of mistake.
However in most cases the court will not enforce

OF COMPANY
the contract as between individual members,
and is enforceable only through the company or,
if the company is being wound up, by the
liquidator except where a personal right is
infringed.
In Wood v. Odessa Water-works Co. (1889)42 Ch
636 a company declared a dividend and passed
a resolution to pay it by giving to the shareholders

OF COMPANY
debenture bonds bearing interest and redeemable
at par, by an annual drawing, over thirty years. The
articles empowered the company to declare a
dividend to be paid to the shareholders. It was
held that the words to be paid meant paid in cash,
and a shareholder could restrain the company from
acting on the resolution on the ground that it
contravened the articles. Second, members are only

OF COMPANY
bound by and entitled under the contract qua
members. In Rayfield v Hands [1960]Ch. 1 the
articles of a private company provided that a
member intending to transfer shares should inform
the directors, who would take the shares equally
between them at fair value. It was held that the
articles bound the defendant directors to buy the
plaintiffs shares and related to the relationship

OF COMPANY
between the plaintiff as a member and the
defendants, not as directors, but as members of
the company, and it was not necessary for the
company to be party to the action. Third, the
constitution does not constitute a contract binding
the company or any member to an outsider i.e. a
person who is not a member of the company. This is
on the general principle that a person not a party to

OF COMPANY
a contract has neither rights nor liabilities under it.
In Eley v. Positive Life Assurance Co. Ltd (1876)1
Ex.D. 88 (C.A.) the articles provided that E. should
be the solicitor to the company. He was employed
as such for a time but subsequently the company
ceased to employ him. It was held that he was not
entitled to claim damages for breach of contract
against the company as the articles did not

OF COMPANY
constitute a contract between E and the company.
However where a director takes office on the
footing of an article providing for remuneration for
the director, although the article is not in itself a
contract between the company and the director, its
terms may be implied into the contract between
the company and the director. In Re New British
Iron Co. [1898]1 Ch. 324 an article provided that

OF COMPANY
the remuneration of the directors
should be the
annual sum of 1,000. the directors
were
employed and accepted office on the
footing of
the articles. For some time the
directors, who
were also members, acted as directors
but were
DISCUSSION QUESTION
directors and they were entitled to recover the
arrears of remuneration.
The articles of association of company Q provide
that where the office of a director becomes
vacant by reason of the death, resignation,
disqualification or removal during the period of
office, the board of directors may fill the casual
vacancy. It is further provided that such a
DISCUSSION QUESTION
director may have his contract terminated by the
board of directors but he must be given three
months notice prior to the termination. Chebii, who
had no shares in the company, was appointed as
Executive Director by the board of directors to fill a
casual vacancy occasioned by the death of
Chemngoren. A few months into the job, the
prevailing opinion among the other directors was
DISCUSSION QUESTION
that he had a penchant for making decisions
which expose the company to unnecessary risk.
The board of directors therefore decided to
relieve [him] of [his] responsibilities as an
executive director with immediate effect. Chebii
wants the company to retain him until the
required notice period in the articles elapses.
DISCUSSION QUESTION
With the aid of decided cases discuss
whether
Chebii can sue the company to compel
it to
retain him until the notice period
provided in
the articles of association passes.
PROMOTION AND INCORPORATION

OF COMPANIES
Promotion is the process of forming a company. A
promoter is a person who forms the intention to
form a company, and takes the necessary steps to
carry that intention into operation. In Twycross v.
Grant (1877) 2C.P.D. 469, 541 Lord Cockburn
defined a promoter as one who undertakes to
form a company with reference to a given project
and to set it going, and who takes the necessary
PROMOTERS
steps to accomplish that purpose. Legally the
persons who form a company are the founders, in
the Companies Act called the subscribers to the
memorandum.
The Companies Act does not however define
promoter except in Section 45 of the old
Companies Act which provides that a promoter
who takes part in the issue of a prospectus
POSITION AND DUTIES OF

PROMOTERS
containing untrue statements will incur liability,
although for that purpose, promoter does not
include any person acting in a professional capacity
for the persons engaged in the formation of the
company.
A promoter is not an agent for the company he
is forming because a company cannot have an
agent before it comes into existence. In Kelner v.
POSITIONS AND DUTIES OF

PROMOTERS
Baxter (1866) LR 2CP 174, Kelner sold wine to
Baxter and others who were described as acting on
behalf of the proposed Gravesend Royal Alexandra
Hotel Company, Limited. The wine was delivered
and used. Later on but when the company failed,
Kelner successfully sued Baxter personally. Erle, CJ
said:Where a contract is signed by one who
professes to be signing as agent, but who has no
POSITION AND DUTIES OF

PROMOTERS
principal existing at the time, and the contract
would be altogether inoperative unless binding
upon the person who signed it, he is bound
thereby: and a stranger cannot by a subsequent
ratification relieve him from that responsibility.
A promoter is also not strictu sensu a trustee for
a company that is yet to be formed. However
from the moment he acts with the company in
DUTIES OF PROMOTERS
mind, he stands as a fiduciary towards the
company. Accordingly, first, he must not make
secret profits out of the promotion such as a profit
on a sale of property to the company, and if he does
he must account to the company for the same. In
Gluckstein v. Barnes [1900] AC 240, Gluckstein and
3 others bought the Olympia exhibition premises in
liquidation proceedings for 140,000 and then
DUTIES OF PROMOTERS
promoted a company, Olympia Ltd to which they
sold the property for 180,000. There were no
independent directors. In a prospectus inviting
applications for shares and debentures the 40,000
profit was disclosed, but not a further profit of
20,000 which they had made by buying securities
on the property at a discount and then enforcing
them at their face value. The company went into
DUTIES OF PROMOTERS
liquidation and the liquidator claimed part of the
profit of 20,000 received by Gluckstein. It was held
that he has to account for the profit to the
company.
Second, a promoter must disclose to either to an
independent board of directors or to the existing or
intended shareholders, for example by making a
disclosure in the prospectus, any material facts
DUTIES OF PROMOTERS
relating to a contract with the company, and the
company must agree to the terms otherwise the
contract is voidable at the companys option.
In Erlanger v. New Sombrero Phosphate Co.
(1878) 3 App. Cas. 1218 (PC) A syndicate of
which E was the head, purchased an island in
the West Indies said to contain valuable mines
of phosphates for 55,000. E formed a company
DUTIES OF PROMOTERS
to buy this island, and a contract was made
between X, a nominee of the syndicate and the
company for its purchase at 110,000. It was held
that as there had been no disclosure by the
promoters of the profit they were making, the
company was entitled to rescind the contract and
recover the purchase money from E and the other
members of the syndicate. Per Lord Cairns LC at
DUTIES OF PROMOTERS
1236: I do not say that an owner of property
may not promote and form a joint stock
company, and then sell his property to it, but I
do say that if he does he is bound to take care
that he sells it to the company through the
medium of the board of directors who can and
do exercise independent and intelligent
judgment on the transaction.
DUTIES OF PROMOTERS
In reality, some or all of the promoters will
usually be the first directors, or the promoter
will usually sell his business to the company in
which he is the largest shareholder, and
therefore the requirement of an independent
board may be difficult to achieve. Lindley MR in
Lagunas Nitrate Co. v. Lagunas Syndicate
(1899)2
Ch 392 (CA) at 426: After Salomons Case I
think it
DUTIES OF PROMOTERS
is impossible to hold that it is the duty of the
promoters of a company to provide it with an
independent board of directors, if the real truth
is disclosed to those who are induced by the
promoters to join the company.
If a promoter makes secret profit by selling
property to the company, the latter may among
other remedies, rescind the contract and recover
REMEDIES OF COMPANIES AGAINST

PROMOTERS
the purchase money paid. The company may
also compel the promoter to account for any
profit he has made, and may also sue the
promoter for damages for breach of his fiduciary
duties. However the company cannot affirm the
contract and at the same time ask for account of
profits or for damages as this would in effect be
asking the court to vary the contract.
REMUNERATION OF
PROMOTERS
A promoter has no right against the company for
payment of his services rendered before the
formation of the company in the absence of a
contract under seal, because the services would
constitute past consideration. Companies are also
not bound by pre-incorporation contracts made on
their behalf before they are incorporated, nor can
they ratify, and enforce such contracts. In Kelner v.
PRE-INCORPORATION
CONTRACTS
Baxter, Erle CJ stated at 1236 : When the company
came afterwards into existence it was a totally new
creature, having rights and obligations.
Section 44(1) of the Companies Act 2015 provides
that a contract that purports to be made by or on
behalf of a company at a time when the company
has not been formed has effect, subject to any
agreement to the contrary, as a contract made with
PRE-INCORPORATION
CONTRACTS
the person purporting to act for the company or
as agent for it, and the person is personally
liable on the contract accordingly. Subsection
(2)
states that such liability applies to a deed as it
applies to the making of a contract.
Denning MR stated in Phonogram Ltd v. Lane
[1982]QB 938 that the words subject to any
agreement to the contrary mean that if there
PRE-INCORPORATION
CONTRACTS
was an express agreement that the man who
was signing was not liable, the section would
not apply. But unless there is a clear exclusion
of
personal liability, where a person purports to
contract on behalf of a c company not yet
formed then however he expresses his
signature
he himself is personally liable on the contract.
In Braymist Ltd v. Wise Finance Co. Ltd [2002]
PRE-INCORPORATION
CONTRACTS
EWCA Civ 127; [2002] Ch 273 CA, it was held that
the provision not only confers liabilities on the
agent, but also rights of enforcement. Thus the
underlying contract is subject to all the normal rules
of contract. In Braymist the court held that the
identity of the vendor (whether it was Braymist or
the firm of solicitors) was immaterial to the
purchaser, and so the solicitors (the agents who had
PRE-INCORPORATION
CONTRACTS
signed the contract) could enforce the contract
of sale.
A company cannot by adoption of ratification,
obtain the benefit of a contract purportedly
made on its behalf before it came into existence.
A new contract must be made after its
incorporation in the same terms as the old one.
In Natal Land Co. & Colonisation Ltd v. Pauline
PRE-INCOPRORATION
CONTRACTS
Colliery and Development Syndicate Ltd [1904]
AC 120 (PC) N Co. agreed with a person acting on
behalf of a future company, P. Co. that N Co. would
grant a mining lease to P Co. P Co. discovered coal
whereupon N Co. refused to grant the lease. It was
held that P Co. could not compel N Co. to grant the
lease.
Persons who purport to act on behalf of a company
PRE-INCORPORATION
CONTRACTS
before it is incorporated, cannot enforce any
liabilities arising from such action against the
company. It is essential that a principal for whom an
agent purports to act should be in existence at the
time the contract is entered into on his behalf. In Re
English and Colonial Produce Co. Ltd [1906]2 Ch
435, solicitors, on the instructions of persons who
afterwards became directors of the company
PRE-INCORPORATION
CONTRACTS
prepared
the
memorandum
and
articles of
association of the company, and paid
registration fees. It was held that the
company
was not liable to pay their costs.
DISCUSSION QUESTION
Mutheithie Limited was a private company whose
shareholders were Mr Munga, his wife and seven
children. Mr Munga and his wife were the initial
directors for two years, until their two youngest
children were appointed directors. Kagia & Co.
Advocates were the advocates involved in the
registration of Mutheithie Limited. The articles of
association of the company provided that the
DISCUSSION QUESTION
directors may pay any person for services provided
during the promotion of the company. There is also
a provision in the articles of association that Kagia
& Co. shall be the companys legal advisors. When
Mr Munga and his wife were directors, they
promised Kagia & Co. Advocates that they would
pay their fees for services provided during the
promotion of the company. However, by the time
DISCUSSION QUESTION
their directorship ended the payment had not been
made. The newly appointed directors have
successfully convinced the other shareholders to
replace Kagia & Co. Advocates as the companys
legal advisors, and refused to pay their fees for legal
services provided during the promotion.
(a) Explain the legal position with respect to the
payment for services provided during the
DISCUSSION QUESTION
promotion of the company.
(b) Discuss whether Kagia & Co.
Advocates may successfully seek
legal redress for the termination of
their appointment as legal advisors.
LIFTING THE VEIL

immediately before obtaining a certificate of
trading.
The principle established in Salomon v. Salomon &
Co. that a company is a separate legal entity from
its members may be referred to as the veil of
incorporation. In general the law will not go behind
the separate personality of the company to the
members. However there are exceptions when the
veil of incorporation can be lifted so that the law

disregards the corporate entity and instead pays
regard to the economic reality behind the legal
faade.
The instances in which this can happen are either
on the basis of statute or judicial interpretation.
One instance is section 33 where the Companies
Act provides that where a company carries on
LIFTING THE VEIL

business for more than six months when the
number of members has fallen below the
statutory minimum every person who is a
member of the company during after that
period and who knows the business is being
carried on is jointly and severally liable for all
the debts contracted during such time. A
company registered in Kenya is an alien
enemy
LIFTING THE VEIL

if its agents or the persons in de facto control of
its affairs are alien enemies, and in determining
whether alien enemies have such control, the
number of alien enemy shareholders and the
value of their holdings are material.
Also, when an officer of a company signs on
behalf of the company a bill of exchange,
promissory note, cheque, or order for money
LIFTING THE VEIL

or goods in which the companys name is not mentioned,
the officer is personally liable to the holder of the bill of
exchange for the amount thereof unless it is paid by the
company.
The veil has also been lifted where an attempt is made to
circumvent statute. In Wallersteiner v. Moir [1974]1
W.L.R. 991 (C.A.) the company of which the Plaintiff was a
director made a loan to another company which was his
LIFTING THE VEIL

puppet. The court held that the action was in
breach of the equivalent of our section 191 which
prohibits loans to directors, so that the loan should
be treated as made to him. Similarly, in Gilford
Motor Co. Ltd v. Horne [1933]Ch. 935 (C.A.) the
employee covenanted that after the termination of
the employment he would not solicit his employers
customers. Soon after the termination of his
LIFTING THE VEIL

employment he formed a company of which the
two directors and shareholders were his wife and
one other person and which sent out circulars to
customers of his former employer. An injunction
was granted against the ex-employee and the
company. Thus a court will not allow a company to
be used as a device to mask the carrying on of a
business by a former employee of another person
LIFTING THE VEIL

and to enable the former employee to break a
valid covenant in restraint of trade contained in
the contract under which he was formerly
employed. Similarly, in Jones v. Lipman [1962]1
W.L.R. 832, the Defendant having agreed to sell
land to Plaintiff, he sold and transferred the land
to a company controlled by him. It was held that
the company was the creature of the Defendant,
LIFTING THE VEIL

a mask to avoid recognition by the eye of equity
and therefore specific performance could not be
resisted by the Defendant. Specific performance
was also granted against the company.
Generally the veil is lifted whenever the Companies
Act recognises the relationship of holding company
and subsidiary. Thus generally group accounts must
be laid before the holding company in general
LIFTING THE VEIL

meeting (s. 150). The power of an inspector of a company
under sections 165 and 173 to investigate the real owners
of a company is an example of the veil being lifted.
The veil will also be lifted in cases of fraudulent trading
where an order is made under section 323 holding
persons who were party to the carrying on of business by
the company liable for the debts of the company where
the company incurs debts without having any reasonable
prospect of being able to pay them.
THE OBJECTS
The memorandum of association must state the
objects of the company: section 2. In Cotman v.
Brougham [1918] A.C. 514, at 520 Lord Parker
observed that the statement of objects in the
Memorandum serves a double purpose: First, it
protects the subscribers who know the purposes to
which their money can be applied; and second, it
protects person dealing with the company, as they
THE DOCTRINE OF ULTRA

VIRES
are made aware the extent of the companys
powers. To protect the shareholders and those who
deal with the company, the courts evolved the
doctrine of ultra vires to the effect that a company
has power only to carry out objects which are
stated in the memorandum, together with anything
incidental thereto. Lord Selbourne in Att. Gen. v.
Great Eastern Railway [1880]5 App. Cas. 473 at 478

VIRES
said that the doctrine of ultra vires ought to be
reasonablyunderstood and applied,
andwhatever may fairly be regarded as incidental
to, or consequent upon, those things which the
Legislature has authorised ought not (unless
expressly prohibited) to be held to be ultra vires.
In practice therefore it is usual to set out at length
in the memorandum all the objects which the

VIRES
company might require, and the short form of
objects clause in the model memorandum in Table
B First Schedule to the Act is seldom used.
Moreover many powers such as the power to
borrow money for the purpose of the business
most of which would otherwise be implied, are set
out expressly. Lord Parker in Cotman v. Brougham
explained, Moreover, experience soon showed

VIRES
that persons who transact business with companies
do not like having to depend on inference when the
validity of a proposed transaction is in
questionThus arose the practice of specifying
powers as objects, a practice rendered possible by
the fact that there is no statutory limit on the
number of objects which may be specified.
An act not authorised by the objects clause of the

VIRES
memorandum or by statute is beyond the powers
of the company and void, so that it cannot be
ratified even if all the members wish to do so. In
Ashbury Railway Carriage v. Riche (1875) L.R. 7 H.L.
653, A company was incorporated with the objects
inter alia to make and sell or lend on hire railway
carriages and wagons, and to carry on the business
of mechanical engineers and general contractors.

VIRES
The directors contracted to purchase a
concession for making a railway in Belgium. It
was held that the contract was ultra vires the
company and void so that not even the
subsequent assent of the whole body of
shareholders could ratify it.
Once the practice developed of setting out
profligate powers in the memorandum, the ultra
MAIN OBJECTS RULE

vires doctrine ceased to achieve its purpose, and in
order to counter the practice, courts developed the
main objects rule by which one of the objects could
be held to be the main object of the company and
the remainder to be merely ancillary to the main
object. In Anglo-Overseas Agencies Ltd. V. Green
[1961]1 Q.B. 1 at 8, the rule was explained thus:
where a memorandum of association expresses
MAIN OBJECTS RULE

the object of the company in a series of
paragraphs, and one paragraph, or the first two
or three paragraphs, appear to embody the
main object of the company, all other
paragraphs are treated as merely ancillary to
this main object, and as limited or controlled
thereby.
However the main objects rule of construction
MAIN OBJECTS RULE

can be excluded by an appropriate provision in the
memorandum of association. In Cotman v.
Brougham, the objects clause contained thirty sub
-clauses enabling the company to carry on almost
every kind of business including acquiring, working
and developing any licenses in particular to collect
rubber, and estates, plantations and properties, and
dealing in any stocks or in any shares of any
MAIN OBJECTS RULE

company. It concluded with a declaration that every
sub-clause should be construed as a substantive
clause and not limited or restricted by reference to
or inference from any other sub-clause or by the
name of the company, and that non of the sub
-clauses or the objects of powers therein should be
deemed subsidiary merely to the objects in the first
sub-clause. The company underwrote and had
MAIN OBJECTS RULE

alloted to it shares in an oil company, and when
the oil company was wound up the rubber
company was placed on the list of contributories. It
was held that the underwriting was intra vires the
rubber company.
The main objects rule may also be excluded where
the objects clause enables the company to carry on
any other business which in the opinion of the
MAIN OBJECTS RULE

directors may advantageously be carried out in
connection with any of its businesses or the general
business of the company: Bell Houses Ltd. v. City
Wall Properties Ltd [1966]2 Q.B. 656 (C.A.)
When the main object of a company fails for any
reason the substratum of the company is said to
have gone and it is just and equitable that the
company be wound up. In Cotman v. Brougham
SUBSTRATUM
[1918]A.C. 514, at 520 Lord Parker explained:
The question whether or not a company can be
wound up for failure of substratum is a question
of equity between a company and its
shareholders. The question whether or not a
transaction is ultra vires is a question of law
between the company and a third party.
In Re German Date Coffee Co. (1882)20 Ch.D
169
SUBSTRATUM
The objects of a company included to acquire and
use a German patent for manufacturing coffee from
dates, and to acquire and use any other invention
for that or similar purpose. The German patent was
not granted, but the company acquired a Swedish
patent for the same purpose and also made coffee
from dates without a patent in Hamburg. The
company was solvent, and the majority of the
SUBSTRATUM
shareholders wished it to continue. Two
shareholders however petitioned for a winding up
on the grounds that its objects had entirely failed. It
was held that the substratum had failed as it was
impossible to carry out the objects for which the
company was formed, and it was just and equitable
that the company be wound up. The real object was
not just to make substitute coffee from dates but to
SUBSTRATUM
work a particular German patent in Germany: Where on
the face of the memorandum you see there is a distinct
purpose which is the foundation of the company, then
although the memorandum may contain other general
words which include the doing of other objects, those
general words must be read as being ancillary to that
which the memorandum shews to be the main purpose,
and if that main purpose fails and fails altogether, then
SUBSTRATUM
the substratum of the association fails, per
Kay J. at 177.
However the company will not be wound up if the
substratum has not gone. In Re Kitson & Co. Ltd
[1946]1 All E.R. 435, the objects K. Co. were to carry
on the business of general engineers and inter alia
acquire a specified existing business. Having
acquired the existing business K. Co. later sold it.
SUBSTRATUM
K Co. intended to continue with the business of
general engineers and to buy another existing
business. Certain shareholders petitioned for a
winding up, alleging that the substratum of K.
Co. had gone. It was held that since the main
object was to carry on an engineering business
of a general nature, the substratum had not
gone.
ULTRA VIRES IN THE WIDER

SENSE
In Mahony v. East Holyford Mining Co. (1875)
L.R.7H.L. 869 at 893 Lord Hatherley said that person
dealing with the company even if they do not have
actual notice of the companys objects because
they have not inspected the memorandum, have
constructive notice of the powers as they are
deemed to know them since the memorandum like
most documents registered with the Registrar of

SENSE
companies is open to public inspection and could
have been inspected. Accordingly if they make a
contract which is ultra vires the company, they
cannot enforce it. In Re Jon Beauforte (London) Ltd
[1953]Ch. 131 the company authorised by its
memorandum to carry on business as costumiers
and gown makers, started the business of making
veneered panels. Builders were employed to build a

SENSE
factory, suppliers sold veneers and coke merchants
sold coke. Correspondence showed that the coke
suppliers had actual notice that the business being
carried on and for which coke was required was
that of veneered panel manufacturers, and they
had constructive notice of the contents of the
memorandum, and hence that the transaction was
ultra vires the company. It was held that they could

SENSE
not prove their debt in the companys liquidation.
The contract would however not have been void if
the coke merchant had not had clear notice of the
veneered panels business since coke may be used
for other businesses such as costumiers, and thus
the merchants could not have discovered from the
memorandum alone the ultra vires nature of the
transaction. Accordingly if a person dealing with a

SENSE
company enters into a contract which could come
within the objects clause but in fact does not, he is
only subject to the ultra vires rule if he knew that
the goods supplied under the contract were not in
fact being used for a purpose within that clause.
This type of ultra vires cases have been described as
being ultra vires in the wider sense: Rolled Steel
Ltd v. British Steel Corpn [1982]2 W.L.R. 715, 734.
ULTRA VIRES IN THE NARROW

SENSE
Such cases are distinguishable from ultra vires in
the narrow sense where the activities are
patently outside the objects clause such as the
supply of veneers to a theatrical costumier. In
this sense the contracts are caught by the ultra
vires doctrine even if the supplier had no actual
knowledge because he is bound by his
constructive notice of he objects clause.
ALTERATION OF OBJECTS
If a company wished to do something ultra vires it
would usually alter its objects by special resolution
so that the transaction will be intra vires for the
following reasons: 1. to carry on its business more
economically or efficiently; 2. to attain its main
purpose by new or improved means; 3. to enlarge
or change the local area of its operation; 4. to carry
on some business which under existing
ALTERATION OF OBJECTS
circumstances may conveniently or advantageously
be combined with the business of the company
(including requiring a change of name); 5. to restrict
or abandon any of the objects specified in the
memorandum; 6. to sell or dispose of the whole or
any part of the undertaking of the company; and 7.
to amalgamate with any other company or body
of persons.
COMPANIES ACT 2005: 1.

COMPANIES FULL LEGAL CAPACITY
The Companies Act 2005 section 28 now
provides that unless the articles of a company
specifically restrict the objects of the company,
its objects are unrestricted. It is important to
note that in the Act, the objects clauses are
contained in the companys articles (if they are
included at all). Section 26 provides that
provisions that were previously contained in a
2. PROTECTION OF THIRD PARTIES

companys memorandum of association except
those specified to be contained therein by section
12 become provisions of the companys articles.
The section was intended to confer on companies
full legal capacity of a natural person.
In addition, section 33 provides that the validity of
an act or omission of a company may not be called
into question on the ground of lack of capacity
3. STATUTORY OUSTER OF CONSTITUTIONAL

LIMITATIONS ON DIRECTORS POWERS
because of a provision in the constitution of the
company. The section was intended to ensure
that a third party dealing with a company should
not be disadvantaged by the possibility that the
company was acting beyond its capacity.
Section 34 (1) provides that the power of the
directors to bind the company, or authorise
others to do so, is free of any limitation
STATUTORY OUSTER OF CONSTITUTIONAL

contained in the companys constitution in favour of
a person dealing with a company in good faith. A
person deals with a company if he is a party to a
transaction or other act to which the company is a
party: s. 34(2). Such a person dealing with a
company is not bound to enquire as to any
limitation on the powers of the directors to bind the
company or to authorise others to do so, and is

presumed to have acted in good faith unless the
contrary is proved. In Smith v. Henniker-Major and
Co. [2002]EWCA Civ. 762, the chairman of a
company sought to rely on a similar provision in the
English CA to validate a resolution passed at the
meeting, attended only by himself, to assign to
himself certain causes of action of the company.
The chairman believed he had power under the

companys articles to act alone, but in fact the
meeting was inquorate since the articles provided
that the quorum for a board meeting was two. The
majority of the judges in the CA held that he could
not bring himself within the scope of person
dealing
with the company since he was not simply a
director dealing with the company; he was the
chairman with the duty to ensure that the

constitution was properly applied. In EIC Services
Ltd v. Phipps [2004]EWCA Civ 1069 the Court of
Appeal held that shareholder receiving a bonus
share was not a person dealing with a company
within the meaning of a similar provision, and so
the share issue was void as it had not been formally
authorised by the members.
In TCB Ltd v. Gray [1986]Ch 621 affd on other

grounds [1987]Ch 458, G was sued on a guarantee
he had given to the Plaintiff TCB to secure the
indebtedness of a company called Link. The
debenture evidencing Links debt had been signed
by one Rowan purporting to act as Grays attorney,
but Links articles required a director to sign
personally. The court ruled that TCB, which acted
on the debenture in good faith was protected. To

the argument that TCB did not act in good faith
since it was put on inquiry by the unusual
manner in which the debenture had been
executed, the Court held that it is impossible to
establish lack of good faith within the meaning
of the sub-section solely by alleging that
inquiries ought to have been made which the
second part of the subsection says need not be

made. Moreover, transactions which a company
purports to enter into are deemed to be validly
entered into.
The person is also not to be regarded as having
acted in bad faith only because the person knew
that a particular act is beyond the powers of the
directors under the constitution of the
company: s. 34(2)(b)(iii).

The limitations on the directors powers under
the
companys constitution include limitations
deriving from a resolution of the company or
any class of shareholders of the company, and
an agreement between the members of the
company or any class of shareholders of the
company.
ULTRA VIRES FOR INTERNAL

PURPOSE
Section 34(4) preserves the right of a member of
the company to bring proceedings to restrain the
doing of an act beyond the powers of the directors,
although such proceedings may not be brought in
respect of an act done in fulfillment of a legal
obligation arising from a previous act of the
company. Similarly, by section 34(5), the liability
incurred by the directors, or by any other person

PURPOSE
because of exceeding their powers is not affected.
In effect, section 34 (4) and (5) have preserved the
ultra vires doctrine for internal purposes. Thus the
abolition of the traditional connection between the
companys objects clause and its capacity does not
mean that those acting on behalf of the company
have a to do as they wish in the companys name. A
member has a right to seek an injunction to prevent

PURPOSE
the company from entering into what would
have been an ultra vires transaction. Directors
must also observe any limitations on their
powers flowing from the companys
constitution, and will be liable to the company
for any breaches. In pursuing the claim against
the directors the company will have to prove
that its constitution prohibited the directors

PURPOSE
actions, and that will involve construing the objects
clause. Some powers may be construed restrictively
as incidental powers. In Re Introductions Ltd,
[1970]Ch 199 the dispute concerned the validity of
a secured loan where the company was carrying on
the business of pig farming which was ultra vires.
The bank argued that the companys objects
included the power to borrow, since the objects

PURPOSE
made the power to borrow an independent object,
by a clause which provided that each of the
proceeding sub-clauses shall be construed
independently of and shall be in no way be limited
by reference to any other sub-clauses and the
objects set out in each sub-clause are independent
objects of the company. The court held that
borrowing cannot be exercised in the air, since it is

PURPOSE
not an end in itself, and must be for
some
purpose of the company. Thus the subclause on
borrowing must be construed as a
power, which
is exercisable for a purpose within the
companys objects. In this case the
borrowing
was not for a legitimate purpose of the

PURPOSE
conferred expressly or impliedly by the companys
constitution is not beyond the companys capacity
by reason of the fact that the directors entered into
it for some improper purpose. Thus in Rolled Steel
Products (Holdings) Ltd v. British Steel Corpn [1986]
Ch 246, Browne-Wilkinson LJ suggested that Re
Introductions was not a decision relating to ultra
vires in the strict sense: it is an example of a case in

PURPOSE
which a third party has entered into a transaction
with a company with actual notice that the
transaction was an abuse of power and accordingly
could not enforce the transaction against the
company.
The judgment in Rolled Steel also refers throughout
to ratification by the unanimous consent of all the
shareholders where the transaction is an abuse of

PURPOSE
corporate powers. Browne-Wilkinson, LJ stated,
Only if the question of ratification by all the
shareholders arises will it be material to consider
whether the transaction is beyond the capacity of
the company since it is established that, although
all the shareholders can ratify a transaction within
the companys capacity, they cannot ratify a
transaction falling outside the objects. The

PURPOSE
distinction is thus important for the
issue of
directors abuse of corporate power.
DISCUSSION QUESTION
Mutei Coffee Estates Company Limited was formed
in 1973. The members of the company comprise
mainly of coffee farmers from Muranga, Kirinyaga
and Nyeri counties. Its objects clause provides that
it will operate coffee estates, sell through wholesale
or otherwise coffee seeds and other by-products of
coffee, process and add value to coffee and other
Coffee products, acquire land for purposes of its
DISCUSSION QUESTION
business and sell the same, and
undertake such
other business as the directors may
deem
Profitable and convenient.
In the late 1970s and 1980s, the
company was
highly profitable as a result of the
coffee boom.
However, from the year 2000, as a
DISCUSSION QUESTION
losses. Its coffee business has now nearly collapsed.
Recently, the shareholders passed a resolution that
the company should subdivide and sell to its
members at market rates several of its vast estates,
and focus on processing coffee from farmers in its
factories at a fee.
Two shareholders want the company wound up on
the grounds that the company is no longer able
DISCUSSION QUESTION
to undertake its core functions, and
has
deviated to other unrelated activities.
Examine the merits of the two
shareholders
contention.
RULE IN TURQUANDS CASE

In Ernest v. Nicholls (1857)6 HL Cas 401, the House
of Lords held that a person dealing with a company
should be deemed to have notice of that companys
registered constitutional documents. This is
because once the memorandum and articles of a
company are registered they become public
documents. It follows that such a person dealing
with the company, even if he does not have actual

notice, has constructive notice of the contents of
the public documents of the company such as the
memorandum and articles of association, special
resolutions and list of directors because they are
open for public inspection at the Companies
Registration Office.
Section 34(2) of the Companies Act, 2015 provides
that a person dealing with a company is not bound

to enquire as to any limitation on the powers of the
directors to bind the company or to authorise
others to do so. In addition, section the
presumptions in section 34(1) apply to all those
dealing with the company in good faith, and a
person is not to be regarded as acting in bad faith
by reason only of his knowing that an act is beyond
the powers of the directors under the companys

constitution. These provisions effectively abolish
the doctrine of constructive notice of the contents
of the companys registered documents, and
imposes no penalty for failure to take time to
search.
The constructive notice doctrine developed
contemporaneously with the indoor management
or internal management rule which to an extent

mitigated its effects. In Royal British Bank v.
Turquand (1856)6 El. & Bl. 327; 119 E.R. 886, the
Royal British Bank sued Turquand as the liquidator
of a mining and railway company for the repayment
of money borrowed on a bond signed by the
companys two directors and the secretary under
the company seal. The company argued
unsuccessfully that the bond was not valid because

under its constitution the directors had power to
borrow only such sums as had been authorised by
an ordinary resolution of the company, and in this
case no such resolution had been passed. It was
held that the bond was binding on the company as
the lenders were entitled to assume that a
resolution authorising the borrowing had been
passed: the replication shews a

resolution, passed at a general meeting, authorising
the directors to borrow on bond such sums for such
periods as and at such rates of interest as they
might deem expedientbut the resolution does not
otherwise define the amount to be borrowed
parties dealing with [these companies] are bound
to read the statute and the deed of settlement. But
they are not bound to do more. And the party here,

on reading the deed of settlement,
would find,
not a prohibition from borrowing, but a
permission to do so on certain
conditions.
Finding that the authority might be
made
complete by a resolution, he would
have a right
to infer the fact of a resolution

The companies Act provides that the acts of a
director or manager are valid notwithstanding
any defect that may afterwards be discovered in
his appointment or qualification, effectively
validating the acts of a director who has not
been validly appointed because there was some
irregularity in his appointment. Thus an outsider
dealing with the company or a member is

entitled to assume that a person who
appears to
be a duly appointed director is in fact
so. The
principle is consistent with ostensible
or
apparent authority in the law of
agency, so that
an outsider may be protected where
an

a representation that he had authority made by
the
board of directors or such a representation
contained in the companys public documents. If a
person acts on behalf of a company without actual
authority the company, usually the board of
directors may ratify the contract in which case the
company will be bound. Further if in such a case
the

company does not ratify then it will still be bound if
the other party can prove:1. that he was induced to
make the contract by the agent being held out as
occupying a certain position in the company; 2. that
the representation, which is usually by conduct was
made by the persons with actual authority to
manage the company generally or in respect of the
matters to which the contract relates, who are

usually the board of directors; and 3. that the
contract was one which a person in the position
which the agent was held out as occupying would
usually have actual authority to make. In Freeman &
Lockyer v. Buckhurst Park Properties (Mangal) Ltd
[1964]2 QB 480 (C.A.) the articles of a company
formed to purchase and resell real estate
empowered the directors to appoint one of their

body managing director. K., a director was never
appointed managing director but, to the knowledge
of the board, he acted as such. On behalf of the
company he instructed architects to do certain
work in connection with the estate. It was held that
the company was bound by the contract and liable
for the architects fees. K had apparent authority
because he had been held out by the board as

managing director to do what a managing director
would usually be authorised to do on behalf of the
company, and his act was within the usual authority
of a managing director. Accordingly the Plaintiff
could assume that he had been properly appointed.
According to Diplock LJ at 505, 506, It must be
shown: (1) that a representation that the agent had
authority to enter on behalf of the company into

the contract of the kind sought to be enforced was
made to the contractor; (2) that such
representation was made by a person or persons
who had actual authority to manage the business
of the company either generally or in respect of
those matters to which the contract relates; (3) that
he (the contractor) was induced by such
representation to enter into the contract, that is,

that he in fact relied upon it; and (4) that under the
memorandum or articles of association the
company was not deprived of the capacity to enter
into a contract of the kind sought to be enforced or
to delegate authority to enter into a contract of that
kind to the agent. Requirement (4) above has now
been reversed by section 33 of the Companies Act
2015. In Mahoney v East Holyford Mining Co.

(1875)L.R.H.L. 869 the persons who signed the
articles of a company, and who under the articles
were entitled to appoint directors, treated some of
themselves as directors although there was no
proper appointment. The articles provided that
cheques should be signed as directed by the board.
The person acting as secretary informed the
companys bank that the board had resolved that

cheques should be signed by two of three named
directors and countersigned by the secretary. The
bank acted on the communication and honoured
cheques so signed. It was held that the bank was
entitled to honour the cheques and was not liable
to refund the money paid. The rule in Turquands
case does not apply, and thus the company is not
bound in the following cases: 1. where the outsider

knew of the irregularity or lack of actual authority.
In Howard v. Patent Ivory Manufacturing Co. (1888)
38 Ch.D 156, the articles of a company allowed the
directors to borrow up to 1,000 on behalf of the
company without the consent of a general meeting
and further money with such consent. The directors
themselves lent 3,500 to the company without
such consent, and took debentures. It was held that

the company was liable, and the debentures were
valid, only to the extent of 1,000. 2. Where the
outsider purported to act as a director in the
transaction, that is to act for and on behalf of the
company in the transaction. 3. Where there are
suspicious circumstances putting the outsider on
inquiry. In A.L. Underwood Ltd v. Bank of Liverpool
and Martins [1924]1 K.B. 775 (C.A.) the sole

director and main shareholder in a company paid
cheques drawn in favour of the company, into his
own account. It was held that the bank was put on
inquiry and not entitled to rely on his ostensible
authority, nor on the rule in Turquands case. 4.
Where a document is forged so as to purport to be
the companys document unless it is held out as
genuine by an officer of the company acting within

the scope of his authority: See Ruben v. Great
Fingall Consolidated [1906] AC 439. In Lovett v.
Carson Country Homes [2009] EWHC 1143
administrators were appointed to Carson Homes
by Barclays Bank pursuant to powers conferred
by a debenture. Carter, a director and shareholder
asserted that his signature had been forged by the
co-director, whose signature was however genuine,

and that the debenture was therefore a nullity. The
judge found that Carters signature was indeed a
forgery and that the co-director had no actual
authority to apply his signature in this way, but
there had been a practice of this, sometimes
authorised or at least ratified by Carter after the
event. He further decided that both the directors
were authorised signatories for the purpose of the

equivalent of section 37 and the bank was a
purchaser. The court held that the co-director had
been clothed with ostensible authority to warrant
to the Bank that all formalities relating to
approval
and execution of the debenture had been
complied
with, and that the signatures could be relied upon
as genuine.
PROSPECTUSES
Section 2 of the Companies Act defines a
prospectus as any prospectus, notice circular,
advertisement or other invitation, offering to the
public for subscription or purchase any shares or
debentures of a company.
A prospectus is therefore any document used to
induce the public to purchase shares or debentures
in a company. It is only in a public company that the
PROSPECTUSES
invitation can be made. A private company raises its
capital privately. The public for purposes of a
prospectus is not restricted to the public at large
but includes any section of the public, whether
selected as members or debenture holders of the
company or as clients of the person issuing the
prospectus or in any manner. In Re South of
England Natural Gas Co. Ltd [1911] only 3000
PROSPECTUSES
copies of a document which offered shares for
Subscription, and which was headed for
private
circulation only were distributed to the
shareholders of a number of gas companies. It
was held, that there was an offer of shares to
the public.
However an offer or invitation is not treated as
made to the public if it can be regarded as not
PROSPECTUSES
calculated to result in the shares or debentures
becoming available for subscription or purchase by
persons who have not received the offer or
invitation or if it is otherwise a domestic concern of
the persons making and receiving it. In Nash
v. Lynde [1929] A.C. 158, a prospectus was sent by
N., the managing director of a company, to a co
-director. The co-director sent it to a client, who
PROSPECTUSES
sent it to a brother in law, L. The intention was to
induce L to become a director, which he did and he
also took some shares in the company. It was held
that the prospectus had not been issued.
An offer by a private company to existing members
of the company or to existing employees under an
employees share scheme is a domestic concern of
the persons making and receiving the offer.
PROSPECTUSES
In the Jenkins Report(1962) Cmnd 1749 noted with
respect to the expression subscription or purchase,
it is generally accepted that subscription or
purchase involves the payment of money and
accordingly that a document containing an offer of
securities for a consideration other than cash (e.g.
shares) cannot be a prospectus although it may be
a circular
CONTENTS OF PROSPECTUS
Section 40 of the Companies Act requires that it
must include all matters which Part I of the Third
Schedule to the Companies Act specifies such as
names, occupations and addresses of directors,
qualification and remuneration of directors,
minumum subscription, the amount payable on
allotment of each share, particulars of the vendors
of any property to be purchased and the
CONTENTS OF PROSPECTUS
consideration to be paid, preliminary expenses of
the issue, the rights attached to various classes of
shares and the dates of, parties to and the general
nature of every material contract entered into. The
prospectus must also include the reports by the
companys auditors setting out the profits and
losses, rates of dividend, assets and liabilites, etc as
specified in Part II of the Third Schedule to the Act.
ESSENTIAL REQUIREMENTS
Every prospectus must be dated, and that date is,
unless proved otherwise, the date of publication of
the prospectus.
Section 39 provides that no prospectus may be
issued by or on behalf of a company unless before
the date of publication a copy is delivered to the
Registrar. The prospectus must state on its face that
a copy has been delivered to the Registrar.
FORM OF APPLICATION
Generally it is unlawful to issue any form of
application for shares or debentures unless the
form is accompanied by a prospectus containing
the Third Schedule matters and reports. The
exceptions are; where the form of application is
issued to existing shareholders or debenture
-holders of the company, or relates to shares or
debentures similar to shares or debentures
FORM OF APPLICATION
previously issued and for the time being
listed
on a prescribed stock exchange; or the form is
issued in connection with an invitation to a
person to agree to underwrite the shares or
debentures; or the form is issued in relation to
shares or debentures which are not offered to
the public that it need not comply with the
provisions of the Third Schedule: (S. 40(6)) A
FORM OF APPLICATION
person who underwrites shares usually
agrees,
in return for a commission, to take up a
specified number of shares if the public fail to
apply for them. Such a person will have
before
he agrees to underwrite, all the information
he
needs about the company.
LIABILITY
Since a company is liable for the misrepresentation
of its directors and other agents within the scope of
their authority, a person induced to subscribe for
shares or debentures in a company by a
misrepresentation may have a remedy against the
company or the individuals responsible.
The main remedy against the company is rescission
of the contract with or without an action for
LIABILITY
damages.
A
shareholder
cannot
recover
damages for fraud against the
company without
rescission because that would be
inconsistent
with the contract between him and the
other
shareholders. The same is true of a
claim to
LIABILITY
against the individuals responsible are
compensation for negligent representation under
section 41 and damages for fraud.
Section 41 provides that a promoter, director at
the
time or a person authorising the issue of a
prospectus is prima facie liable to pay
compensation to those who subscribe on the
faith
of the prospectus for the loss they sustain by
LIABILITY
reason of any untrue statement contained therein.
The expression promoter means a promoter who
was party to the preparation of the relevant portion
of the prospectus. Experts who give reports for
inclusion in a prospectus are also liable for the
untrue statement in their report, but not for any
other part of the prospectus.
It may also be possible to claim negligent
LIABILITY
misrepresentation under the principle in Hedley
Byrne & Co. Ltd v. Heller & Partners Ltd [1964]A.C.
465 which is that a negligent, although honest,
misrepresentation, spoken or written, may give
rise
to an action for damages for financial loss caused
thereby. The law places a duty of care where one
party seeks information or advice from another
party, trusts the other to exercise due care, it is
LIABILITY
reasonable for him to do so, the other knows or
ought to know that reliance is being placed on
his skill and judgment or ability to make careful
inquiry and he does not expressly disclaim
responsibility for his representation.
With respect to damages for fraud, liability will
arise if a prospectus is issued which contains a
false statement which the person issuing does
LIABILITY
not believe to be true with the
intention that
the other person should act upon it to
his
detriment.
SHAREHOLDERS AS AN ORGAN OF
THE COMPANY
The Companies Act recognises a limited but
nevertheless significant role for the companys
members. It gives members certain rights and
reserves to them certain important prerogatives to
the exclusion of the directors. This is done when
there is a substantial risk associated with leaving
power in the hands of the directors.
Thus members, not directors must approve certain
THE COMPANY
types of contracts between the company and
its
directors, members have the right to decide
upon changes to the constitution of the
company, and to the rights attached to their
shares. Members also have the right to remove
the directors. And when wrongs have been
committed against the company but the
directors, perhaps because of self interest are
THE COMPANY
not inclined to pursue the claims, members can
sometimes pursue these claims and obtain a
remedy for the company.
Beyond the rights bestowed by the Act additional
rights of control are derived from the articles of
association itself. This is the agreement that divides
a companys power between the directors and the
members. It sets out the constitutional framework
THE COMPANY
of the company. Companies are free to draft their
own articles, but the Companies Act 2015 provides
default sets of Model Articles of Association for
different types of companies which will
automatically apply to companies that do not
register their own articles, and will in any event
apply to the extent that any registered articles do
not exclude or modify the relevant Model Articles.
THE COMPANY
The basic rule in the Model Articles is that the
directors, not the members, will manage the
business of the company, subject to any exceptions
in the Act. However, the shareholders may by
special resolution direct the directors to take, or
refrain from taking specified action, although no
such special resolution invalidates anything which
the directors have done before the passing of the
THE COMPANY
resolution.
The members and the directors constitute the
organs of the company: they have constitutional
authority to act as the company rather than
merely to represent the company as its agent.
Where the general management of the company
is
vested in the directors, the members have no
power by ordinary resolution to give directions to
THE COMPANY
the board or to overrule its business decisions. In
Automatic Self-Cleansing Filter Syndicate Co. Ltd. V.
Cuninghame [1906]2 Ch 34 (CA), article 96 of the
companys articles of association vested in the
directors the management of the business and the
control of the company, and article 91 specifically
empowered them to sell any property of the
company on such terms and conditions as they
THE COMPANY
might think fit. At a general meeting a
resolution
was passed directing the board to sell the
companys undertaking to a new company
formed for the purpose, but the directors
disapproved of the proposed terms and
declined
to carry out the sale. It was held that the
shareholders had no say in the matter, which
was for the board alone to decide.
THE COMPANY
In Quin & Axtens Ltd [1909] 1 Ch. 311 (CA) the
articles contained an article like Table A, article
80,
and also provided that no resolution of the
directors to acquire or dispose of premises was
to
be valid unless neither A nor B (the managing
directors) dissented. The directors resolved to
acquire premises. B dissented. An ordinary
resolution to the same effect as the board
THE COMPANY
resolution was passed at an extraordinary general
meeting of the company. It was held that the
ordinary resolution was inconsistent with the
articles and the company was restrained from
acting on it: [Approved by the House of Lords sub
nom without the Respondents even being called in
Quin & Axtens Ltd v. Salmon [1909] AC 442]. The
directors powers can however be altered for the
THE COMPANY
future by an alteration of the articles in the proper
way, but the articles cannot be altered with
retrospective effect. If the directors are unable to
exercise one of their powers because of a deadlock
on the board or because their number has fallen
below the number required for a quorum, the
company in general meeting may exercise that
power. The company in general meeting may
THE COMPANY
however act if there is no board competent or able
to exercise the powers conferred upon it such as
because of a deadlock. In Barron v. Potter [1914] 1
Ch. 895, the articles gave the board of directors
power to appoint an additional director and, owing
to differences between the directors, no board
meeting could be held for the purpose. Held, the
company retained the power to appoint additional
THE COMPANY
directors in general meeting. The position is
similar where the company has no directors, per
Lord Halisham in Alexander Ward & Co. Ltd v.
Samyang Navigation Co. Ltd 1975 S.C. (H.L.) 26
at 47.
The ruling in Cuninghames case does not apply to
decisions outside the companys business and its
management. Thus in Re Emmadart Ltd [1979] Ch
THE COMPANY
540, it was held that directors had no power
under such an article to resolve to put the
company into liquidation.
General meetings, which all the members are
entitled to attend, and class meetings which
only one class of members is entitled to attend
is assumed to be the preferred mode of decision
making in public companies: s. 255(2).
DECISION MAKING IN
COMPANIES
By contrast, section 255(1) assumes that written
resolutions will be the normal mode for private
companies. Most corporate decisions can be
taken by simple majority of not less than fifty
percent (ss.256(1)) with each member having
one vote per share unless the articles provides
otherwise through ordinary resolution. On
matters where there is added risk however, a
DECISION MAKING IN
COMPANIES
special majority of not less than seventy-five
percent is required (s. 257(1). Such decisions
include amending the companys articles, disapply
members preemption rights when shares are
issued, reduce share capital, and resolve that the
company be wound up. Ordinary and special
majorities are assessed differently depending on
whether decisions are made by written resolution
DECISION MAKING IN
COMPANIES
or at a meeting. Decisions taken by written
resolution must be passed by the required
percentage of all members with voting rights,
while decisions taken at meetings need only be
passed by the appropriate percentage of those
present and voting either on a show of hands or
by poll, whether in person, by proxy or in
advance.
INFORMAL DECISION MAKING: THE

DUOMATIC PRINCIPLE
Members may make decisions formally by written
resolutions or by vote in general meetings.
However informal assent is also possible. The
informal unanimous assent rule provides that a
formal general meeting or written resolution is
unnecessary if all the members entitled to vote on
the matter informally assent to the transaction. A
company is bound in a matter intra vires by the

DUOMATIC PRINCIPLE
unanimous but informal agreement of its voting
members. In Re Duomatic Ltd [1969]2 Ch 365, the
liquidator of Duomatic claimed repayment of
remuneration from one of the companys directors
on the ground that the payments were not formally
authorised by the company in general meeting. The
court held that where it can be shown that all the
shareholders who have the right to vote to attend

DUOMATIC PRINCIPLE
and vote at a general meeting of the company
assent to some matter which a general meeting
of the company could carry into effect, the
assent is as binding as a resolution in general
meeting.
What type of informal consent is sufficient to
trigger the Duomatic principle remains topical.
In Schoffield v. Schoffield [2011] EWCA Civ 103

DUOMATIC PRINCIPLE
N representing the corporate holder of 99.9% of the
shares in the company unsuccessfully argued that
he and his son who held the remaining shares had
agreed informally to treat as valid and effective a
meeting which was called without the 14 days
notice required by the Companies Act and at which
amongst other matters, the son was dismissed as
director and N was appointed sole director.

DUOMATIC PRINCIPLE
The court held that an unqualified agreement by
the son had not been objectively established.
The informal consent of the members must be
unanimous. In Re DJan of London Ltd [1994] 1
BCLC 561 (Ch), the principal shareholder held
99% of the shares and his wife 1%. He could not
argue that there had been a unanimous informal
members resolution ratifying his negligence

DUOMATIC PRINCIPLE
because although his wife was likely to have
supported him, the issue was never in fact raised.
The Duomatic principle not only applies to
decisions which formally require special and
extraordinary resolutions, but also to decisions
formally required to be taken by a group or class of
shareholders, and to decisions by members to
ratify breaches of directors duties. In Shahar v.

DUOMATIC PRINCIPLE
Tsitsekkos [2004] EWHC 2659 (Ch) the principle
was extended so that the agreement of the
beneficial owner of the shares is effective where
the trustee can be compelled to vote in
accordance with the beneficial owners wishes.
However if shares are held for more than one
beneficial owner jointly the assent of one of a
number of these owners will not suffice.

DUOMATIC PRINCIPLE
Similarly where a person holds some shares for
himself and other shares as a trustee or
executor, his assent will prima facie apply only in
relation to his shares, and not the shares he
holds on trust for a beneficial owner unless he
intends or purports to be making a decision in
relation to those shares: Rolfe v. Rolfe [2010]
EWHC 244.

DUOMATIC PRINCIPLE
There are limits to the application of the principle.
In Re New Cedos Engineering Co. Ltd [1994] 1 BCLC
797 it was emphasised that the Duomatic principle
cannot be invoked in order to enable something to
be done informally which those concerned would
not be competent to do formally at a general
meeting or in other specified formal manner. In the
case the number of registered members had

DUOMATIC PRINCIPLE
reduced to one, so that no meeting complying
with the companys articles could effectively be
held. It was ruled that nothing done informally
by this sole member was equivalent to a
decision of the members reached at a meeting.
Similarly in Re Oceanrose Investments Ltd [2008]
EWHC 3475 (Ch) approval by the sole member
of a UK company to the terms of a proposed

DUOMATIC PRINCIPLE
cross-border merger did not over-come
the
requirement for meeting under reg. 13
of the
Companies (Cross-Border Mergers)
Regulations
2007.
CONTROLLING MEMBERS
DUTIES
Controlling members are members of a
company who between them possess sufficient
voting power to pass the appropriate resolution
in general meeting. In general the majority of
the company may exercise their votes to control
the company provided that they comply with
the Companies Act, and in general when voting
a shareholder may consult his own interests:
SHAREHOLDERS INTEREST
Per Megarry V-C in Estmanco (Kilner House) v.
G.L.C. [1982]1 All E.R. 437 at 444.
It was for long held that a share is a piece of
property which is to be enjoyed and exercised
for the owners advantage. Thus a shareholder
may bind himself by contract to vote in a
particular way: When a director votes as a
director for or against any particular resolution
in a directors meeting he is voting as a person
under a fiduciary duty to the company for the
proposition that the company should take a certain
course of action. When a shareholder is voting for
or against a particular resolution he is voting as a
person owing no fiduciary duty to the company and
who is exercising his own right of property, to vote
as he thinks fit. The fact that the result of the voting
at the meeting (or at a subsequent poll) will
bind the company cannot affect the position
that, in voting, he is voting simply in exercise
of
his own property rights, per Walton J. in
Northern Counties Securities Ltd v. Jackson &
Steeple Ltd [1974]1 W.L.R. 1133 at 1144.
THE MAJORITY RULE

The general rule in companies is majority rule,
whether by directors or members, although in the
latter case sometimes with the additional
protection of super majority. Majority rule applies
not only to decisions to pursue business activities,
but also to decisions not to pursue corporate
wrongdoers.
As has been seen the law normally allows
members
THE MAJORITY RULE

to treat their vote as an incident of property
which they may exercise prima facie to their
advantage. Moreover even the strict fiduciary
duties of directors do not go as far as prohibit
them altogether from acting in matters where
their own personal interests are affected by
what they do as directors, still less from
voting
as they like in their capacity as members.
MAJORITY RULE
The majority rule meant that substantial power was
placed in the hands of those who control more than
half the votes on the board or at a members
meeting. Indeed where shares were dispersed
among a large number of members, comparable
power is exercisable by persons who command less
than fifty per cent of the votes. Minority members
must, in principle, accept the decisions of the
THE MAJORITY RULE

majority and must also acknowledge that their
power is a fact of business life. In reality minority
tend not to have clout in the company.
The law must thus provides some remedies to meet
the cases in which majority power is abused in
recognition of the idea that there can be no power,
including over other peoples investment, without
corresponding responsibility. The law must thus
THE MAJORITY RULE

strike a balance between so that it does not
readily support the majority and condone unfair
and wrongful acts and decisions, or extend too
great an indulgence to the minority so that they
are able to obstruct the companys legitimate
business.
Both the legislature and judiciary have
attempted to reconcile the opposing interests.
THE MAJORITY RULE

Statutory protection is given to minorities by
formalities of several kinds including requiring a
special resolution rather than simple majority vote
in important matters such as constitutional
alteration; requiring courts sanction in matters like
reduction of capital or scheme of arrangement; and
giving dissentients a right to apply to court to have
a resolution cancelled where for example there is
THE MAJORITY RULE

variation of class rights, and sometimes
empowering the court to order alternatively that
they be bought out. Some checks are imposed on
the use of these measures by safeguards such as
that dissentients must hold at least 15% in value of
share capital.
Other provisions give members direct access to the
courts, for example the right to petition to have the
THE MAJORITY RULE

company compulsorily wound up, and the right
to seek relief for unfairly prejudicial conduct.
Courts also developed rules to curb abuse of
power by those in control such as the fiduciary
duties of directors. Majority members are also
bound to act bona fide and in the common
interest in the alteration of articles and variation
of class rights.
THE MAJORITY RULE

Apart from these well known limitations, a
significant problem for members seeking to cure
maladministration of the company by legal
action was that courts resistance to such claims
on several grounds: avoiding multiplicity of suits,
majority rule should prevail, and courts cannot
adjudicate on matters of business policy but on
matters of law.
FOSS V. HARBOTTLE
The main judicial instrument by which the policy of
non-intervention was maintained was the rule in
Foss v. Harbottle. Minority members who
complained of a wrong or irregularity found this a
formidable, and perhaps insurmountable barrier to
their quest for justice, even where they had a real
and well founded grievance. The main criticism
against the rule was that it was complex, and
FOSS V. HARBOTTLE
it was considered unjust to recognise a substantive
right but deny a remedy on procedural grounds.
The rule provided that subject to certain limited
exceptions; first, the proper claimant in an action
for a wrong alleged to have been done to the
company by anyone, whether director, member or
outsider, or to recover money or damages alleged
to be due to it is prima facie the company itself (the
THE RULE IN FOSS V

HARBOTTLE
proper claimant principle); and second, if the
alleged wrong is a matter which it is competent
for the company to settle itself (the internal
management principle) or, in the case of an
irregularity to ratify or condone by its own
internal procedure (the irregularity principle),
then no individual member may bring action.
This is because a general meeting may be held
THE RULE IN FOSS V

HARBOTTLE
so that the members may by ordinary
resolution decide whether to sue or
not. In Foss
v. Harbottle (1843)2 Hare 461; 67 E.R.
189, two
members took proceedings against the
companys five directors and others
alleging that
the property of the company had been
THE RULE IN FOSS V

HARBOTTLE
property. They asked that the Defendants
should be held accountable to the company, and
also sought appointment of a receiver. It was
held that it was incompetent for the Plaintiffs to
bring such proceedings, the sole right to do so
being that of the company in its corporate
character.
THE RULE IN FOSS V

HARBOTTLE
In Pavlides v. Jensen [1956] Ch 565 a minority
shareholder sought to bring an action on behalf of
himself and all other shareholders, save three who
were directors, against those directors and the
company for damages, alleging that the directors
had been negligent in selling an asset of the
company for less than its market value. Most of the
shares in the company were held by another
THE RULE IN FOSS V

HARBOTTLE
company the directors of which were also the
directors of the first company. It was held that
since
the sale of the mine was intra vires the company
and there was no allegation of fraud by the
directors or appropriation of assets of the company
by the majority shareholders in fraud of the
minority, the action was not maintainable. It was
open to the company, on the resolution of a
RATIONALE FOR RULE

majority of the shareholders, to sell the mine at a
price decided by the company in that manner, and
it was open to the company by a vote of the
majority to decide that, if the directors by their
negligence had sold the mine at an undervalue,
proceedings should not be taken by the
company against the directors.
The rule avoids multiplicity of suits. The reason for
RATIONALE FOR RULE IN FOSS V.

HARBOTTLE
the last part of the rule is that litigation at the suit
of a minority of the members is futile if the majority
do not wish it. In (1875)1 Ch.D. 13 at 25, Mellish L.J.
MacDougall v. Gardiner stated, If the thing
complained of is a thing which in substance the
majority of the company are entitled to do, or if
something has been done irregularly which the
majority of the company are entitled to do regularly

HARBOTTLE
, or if something has been done illegally which the
majority of the company are entitled to do legally,
there can be no use in having litigation about it, the
ultimate end of which is only that a meeting has to
be called, and then ultimately the majority gets its
wishes.
The court will thus not interfere with irregularities
at meetings at the instance of a shareholder. In

HARBOTTLE
MacDougall v. Gardiner (1875)1 Ch. D. 13 (C.A.), the
articles empowered the chairman, with the consent
of the meeting, to adjourn a meeting, and also
provided for taking a poll if demanded by five
shareholders. The adjournment was moved, and
declared by the chairman to be carried; a poll was
then demanded and refused by the chairman. A
shareholder suing on behalf of himself and all

HARBOTTLE
other shareholders except those who were
directors brought an action against the directors
and the company for a declaration that the
chairmans conduct was illegal and an injunction to
restrain the directors from carrying out certain
arrangements without the shareholders approval.
It was held that the action could not be brought by
a shareholder; if the chairman was wrong, the

HARBOTTLE
company alone could sue. In Devlin v. Slough
Estates Ltd, The Times, June 16, 1982 it was held
that the court will not grant a declaration that
the accounts are not in the correct form at the
instance of a shareholder.
The rule is subject to a number of exceptions, in
which cases a minority of shareholders, or even
an individual shareholder, may bring a minority
FORM OF ACTION
shareholders action, i.e. the minority shareholders
sue on behalf of themselves and all other
shareholders except those who are defendants, and
may join the company as a defendant. The directors
are usually defendants. This action is brought
instead of an action in the name of the company.
Lord Denning M.R. in Wallersteiner v. Moir (No. 2)
[1975] Q.B. 373 at 390 stated, The form of the
FORM OF ACTION
action is always A.B. (a minority shareholder) on
behalf of himself and all other shareholders of
the company against the wrongdoing directors
and the company.
This type of action is a derivative action, i.e. the
right to sue derives from that of the company.
The shareholders as such have no such right. If
their own personal rights are being infringed
EXCEPTIONS OF RULE (LIMITS ON

SHAREHOLDERS INTEREST): 1. FRAUD ON
THE MINORITY
they should bring a representative action.
The exceptions are: first, where the wrong
complained of is a fraud on the minority by the
majority and the wrongdoers are in control of the
Company. The wrongdoers control the majority of
the shares in the company, and will not permit an
action to be brought in the name of the company. If
the aggrieved minority could not bring a minority
LIMITS ON SHAREHOLDERS
INTEREST: FRAUD ON THE MINORITY
shareholders action in this case their grievance
would never reach the courts. Where an action is
brought under this exception the wrongdoers are
usually both directors and controlling shareholders.
In Cook v. Deeks [1916] 1 A.C. 554 an individual
shareholder brought an minority shareholders
action to compel the directors to account to the
company for the profits made out of the
construction contract which they took in
their own
names, and who, by their voting power,
prevented
the company itself from suing. As to the
meaning of
fraud, in Daniels v. Daniels [1978]2 All
E.R. 89 the
minority shareholders of a company were
allowed
The directors objected that since fraud had not
been alleged the action should not be allowed.
Templeman J. laid down a wider definition of
fraud for this purpose thus: If minority
shareholders can sue if there is fraud, I see no
reason why they cannot sue where the action of
the majority and the directors, though without
fraud, confers some benefit on those directors
and majority shareholders themselves.
The judge distinguished Pavlides v. Jensen on the
grounds that the directors had not benefited from
this negligence. In essence since fraud is often
impossible to prove, it may be presumed from such
obvious facts.
In Estmanco (Kilner House) Ltd v. Greater London
Council [1982]1 All E.R. 437 the majority
shareholder proposed to alter a contract it had with
company in order to deprive the minority
shareholders of certain rights. The majority
shareholder then proposed a resolution whereby
the company should not sue for breach of contract.
When the minority shareholder sought to sue on
the companys behalf the majority shareholder
argued that since it had acted bona fide for the
benefit of the company there was no fraud on
the
minority to allow such an action. Megarry V-C
refused to accept that test of fraud on the
minority as applicable for the purposes of
bringing an action. It only related to the
alteration of the companys articles. In this case
the action of the shareholder injured one
category of shareholder to the benefit of
another. Fraud in this sense is abuse of power.
The second element concerns the control by the
majority. In Prudential Assurance Co. Ltd v. Newman
Industries Ltd (No. 2) [1982]1 All E.R. 354 Vinelott J.
was prepared to extend the exception beyond
control denoting actual voting power, as appeared
to have been settled, when the alleged fraud was
committed by directors who did not exercise actual
INTEREST:
voting control but who exercised control in
practice.
The majority cannot waive a breach of a directors
fiduciary duty by approving a misappropriation by
him of the companys property which would be a
fraud on the minority: Cook v. Deeks [1916]1 A.C.
554. The same is true where there is an attempted
confirmation of a share issue made by a director in
INTEREST: FRAUD ON MINORITY
order to give him control of the company and
benefit the majority to the detriment of the
minority i.e. the general meeting cannot then
waive the directors breach of duty: Ngurli v.
McCann (1954) 90 C.L.R. 425.
Members cannot by resolution at general
meeting, expropriate the companys property.
In
Menier v. Hoopers Telegraph Works (1874) L.R.
9 Ch. App. 350 the shareholders in E Co. which
was formed with the object of constructing a
submarine telegraph, were H Co. with 3,000 shares,
M. with 2,000 and thirteen other persons with 325
between them. H Co. was to make and lay cables
for E Co. The directors of E Co., who were nominees
of H Co. and H Co. decided not to pursue an action
in which E Co. was claiming a concession to
construct the telegraph, procured the passing of a
resolution in general meeting to put E Co. into
voluntary winding up and concealed the fact that
they had agreed to end the agreement between E
Co. and H Co. so that H Co. could sell the cable to a
third company. M brought an action on behalf of
himself and the other shareholders except those
who were defendants, in which he joined E Co. as
Defendant. He claimed inter alia a declaration
that H Co. was a trustee of the resulting profit
for M and other shareholders in E Co. It was
held that M succeeded. The majority
shareholder had obtained certain advantages by
dealing with something which was the property
of the whole company.
Similarly, an alteration of the articles by special
LIMITS ON SHAREHOLDERS INTEREST:

BEST INTERESTS OF THE COMPANY
resolution in general meeting in order to enable
some members to acquire the shares of other
members must be bona fide for the benefit of the
company as a whole. Thus in Sidebottom v. Kershaw
, Leese & Co. [1920]1 Ch. 154 (CA) a private
company in which the directors held a majority of
the shares, altered its articles so as to give the
directors to power to require any shareholder who

competed with the companys business to transfer
his shares, at their fair value to nominees of the
directors. S who had a minority of the shares and
was in competition with the company, brought an
action for a declaration that the special resolution
was invalid. It was held that as a power to expel a
shareholder by buying him out was valid in the case
of original articles it could be introduced in altered

articles provided the alteration was made bona
fide for the benefit of the company as a whole.
At the same time cases such as Greenhalgh v.
Arderne Cinemas Ltd [1951] Ch. 286 (CA)
established the rule that in making any
alteration to the articles the general meeting
must act bona fide for the benefit of the
company as a whole. In the case the articles of a

private company prohibited a transfer of
shares
to a non-member so long as another member
was willing to buy them at a fair value. The
holder of the majority of the shares wished to
transfer them to a non-member, so the articles
were altered so as to permit a transfer to any
person with sanction of an ordinary
resolution. It was held that the alteration was

BEST INTERESTS OF COMPANY
bona fide and valid although the minority lost their
rights of pre-emption. (see also Shuttleworth v. Cox
Bros Ltd [1927]2 K.B. 9 (CA)). Thus Shareholders are
the best judges of their own affairs, and it is only
where it appears that some sinister motive has
operated, or that interests other than the interest
of the company has plainly prevailed, that the Court
will entertain a complaint. The test always is

whether the resolution complained of can be
held to be so oppressive and extravagant that
no reasonable man could consider it to be for the
benefit of the company. Thus controlling members
do owe a duty to the company i.e. the corporators
as a body, to act bona fide for the benefit of the
company as a whole and not to commit fraud on
the minority.
INTEREST: BEST INTERESTS OF CLASS
Similarly a class meeting of preference
shareholders sanctioning a modification of the
special rights of the preference shares must act
bona fide for the benefit of the class as a whole:
In Re Holders Investment Trust Ltd [1971]1
W.L.R. 583 a reduction of capital was to be
effected by cancelling the five percent 1
cumulative preference shares and allotting the
INTEREST: BEST INTERESTS OF CLASS
holders an equivalent amount of six percent
unsecured loan stock repayable 1985/90. The
majority of the preference shareholders who
supported the reduction, were also holders of 52
percent of the companys ordinary stock and
non-voting ordinary shares. Minority preference
shareholders opposed the reduction. The court
refused to confirm it. The majority preference
INTEREST: BEST INTEREST OF CLASS
shareholders had considered what was best in
their
own interests, based on their large equity
shareholding, without considering what was best
for preference shareholders as a class. Further
the
reduction was unfair-the advantages of the
exchange into unsecured stock did not
compensate
for the disadvantages.
INTEREST: EQUITY
The controlling members may in fact be subject to
more stringent controls than the accepted doctrine
of a fraud on the minority, although not being
subject to the full fiduciary duties of a director. In
Clemens v. Clemens Bros Ltd [1976]2 All E.R. 268 the
Defendant owned 55 percent of the issued shares
of a family company. She was one of five directors
and proposed to give the other directors shares
INTEREST: EQUITY
and to set up a trust for long service employees.
The Plaintiff, who was the Defendants niece, held
40 percent of the shares and was not a director. The
defendant proposed resolutions to increase the
capital so that the Plaintiffs shares would fall below
25 percent of the total and her right to veto special
resolutions would be lost. It was clear that she
would never now obtain control of the company.
INTEREST: EQUITY
The judge held that the defendant was not entitled
to exercise her majority votes as an ordinary
shareholder in any way she pleased. That right was
subject to equitable considerations which could
make it unjust to exercise them in a particular way.
In this case such considerations applied and the
resolutions would be set aside.
The importance of Clemens is that it shows that the
INTEREST: EQUITY
majority do not have unrestricted voting rights if it
is unjust in the particular circumstances.
In Estmanco (Kilner House) v. Greater London
Council [1982]1 All E.R. 437 Megarry V-C however
accepted the general proposition that the
shareholders do not owe any fiduciary duties but
affirmed that in altering the articles they are subject
to the doctrine of fraud on the minority, i.e. they
INTEREST: EQUITY
must act in what they believe to be in the best
interest of the company as a whole. In that case the
majority shareholder wished to deprive the
company of a right of action under a contract and
proposed, and carried a resolution to that effect. A
minority shareholder sought to bring an action on
behalf of the company to prevent this. Megarry V-C
considered the situation at 444 thus: Plainly there
INTEREST: EQUITY
must be some limit to the power of the majority to
pass resolutions which they believe to be in the
best interests of the company and yet remain
immune from interference by the courts. It may be
in the best interests of the company to deprive the
minority of some of their rights or some of their
property, yet I do not think that this gives the
majority an unrestricted right to do this, however

ILLEGALITY OR ULTRA VIRES
unjust it may be, and however much it may
harm shareholders whose rights as a class differ
from those of the majority.
Where the act is one which is illegal, or ultra vires
the company, it cannot be condoned by the
majority of the members. Also, where the matter is
one which can be validly done or sanctioned not by
simple majority, but only by some special majority
INTEREST: A JUSTICE EXCEPTION?
such as a special resolution, which has not been
obtained. In Baillie v. Oriental Telephone Co.
[1915]1 Ch. 503 a shareholder was able to bring a
minority shareholders action to restrain the
company from acting on a special resolution of
which insufficient notice had been given.
It was assumed though not decided in Heyting v.
Dupont [1964]1 W.L.R. 843 that where justice
demands that an action be brought such as where
all that is alleged is damage to the company arising
from a directors misfeasance in withholding an
asset of the company without fraud or ultra vires.
The company was to exploit an invention of the
defendant consisting of a machine for making
plastic pipes and the defendant withheld the
companys patent application. However the
company could not have exploited the invention
because it was in a state of paralysis owing to
discord so there was no damage to the company
and so justice did not require the exception to be
made. In Prudential Assurance Co. Ltd v. Newman
Industries Ltd (No. 2), Vinelott J. based his decision
on the derivative action against the directors on the
doctrine that a minority action could be allowed if
the interests of justice require that a minority
action should be permitted. The Court of Appeal
however expressed the opinion that any exception
based on the justice of the case was not a practical
one.
The difficulty is that the question whether a
minority should be allowed to bring a derivative
action ought to be a preliminary issue tried before
the merits of the case. A justice exception will
however require a full trial of the issue to
determine how justice will best be served. The
court of Appeal in Prudential thought that in such a
preliminary action the minority shareholder should
be required to establish at least a prima facie case
that (a) the company is entitled to the relief
claimed, and (b) the action falls within the proper
INTEREST: REPRESENTATIVE ACTIONS
boundaries of the rule restricting members actions
on behalf of the company. In Hogg v. Cramphorn
[1967] Ch. 254 the Plaintiff was held to be justified
in suing in a representative capacity in respect of
the alleged wrongful disposition of the companys
money by the directors which could be condoned
by a resolution in general meeting, so that the
action should have been dismissed unless it was not
a derivative representative action but an individual
rights representative action.
A member of a company may enjoy a right alone or
in common with other members of the company
and the rule in Foss v. Harbottle has no application
where individual members sue, not in right of the
company, but in their own right to protect their
individual rights as members. In such a case a
member can bring an action in his own name, and
may sue on behalf of himself and other members.
The breach of duty owed to an individual
shareholder cannot be ratified by a majority of
shareholders. Thus in Pender v. Lushington (1866)6
Ch. D. 70, a shareholder was able to enforce the
articles giving him the right to vote at a meeting
and compel the directors to record his vote.
Similarly actions for damages by shareholders in
their own right do not come within the rule.
Circumstances in which an individual member
can sue in his own name are; first, where the
company is acting illegally or ultra vires; second,
where a special majority is required and has not
been obtained; and third, where the company is
acting contrary to its articles.
In the Prudential case, the minority shareholder
used this form of action in addition to the
derivative action. The claim was based on the loss
suffered by the shareholders as a result of the
directors alleged fraud on the company. Because
the company had lost money, the shareholders
profit expectations had been diminished. The
argument failed in the Court of Appeal. The alleged
loss to the shareholders was neither
separate
nor distinct from that suffered by the
company.
Only one loss had occurred and only
one action
could be allowed. Such actions could
subvert the
Rule in Foss v Harbottle.
STATUTORY PROTECTION OF
MINORITY SHAREHOLDERS
Section
221
provides
that
a
contributory may
petition that a company be wound up
by the
court. A member of a company is a
contributory
and it has been held that a holder of
fully paid
up shares is a contributory. Thus in
appropriate
JUST AND EQUITABLE

the just and equitable ground, and a member is not
confined to such circumstances as affect him as a
shareholder i.e. he is not confined to cases where
his position as a shareholder has been worsened by
the action of which he complains. He is entitled
only to rely on any circumstances of justice or
equity which affect him in his relations with the
company or with other shareholders. However the
JUST AND EQUITABLE

Court will not as a rule order a winding up on a
contributorys petition unless he alleges and proves
at least to the extent of a prima facie case, that
there will be assets for distribution among the
shareholder, so that a purely private advantage will
not suffice: Re Chesterfield Catering Co. Ltd [1976]3
All E.R. 294. The reason is that unless there are such
assets the contributory has no interest in a winding
JUST AND EQUITABLE

up. A contributorys petition which is opposed by
the majority of the contributories will usually not
be granted except where the conduct of the
majority is something of which the minority have a
right to complain [Re Middlesborough Assembly
Rooms Co. (1880)14 Ch.D. 104 where the company
suspended its business for more than three years
due to a depression intending to resume in more
JUST AND EQUITABLE

favourable circumstances], or the main object of
the company has failed [Re German Date Coffee Co.
(1882)20 Ch. D. 169 where the company was
unable to acquire a German patent which it was to
use to manufacture coffee from dates]. The
company may also be wound up on just and
equitable grounds where it was formed to carry out
a fraud, or an illegal business as distinguished from
JUST AND EQUITABLE

fraud in the course of business with the outside
world. In Re Thomas Edward Brinsmead & Sons
[1897] 1 Ch. 45, T and his sons were relatives of,
and had been employed by persons who carried on
the business of piano manufacturers as J.B. & Sons.
They left J.B & Sons and formed a company T &
Sons for carrying out a similar business. A
prospectus was issued which stated that the price
JUST AND EQUITABLE

paid for the business was 76,650
when it was
really only 1,000 in cash together
with 5,000
in shares in the company. Money was
subscribed
by the public and most of it found its
way into
the hands of the promoters. J.B. &
Sons
JUST AND EQUITABLE

possible from J.B & Sons. Numerous other actions
were brought against the company for fraud in the
prospectus. It was held that the company should be
wound up. Similarly where the mutual rights of the
members are not exhaustively defined in the
articles such as where they entered into
membership on the basis of personal relationship
involving mutual confidence or an understanding as
JUST AND EQUITABLE

to the extent to which each is entitled to participate
in the management of the companys business and
the right to transfer shares in the company is
restricted, and the confidence is not maintained or
the petitioner is excluded from the management. In
Re Westbourne Galleries Ltd [1973]A.C. 360, E and
N were partners in the carpet dealing business with
an equal share in the management and profits. In
JUST AND EQUITABLE

1958 they formed a private company to take over
the business, and E and N were the first directors,
with each holding 500 1 shares. The articles
provided that the shares could not be transferred
without the directors consent. Later Ns son G. was
appointed a director and E and N each transferred
100 shares to him. The company made good profits
which were all distributed by way of directors
JUST AND EQUITABLE

remuneration. After a disagreement between E and
N, with whom G sided, N and G removed E as
director by ordinary resolution, and thereafter
excluded him from the conduct of the companys
affairs. E petitioned for an order under section
222(f) for winding up on the ground that it was just
and equitable. It was held by the House of Lords
that it was just and equitable that the company be
JUST AND EQUITABLE

wound up. After a long association in
partnership, during which he had an
equal share
in the management and profits, E had
joined in
the formation of the company, and the
indisputable inference was that he and
N had
done so on the basis that the character
of the
JUST AND EQUITABLE

in justice and equity, to make use of their legal
powers of expulsion. Furthermore E was unable to
dispose of his interest in the company without the
consent of N and G. Lord Wilberforce stated at
pages 379: The words [just and equitable] are a
recognition of the fact that a limited liability
company is more than a mere legal entity, with a
personality of its own: that there is room in
JUST AND EQUITABLE

company law for recognition of the fact that behind
it, or amongst it, there are individuals, with rights,
expectations and obligations inter se which are not
necessarily submerged in the company structure.
The structure is defined by the Companies Act and
by the articles of association by which shareholders
agree to be bound the just and equitable
provision does notentitle one party to disregard
JUST AND EQUITABLE

the obligation he assumes by entering a company,
nor the court to dispense him from it. It does, as
equity always does, enable a court to subject the
exercise of legal rights to equitable considerations;
considerations, that is, of a personal character
arising between one individual and another, which
may make it unjust, or inequitable, to insist on legal
rights, or exercise them in a particular wayThe
JUST AND EQUITABLE

superimposition of equitable considerations
requires something more [than the fact that the
company is a small one, or a private company],
which typically may include one, or probably more,
of the following elements: (i) an association formed
or continued on the basis of a personal relationship,
involving mutual confidence-this element will often
be found where a pre-existing partnership has been
JUST AND EQUITABLE

converted into a limited company; (ii) an
agreement, or understanding, that all, or some (for
there may be sleeping members), of the
shareholders shall participate in the conduct of the
business; (iii) restrictions on the transfer of the
members interest in the company-so that if
confidence is lost, or one member removed from
management, he cannot take out his stake and go
JUST AND EQUITABLE

elsewhere. In Re Yenidje Tobacco Co. Ltd
[1916]2 Ch. 426, Weinberg and Rothman were the
sole shareholders in and directors of a company,
with equal rights of management and voting power.
After a time they became bitterly hostile to one
another and disagreed about the appointment of
important servants of the company. All
communications between them were made
JUST AND EQUITABLE

through the secretary. The company
made large
profits inspite of the disagreement. It
was held
that mutual confidence had been lost
between
W and R and the company should be
wound up.
See also Loch v. John Blackwood Ltd
[1924] A.C.
OPPRESSION OF THE
MINORITY
The Companies Act also contains provisions which
are designed to protect minorities against
oppression and mismanagement. Section 211 sets
out the ground for such an application where the
affairs of the company are being conducted in a
manner oppressive to a member(s). Oppression can
be of such a nature as will make it just and
equitable for the court to wind up the company,
OPPRESSION OF THE
MINORITY
but to order winding up may be prejuducial to
the interests of the oppressed minority and so
the court may make such order to bring an end
to the matter as it thinks fit. Such an order may
for example provide for the purchase of the
shares of the prejudiced minority, or alter the
rights given to any class of shares by the
memorandum or articles of the company.
OPPRESSION OF THE
MINORITY
Oppression generally entails any blight
on the
principle that members are entitled to
have the
business of the company conducted fairly
and in
accordance with its constitution and the
law.
Oppression must involve persistent and
persisting
OPPRESSION OF THE
MINORITY
shares carrying a right to vote but the minority of a
different class of shares carrying a right to share in
the distributed profits of a private company. The
majority of the latter class of shares were held by
his sons, whose shares he had given to them. The
controlling shareholder, who had founded the
company and transferred his business to it,
continued to regard the business as his own and
OPPRESSION OF THE
MINORITY
ignored the wishes of the older
shareholders
and of his co-directors, including the
petitioners,
his sons. The court approved the
definition of
oppressive as meaning burdensome,
harsh and
wrongful. The court made an order
that the
OPPRESSION OF THE
MINORITY
operative Wholesale Society [1959] A.C. 324 a
holding company engaged in the same class of
business as its subsidiary which had an independent
minority of members, ruined the subsidiary in the
interests of the holding company and its controllers
by cutting off supplies. Three of the subsidiarys
directors were nominated by, and were also
directors of the holding company. These nominee
OPRESSION OF THE
MINORITY
directors actively supported the policy of the
holding company. The minority shareholders of
the subsidiary petitioned for an order that the
holding company should purchase their 1
shares. At one time the shares were had been
worth 6 but by the time of the action they
were practically worthless. It was held that the
conduct of the holding company through the
OPRESSION OF THE
MINORITY
nominee directors was conduct of the affairs of the
subsidiary and was oppressive to the minority. The
holding company was ordered to buy the minoritys
shares at a fair price. Lord Viscount Simonds at page
48 stated: Whenever a subsidiary is formedwith
an independent minority of shareholders, the
parent company must, if it is engaged in the same
class of business, accept an obligation so to
MISFEASANCE
PROCEEDINGS
conduct what are in a sense its own affairs as to
deal fairly with its subsidiary.See also Lord
Keith at 63.
Section 324 provides that misfeasance proceeding
may be taken, if in winding up it appears that any
promoter, or director, manager or liquidator or any
officer of the company has misapplied or retained
or has become liable or accountable for any money
MISFEASANCE
PROCEEDINGS
or property of the company or has
been guilty of
any misfeasance or breach of trust in
relation to
the company.
The official receiver, liquidator, any
creditor or
contributory
may
make
the
application, and the
court examine the conduct of such a
MISFEASANCE
PROCEEDINGS
may also order him to contribute to the assets
of the company as it thinks fit.
In Coventry and Dixons Case (1880)14 Ch.D. 660
it was said that the section does not create any
new liability, any new right, but only provides a
summary mode of enforcing rights which must
otherwise be enforced by the ordinary
procedures of the courts. Further, the applicant
MISFEASANCE
PROCEEDINGS
must show something which would have been the
ground of an action by the company if it had not
been wound up. James L.J. defined misfeasance at
670 as misfeasance in the nature of a breach of
trust, that is to say, it refers to something which the
officerhas done wrongly by misapplying or
retaining in his own hands any moneys of the
company, or by which the companys property has
MISFEASANCE
PROCEEDINGS
been wasted, or the companys credit
improperly pledged. It must be some act
resulting in some actual loss to the company.
The section is therefore not available in all cases
in which the company has a right of action
against an officer of the company. In Re Etic
Limited [1928] Ch.861, a misfeasance summons
was taken out by the liquidator against the
MISFEASANCE
PROCEEDINGS
secretary of a company for sums
overdrawn by
him on account of his salary on the
instructions
of the managing director. It was held
that this
was a claim for repayment of an
ordinary debt
due from the secretary without any
wrongful
INSPECTION
Section 165 empowers the members of a
company to apply to the courts to appoint one
or more inspectors to carry out investigations
and report their findings, in the case of a
company having a share capital, by not less than
two hundred members or by members who hold
not less than one-tenth of the issued shares,
and in the case of a company not having a share
INSPECTION
capital by not less than one-fifth of members. The
court must be convinced that the application is
based on good reason and may require the
applicants to give security to cover the cost of the
investigation. The inspectors function is
investigatory and judicial, but they must in view of
the consequences which may follow from their
report, act fairly. In Telestro Bros. Pty Ltd v. Tait
INSPECTION
(1963)109 C.L.R. 353 the majority of
the High
Court held that the inspector need not,
before
making a report on the companys
affairs, give
the company an opportunity of
answering or
explaining
matters
which,
if
unanswered or
DERIVATIVE CLAIM
The rule in Foss v. Harbottle has been replaced by
derivative claims in the Companies Act 2015.
Section 239 provides that such claims mean
proceedings by a member of the company in
respect of a cause of action vested in the company
and seeking relief on behalf of the company.
A derivative claim may be brought only in respect
of
a cause of action arising from an actual or
proposed
GROUNDS OF DERIVATIVE
CLAIM
act or omission involving negligence, default,
breach of duty or trust by a director of the
company, and provided the cause of action is in
respect of a relevant breach by a director, which
includes former director, third parties may also be
made defendants in the derivative claim either in
lieu of or in addition to the corresponding director:
s. 239(4)
PERMISSION TO CONTINUE CLAIM

BY COMPANY
When a member commences a derivative claim
he must apply to the court for permission to
continue the action: s. 240.
In addition if a company brought a claim and the
cause of action on which the claim is based could
be pursued as a derivative claim, a member of the
company may apply to court for permission to
continue the claim as a derivative claim on the
COMPULSORY REFUSAL OF
PERMISSION: S. 242(1)
grounds that the manner in which the company
commenced or continued the claim amounts to an
abuse of the process of the court, the company has
failed to prosecute the claim diligently, and it is
appropriate for the member to continue the claim
as a derivative claim.
Section 242(1) provides that the court will refuse
permission to continue the proceedings where a
DISCRETIONARY REFUSAL OF
PERMISSION: 242(2)
person acting in accordance with the directors duty
to promote the success of the company under
section 144 would not seek to continue the claim,
or if the cause of action arises from an act or
omission that has occurred or is yet to occur but
has been authorised or ratified by the company.
In exercise of its discretion as to whether to permit
the continuation of the claim, section 242(2)
PERMISSION: 242(2)
requires the court to consider the following factors:
first, whether the member is acting in good faith in
seeking to continue the action; second, the
importance that a person acting in accordance with
a directors duty to exercise independent judgment
as required by section 145 would attach to
continuing the claim. Thus in Mission Capital Plc v.
Sinclair [2008]EWHC 1339 two former executive
PERMISSION: 242(2)
directors who were father and daughter
unsuccessfully sought permission to continue a
derivative claim. The company via its three non
executive directors had terminated the formers
employment and dismissed them as directors on
the basis that they had failed to meet financial
forecasts and submit important financial
information to the board. They brought a
PERMISSION: 242(2)
derivative claim against M, the non-executive
directors and their replacement director P claiming
M would suffer damage from their wrongful
dismissal and that P would act improperly. It was
held that if a person acting to promote the success
of the company would seek to continue the claim,
the court must in its discretion consider the
importance that the person would attach to
PERMISSION: 242(2)
continuing with the claim. The court must also
consider whether the member has alternative
personal claims which could be pursued in his own
right rather than on behalf of the company.
The third factor the court must consider in the
exercise of its discretion under section 242(2) is if
the cause of action results from an act or omission
that is yet to occur and whether the act or
omission
PERMISSION: 242(2)
is likely in the circumstances to be authorised
before it occurs or ratified by the company after
it occurs. Fourth, the court will consider
whether the company has decided not to pursue
the claim; fifth, whether the act or omission in
respect of which the claim is brought gives rise to a
cause of action that the member could pursue in
the members own right rather than on behalf of
PERMISSION: 242(2)
the company. In Franbar Holdings Ltd v. Patel
[2008] EWHC 1534, Medicentres (M) was a
company established to provide primary health care
and medical services. It was wholly owned by F until
July 2005 when F sold 75% of the shares to Casualty
Plus (C). F an C entered into a shareholder
agreement pursuant to which C appointed two
directors to M, P and F appointed L. The agreement
PERMISSION: 242(2)
also gave each party an option to sell and call for
the remaining shares at a price nine time Ms
earnings. F brought derivative proceedings
against C and P claiming negligence, default and
various breaches of duty of care owed by P to
M, including claims that P drove down Ms share
price by driving business away from it. The High
Court refused permission to continue the claim
PERMISSION: 242(2)
because the judge thought that a person acting
under the equivalent of s. 145 would not attach
great importance to the claim, and that there were
alternative modes of redress, namely an unfair
prejudice claim and a petition, which would enable
F to claim what it was now seeking.
Section 242(3) also requires the court to give
particular regard to any evidence before it as to the
PERMISSION: 242(2)
views of the members of the company who have no
direct or indirect personal interests in the matter. In
Smith v. Croft (No. 2) [1988] Ch. 114, a case that
predated the changes to the law, the claimants
were minority shareholders claiming the power to
recover, on behalf of the company, sums which had
been paid away in transaction which were both
ultra vires and in breach of the statutory prohibition
PERMISSION: 242(2)
on financial assistance (financial assistance by a
company for the acquisition of its own shares).
With their supporters, the Plaintiffs had 14% of the
voting rights in the company and the Defendants
63%, and there were other shareholders
commanding 21% of the votes who did not wish the
litigation to proceed. Knox J held that a prima facie
case of ultra vires and illegality had been made out
CLAIM BY MAJORITY SHAREHOLDER

for which the company was entitled to relief, the
plaintiffs accordingly had standing to bring a
derivative action but that the Plaintiffs
nevertheless had no right to sue if a majority of
the shareholders who were independent of the
Defendants did not want the action to continue.
Permission will also rarely be granted to a majority
shareholder. In Cinematic Finance Ltd v. Ryder

[2010] All ER 283, the corporate claimant had
become a majority shareholder in various
investment companies set up for film financing
when those companies failed to repay loans the
claimant had made to them. The claimant alleged
various breaches of duty by the defendant directors
and shadow directors. The directors responded that
this was not an appropriate case for a derivative

action, given the claimants control
over the
companies in question. The judge
refused to
grant permission to continue stating,
only in
very exceptional circumstances could
it be
appropriate to permit a derivative
claim brought
MEMBERS PERSONAL
RIGHTS
Members claims for a personal remedy are
generally based on wrongs committed in relation
to: (1) contractual rights derived from the
companys constitution, which claims are subject to
the internal regularity rule in Foss v. Harbottle.
Thus in Pender v. Lushington (1877)6 Ch D 70. P had
split his shareholding among nominees in order to
defeat a provision in the articles that fixed a
MEMBERS PERSONAL
RIGHTS
maximum number of votes to which any member
was entitled. The chairman refused to accept the
nominees votes and accordingly declared lost a
resolution proposed by P, which would otherwise
have been carried. P brought a representative
action on behalf of himself and the other
shareholders, and also an action in the name of the
company, in which the court granted an injunction
MEMBERS PERSONAL
RIGHTS
restraining the directors from acting on the basis
that the nominees votes had been bad. The
court also held that P had a right to sue in the
companys name at least until a general meeting
resolved otherwise, and a further right to sue in
his own name.
(2) Contractual rights derived from outside
contracts, especially shareholder agreements.
Thus
MEMBERS PERSONAL
RIGHTS
in Southern Foundries (1926) Ltd v Shirlaw, [1940]
AC 701 in which the Respondent was appointed a
managing director of Southern by a written
agreement for ten years, and later the company
altered its articles so as to allow another company
which had taken it over to remove the Respondent
from his directorship, the Respondent sued
Southern for breach of contract and was awarded
MEMBERS PERSONAL
RIGHTS
damages. (3) The duties owed by
directors to
members individually can be asserted
successfully; (4) the entitlement
inherent in the
unfair prejudice claims; and (5) the
entitlements inherent in the just and
equitable
winding up provisions.
UNFAIRLY PREJUDICIAL CONDUCT OF

THE COMPANYS AFFAIRS
THE Companies Act gives the court on the
application of a member a wide ranging power to
remedy conduct of a companys affairs that is
unfairly prejudicial to the interests of the members
generally or to some part of its members: s. 781
The most common complaint is that a controlling
majority has acted in a manner that is unfairly
prejudicial, and the most common remedy is an

order that the majority do purchase the shares of
the minority at a price that reflects their proportion
of the companys value. The circumstances of
oppression governed by section 211 of the old
Companies Act would fell squarely within this
principle; Scottish Co-operative Wholesale Society
Ltd v. Meyer [1959] AC 324.
The conduct complained of must be both unfair
and

prejudicial, not merely unfair. The test is
objective, and the emphasis is not on the
motive
or intention of the controllers, as it is on the
effect that the conduct has had on the
complaining member. In Re Guidezone Ltd
[2000]2BCLC 321 at 355 the court stated:
unfairness is not to be judged by reference
to
subjective notions of fairness, but rather by

testing whether, applying established equitable
principles, the majority has acted, or is
proposing to act, in a manner which equity
would regard as contrary to good faith.
Prejudice was explained in Re Coroin Ltd
[2012]EWHC 2343: Prejudice will certainly
encompass damage to the financial position of a
member. The prejudice may be damage to the
value

of his shares but may also extend to other
financial damage which in the circumstances of
the case is bound up with his position as a
membermoreover, prejudice need not be
financial in character. A disregard of the rights of
a member as such, without any financial
consequences, may amount to prejudice falling
within the section.

Some of the actions that have been held
unfairly prejudicial include, taking excessive
remuneration-Re Cumana [1986] BCLC 430,
exclusion from the management of a company
-Re RA Noble & Sons (Clothing) Ltd [1983]BCLC
273, not paying dividends-Re a Company, ex p
Glossop [1988]1 WLR 1068, making or
proposing
a rights issue which the minority cannot take

up-Re Cumana [1986] BCLC 430,
mismanagement but only if serious-Re
Macro
(Ipswich) Ltd [1994]2 BCLC 354,
misuse of
fiduciary powers-Scottish Co-operative
Wholesale, dilution of a shareholders
interest:
Re Zetnet Ltd [2011] EWHC 1518
DISCUSSION QUESTION
Kimara Agencies is a company with six
shareholders who initially held equal numbers of
shares. It had two directors out of four of the
shareholders who are also shareholders in another
company, Wakulima Motels Limited.
Over the course of the past one year, the four
shareholders have deliberately sidelined the other
two from the activities of Kimara Agencies Limited.
DISCUSSION QUESTION
While the two shareholders are given notices of
meetings, they are hardly allowed to express
themselves during the meetings and their
contributions and suggestions are invariably
overruled by the four shareholders. During one
such meeting, the four shareholders pushed
through a resolution requiring the directors to
conduct a call on shares, as a result of which the
DISCUSSION QUESTION
two shareholders, who had not fully paid up for
their shares forfeited some of their shares, while
the two directors who also had not fully paid up
for all their shares, merely had a lien placed on
their shares. The forfeiture and the lien were
conducted procedurally in accordance with the
articles of association of the company. The
forfeited shares were subsequently sold to two
DISCUSSION QUESTION
of the four shareholders who were not directors. As
at the beginning of this year, the four shareholders,
who also hold shares in Wakulima Motels Limited,
collectively held over three-quarters of the shares
in Kimara Agencies Limited. Recently, the majority
shareholders approved a proposal by the directors
of Kimara Agencies Limited to sell several buildings
owned by the company to Wakulima Motels
DISCUSSION QUESTION
Limited which wants to convert them into
student hostels to tap into the lucrative student
accommodation business. The two minority
shareholders find the sale objectionable. They
have determined that they would be moving to
court to contest all the activities by the majority
shareholders over the course of the past one
year.
DISCUSSION QUESTION
Discuss two legal issues likely to be
raised by the
minority
shareholders
in
their
challenge of the
action of the majority.
DIRECTORS
The management of companies is entrusted to
directors, by whatever name called. Section 3 of
the Companies Act 2015 provides that a director
is any person occupying the position of a director of
the body by whatever name called; and any person
in accordance with whose directions or instructions
not being given in a professional capacity, the
directors of the body are accustomed to act.
APPOINTMENT OF
DIRECTORS
that a public company should have at least two
directors, while a private company must have at
least one director.
A companys articles typically provide that the
first directors will be appointed by the
subscribers to the memorandum and articles
and that thereafter directors will be elected by
APPOINTMENT OF
DIRECTORS
the members in general meeting, and
that a
proportion, such as one-third, should
retire
every year but be eligible for reelection.
Section 132 of Companies Act (section
181 of
the old Companies Act) provides that a
motion
APPOINTMENT OF
DIRECTORS
resolution during a general meeting
can only be
moved if a resolution that it be moved
has first
been agreed to by the meeting without
any vote
being cast against it. A resolution
moved to the
contrary is void, and any provision in
the
APPOINTMENT OF DIRECTORS
Accordingly in public companies vacancies in the
board of directors cannot normally be filled by a
single resolution appointing a number of candidates
en bloc, unless a resolution for a single vote has first
been passed without objection. and at least one of
the directors must be a natural person: s. 129.
The general meeting, it would seem, is required to
act for proper purposes in appointing a director.
APPOINTMENT OF
DIRECTORS
In Theseus Exploration NL v. Mining and Associated
Industries Limited [1973] Qd R 81, the court issued
an interim injunction to prevent members of the
company electing certain persons as directors,
because there was sufficient evidence that those
persons intended to use the companys assets
solely for the benefit of the majority member. See
also Re HR Harmer Ltd [1959]1WLR 62.
APPOINTMENT OF
DIRECTORS
Quoted companies and public interest companies
must establish and appoint a board nomination
committee in which at least 2/3 of its members are
shareholders of the company and together
represent 2/3 of the share capital of the company:
s. 133 (1).
A public interest company is defined in section
133(4) as a company that has the responsibility of
APPOINTMENT OF
DIRECTORS
receiving, handling or spending public
funds.
The board nomination committee is
responsible
for
nominating
candidates
for
appointment to
the companys board of directors.
A person who is employed by a quoted
company
is not eligible to be appointed as a
ELIGIBILITY FOR APPOINMENT AS

DIRECTORS
A person who has not reached 18
years of age
cannot be appointed a director of a
company,
and any such appointment is void: s.
131. An
undischarged bankrupt or a person
who has
made an arrangement or composition
with his

DIRECTORS
which he was adjudged bankrupt.
A person of unsound mind, and a
person who
Has been disqualified by court order
under Part
X of the Companies Act 2015 or
Insolvency
Law. Further restrictions are imposed
by the
Insolvency Act to prevent the phoenix

DIRECTORS
directors of companies that use the
same or
substantially the same registered
business or
trading name as that used by the
insolvent
company during the insolvency period.
Breach
of the restrictions is an offence, in
addition to
VACATION OF OFFICE: 1.
RETIREMENT
management. A director may cease to be such for
various reasons, such as death, dissolution of the
company, retirement by rotation under the articles
or retirement under an age limit under section 183
unless the articles provide otherwise or the
company is a private company which is not a
subsidiary of a public company or he was appointed
by the company in general meeting after special
2. DISQUALIFICATION
notice was given notwithstanding his
age.
A director also vacates offices on being
disqualified, and the articles usually
provide for
the circumstances warranting vacation
by
disqualification. Table A Article 88
provides that
the office of director shall be vacated if
DISQUALIFICATION
of 183 (age limit), (b) becomes bankrupt or makes
any arrangement composition with his creditor
generally; (c) becomes prohibited from being a
director by order under section 189; (d) becomes of
unsound mind; (e) resigns his office by notice in
writing to the company; and (f) is absent without
permission for more than six months from meetings
of directors held during that period.
3. REMOVAL
Section 140(1) of the Companies Act 2015 provides
that a company may remove a director before the
end of his period of office by ordinary resolution,
despite anything to the contrary in any agreement
between the company and the director. However
special notice must be given of any resolution to
remove the director or to appoint another person
to replace the director at the meeting at which the
REMOVAL OF DIRECTOR
removal takes place.
The replacement is deemed to have become a
director for purposes of determining when he
will retire, on the day on which the director in
whose place he is appointed was last appointed.
If the vacancy is not filled at the meeting at
which the director is removed, it will be filled as
a casual vacancy: s. 133(4)
REMOVAL OF DIRECTOR
The person removed as director is still under a
duty to avoid conflicts of interest with respect
to
exploitation of any property, information or
opportunity that he became aware of while a
director, and also not to accept benefits from
third parties with regard to things done or
committed to be done by that person before
ceasing to be a director: s. 133(5).
REMOVAL OF DIRECTORS
The Act does not prevent the articles giving a
directors shares special voting rights. In Bushell
v. Faith [1970] AC 1099, Bushell Court
(Southgate) Ltd had three shareholders, a
brother and two sisters, each holding 100
shares. The two sisters purported to remove
their brother as a director by casting 200 votes
on a resolution against his 100. He challenged
REMOVAL OF DIRECTORS
the removal on the grounds of Article 9 which
said that on a resolution to remove a director
from office any shares held by that director
shall on a poll in respect of such resolution
carry
the right to three votes per share (thus
defeating the resolution to remove by 300 to
200). The House of Lords held that the brother
had not been validly removed as a director.
COMPENSATION FOR LOSS OF

OFFICE
If there is a contract between the director and the
company, then dismissal from office under section
140 may be a breach of that contract by the
company. This will be the case where the contract is
for a fixed period which has not expired, or if the
director is entitled to a period of notice.
Alternatively dismissal of a person from office of
director may breach a second contract between the
COMPENSATION FOR LOSS OF

OFFICE
director and the company if the
director can
perform the second contract only by
being a
director. For example, a contract
between a
company and the managing director
may
depend on the person continuing to be
a
VALIDITY OF ACTS OF
DIRECTORS
to ensure that members can discover the terms of
their directors contracts of service: Ss. 191-193.
The Companies Act 2015 provides that the acts of a
director are valid even if it is later discovered that
the appointment was defective, or the director was
disqualified or ceased to hold office, of the director
was not entitled to vote on the matter. The acts of a
director are valid even if the resolution for the
POWERS OF DIRECTORS
directors appointment is void: s. 134(1). The
powers of directors depend on the articles
since apart from requiring that certain things shall
be done by members in general meeting such as
alteration of the articles, the Act leaves the
distribution of power between the general meeting
and the board to the articles. Table A, article 80 for
example provides that the business of the company
POWERS OF DIRECTORS
shall be managed by the directors, who may pay all
expenses incurred in promoting and registering the
company, and may exercise all such powers of the
company as are not, by the Act or by the
regulations, required to be exercised by the
company in general meeting, subject to the Act and
the regulations, and not inconsistent with the
regulations or provisions as may be prescribed by
POWERS OF DIRECTORS
the company in general meeting. However no
regulation made by the company in general
meeting shall invalidate any prior act of the
directors which would have been valid if that
regulation had not been made.
Thus if the directors act within the powers given
to them by such article, they are not bound to
obey resolutions passed by the shareholders at
a
POWERS OF DIRECTORS
general meeting; such resolutions cannot override a
decision of the directors or control the exercise of
their powers in the future. In Bamford v. Bamford
[1970] Ch 212 at 220 Plowman J. stated:
A company cannot by ordinary resolution dictate
to or overrule the directors in respect of matters
entrusted to them by the articles. To do that it is
necessary to have a special resolution. In Salmon v.
POWERS OF DIRECTORS
Quin & Axtens Ltd [1909] 1 Ch. 311 (CA) the articles
contained an article like Table A, article 80, and also
provided that no resolution of the directors to
acquire or dispose of premises was to be valid
unless neither A nor B (the managing directors)
dissented. The directors resolved to acquire
premises. B dissented. An ordinary resolution to the
same effect as the board resolution was passed at
POWERS OF DIRECTORS
an extraordinary general meeting of the company. It
was held that the ordinary resolution was
inconsistent with the articles and the company was
restrained from acting on it: [Approved by the
House of Lords sub nom without the Respondents
even being called in Quin & Axtens Ltd v. Salmon
[1909] AC 442]. The directors powers can however
be altered for the future by an alteration of the
POWERS OF DIRECTORS
articles in the proper way, but the articles cannot be
altered with retrospective effect. If the directors are
unable to exercise one of their powers because of a
deadlock on the board or because their number has
fallen below the number required for a quorum, the
company in general meeting may exercise that
power. In Barron v. Potter [1914] 1 Ch. 895, the
articles gave the board of directors power to
POWERS OF DIRECTORS
appoint an additional director and, owing to
differences between the directors, no board
meeting could be held for the purpose. Held, the
company retained the power to appoint additional
directors in general meeting. The position is similar
where the company has no directors, per Lord
Halisham in Alexander Ward & Co. Ltd v. Samyang
Navigation Co. Ltd 1975 S.C. (H.L.) 26 at 47.
POWERS OF DIRECTORS
If the directors improperly refuse to exercise a
power to initiate an action in the name of the
company, a minority shareholders action may
be brought by way of an exception to the rule in
Foss v. Harbottle: Cook v. Deeks [1916]1 A.C.
554.
The directors cannot delegate their powers
unless
empowered to do so by the articles. The articles
REMUNERATION OF
DIRECTORS
usually provide for delegation to the managing
director.
Directors are not employees of the company and
accordingly have no claim to payment of their
services unless there is provision for payment in the
articles. At times some directors hold executive
positions in the company such as managing director
in which event they are servants of the company
REMUNERATION OF
DIRECTORS
and receive a fixed salary.
The Act requires that the accounts laid before
the company in general meeting must show
certain particulars of directors salaries, pensions
etc.
It is unlawful for a company to make to a director
any payment by way of compensation for loss of
office, or as consideration for or in connection with
REMUNERATION OF
DIRECTORS
retirement unless particulars of the proposed
payment including the amount are disclosed to
the members and the proposal is approved by
the company: section 189. it was held in Re
Duomatic Ltd [1969]2 Ch. 365 that disclosure
must be made to all members, even those with
no right to attend and vote at general
meetings,
whilst payment is still a proposed payment. In
LOANS TO DIRECTORS
Wallersteiner v. Moir [1974] 1 WLR 991 at 1016,
Lord Denning stated that he imagined that
payment could be later approved by the
company in general meeting.
Section 191 renders illegal loans by a company
to any person who is its director or director of its
holding company, nor may the company
guarantee or provide security in connection with
LOANS TO DIRECTORS
a loan made to any director. Exception: (i) private
companies, (ii) subsidiaries, the director of which is
its holding company, (iii) loans made with the
approval of the company in a general meeting to
provide the director with funds to meet
expenditure for the benefit of the company, and (iv)
where the companys business includes the lending
of money or the giving of guarantee in connection
POSITION OF DIRECTORS
with loans made to other persons.
Directors are officers of a company and sometimes
also employees. As directors they owe strict
fiduciary obligations to the company requiring a
high standard of honesty and loyalty, but relatively
undemanding standards of competence. They are
not the agents of the shareholders in running the
business of the company. In Great Northern Railway
v. Turner (1872)L.R. 8 Ch. 149 at 152, directors were
described as trustees of the companys money and
property, and of the powers entrusted to them.
More properly they are in a fiduciary position to the
Company: They control the companys property and
must apply it for the specified purposes of the
company and a misapplication of it is a breach of
duty. They must also exercise the powers for the
purpose for which they were conferred and bona
fide for the benefit of the company as a whole.
Piercy v. S. Mills & Co. Ltd [1920]1 Ch 77, directors
had power to issue the unissued shares of the
company. The company was in need of no further
capital but the directors made a fresh issue to
themselves and their supporters with the object of
maintaining control of the company and resisting
DIRECTORS AS FIDUCIARIES
the election of three additional directors. It was
held that the allotment of shares was invalid and
void as directors are not entitled to use their power
of issuing shares for the purposes other than bona
fide and for the benefit of the company.
Directors are strictu sensu not trustees since the
companys money and property are not vested in
them but in the company, and their functions are
DIRECTORS AS FIDUCIARIES
the same as those of trustees. Also their duties of
care are not as onerous as those of trustees. In
Smith v. Anderson (1880) 15 Ch.D. 247 (CA) at 275
James L.J. stated: A trustee is a man who is the
owner of the property and deals with it as principal,
as owner, and as master, subject only to an
equitable obligation to account to some persons to
whom he stands in the relation of trustee, and who
DIRECTORS AS AGENTS
are his cestui que trustThe office of director is
that of a paid servant of the company.
Directors are agents through whom a company acts,
and it is largely because they are agents that they
owe fiduciary duties and certain duties of care to
the company. In Mills v. Mills (1936)60 C.L.R. 150
Dixon J. stated: Directors of a company are
fiduciary agents, and a power conferred upon them
DIRECTORS AS AGENTS
cannot be exercised in order to obtain some
private advantage or for any purpose foreign to
the power.
Like other agents directors incur no personal
liability on contracts made by them on behalf of the
company, within the scope of their authority. If
however they exceed the power given to them by
the memorandum and articles they will be liable for
DIRECTORS AS AGENTS
breach of warranty of authority. Their actions may
however be ratified by the company in general
meeting if they act within the powers in the
memorandum and articles but outside the powers
conferred on them by the articles.
The directors may be specifically appointed agents
for the shareholders to negotiate a sale of the
companys shares, and if so, the shareholders are
DIRECTORS AS AGENTS
liable for their fraud. In Breiss v. Woolley 1954 A.C.
333, R managing director of N ltd, by frauds of
which the other directors were ignorant, made N
ltd
profitable, and negotiated with E ltd for the sale of
the shares in N ltd without disclosing that the
profits were based on dishonest trading. The
negotiations were reported to the shareholders
who, in ignorance of Rs fraud, authorised R to
DIRECTORS AS AGENTS
complete the sale on the basis of negotiations.
The fraud was subsequently discovered and the
shareholders were sued for damages. Held, they
were liable for his fraud even though it preceded
his appointment as agent.
If directors hold themselves out as agents for
the shareholders they must disclose any profit
made by them to the shareholders. In Allen v.
DIRECTORS AS AGENTS
Hyatt (1914)30 T.L.R. 444, Directors entered into
negotiations for the amalgamation of the company
with other companies. Before the negotiations
were completed they induced a number of
shareholders to give them options on their shares
at par, representing that this was necessary to
effect the amalgamation. The directors then
exercised the option and thereby made a
DUTIES OF DIRECTORS
handsome profit. It was held that they had to
account for this profit to the shareholders.
The Companies Act 2015 has supplanted general
rules on directors duties which are based on the
common law rules and equitable principles.
Section 141 provides that the general duties are
owed by a director of a company to the company.
The basis of the provision is to exclude a pluralist
DUTIES OF DIRECTORS: THE ENLIGHTENED

SHAREHOLDER VALUE APPROACH
perspective in which the directors duties were
perceived as extending to all stakeholders of the
enterprise including shareholders, creditors and
employees, and to affirm the enlightened
shareholder value approach which adopts a
shareholder oriented approach but recognises
that in assessing what might likely promote success
of the company for the members benefit, directors
DUTIES OF DIRECTORS
should take into account the interest of the
stakeholders and wider interests such as
environment in so far as they believed in good
faith that these factors were relevant.
The corollary is that directors do not generally
owe their duties to anyone other than the
Company, nor fiduciary duties to individual
members. In Percival v. Wright [1902]2 Ch 421
DUTIES OF DIRECTORS
The Plaintiffs offered to sell their
shares and the
Defendant Chairman and two other
directors
agreed to buy them at 12.50, but did
not
disclose that the board had been
negotiating
with an outsider for the sale of all the
companys shares at a higher price
DUTIES OF DIRECTORS
sale set aside on the ground that the directors
ought to have disclosed the negotiations. It was
held that the sale was binding, as the directors
were in no fiduciary relationship with
shareholders individually, and were under no
obligation to disclose the negotiations to the
Plaintiffs.
However exceptionally directors may owe duties
DUTIES OF DIRECTORS
to individual members such as when they
undertake to act as agents of the individual
members. In Coleman v. Myers [1977]2 NZLR 225
the Defendants were directors of a family company.
The 1st Defendant made a takeover offer to all other
shareholders and ultimately succeeded in acquiring
total control of the company. The Plaintiffs were
minority shareholders who had reluctantly agreed
DUTIES OF DIRECTORS
to sell when the 1st Defendant invoked statutory
powers of compulsory purchase. They then
brought action against the Defendants alleging
breaches of fiduciary duty owed by the
Defendants as directors to them as
shareholders. The Court of Appeal of New
Zealand held that a fiduciary relationship existed
between the directors and the Plaintiffs in the
DUTIES OF DIRECTORS
special circumstances: the company was a
private company with shares held largely by
members of one family, and the other members
had habitually looked to the Defendants for
business advice, and information affecting the
true value of the shares had been withheld from
the other family members by the Defendants. The
Defendants were thus liable to compensate the
FIDUCIARY DUTIES
Plaintiffs.
The fiduciary duties of directors are two fold. First,
to exercise their powers for the purposes for which
they were conferred and bona fide for the benefit
of the company as a whole. This is now expressed in
sections 143 and 144 of the Companies Act 2015.
Section 143 provides that the directors have a duty
to act within the constitution of the company, and
FIDUCIARY DUTIES
to exercise powers for the purpose for which they
are conferred. Section 144 on the other hand
provides that a director of a company shall act in
the way in which the director considers in good
faith would promote the success of the company
for the benefit of its members as a whole, and in so
doing the director shall have regard to; first, the
long term consequences of any decision of the
FIDUCIARY DUTIES
directors; second, the interests of the employees of
the company; third, the need to foster the
companys business relationships with suppliers,
customers and others; fourth, the impact of the
operations of the company on the community and
the environment; fifth the desirability of the
company to maintain a reputation for high
standards of business conduct; and sixth the need
FIDUCIARY DUTIES
to act fairly as between the directors and the
members of the company. The listed criteria affirm
the enlightened shareholder value approach as a
philosophical underpinning of the duties of the
directors to the company.
The directors discretionary power to refuse to
register a transfer of shares is a fiduciary power. In
Re Smith and Fawcett Ltd [1942] CH 304 (CA), the
FIDUCIARY DUTIES
articles gave the directors an absolute and
uncontrolled discretion to refuse to register any
transfer of shares. The two directors each held
4,001 of the 8,002 ordinary shares. F died and his
son, as his executor, applied for the shares to be
registered in his name. S refused, but offered to
register 2,001 shares if 2000 were sold to him at a
fixed price. Fs son applied for rectification of the
FIDUCIARY DUTIES
register but failed. There was nothing to show that
the directors power was not exercised in the
companys interest.
The directors power to issue shares is also a
fiduciary duty, and its exercise is invalid if it is not
exercised for the purpose for which it was granted,
which is primarily to raise capital when required by
the company. The second fiduciary duty of directors
FIDUCIARY DUTIES
is not to put themselves in a position in which their
duties to the company and their personal interests
conflict. Thus an issue of shares is invalid if the
directors are motivated by self-interest e.g. desire
to preserve their control of the company. In Hogg v.
Cramphorn Ltd [1967] Ch 254, directors, in an
endeavour to secure control in order to forestall a
take-over bid, issues unissued shares in the
FIDUCIARY DUTIES
company to trustees to be held for the benefit of
employees, the shares being paid for by the
trustees out of an interest free loan from the
company. It was held that the issue exceeded the
directors fiduciary power, it being immaterial that
it was made in the bona fide belief that it was in the
interest of the company. Since the directors did not
hold the majority of the shares before the new
FIDUCIARY DUTIES
issue, the issue could be ratified by the company
in general meeting, the votes carried by the
shares issued to the trustees not being
exercised.
In Howard Smith Ltd v. Ampol Petroleum Ltd
[1974] A.C. 821, the directors were by contrast
not motivated by any purpose of personal gain
but the allotment was set aside because they
FIDUCIARY DUTIES
issued the shares for the purpose of destroying
the existing majority block of shares.
The phrase bona fide in the interest of the
company as a whole does not limit the
justification
for the directors action to the simple interest of
the
company, but extends in some instances to action
that is fair between different classes of
shareholders. In Mills v. Mills (1938) 60 C.L.R. 150
FIDUCIARY DUTIES
Latham J. stated of cases where directors act
partially by improperly favouring one section of
shareholders against another: The question
which arises is sometimes not a question of the
interest of the company at all, but a question of
what is fair between different classes of
shareholders. Where such a case arises some
other test than that of the interest of the
FIDUCIARY DUTIES
company must be applied.
Thus where the interest of two or more classes
of shareholders are fundamentally different and
opposed, and it is virtually impossible to
determine the interest of the company as a
whole, the directors must act fairly between the
classes of shareholders.
If directors exercise a power for the proper
FIDUCIARY DUTIES
purpose and in good faith, their
judgment is not
open to review by the courts.
Where a director is also a shareholder
in the
company he may promote his own
interest so
long as his dominant motive is to
benefit the
company. In Mills v. Mills (1938) 60
FIDUCIARY DUTIES
immaterial that one director derived some benefit
from the passing of the board resolution.
The duty of directors to the company however has
effect subject to any law requiring directors in
certain circumstances to consider or act in the
interests of creditors of the company: section
144(3). In Rubin v. Cobalt Pictures Limited [2010]
EWHC 2240 (Ch) the court affirmed that in the area
FIDUCIARY DUTIES
of bordeline insolvency, the directors must have a
paramount regard for the interests of creditors, and
in deciding whether to enter into a transaction on
behalf of the company the directors have a duty to
give consideration to the separate interests of the
company and its creditors [50]. Similarly in
Westpac Banking Corpn v. The Bell Group Ltd (In
Liquidation) (No 3) [2012] WASCA 157 the Court of
FIDUCIARY DUTIES
Appeal of Western Australia found that the
directors implementation of a scheme to
prioritise
the interests of certain banks when the corporate
group was on the verge of insolvency had
prejudiced the different companies respective
ability to meet the claims of other creditors.
Accordingly it was held that directors had
breached
their duties to act in the best interest of the
FIDUCIARY DUTIES
companies. Outside insolvency however the general
law does not recognise any duties owed to creditors
nor does the law give any standing to creditors,
individually or collectively to sue to redress any
breach of any supposed duty owed by the directors:
Yukong Line Ltd v. Rendsburg Investments Corp of
Liberia [1998]2 BCLC 485; see also A Keay, The
Duty of Directors to Take Account of Creditors
FIDUCIARY DUTIES
Interests: Has it Any Role to Play?
[2002]JBL
379
RELIEF OF DIRECTORS FROM

LIABILITY
Since directors fiduciary duties are owed to the
members as a body, the majority of the
members in general meeting may after full
disclosure of all material circumstances waive a
breach of fiduciary duty by a director, and if he
is a member the director may vote in favour of
the waiver provided there is no fraud on the
minority. In Cook v. Deeks [1916]1 A.C. 554 (PC)

LIABILITY
Two directors of a construction company
negotiated for a construction contract in the usual
way in which the companys business was carried
on, and then took the contract in their own names.
A meeting of the company was called and by their
votes as holders of three-quarters of the shares a
resolution was passed declaring that the company
had no interest in the contract. It was held that the

LIABILITY
benefit of the contract belonged to the company
and the directors must account to the company
for it, and the purported ratification was a fraud
on the minority and ineffective.
The Companies Act however provides that any
provision whether in the articles or in any
contract with the company or otherwise for
exempting a director or other officer or auditor

LIABILITY
from liability for negligence, default, breach of
duty or breach of trust in relation to the company,
or indemnifying him from such liability is void.
However the company may pursuant to a provision
in the article indemnify such person from liability
for costs of proceedings concluded in his favour or
in which relief is granted to him under section 446
by the court: see also Table A, article 136.

LIABILITY
Section 446 provides that if, in proceedings for
negligence, default breach of duty or breach of
trust against a director or other officer or auditor
of
a company, it appears that he has acted honestly
and reasonably, having regard to all the
circumstances including those connected to his
appointment, he ought fairly to be excused, the
court may relieve him wholly or partly, from
liability

LIABILITY
on such terms as it thinks fit. A director does not act
reasonably unless he does everything which a
normal man would do in the conduct of his own
affairs. In Selangor United Rubber Estates Ltd v.
Cradock (No. 3) [1968]1 W.L.R. directors of a public
company who disposed of virtually all its assets
without regard for minority shareholders, and
without consideration, but blindly at the behest of

LIABILITY
the majority shareholder who nominated them to
the board, did not act reasonably and could not be
relieved. Similarly in Re Duomatic Ltd [1969] 2 Ch
365, a director dealing with payment to another
director of compensation for loss of office, who did
not seek legal advice but dealt with the matter
himself without a proper exploration of what
should be done on the companys behalf did not act

LIABILITY
reasonably.
Section 446 only applies to proceedings against a
director by or on behalf of or for the benefit of the
company as a whole, or penal proceedings against a
director for breach of the Companies Act. It does
not apply to claims against a director by a third
party to enforce a debt: Customs and Excise
Commissioners v. Hedon Alpha [1981] 2 All E.R. 697.
SECRET BENEFITS OF
DIRECTORS
At common law, the fiduciary position of a director
requires that he must not make a secret profit out
of that position. If he does, he must account for it
to the company. It is immaterial that the company
itself could not have obtained the profit. The
company in general meeting could consent to such
rofit being made or kept. In Regal (Hastings) Ltd v.
Gulliver [1967] 2 A.C. 134, R Ltd owned one cinema
SECRET BENEFITS OF
DIRECTORS
and wanted to buy two others with a view to selling
the three together. R Ltd formed a subsidiary
company to buy the two cinemas, but was unable
to provide all the capital required, so all the
directors of R Ltd except one subscribed for some of
the shares in the subsidiary themselves. The
cinemas were acquired and the shares in R Ltd and
the subsidiary sold at a profit. It was held that the
SECRET BENEFITS OF
DIRECTORS
former directors who subscribed for shares in the
subsidiary must account for to R Ltd for the profit
they made, because it was only through the
knowledge and opportunity they gained as
directors of R Ltd that they were able to obtain the
shares. The one former director who did not
himself subscribe but merely found someone else
to do so was under no liability nor was the solicitor
SECRET BENEFITS OF
DIRECTORS
who was invited to subscribe by the directors.
Lord Russell stated: The liability arises from the
mere fact of a profit having, in the
circumstances, been made. The profiteer,
however honest and well intentioned, cannot
escape the risk of being called upon to account,
(at 144).
In the Regal Case the directors could have
SECRET BENEFITS OF
DIRECTORS
protected themselves by a resolution (either
antecedent or subsequent) of the Regal
shareholders in general meeting (per Lord
Russell of
Killowen at 150) and the case was distinguished
from Lindgren v. L. & P. Estates Ltd [1968] Ch
572
(CA) where the directors were released from
liability by the company retaining them on the
board, after it had knowledge of the facts (the
CONFLICT OF INTEREST
alleged breach of duty was that the directors
had merely rubber stamped the decision of
other persons).
The Companies Act addresses secret benefits by
directors within the scope of conflict of interest by
making separate rules on conflict of interest, and
benefits from third parties. The notion of conflict of
interest is wide and refers to a conflict of interest
and duty and to a conflict of duties: s. 147(7) and
148(4).
Section 147 provides that a director of a company
should avoid a situation in which he has or can have
a direct or indirect interest that conflicts or may
conflict with the interest of the company, especially
where exploitation of any property, information or
opportunity in concerned. It does not matter
whether the company would take advantage of the
property, information or opportunity: s. 147(2).
However the duty is not infringed if the situation
If the situation could not reasonably be regarded as
likely to give rise to a conflict of interest or the
matter has been authorised by the other directors.
Such authorisation may be given by the directors
when the matter concerned is proposed to them
and authorised. However in private companies
there should be nothing in the companies
constitution invalidating the giving of such
authorisation, while in public companies there
should be a provision in the companys
constitution enabling the directors to give such
authorisation, which must then have been
complied with by the directors: s. 147 (4) & (5).
Further safeguards to the integrity of the
authorisation process set out in the Act are that
the meeting at which the matter is considered
must have quorum which does not reckon the
concerned director and any other director with
interest, and the authorisation must be given
without the vote of the concerned director and
any other director with an interest: s. 147(6).
BENEFIT FROM THIRD PARTY

Section 148 regulates benefits from third
parties. A third party means a person other than
the company, an associated body corporate or a
person acting on behalf of the company or
associated body corporate: s. 148(7) .
A person who is a director of a company
should not accept a benefit from a third party
if the benefit is attributable to either the fact
BENEFIT FROM THIRD

PARTIES
that the person is a director of the company, or
the act or omission of the person as a director.
The duty is not infringed if the acceptance of the
benefit cannot reasonably be regarded as likely
to give rise to a conflict of interest: s. 148(3).
The receipt of benefits from a third party in
circumstances giving of likely to give rise to conflict
of interest is also a crime punishable by
BENEFIT FROM THIRD

PARTIES
a fine of not more than one million
shillings, and
forfeiture of the benefit to the
company.
CONTRACTS WITH
DIRECTORS
A consequence of the general duty of a
director
towards the company not to allow conflict
between duty and interest is that even if he
makes no profit, a director must not be
interested in a contract or proposed contract
with the company unless the articles permit it,
as they usually do. If this rule
CONTRACTS WITH
DIRECTORS
is broken the contract is prima facie voidable by
the company. This is so even if his interest is
only that of a shareholder in another company
which contracts with the company of which he is
a director.
Transvaal Lands Co. v. New Belgium (Transvaal)
Land, etc [1914] 2 Ch. 488 (CA), T bought some
some shares in L Co. from N.B. Co. H was a
CONTRACTS WITH
DIRECTORS
shareholder in both T Co. and N.B. Co. and also a
director in T Co. As such director he voted for the
purchase and N.B Co. had notice of it. H did not
disclose the nature of his interest (his shareholding
in N.B Co) as required by the articles of T Co., which
also provided that a director was not to vote in
respect of any contract in which he was concerned.
It was held that the contract was voidable at the
CONTRACTS WITH
DIRECTORS
option of T Co.: Where a director of a company has
an interest as shareholder in another company or is
in a fiduciary position towards and owes a duty to
another company which is proposing to enter into
engagements with the company of which he is a
director, he is in our opinion within this rule. He has
a personal interest within this rule or owes a duty
which conflicts with his duty to the company of
CONTRACTS WITH
DIRECTORS
which he is a director. It is immaterial whether this
conflicting interest belongs to him beneficially or as
trustee for others: per Swinfen Eady L.J. at 503.
It is usual to provide in the articles that a director
who is interested in a contract with the company
must declare his interest as required by the Act,
that he shall not vote on any contract, and that if he
does vote, his vote shall not be counted. The effect
DECLARATION OF INTEREST
of this is to allow the director to contract with
the company, on disclosing his interest, and to
keep any profit he may make.
that if a director of a company is directly or
indirectly interested in a proposed transaction
or arrangement with the company or which the
company has already entered into the director
should declare the nature and extent of his
interest to the other directors, and in the case of
a public company, also to the members of the
company.
In a public company if the transaction or
arrangement is for an amount, or goods or services
valued at an amount exceeding ten percent of the
value of the assets of the company, the
declaration
should also be made to the members of the
company either at a general meeting or by a
declaration given to the other directors: s.
152(2). The declaration must have a valuation
of the goods or services and assets of the
company duly certified by the companys
auditor as being the true market value: s.
152(3). The director must make the declaration
before the company enters into the transaction or
arrangement concerned: s. 152(5).
However the director need not make a declaration
of an interest if he is not aware of the transaction
or
arrangement to which the interest relates: s.
155(6). The director is however taken to be aware
of matters which a director ought reasonably to be
aware: s. 152(7).
Section 152(8) provides that a director need not
declare an interest where it can reasonably be
regarded as likely to give rise to a conflict of
interest, or if the other directors are already
aware of the interest, or if it concerns the terms
of the directors service contract that has been
or is to be considered by a meeting of the
directors, or a committee of directors appointed
COMPETING WITH THE

COMPANY
for the purpose. Directors are treated as being
aware of anything of which they ought reasonably
to be aware: s. 152(9).
Under the general law, apart from the case where a
director has a service agreement with the company
which requires him to serve only the company,
there is authority to the effect that he may become
a director for a rival company so as to compete with
DIRECTORS COMPETING WITH

COMPANY
the first provided he does not disclose to the
second company any confidential information
obtained by him as a director of the first company,
and that what he may do for a rival company he
may do for himself or a rival firm [per Lord
Blanesburgh in Bell v Lever Bros Ltd [1932]A.C.
161 at 195]. However he must not subordinate the
interest of the first company to those of the second
REASONABLE CARE, SKILL, AND

DILIGENCE
and if he does he runs the risk of an
application
relating to unfairly prejudicial conduct:
per Lord
Denning in Meyer v. Scottish C.W.S. Ltd
[1959]
A.C. 324 at 368.

DILIGENCE
In Re City Equitable Fire Insurance Co. Ltd [1925]Ch.
407 at 428 Romer J. laid down three propositions:
first, a director need not exhibit in the performance
of his duties a greater degree of skill than may
reasonably be expected from a person of his
knowledge and experience. Directors are thus not
liable for mere errors of judgment. However a
greater degree of skill must be shown by an

DILIGENCE
executive director such as a finance or legal director
. It is an implied term of his contract of service that
he will use reasonable skill in the performance of
the duties of his office i.e. the degree of skill which
may reasonably be expected of a person in such a
position: Lister v. Ramford Ice and Cold Storage Co.
Ltd [1957] A.C. 555. Further the duties of directors
vary according to the nature of the company and of

DILIGENCE
its business. Second, a director is not bound to give
continuous attention to the affairs of his company.
His duties are of an intermittent nature to be
performed at periodical board meetings. He is not
however bound to attend all such meetings, though
he ought to attend whenever in the circumstances
he is reasonably able to do so. Greater diligence
than that indicated is required of an executive

DILIGENCE
director, whose contract of service requires him to
work full time for the company. Third, in respect of
all duties that having regard to the exigencies of
business and the articles of association may
properly be left to some other official, a director is
in the absence of grounds of suspicion justified in
trusting that official to perform such duties
honestly. In Re City Equitable Fire Insurance Co.

DILIGENCE
[1925] Ch. 407, the directors of an insurance
company left the management of the companys
affairs almost entirely to B, the managing director.
Owing to Bs fraud a large amount of the companys
assets disappeared. Items appeared in the balance
sheet under the headings of loans at call or at
short notice and cash at bank or in hand, but the
directors never inquired how these items were

DILIGENCE
made up. Had they done so, they would have
discovered that the loans were chiefly to B., and
to the companys general manager, and that
the
cash at bank or in hand included 73,000 in
the hands of a firm of stockbrokers in which B
was a partner. It was held that the directors
were negligent. However since the articles
protected the directors from liability except in

DILIGENCE
case of wilful neglect or default, they were held
not liable. Relief of directors from liability for
breach of duty in connection with their fiduciary
duties applies also to the duties of care. As to relief
by a resolution of the company in general meeting,
it was held in Pavlides v. Jensen [1956] Ch. 565 that
if the directors by their negligence had sold the
companys mine at an undervalue, it was open to
REASONABLE CARE, SKILL AND

DILIGENCE
the company by a vote of the majority to decide
that proceedings should not be taken against
them.
The Companies Act, 2015 has brought to an end
the subjective standard in Re City Equitable Fire
Insurance Co Ltd. Section 146 requires that in
performing the functions of director, a director is
bound by both objective and subjective standards.

DILIGENCE
It provides that a director owes a duty to the
company to exercise the same standards of care,
skill and diligence that would be exercisable by a
reasonably diligent person with: (1) the general
knowledge, skill and experience that may
reasonably be expected of a person carrying out the
functions performed by the director in relation to
the company (the objective test); and (2) the

DILIGENCE
general knowledge skill and experience that the
director has (the subjective test). The Act thus
adopts as the minimum standard that
objectively expected of a person in the directors
position; that standard may then be raised by
the subjective element of the test if the
particular director has any special knowledge,
skill and experience. Directors thus have a duty to

DILIGENCE
keep themselves informed. In Lexi Holdings Plc (In
Administration v. Luqman [2009] EWCA Civ 117,
[2009] BCC 716, the Court of Appeal held two
sisters liable as directors for the consequences of
failing to exercise oversight of the companys affairs
which would have ended their brothers dishonest
dealings. As managing director, he had stolen
almost 60,000 that banks had lent the company

DILIGENCE
for use in its business. Because of their
negligence the sisters were held liable jointly with
their brother for the stolen money. Similarly in
Weavering Capital (UK) Ltd (In Liquidation) v.
Peterson [2012] EWHC 1480 (Ch) affd [2013]
EWCA
Civ 71 where the court held both husband (the
only
active director) and his wife (also a director) liable
for losses resulting from a fraudulent scheme

DILIGENCE
involving swap agreements and misrepresentation
to investors. The wife argument that she had only a
confined area of responsibility was rejected. The
court held that her conduct fell short of what was
expected of a reasonable director of a hedge fund
management company in her position, with her
experience, actual knowledge and intelligence, and
she simply failed to acquire a sufficient knowledge
DUTY TO EXERCISE INDEPENDENT

JUDGMENT
of the business to discharge such duties.
Section 145 requires a director to exercise
independent judgment. However the duty is not
infringed by a director who acts in accordance with
an agreement duly entered into by the company
that restricts the future exercise of discretion by the
directors, or in a way authorised by the constitution
of the company. In Fulham Football Club Ltd v.

JUDGMENT
Cabra Estates Plc [1994] 1 BCLC the football club
and its directors contracted with the landlords of
the football ground which they held on lease that in
return for a substantial payment they would not
oppose any future application to the planning
authorities which the landlords might make for the
development of the grounds. Later the directors
wished to go back on this undertaking and they

JUDGMENT
argued that it was an unlawful fetter on their
ability to act in the best interest of the company
and was therefore void. The court noted that by
the undertaking the company had entered into a
contractual arrangement which conferred upon
them substantial benefits, and it could not be
said that the directors improperly fettered the
future exercise of their powers.

JUDGMENT
In the case of nominee directors, the nominator
expects that them to look after its interests, yet
the directors duties are expressly owed to the
whole company, not a specific nominator. In
Scottish Co-operative Wholesale Society Ltd v.
Meyer [1959] AC 324 it was held that a nominated
director must not put the principals interest above
those of the company.
DISCUSSION QUESTION
The articles of association of Wambu Limited
provide that a document shall be executed by the
company where it is signed by two directors or a
director and a secretary, and the seal of the
company duly affixed. The managing director of
the company signed a charge over the companys
assets in favour of a bank as security for a loan, and
on the strength thereof the bank advanced
DISCUSSION QUESTION
the company money. The bank was also
provided with a resolution of the directors
approving the borrowing, although the articles
of association require a resolution of the general
meeting. The company has refused to pay back
the loan arguing that the transaction did not
comply with the articles.
(a) Assess the applicable legal doctrine to the
DISCUSSION QUESTION
dispute.
(b) Advise the bank on two exceptions
to the
doctrine.
THE SECRETARY
Every company must have a secretary and a
sole
director cannot be a secretary: section 177. A
corporation cannot be the secretary if its sole
director is also the sole director of the
company:
section 178.
The secretary is usually appointed by the
directors.
THE SECRETARY
Table A article 110 provides that the secretary
shall be appointed by the directors for such
term, at such remuneration and shall upon such
conditions as they think fit, and any secretary
appointed may be removed by them. A
secretarys role was described in Barnett,
Hoares
& Co. v. South London Tramways Co. (1887)18
THE SECRETARY
QBD 815 at 817 by Lord Esher M.R. thus: [A]
secretary is a mere servant; his position is that
he is to do what he is told, and no person can
assume that he has any authority to represent
anything at all; nor can anyone assume that
statements made by him are necessarily to be
accepted as trustworthy without further
inquiry.
THE SECRETARY
Thus the company was in the case held not to be
liable for the acts of its secretary in fraudulently
making representations to induce persons to take
shares in the company. It has also been held that
the secretary has no independent authority to bind
the company by contract. In Houghton & Co. v.
Nothard, Lowe & Wills Ltd [1928]A.C. 1, L. a director
of N. Co. without any authority from the company
THE SECRETARY
made a contract with H. The contract was
confirmed by a letter written by the secretary
on
behalf of the company. It was held that the
secretary as such had no power to bind the
company.
The secretary cannot borrow money on behalf
of
the company, nor can he issue a writ in the
companys name or lodge defences in the
THE SECRETARY
companys name without the authority of the
company. The secretary cannot also register a
transfer until he is authorised to do so by the
directors, nor can he strike a name off the register
of shareholders without authority. He cannot also
summon a general meeting on his own authority.
In modern time the company secretary is the chief
administrative officer of the company. He is no
THE SECRETARY
longer a mere clerk, and regularly makes
representations on behalf of the company and
enters into contracts which come within the day
to day running of its business on its behalf. He is
certainly entitled to sign contracts connected
with the administrative side of the companys
affairs, such as employing staff and ordering
cars. In Panorama Developments (Guildford) Ltd
THE SECRETARY
v. Fidelis Furnishings Fabrics Ltd [1971]2 Q.B. 711
(CA) the secretary purportedly on behalf of the
company, fraudulently hired cars, ostensibly for the
purpose of meeting customers, and used the cars
for his own private purposes. It was held that the
secretary had ostensible authority to enter into
contracts for the hire of cars on behalf of the
company and the company was liable to pay the
THE SECRETARY
hire charges.
The duties of the company secretary depend on the
size of the company, and on the arrangements with
him. He attends meetings of the company, and of
directors, and makes proper minutes of the
proceedings. He issues under the direction of the
board, all notices to members and others. In
practice he usually countersigns every instrument
THE SECRETARY
to which the seal of the company is affixed. He and
his department conducts all correspondence with
shareholders regarding transfers of their shares,
and keep the books of the company, or at least
those of them that relate to the internal business of
the company such as register of members, share
ledger, transfer book. He also makes the necessary
returns to the Registrar such as annual returns.
THE SECRETARY
The secretary is an officer of the company, and
therefore the court can relieve him from liability
in certain cases. The appointment of the
secretary may be terminated by giving the
agreed notice, or if non is agreed, reasonable
notice, but it may be terminated without notice
if the secretary makes secret profit: McKays
Case (1875)2 Ch. D 1.
WINDING UP
Winding up of companies are of three types:
compulsory winding up by the court, winding up
subject to the supervision of the court, and
voluntary winding up.
Section 219 provides that a company formed and
registered may be wound up on several grounds.
First, where the company has by special resolution
resolved that it be wound up by the court. Second,
GROUNDS FOR COMPULSORY

WINDING UP BY COURT
where default is made in delivering the statutory
report to the Registrar or in holding the statutory
meeting. Only a shareholder may present a petition
on this ground and where the reason is failure to
hold a statutory meeting at least fourteen days
must have elapsed between the last date on which
the meeting ought to have been held and the date
of presentation of the petition. But instead of

WINDING UP BY COURT
making the winding up order the court may order
that the statutory report should be delivered or the
meeting held and order that the costs be borne by
the persons responsible for the default: section
221. Third, the company does not commence its
business within a year after its incorporation or
suspends its business for a whole year. A winding
up order will only be made on this ground if the

WINDING UP BY COURT
company has no intention of carrying on business.
In Re Middleborough Assembly Rooms Co (1880)14
Ch. D. 104, a company was formed to build and use
assembly rooms. Owing to a depression in trade in
the neighbourhood, building was suspended for
more than three years although the company
intended to continue its operation when trade
prospects improved. A shareholder presented a

WINDING UP BY COURT
winding up petition which was opposed by four
-fifths of the shareholders. It was held that the
petition should be dismissed. Since the conduct of
the majority was not unreasonable or something of
which the minority had a right to complain, the
wishes of the majority were not to be disregarded.
It would have been different if business could not
have been carried on or there was an intention to

WINDING UP BY COURT
abandon the undertaking. However where a
company has been formed abroad and carried on
business there, it will not be wound up merely on
the ground that it has not started its business in
Kenya within the year if it intends to do so as soon
as possible: Re Capital Fire Insurance Association
(1882)21 Ch. D 209. However there is no need to
wait for a year if it is apparent within the year that

WINDING UP BY COURT
the company cannot carry out the
objects for
which it was formed: Re German Date
Coffee
Co.: (1882) 20 Ch.D. 169. Fourth, the
number of
members is reduced in the case of a
private
company below 2, or in the case of any
other

WINDING UP BY COURT
whom the company owes more than
Kshs. 1,000
has left at the companys registered
office
demand under his hand for the
payment of the
sum due and the company has for
three weeks
thereafter neglected to pay the sum or
to secure

WINDING UP BY COURT
company is returned unsatisfied in
whole or in
part; or it is proved to the satisfaction
of the
court that the company is unable to
pay its
debts
taking
into
account
the
contingent and
prospective liabilities of the company:
Section

WINDING UP BY COURT
[1916]2 Ch 426, W and R who had traded
separately as tobacco and cigarette manufacturers,
agreed to amalgamate and form a private company.
W and R were the directors and had equal voting
power. After some time, their relations deteriorated
to the extent that they would not speak to each
other and communication between them had to be
conveyed through the secretary. The company

WINDING UP BY COURT
nevertheless continued to make good profit. It
was held that a deadlock had arisen, and since
the company was in the nature of a partnership
under the guise of a private company, it was just
and equitable that it be wound up.
A company formed for a fraudulent purpose
may be wound up on the just and equitable
ground. In Re Thomas Edward Brinsmead & Sons

WINDING UP BY COURT
[1897]1 Ch 406, three men named Brinsmead,
former employees of John Brinsmead & Sons, the
well known piano makers, formed the present
company to make pianos which were to be passed
off as the product of the older established firm. An
injunction had been obtained to restraining the
company from this action, but meantime shares in
the company worth many thousands of pounds had

WINDING UP BY COURT
been subscribed for by the public in a promotion
fraud instigated by the consolidated contract
corporation. On this evidence, it was held to be
just and equitable to grant a winding up order. It
is just and equitable to wind up a company
when its substratum of principal object has failed:
Re German Date Coffee . It is just and equitable to
wind up a company where there is such a justifiable

WINDING UP BY COURT
(and it seems insoluble) lack of confidence in the
management of the companys affairs that it is
unjust and inequitable to require the petitioner
to remain a member. In Loch v. John Blackwood
Ltd [1924]AC 783, the engineering business of
John Blackwood had after its death, been
formed into a company and run by one of his
trustees, Mclaren, for the benefit of the three

WINDING UP BY COURT
beneficiaries in his estate: McLarens wife (who was
to take one half), Mrs. Loch (one-quarter) and
Rodger (since deceased, one quarter). The business
had been run very profitably by Mclaren, but (as is
described in the judgment) he had run it in a
manner which was oppressive to the beneficiaries
other than his wife. They accordingly petitioned for
the winding up of the company on the ground that

WINDING UP BY COURT
it was just and equitable to do so.
It may be just and equitable to wind up a
company where one party has simply
exercised
his or her legal rights, but in an unjust or
inequitable way. In Ebrahimi v. Westbourne
Galleries Ltd [1973] AC 360, the company was
formed in 1958 to take over a business which
Nazar and Ebrahimi had run in partnership for

WINDING UP BY COURT
over a decade. At first, the two were equal
shareholders and the only directors, but soon
afterwards Nazars son joined the company as a
director and shareholder, so that Ebrahimi found
himself in a minority position both on the board
of directors and at a general meeting. In 1969
after some disagreement between the parties,
an ordinary resolution was passed removing

WINDING UP BY COURT
Ebrahimi as director. Ebrahimi sought relief on
grounds of oppression of the minority, or
alternatively for winding up on just and equitable
grounds. The court refused an order on oppression
because his complaint was in his capacity as
director rather than as member, but issued an
order
for winding up on just and equitable grounds on
the
basis that because of long association in

WINDING UP BY COURT
partnership, a special underlying obligation of his
fellow members in good faith, or confidence existed
that so long as the business continues he would be
entitled to management participation, an obligation
that had been breached by his expulsion.
Last, In the case of a company incorporated outside
Kenya and carrying on business in Kenya, where
winding up proceedings have been commenced in
WHO MAY PETITION FOR

COMPULSORY WINDING UP BY COURT
respect of it either in the country of its
incorporation or in any country in which it has
established a place of business: section 219.
Section 221 provides that an application to the
courts for winding up is by petition which may be
presented by any of the following parties: First, the
company; second, a creditor. A secured creditor
may petition but will normally rely on his security,

so that the petition is almost always by an
unsecured creditor. However where the petitioning
creditors debt is disputed on a substantial ground,
the court will usually restrain the prosecution of the
petition as an abuse of the process of the court,
even if the company appears to be insolvent. In
Stonegate Securities Ltd v. Gregory [1980] Ch 576,
prior to the presentation of a petition to wind up

the plaintiff company, the defendant in accordance
with the Act, served a notice on the company
demanding the payment of a debt within 21 days.
The company, while accepting that there was a
contingent or prospective liability to the defendant,
denied that the debt was presently due. It filed suit
seeking to restrain the defendant from presenting a
petition. The trial judge found that there was a

bona fide dispute whether the Defendant was a
creditor for a sum presently due and granted an
injunction restraining the defendant from
presenting a petition in respect of the alleged debt
provided that within three weeks, the directors of
the company made a declaration of solvency of the
company. The company successfully appealed. The
Court of Appeal held that winding up proceedings

are not suitable proceedings in which to determine
a genuine dispute about whether the company
does or does not owe the sum in question.
Similarly, winding up proceedings are not suitable
proceedings in which to determine whether that
liability is an immediate liability or only prospective
or contingent liability.
A creditor whose debt is presently due and who

cannot obtain payment normally has a right as
between himself and the company ex debito
justitiae to a winding up order even if the company
is being wound up voluntarily or is in receivership:
Re Chapel House Colliery Co. (1883)24 Ch.D 259.
Thirdly, by a contributory. Section 214 defines a
contributory as any person liable to contribute to
the assets of the company in the event of its being

wound up. On the basis of section 213, it includes
all person who at the date when a winding up
commences are members of the company, or had
been members within the year immediately
preceding that date. Every contributory has a
statutory right to petition, which cannot be
excluded or limited by any provisions in the
articles.
In Re Peveril Gold Mines Ltd [1898]1 Ch 122 the

companys articles provided that no member should
petition for the winding up of the company unless
two directors had consented in writing, or a general
meeting had so resolved, or the petitioner held at
least 20% of the issued capital. A member
presented a petition without satisfying any of these
conditions. It was held that the articles were
ineffective to prevent him from doing so.

However the court will not as a rule make an order
on a contributorys petition unless the contributory
alleges and proves prima facie that there will be
assets for distribution among the shareholders, or
that the affairs of the company require investigation
in respects which are likely to produce a surplus of
assets available for distribution: Re Expanded Plugs
Ltd [1966]1 W.L.R. 514, Re Othery Construction Ltd

[1966] 1 W.L.R. 69. This is because unless there are
such assets, a contributory has no interest in a
winding up.
If a petition is presented by a holder of a small
parcel of fully paid up shares on facts similar to Re
German Date Coffee Co. (1882)20 Ch 169 or Re
Thomas Edward Brinsmead & Sons [1897]1 Ch 406
should the court apply the available assets for

distribution rule?
However the rule does not apply where the basis of
the contributorys petition is just and equitable
grounds. At the same time, such a petition which is
opposed by the majority will not be granted except
where the conduct of the majority is something of
which the minority have a right to complain: Re
Middlesborough Assembly Rooms Co. (1882)14

Ch.D 104.
Section 221(2) further provides that when a
company which is already in the course of being
wound up voluntarily or subject to supervision
cannot be continued with due regard to the
interests of the creditors or contributories may
make an order for complusory winding up on the
petition of the official receiver, or of the persons

mentioned above as being entitled to
present
a
petition.
Fourth,
the
official
receiver;and last,
the A-G in consequence of a report of
inspectors
on the companys affairs under section
170(2)
on the basis of which he concludes
that it is
PROCEDURE ON WINDING UP
In the case of compulsory winding up by the
courts
the commencement of the winding up dates from
the presentation of the petition unless before that
date a resolution was passed to wind up
voluntarily
in which case the commencement is the time of
resolution: Section 226
Section 235 empower the court to appoint a
provisional liquidator
PROCEDURE ON WINDING
UP
time after presentation of a petition and before a
winding up order is made. When the court has
heard the petition it may either dismiss it with or
without costs, or adjourn the hearing
unconditionally or conditionally, or make an
interim order or any other order such as for
compulsory winding up or winding up under the
supervision of the court as it thinks fit: Section
CONSEQUENCES OF WINDING UP
ORDER
222. Where the grounds of the petition are that a
statutory meeting has not been held, or a statutory
report given, the court may require that the
meeting be held and the report filed instead of
making the winding up order, and also order the
costs to be paid by any persons responsible for the
default: Section 222(3).
(1) Section 229 provides that an order of winding
ORDER
up a company operates in favour of all creditors
and contributories as if made on a joint petition
of a creditor and a contributory.
(2) Any disposition of property and any transfer of
shares or alteration in the status of members after
the order is void unless the court orders otherwise:
Section 224. The winding up order thus divests the
company of beneficial ownership of its assets,
ORDER
although it still has legal ownership: Ayerst v. C & K
(Construction) Ltd [1976] A.C. 167. The object is to
prevent, during this period, the improper alienation
and dissipation of the property of the company in
extremis. But where the company is a trading
company, the court can sanction transactions in the
ordinary course of business, for otherwise the
presentation of the petition whether well- or ill-
ORDER
founded, would paralyse the companys trade. The
disposition includes dispositions of the companys
property made by third parties whether directly or
indirectly: Re Leslie Engineers Co. Ltd [1976] 1
W.L.R. 292. (3) Any attachment, distress or
execution put in force against the estate or effects
of the company is void: Section 225. (4) Moreover
when the winding up order has been made or an
ORDER
interim liquidator appointed, no action may be
proceeded with or commenced against the
company except by leave of the courts and
subject to such terms as the court may impose:
Section 228. The purpose is to ensure that when
a company goes into liquidation the assets are
administered for the benefit of all the creditors.
(5) The official receiver becomes the provisional
ORDER
liquidator of the company by virtue of his office
until he or another person becomes liquidator:
Section 236. (6) The winding up order has the
effect
of terminating most of the powers of the directors,
which are then assumed by the liquidator. The
directors continue to have a duty to disclose
confidential information. (7) The companys
employees are ipso facto dismissed, but may sue
for
ORDER
damages for breach of contract, although an
employee who continues to discharge the same
duties and receive the same wages may be deemed
to have entered a tacit relocation into a contract of
service with the liquidator.
Section 239 provides that when a winding up order
is made, or a provisional liquidator appointed, he
takes into his custody and control all the property
THE WINDING UP ORDER AND

COMPANY PROPERTY
of the company. Winding up does not,
as does
bankruptcy or sequestration, operate
as a cessio
bonorum or transfer of the property, as
the it
remains vested in it as before: Per
Warrington
L.J. in Re H. J. Webb & Co. (Smithfield,
London)
SPECIAL MANAGER
application of the Official Receiver
acting as
liquidator whether provisional or not
by the
court. The official receiver may make
the
application where he is satisfied that
the nature
of the companys business, or the
interests of
PROCEEDINGS AFTER WINDING UP

ORDER
appointment will usually fix the term
and
remuneration of the special manager
and confer
such powers on him as it thinks fit. The
special
manager is required to give such
security as the
Official Receiver requires: Section 258.
Section 232 empowers the official
1. STATEMENT OF COMPANYS
AFFAIRS
affairs, which has to be made in
accordance with
the statutory form and verified by
affidavit. This
report must be submitted within
fourteen days
after the appointment of a provisional
liquidator
unless the court orders otherwise. A
director
STATEMENT OF COMPANYS AFFAIRS

the names, residences and occupations of its
creditors; (c) the security held by them and dates
when they were given, and such other information
as may be required. The statement is made by one
or more of the directors and the secretary, or if the
Official Receiver so requires, by persons who are or
have been officers of the company. The statement is
open for inspection to anyone who states in writing
2. REPORT OF OFFICIAL
RECEIVER
that he is a creditor or contributory. Section 233(1)
requires that as soon as practicably possible after
receipt of the statement of affairs the Official
Receiver must submit a preliminary report to the
court as to the amount of capital issued, subscribed
and paid up, and the estimated amount of assets
and liabilities, the cause of failure of the company
where it has failed, and whether in his opinion
3. FIRST MEETING OF CREDITORS

AND CONTRIBUTORIES
further inquiry is desirable as to any other matter
relating to promotion, formation or failure of the
company or the conduct of its business.
Section 236 requires the official receiver to
convene separate meetings of (i) creditors and (ii)
contributories of the company. The object of these
meetings is for the creditors and contributories to
decide whether an application should be made to
FIRST MEETING OF CREDITORS AND

CONTRIBUTORIES
court to appoint a liquidator other than the Official
Receiver, and if so, whether to apply for
appointment of a committee of inspection to act
with him: Section 248. These first meetings must be
held within sixty days after the winding up order
unless otherwise ordered by the court: Rule 109
Companies Winding Up Rules.
The official receiver must give notice of least

CONTRIBUTORIES
seven days of the time and place
appointed for
each meeting to each creditor and
contribuotry
of the company. The notice may be
personally
delivered or sent by post: Rule 113
Companies
Winding Up Rules.
Rule 114 requires that the official

CONTRIBUTORIES
including the causes of its failure and any
observations thereon he may think fit to make.
The
official receiver may also summon any director or
other officer to attend such meeting.
Rule 121 provides that the official receiver (or
liquidator) or his nominee will be chairman at the
meeting. If there is a difference of opinion the
court will decide. Where a person other than the
4. APPOINTMENT OF
LIQUIDATOR
official receiver is appointed as liquidator, the
court
fixes his remuneration: Section 238. The appointed
liquidator must then notify the Registrar of
Companies of his appointment and give security to
the satisfaction of the Official Receiver.
The committee of inspection is appointed by the
court after the meeting of creditors and
contributories have been held. It consists of
5. COMMITTEE OF
INSPECTION
creditors or contributories or persons
holding
general powers of attorney from them
as may
be agreed at the meeting, or
determined by the
court. Its function is to assist and
supervise the
acts of the liquidator.
There is no statutory limit to the
COMMITTEE OF INSPECTION
or any member of the committee may summon a
meeting of the committee when he thinks
necessary. The committee acts by a majority of the
members present, and a majority of the members
present constitutes a quorum. A person ceases to
be a member of the committee if he sends his
resignation in writing to the liquidator; or becomes
bankrupt or compounds or arranges with his
creditors; or is absent from five consecutive
meetings without leave; or is removed by ordinary
resolution of creditors, if he represents creditors, or
of the contributories, if he represents
contributories: section 249. On a vacancy occuring
the liquidator will summon a meeting of creditors
or contributories to fill the vacancy, but if he thinks
it is unnecessary he may apply to the court for an
POWERS OF THE
LIQUIDATOR
order that the vacancy be filled: Section 249.
Section 241 provides that the liquidator may with
the sanction of the court or committee of
inspection: (i) bring or defend actions in the name
of the company; (ii) carry on business so far as
necessary for beneficial winding up; (iii) appoint an
advocate to assist him in the performance of his
duties; (iv) pay any class of creditors in full; (v)
POWERS OF THE
LIQUIDATOR
make any compromise with creditors or persons
claiming to be such; (vi) compromise calls, debts,
and other claims between the company and any
contributory or debtor.
The liquidator may on his own responsibility
without the sanction of the court: (i) sell the
companys movable and immovable property by
public auction or privately; (ii) do all acts and
POWERS OF THE
LIQUIDATOR
execute all documents in the companys name
and use the companys seal; (iii) prove and
receive dividends in the bankruptcy of any
contributory; (iv) draw, accept and endorse bills
and notes in the name of the company; (v)
borrow money on the security of the companys
assets; (vi) take out in his official name, letters
of administration to a deceased contributory;
POWERS OF THE LIQUIDATOR

(vii) appoint an agent to do any
business which
the liquidator is unable to do himself;
(viii) do
all such other things as are necessary
for
winding up the affairs of the company
and
distributing its assets.
Section 264 empowers the court, after
PRIVATE EXAMINATION
of the company or person who knows or is
suspected to have in his possession any property
of the company or who is indebted to the
company, or from whom the court considers
that it can obtain information concerning
promotion, trade, dealings, affairs or property of
the company to appear before it. If he fails he
may be arrested. Where the official receiver has
PUBLIC EXAMINATION
made a report arising from the statement of
companys affairs stating that in his opinion a fraud
has been committed in the promotion or formation
of the company, or a by an officer of the company
since its incorporation, the court can, based on the
report, direct that that person or officer appear
before it on a day fixed by the court for that
purpose and be publicly examined on oath as to the
PUBLIC EXAMINATION
promotion or formation or conduct of the business
of the company or as to his conduct and dealings as
officer thereof. The persons answers are taken
down and signed by him and may thereafter be
used as evidence against him: section 265.
A liquidator who wishes to resign must offer his
resignation to separate meetings of creditors
and contributories and they must accept the
CESSATION OF LIQUIDATORS
POWERS
resolution by ordinary resolution.
A liquidator may also be removed by
the court if
sufficient cause is shown. (Section
238) This may
be due to the personal character of the
liquidator or failure to perform his
statutory
duties or because the court is satisfied
that he
CESSATION OF LIQUIDATORS
POWERS
property or as much of it as possible and has
distributed the final dividends to the creditors and
made a final return to the contributories, he can
then apply to the court and make a report to it on
his account, and after considering the report and
any objections of creditors and contributories, the
court grant the release or not as the case may be:
Section 247. An order of the court discharging the
CESSATION OF POWERS OF
LIQUIDATOR
liquidator indemnifies him from all liability in
the administration of the affairs of the company
unless it is subsequently discovered that the
release order was obtained by fraud or by
suppression or concealment of any material
fact.
When the affairs of the company have been
completely wound up, the court will make an
order dissolving the company if the liquidator
DISSOLUTION OF COMPANY
applies for the same. The liquidator
must then
within fourteen days of such an order
being
made deliver a copy of the same to the
Registrar
of Companies and he is liable to a fine
if he
defaults: Section 269.
VOLUNTARY WINDING UP
Since a company is created by its members
voluntarily it can also be voluntarily ended. The
advantages of voluntary winding include less
formalities to be complied with. Section 271 of the
Companies Act provides that a company may be
wound up voluntarily: (i) when the period, if any,
fixed for the duration of the company by the
articles has come to an end, or an event, if any on
GROUNDS FOR VOLUNTARY

WINDING UP
the occurrence of which the articles provide that
it is to be dissolved, occurs, and the company
has in a general meeting passed an ordinary
resolution that it be wound up voluntarily; (ii) if
the company passes a special resolution to be
wound up voluntarily.
Voluntary winding up commences with a
resolution of the company, and the date of the
KINDS OF VOLUNTARY WINDING UP

resolution
is
the
date
of
the
commencement of
the winding up. There are two kinds of
voluntary
winding up: (a) members voluntary
winding up,
and (b) creditors voluntary winding up.
MEMBERS VOLUNTARY WINDING UP

A members voluntary winding up takes place
only when the company is solvent. It is entirely
managed by the members, and the liquidator is
appointed by them. No meeting of creditors is
held, and no committee of inspection is
appointed. To obtain the benefit of this form of
winding up, a declaration of solvency is filed
under section 276(3).
1. DECLARATION OF
SOLVENCY
The declaration of solvency is a solemn
declaration
made by the directors, or if there are more than
two of them, by the majority at a board meeting,
stating that they have made a full inquiry into the
companys affairs, and have formed the opinion
that the company will be able to pay its debts in
full
within a specified period not exceeding twelve
months from the commencement of the winding
DECLARATION OF SOLVENCY
up. The declaration is only effective if it is sent to
the Registrar of Companies for registration before
the date of the passing of the resolution, is made
within thirty days immediately preceding the date
of the resolution, and embodies a statement of the
companys assets and liabilities at the latest
practicable date before the declaration.
A director who makes a declaration without
THE LIQUIDATOR
reasonable cause is liable to imprisonment or a
fine or both.
The shareholders may then appoint a liquidator to
proceed with the liquidation of the company. Unlike
the liquidator in a winding up by the court, a
liquidator in a voluntary winding up is not an officer
of the court, but is an agent of the company. His
remuneration is fixed by the company in general
NOTICE OF RESOLUTION
meeting, and within fourteen days of appointment
he must give notice of his appointment to the
Registrar of Companies.
Section 272 provides that when a company has
passed a resolution for voluntary winding up it is
required within fourteen days to give notice of the
resolution by advertisement in the gazette, and in
default the company and its officers at fault are
CONDUCT OF THE
LIQUIDATION
liable to a fine.
Section 282 requires that if the winding up
continues for more than one year, the liquidator
must within three months after the end of the first
year and each successive year, summon a general
meeting of the company and lay before it an
account of his acts and dealings and of the conduct
of the winding up during the preceding year. If the
CONDUCT OF THE
LIQUIDATION
liquidator forms the opinion that the company
will not be able to pay its debts in full within the
period stated in the declaration of solvency, he
must forthwith summon a meeting of creditors,
and lay before it a statement of the companys
assets and liabilities: section 281. The winding
up will then proceed as if it is a creditors
voluntary winding up.
CONDUCT OF THE
LIQUIDATION
As soon as the affairs of the company are fully
wound up the liquidator must call a general
meeting of the company by advertisement in the
gazette at least one month before the meeting and
present an account of the winding up showing how
the winding up has been conducted and how the
companys property has been disposed of. Within
fourteen days after the meeting the liquidator must
DISSOLUTION OF THE
COMPANY
send a copy of the account, together
with a
return of the holding of the meeting to
the
Registrar, who is required to register
the
accounts and returns, and at the end
of three
months from the date of the
registration the
CREDITORS VOLUNTARY WINDING

UP
If no declaration of solvency is made and filed with
the Registrar, it is presumed that the company is
insolvent. In such a case the company must call a
meeting of the creditors for the same day as, or the
next day after, the meeting at which the resolution
for voluntary winding up is to be proposed. Notice
of the meeting must be advertised in the gazette
and sent at the same time as notices of the meeting
MEETING OF CREDITORS
of the company is sent to the members.
The directors must also appoint one of their
number to preside at the meeting: Section 286.
The business of the meeting is : (i) to receive a
full statement by the directors of the position of
the companys affairs, together with a list of
creditors and the estimated amount of their
claims (section 286); (ii) to appoint a liquidator
APPOINTMENT OF
LIQUIDATOR
(section 287); and (iii) to appoint a committee of
inspection (section 288).
Section 287 empowers the creditors and the
company at their respective meeting to nominate
a
liquidator for the purpose of winding up the affairs
and distributing the assets of the company. If the
company and the creditors nominate different
persons, the nomination of the creditors will
APPOINTMENT OF
LIQUIDATOR
prevail, subject to any order by the court. If
different persons are nominated, any director,
member or creditor of the company may within
seven days after the creditors nomination,
apply to the court that the companys nominee
be liquidator instead of or jointly with the
creditors nominee, or that some other person
be liquidator: section 288.
APPOINTMENT OF
LIQUIDATOR
Section 298 empowers the court to
appoint a
liquidator in a voluntary winding up if
for any
reason whatever no liquidator is
appointed or
acting. The court can also remove a
liquidator
for cause shown such as insanity, bias,
dishonesty and undesirability, and
APPOINTMENT OF
LIQUIDATOR
The liquidator must within fourteen days of his
appointment publish in the gazette and deliver to
the Registrar a notice of his appointment in the
form prescribed by the Registrar: section 299. The
appointment of a liquidator terminates the
activities of the directors and they have no power
to act after his appointment.
The creditors may at their first or subsequent
meeting appoint a committee of inspection of not
more than five persons to act with the liquidator. If
they do so, the company in general meeting may
appoint not more than five persons to to be
members of the committee subject to a resolution
of the creditors that the persons should not act on
the committee, except as otherwise ordered by the
court: section 288.
The committee of inspection or the creditors (if
there is no committee) may fix the remuneration to
be paid to the liquidator. In case of vacancy by
death, resignation or otherwise the creditors may
appoint another liquidator: section 291.
If the creditors voluntary winding up continues for
more than one year, the liquidator must within
three months after the end of the year summon a
CONDUCT OF LIQUIDATION
general meeting of the company and a meeting of
the creditors at the end of the first and every
succeeding year and to lay before the meetings an
account of his acts and dealings and of the conduct
of the winding up during the preceding year.
When the liquidation is complete the liquidator
must by notice in the gazette call final meetings
of the company and creditors and present to them
CONDUCT OF LIQUIDATION
his account, and within fourteen days after the
meetings, the liquidator must send to the Registrar
a copy of the account and a return of the holding of
the meetings, or a return that no quorum was
present thereat must be filed with the Registrar,
who is required to register the same. On the
expiration of three months from the registration,
the company is automatically dissolved:section 294.
POWERS OF THE
LIQUIDATOR
In every voluntary winding up, it is the duty of
the liquidator to pay the debts of the company
and adjust the rights of the contributories
among themselves: section 297. He may for
this
purpose, without sanction: settle a list of
contributories, make calls, summon general
meetings of the company for any purpose he
may think fit; exercise all the powers of a
POWERS OF THE
LIQUIDATOR
liquidator in a compulsory winding up under section
241 except those described below.
In a members voluntary winding up, with the
sanction of a special resolution of the company, and
in a creditors voluntary winding up with the
sanction of the court or a committee of inspection,
or if there is no committee a meeting of creditors,
the liquidator may: pay any class of creditors in full,
POWERS OF THE
LIQUIDATOR
make any compromise or arrangement with
creditors, and compromise all calls and liabilities
to calls and other debts and liabilities.
The consequences of voluntary winding up are as
follows: First, after such commencement the
company must cease to carry on its business except
to the extent required for the beneficial winding up
although the corporate powers of the company
CONSEQUENCES OF VOLUNTARY
WINDING UP
continue until it is dissolved: Section 274.
Section 275 provides that shares may still be
transferred by the members if sanctioned by the
liquidator, but any alteration in the status of the
members made after commencement of a
voluntary winding up is void. Second, on
appointment of the liquidator, the powers of the
directors cease except so far as the company in
WINDING UP
general meeting or the liquidator (in a members
voluntary winding up) or the committe of
inspection or, if there is no such committee the
creditors (in a creditors voluntary winding up),
sanction their continuance.
A voluntary winding up does not necessarily
operate as a discharge of the companys
employees,
but if it takes place because the company is
WINDING UP
insolvent, it will operate as a discharge. In
Fowler v. Commercial Timber Co. Ltd [1930]2
K.B. 1, by a written agreement, F was
appointed
managing director of a company for five years
certain. Before the expiration of the five years
the company passed a resolution for voluntary
winding up as it could not by reason of its
liabilities continue its business. F voted for this
WINDING UP
resolution. It was held that the voluntary winding
up operated as a wrongful dismissal of F and a term
could not be implied that if the company went into
voluntary liquidation with the assent of F he should
lose his right to damages. Per Greer L.J. at 6: An
order for the compulsory winding up of a company
puts an end to the employment of the managing
directorand in my judgment the same result must
WINDING UP
necessarily follow where there is a resolution for
the voluntary winding up of the company which
depends upon the company being unable to meet
its obligations.
A compulsory winding up does not bar the right of
any creditor or contributory to have the company
wound up by the court. A creditor of a company in
voluntary winding up is entitled ex debito justitiae
COMPULSORY WINDING UP AFTER

COMMENCEMENT OF VOLUNTARY WINDING UP
as between himself and the company to a
compulsory winding up order. However the
court is bound to have regard to the wishes of
all the creditors, and if the majority favour the
continuance of the voluntary liquidation an
order will not be made unless the petitioner can
show special circumstances: Re B. Karsberg Ltd
[1956]1 W.L.R. 57
WINDING UP UNDER
SUPERVISION
Section 304 provides that when a company has
passed a resolution to wind up voluntarily the
court may order the continuation of voluntary
winding up subject to its supervision on any
terms or conditions. The liquidator will continue
to exercise all powers subject to any restrictions
laid down by the court.
A petition for the winding up of a company
WHO MAY PETITION

subject to supervision of the court may be
presented by any person entitled to petition for
the compulsory winding up of the company.
Before the court can make a supervision order it
must call a meeting for ascertaining the wishes
of creditors and contributories: section 336.
If an order for winding up under courts
supervision is made the liquidator proceeds to
EFFECT OF SUPERVISION
ORDER
wind up the company in the same manner as if
the liquidation were an ordinary voluntary
winding up, exercising without sanction those
powers which a liquidator in a voluntary winding
up may ordinarily exercise without sanction but
the powers for the exercise of which such
liquidator would require sanction may be
exercised only with the sanction of the court, or
EFFECT OF SUPERVISION
ORDER
in a case where the order for the winding up
was on a creditors winding up, with the
sanction of the court or committee of
Inspection: section 308.
Section 307 empowers the courts to appoint an
additional liquidator when a supervision order is
made. Such a liquidator has the same powers
and duties and stands in the same position as a
ADDITIONAL LIQUIDATOR
liquidator appointed in a voluntary
winding up.
The powers of a liquidator in a winding
up under
supervision are listed in Section 308.
Section 338 empowers the court at
any time
within two years to declare a
dissolution void on
the application of the liquidator, or any
DISCUSSION QUESTION
Kirago and Mutune who are alumni of JKUAT
University always vowed that by the age of fourty
-five they would have made enough money to avoid
the hustles of looking for money. When they
graduated, they formed a company for purposes of
supplying government tenders. The articles of the
company provided that its terms would be a period
of twenty years. The company operated for twenty
DISCUSSION QUESTION
years, but by the twentieth year, the relations
between Kirago and Mutune had deteriorated so
much that they hardly spoke to each other,
although the company continued to receive
lucrative tender awards.
Kirago seeks your legal advise with respect to two
grounds on which the company may be wound up.
Write for him an detailed legal opinion thereon.

Company Law Guide

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COMPANY LAW

under the Act or an existing company. It also

COMPANIES LIMITED BY GUARANTEE

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LEGAL EFFECTS OF CONSTITUTION

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LEGAL EFFECTS OF CONSTITUTION

LEGAL EFFECTS OF CONSTITUTION

LEGAL EFFECTS OF CONSTITUTION

LEGAL EFFECTS OF CONSTITUTION

LEGAL EFFECTS OF CONSTITUTION

LEGAL EFFECTS OF CONSTITUTION

LEGAL EFFECTS OF CONSTITUTION

LEGAL EFFECTS OF CONSTITUTION

LEGAL EFFECTS OF CONSTITUTION

LEGAL EFFECTS OF CONSTITUTION

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PROMOTION AND INCORPORATION

POSITION AND DUTIES OF

POSITIONS AND DUTIES OF

POSITION AND DUTIES OF

REMEDIES OF COMPANIES AGAINST

LIFTING THE VEIL

veil of incorporation can be lifted so that the law

LIFTING THE VEIL

LIFTING THE VEIL

LIFTING THE VEIL

LIFTING THE VEIL

LIFTING THE VEIL

LIFTING THE VEIL

LIFTING THE VEIL

LIFTING THE VEIL

THE DOCTRINE OF ULTRA

THE DOCTRINE OF ULTRA

THE DOCTRINE OF ULTRA

THE DOCTRINE OF ULTRA

THE DOCTRINE OF ULTRA

THE DOCTRINE OF ULTRA

MAIN OBJECTS RULE

MAIN OBJECTS RULE

MAIN OBJECTS RULE

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MAIN OBJECTS RULE

MAIN OBJECTS RULE

ULTRA VIRES IN THE WIDER

ULTRA VIRES IN THE WIDER

ULTRA VIRES IN THE WIDER

ULTRA VIRES IN THE WIDER

ULTRA VIRES IN THE WIDER

ULTRA VIRES IN THE NARROW

COMPANIES ACT 2005: 1.

2. PROTECTION OF THIRD PARTIES

3. STATUTORY OUSTER OF CONSTITUTIONAL

STATUTORY OUSTER OF CONSTITUTIONAL

STATUTORY OUSTER OF CONSTITUTIONAL

STATUTORY OUSTER OF CONSTITUTIONAL