Company Law Essay – Cavendish University Law Lecturers Notes
DEFINITION OF COMPANY: The Companies Act Cap 110 definition section states that “company” means a company formed and registered under the Act or an existing company. The companies Act does not sufficiently define what a company is but authors have developed a definition of a company. Professor David Bakibinga in his book company law in Uganda at page 2 defines a company as an artificial legal entity separate and distinct from its members or shareholders. This legal person is distinguishable from natural personality.
Natural persons are born by natural people/persons and their lives end at death, artificial persons (corporations) are created by law and their existence is ended by the law. The possession of a legal personality implies that a company is capable of enjoying rights and being subject to duties, separately from its members. As an artificial legal person, a company is capable of the following;- * It has an existence separate from that of the members and as such;- * It has its own name by which it is recognised. It can own its own property ie assets like buildings, land, bank accounts. etc * It can sue or be sued in its own name. * Even if a member or all the members die, the company will still remain in existence, in other words it has perpetual succession. * It can borrow money in its own name and use its assets as security and it will be responsible for paying back such debts.. * It can employ its own employees, including its members or shareholders. i) This principle of legal personality was first distinctly articulated in the British House of Lords Judgment in the case of Salomon Vs.
Salmon & Company Limited (1897) AC 22 At the court of first instance and appeal court, it was held That therefore the company was a legal entity capable of a separate existence and liable to pay its own debts, and Salomon was not personally liable to pay the debts of the company. ii) That a company is at law a different person altogether from the subscribers although it may be that after incorporation, the business is exactly the same as was before, the same persons are the managers, and the same hands receive the profits.
TYPES OF COMPANIES. Under the Companies Act, provision is made for two major types of registered Companies, which can be lawfully formed in Uganda. Principally these can be further divided into 2 broad categories. 1. Private company. 2. Public company. PRIVATE COMPANIES The Companies Act defines a private company as * A Company, which by its articles restricts the rights to transfer shares of the company. * Secondly, it limits the number of its members to 50 including past and present employees of the company who are shareholders. Thirdly, a private company prohibits any invitations to the public to subscribe for any shares or debentures of the company (investments in the company). * Here the required minimum number of members is 2 people. This position was laid down in the case of LUTAYA Vs. GANDESHA (1987) HCB 49 in which a man and his wife formed a private company and of the 1500 shares of the company, the wife held only 2 shares. This position was also stated in the case of Salomon Vs. Salomon & Co (1897) AC 22.
The second person needed may not be an independent person. He could be the nominee of the first person. Where a private Company does not comply with these requirements, it loses exemptions and privileges conferred on a private company. This failure can only be remedied upon showing court that it was caused by accident or inadvertence or some other sufficient cause. Under the Companies Act, Companies in Uganda can also be further divided into: * Limited by shares * Limited by guarantee * Unlimited companies (a) A company limited by shares.
This is a company where the members enjoy limited liability. This means that in case of winding up of the company if the company’s assets are unable to meet the company’s debts, then the members will only be liable to contribute to the debts of the company only such amounts as a member may not have paid for the shares they bought. i,e. , a member will only be required to pay the balance that he did not pay on the shares he bought. Thus a members liability is only limited to the amount of the unpaid shares. a) A Company limited by guarantee This is one where the liability of its members is limited to such amount as the members may have undertaken to contribute to the company’s assets in the event of its winding up. This guarantee must be expressed in the memorandum of association. i. e. there must be an express statement/undertaking by the subscribers / members that the members guarantee that they will pay a specified amount of money if in the event of winding up of the company, if the company’s assets are not sufficient to meet its debts. b) An unlimited company This is a company in which there is no limit on the liability of the members. This means that in the event of winding up, the members are liable to contribute money sufficient to cover all the company’s debts without any limitations, if the company for example has debts of millions and millions of shillings, the members have to be responsible to pay all the debts and the members personal estate/property can be encroached upon to discharge the liabilities of the company. PUBLIC COMPANIES
The minimum required number for public companies is 7 and it goes up to infinity in other words there is no limit as to the maximum number of members a public company can have. A public company should be a limited liability company. Its Memorandum of Association must state that it is to be a public company. Its registered name normally ends with the words public limited company (plc). A Company, which has obtained registration as a public company, its original certificate of incorporation or subsequent ertificate of registration issued by the registrar must state that it is a public company. Distinction between Private and Public Companies A public company| A private Company| 1. Minimum of 7 members. For such company to do business there must be a minimum of at least 7 members. Where the company continues to do business when the number of members has fallen below the legal minimum, then this is a ground for the winding up of the company. (Winding up is the process of putting the company’s existence to an end. ) 2.
No maximum limit of members. 3. There must be a minimum of two directors 4. Cannot commence business until and unless it obtains a certificate of trading/certificate of commencement of business, in addition to a certificate of incorporation. 5. Must hold a statutory meeting between l & 3 months from the date of commencement of business. Directors are required under the law to send a statutory report to every member within 14 days to the date of the meeting. Such report must also be sent the registrar of companies. 1. Minimum of two members For such company to do business there must be a minimum of at least 2 members. Where the company continues to do business when the number of members has fallen below the legal minimum, then this is a ground for the- winding up of the company. 2. The maximum number of members is 50 3. Only one director can suffice 4. Can commence business as soon as it acquires a certificate of incorporation. 5. No statutory meeting is required of such companies. | HOLDING AND SUBSIDIARY COMPANIES.
A subsidiary company is one that is controlled by another company called a holding company or its parent (or the parent company). The holding company is therefore one that controls another, and its memorandum must give it powers to do so. The most common way that control of a subsidiary is achieved, is through the ownership of majority shares in the subsidiary by the parent Examples include holding companies such as MTN (Uganda) is a subsidiary of MTN (South Africa), Stanbic Bank Uganda is a subsidiary of Standard Bank (South Africa FORMATION/ REGISTRATION PROCESS.
A company is formed by registering it with the Registrar of Companies and obtaining a certificate of incorporation. The registration process goes through the following steps;- 1. RESERVATION OF THE COMPANY NAME. The promoters must choose a name of their choice and then make an application to the registrar of companies to reserve the name for their company.
The name should not be identical with that of an existing company or so nearly resemble it as to be calculated to deceive, it should not also Contains the words “chamber of commerce” except where the nature of the company’s business so justifies it and lastly it should not suggests patronage (a connection) from government or be associated with immorality, crime or scandalous in nature. If the registrar is satisfied that the name meets the above requirements, he will approve and reserve the name, the company must then register within 60 days.
Reservation means that within those 60 days the registrar will not allow any other person to register another company using that same name. To guard against the possibility of a negative reply from the Registrar, promoters must have in mind one or more suitable alternatives. Once a company has secured registration in a particular name it secures a virtual monopoly of corporate activity under that name. In case the Registrar inadvertently approves a name which by law is not adequate, then the new company may change its name within 6 months.
A company may change its name by special resolution and with the written approval of the Registrar. ‘Where the Registrar refuses to register a name without good reason, an application for an order of mandamus to compel the registrar to perform his duty and register the company can be filed in the High Court. 2. PRESENTATION OF THE REQUIRED DOCUMENTS BEFORE THE REGISTRAR FOR REGISTRATION. Within 60 days after the reservation of the name, the promoters will then present the following documents to the registrar to have their company registered. * Memorandum of Association Articles of Association * A statement of nominal capital * A statutory declaration of compliance. * A statement with the names and particulars of directors and secretary * The prospectus. * The Memorandum of Association of the company. The memorandum of association is the most important of all the company documents because it contains the powers of the company, it describes the company and the nature of activities that the company is authorized to do or engage in. * Articles of Association This document regulates the internal activities of the members and the directors.
It contains information on, management, who will be the directors of the company, who will be the managing director, secretary, appointment of the board of directors, qualifications of directors, the chairman of the board, meetings (how meetings of the company should be called and conducted), the classes and rights of shareholders, transfer of shares , borrowing powers of the company, its properties, control of the company finance, dividends/profits and how they should be distributed auditing of books, the company seal and how it should be used etc * Declaration of compliance
This is a statement declaring that all the necessary requirements of the Companies Act with regard to the formation of the company have been duly complied with and that the directors agree to continue complying with them. * A statement of nominal capital This is a statement which shows the capital with which the company is starting with. ie the initial capital of the company. * List of names and particulars of Directors and Company Secretary This document contains the details of the names, age, addresses, occupations of the directors and company secretary of the company.
It should also contain an undertaking by the directors to take and pay for the qualification shares if any that such persons may be required to acquire. * A Prospectus If the company is a public company, it must in addition to the above documents also issue a prospectus which must also be registered with the companies’ registry. It is a document setting forth the nature and objects of a company and inviting the public to subscribe for shares in the company.
It sets out the number of the founders/management, the share qualification of directors, names, description and addresses of directors, the shares offered to the public for subscription, property acquired by the company, the auditors, etc. The purpose of the prospectus is to provide the essential information about the position of a company when it is launched so that those interested in investing in it can properly assess the risk of investment. 3. PAYMENT OF STAMP DUTY AND REGISTRATION FEES.
The registrar will then assess how much duty is to be paid on registration of that company; it is sassed basing on the capital that the company is starting with, the more the capital the greater the stamp duty. Registration fees are also paid. 4. ISSUANCE OF A CERTIFICATE OF INCORPORATION. After all these requirements, a certificate of registration is issued if the Registrar is satisfied. THE MEMORANDUM & ARTICLES OF ASSOCIATION OF A COMPANY. The memorandum of Association
The Memorandum of Association of a company, which is required to be registered for purposes of incorporation, is regarded as the company’s most important document in the sense that it determines the powers of the company. Consequently, a company may only engage in activities and exercise powers, which have been conferred upon it expressly by the memorandum or by implication there from. Contents of the Memorandum The Memorandum of Association of a company limited by shares must state the following:- 1.
The name of the company with “Limited” as the last word. 2. The registered office of the company is situated in Uganda. 3. The objects of the company. 4. A statement as to the liability of the members. 5. A statement to the nature of the company (Whether private or public). 6. The amount of share capital and division thereof into shares of a fixed amount. In addition, the memorandum must state the names, address and descriptions of the subscribers thereof who must be at least two for a private company and seven for a public company. 1. The name.
The name of the company should be indicated and if it is a limited company, it should have the word limited at the end eg Stanbic Bank Uganda Ltd. 2. Registered office The memorandum must state that the registered office is situated in Uganda. However, the actual address must be communicated to the Registrar of Companies within 14 days of the date of incorporation or from the date it commences business by registration of a company form called Notice of situation of registered office of the company, this form will indicate the exact location of the company eg plot 8 industrial area Kampala. . The objects clause This sets out the principle activities the company has been incorporated to pursue. For example; trading in general merchandise, carrying on business of wholesalers and retail traders of all airtime cards, mobile phones and all phone accessories, carrying on the business of mobile money agents etc. The objects must be lawful and should include all the activities which the company is likely to pursue.
The objects or powers of the company as laid down in the memorandum or implied there from determine what the company can do. Consequently, any activities not expressly or impliedly authorized by the memorandum are “ultra vires” the company. The ultra vires doctrine restricts an incorporated company under the Companies Act to the purse only the objects outlined in its registered Memorandum of Association. The doctrine of ultra vires is illustrated in the case of ASHBURY RAILWAY CARRIAGE CO. LTD VS. RICH (1875).
A company which was not authorized by its memorandum of association to lend money or finance any activity made an agreement with the defendant to provide him with finance for the construction of a railway in Beligium, later on the company repudiated this agreement and did not actually provide the finances, the defendant sued the company for breach of contract, the company in its defense argued that financing railway construction was not one of the activities it was authorized to do, it was held that indeed such an act was beyond the powers of the company and such an ultra vires contract was void and un enforceable.
To evade this restrictive interpretation of the objects clause, draftsmen inserted words as “and to do all such other acts and things as the company deems incidental or conducive to the attainment of these objects or any of them. In BELL HOUSES LTD -VS-CITY WALL PROPERTIES LTD (1966) 2 QB 656, a company was formed to carry on the business of General Civil Engineering contracts and in particular to build houses. It had power to carry on any other trade and to do any other things that incidental to the above company’s objects.
The Court held that the company could lawfully contract for a fee to procure loans to other concerns, from or business whatsoever which it can in the opinion of the board of directors be advantageously carried out sources of finance which it had resorted to in the past. It further held that cementing good relations with the financiers would be valuable when the company needed finances for its activities. The Memorandum of Association spells out the main objectives and powers of the company. However, certain powers may be implied in the Memorandum of Association.
For example, in the case of FERGUSON V WILSON (1866) 2CH. A 277, a power to appoint agents and engage employees was implied in the Memorandum of Association. This is only sensible because a company as a fictitious person can only work through agents and employees; and therefore if such a power was not implied, then the company could not function at all. Similarly in GENERAL AUCTION ESTATES & MONETARY CO. V. SMITH (1891) 3CH 432, the court implied powers of borrowing money and giving security for loans. Subsequent cases have also adopted this position.
In NEWSTEAD (INSPECTION OF TAXES) V FROST (1978)1 WLR 441 AT PAGE 449, the court implied powers of entering into partnership or joint venture agreements for carrying the on the kind of business it may itself carry on i. e. intra vires. In PRESUMPTION PRICES PATENT CANDLE CO (1976), the court implied a power of paying gratuities to employees. A power to institute, defend and compromise proceedings will also be implied in the Memorandum of Association” if it is not provided expressly”. Courts at times imply powers because the particular nature of the company’s undertaking demands it.
In EVANS, (1921) I CII. 359. The court observed that a company formed to manufacture chemicals had powers to make grants to Universities and other scientific institutions to facilitate scientific research and training scientists although it may not obtain any immediate financial benefit from the venture. Therefore before the court implies powers it seems: * There must be some reasonable connection between the company’s objects and the power it seeks to exercise. It is not sufficient for it to merely show that it will benefit in some way by exercising that power. It is important to show that the company will in fact benefit in some way even though remote in the exercise of the power (see Evans, (above). However, though the Court may imply these powers in the Memorandum of Association, its better practice to expressly state them. This is only sensible because:- * The company often needs powers which the courts have not ruled that they can be implied and therefore the company can only obtain them by express provisions in the Memorandum of Association, (e. g. the power to buy a share from another company though recognized under the Act has not yet been implied). To avoid uncertainties or expenses of litigation, it is safer to insert them expressly in the memorandum of association. 4. The liability of members The memorandum of a company limited by shares or by guarantee should indicate that the liability of members is limited. With respect to a company limited shares, the liability of a member is the amount, if any, unpaid on his shares. With regard to the liability of a member of a company limited by guarantee, this is limited to the amount he undertook to contribute to the assets of the company in the event of winding up.
A company may also be registered with unlimited liability. In such a situation, the members liability is unlimited and in cases the company does not have sufficient credit to pay its creditors, then the shareholders personal property may be encroached on to pay the company’s debts.. 5. Share capital (clause) The memorandum requires that a company having a share capital must state the amount of share capital with which the company is to be registered and that such capital is divisible into shares of a fixed amount.
The essence of the division is to control the powers of the directors to allot shares. The law does not prescribe the value but they are usually small amounts to encourage people to hold as many shares as possible. The amount of capital with which a company is to be registered and the amount into which it is to be divided are matters to be decided upon by the promoters and will be determined by the needs of the company and finance available. For example if a company has its initial share capital/ startup capital of 5,000,000 it can divide this into 100 shares of 50,000 each.
So of s member subscribes for 50 shares, he will contribute 2,500,000/= . ARTICLES OF ASSOCIATION The Articles of Association contains regulations for managing the internal affairs of the company i. e. the business of the company. They are applied and interpreted subject to the memorandum of association in that they cannot confer wider powers on the company than those stipulated in the memorandum. Thus, where there is a conflict or divergence between the memorandum and articles, the provisions of the memorandum must prevail. anagement, who will be the directors of the company, who will be, appointment of the board of directors, qualifications of directors, the, the classes and rights of shareholders, transfer of shares , , auditing of books, Contents of the Articles * The board of directors (management) and how they will be appointed, their qualifications, how they can resign or be removed from office. * The chairman of the board. * The managing director and how he will be appointed. * Secretary and his appointment. eetings (how meetings of the company should be called and conducted and the required quorum/ number of members that must be present to conduct a valid meeting of the company) and the different types of meeting that the company may hold from time to time voting rights of the members, the right to receive notice and to attend and vote etc. * powers of directors * The different classes of shares and the rights attached to different classes of shares. * Borrowing powers of the company. its properties, control of the company finance, its bankers, dividends/profits and how they should be distributed * appointment of auditors * the company seal and how it should be used etc The Articles must be printed in the English language, divided into paragraphs, numbered consecutively, signed by each subscriber to the memorandum in the presence of at least one witness who must attest the signature. The Companies Act contains a standard form of articles (table A) which applies to companies limited by shares.
These regulate the company unless it has its own special articles which totally or partially exclude table A. The advantages of statutory model articles are: * That legal drafting of special articles is reduced to a minimum since even special articles usually incorporate much of the text of the model. * There is flexibility since any company can adopt the model selectively or with modifications and include in its articles special articles adapted to its needs. INTERPRETATION OF ARTICLES AND MEMORANDUM OF ASSOCIATION
The Memorandum of Association is the basic law or constitution of the company and the articles are subordinate to the Memorandum of Association. It follows therefore that if there is a conflict, the Memorandum of Association prevails. In other words if there is a contradiction between the provisions of the memorandum and the provisions of the articles of association, then the provisions of the memorandum will be followed and those provisions in the articles which are contradicting the memorandum will be void and of no effect.
If there is no conflict, the Memorandum of Association and articles must be read together and any ambiguity or uncertainty in either can be removed by the other CONSEQUENCES OF INCORPORATION The fundamental attribute of corporate personality from which all other consequences flow is that “the corporation is a legal entity distinct from its members”. Hence it’s capable of enjoying rights and being subject to duties which are not the same as those enjoyed or borne by its members. In other words it has a legal personality and it is often described as an artificial person in contrast with a human being-a natural person. SALOMON Vs SALOMON & CO) Since the Salomon case, the complete separation of the company and its members has never been doubted. It is from this fundamental attribute of separate personality that most of the particular advantages of incorporation spring and these are: 1. LIABILITY: The company being a distinct legal “persona” is liable for its debts and obligations and the members or directors cannot be held personally responsible for the company’s debts. It follows that the company’s creditors can only sue the company and not the shareholders.
In in the case of Salomon V Salomon (1897), creditors of the company sought to have Solomon a managing director of the company personally liable for the debts of the company but court held that the company and Solomon were two different persons and that the company as a legal person is liable for its own debts and Solomon a managing director could not be held personally responsible for the debts of the company. In the Ugandan case of Sentamu v UCB (1983) HCB 59, it was held that individual members of the company are not liable for the company’s debts.
The liability of the members or shareholders of the company is limited to the amount remaining unpaid on the shares. For instance, where a shareholder has been allotted 50 shares at Shs. 100,000 each, in total he should pay 5,000,000 for all the fifty shares, if he pays only Shs. 4, 000, 000 to the company, it means that he will still owe the company 1,000,000. This is what is called uncalled capital. The company may call on him to pay it any time. If that does not happen, then at the time of winding up the company, he will be required to pay the Shs. 1, 000, 000.
In the case of a company limited by guarantee, each member is liable to contribute a specific amount to the assets of the company and their liability is limited to the amount they have guaranteed to contribute. If the company has unlimited liability, the members liability to contribute is unlimited and their personal property can be looked at to discharge the company creditors but that is only after utilizing the company’s money and it is not enough to pay all the debts. 2. PROPERTY: An incorporated company is able to own property separately from its members.
Thus, the members cannot claim an interest or interfere with the company property for their personal gain/benefit. Thus, one of the advantages of incorporation (corporate personality) is that it enables the property of the company to be clearly, distinguished from that of the members. In the case of MACAURA Vs NORTH ASSURANCE CO. (1925) AC (see page 3 for facts). In that case Lord Buckmaster of the House in Lords held that no shareholder has a right to any item of the property of the company, even if he holds all the shares in the company.
In the case of Hindu Dispensary Zanzibar v N. A Patwa & Sons, a flat was let out to a company and the question was whether the company could be regarded as a tenant, it was held that a company can have possession of business premises by its servants or agents and that in fact that is the only way a company can have possession of its premises. 3. LEGAL PROCEEDINGS: As a legal person, a company can take action to enforce its legal rights or be sued for breach of its duties in the courts of law.
If it the company being sued, then it should be sued in its registered name, if a wrong or incorrect name is used, the case will be dismissed from court for example in the case of Denis Njemanze V Shell B. P Port Harcourt, the plaintiff sued a company called Shell B. P Port Harcourt which was a non existing company, counsel for the defendant company objected that there was no such company and the suit should be dismissed, counsel for the plaintiff sought courts leave to amend and put the right part but court refused to grant the leave and dismissed the case.
In the case of Wani V Uganda Timber, 1972 HCB the plaintiff applied for a warrant of arrest against a managing director of a company instead of suing the company, chief justice Kiwanoka held that a managing director of a company is not the company and cannot be sued personally, that if there is a case against the company then the company is the right party to be sued not its managing director. 5. PERPETUAL SUCCESSION: s. 15 of the companies Act provides that a company is a legal entity with perpetual sucession.
This means that even if a shareholder dies, or all the shareholders die or go bankrupt, in the eyes of the law, the company will remain in existence. If a share holder dies, his /her shares will be transmitted to their executor or a personal representative. Also in case a shareholder no longer wants to be a shareholder in a company, he will simply transfer his shares to someone else and to company will continue to exist. The only way a company can come to an end is by winding up, striking it off the register of companies or through amalgamation and reconstruction as provided by the Companies Act.
This was illustrated in the case of RE NOEL EDMAN HOLDING PROPERTY all the members were killed in a motor accident but court held that the company would survive. Thus, this perpetual succession gives the certainty required in the commercial world even when ownership of shares changes there is no effect on the performance of the company and no disruption in the company business. 5. TRANSFER OF SHARES: A share constitutes an item of property, which is freely transferable, except in the case of private companies.
When shares are transferred, the person who transfers ceases to be a shareholder and the person to whom they are transferred becomes the shareholder. In private companies, there is a restriction on the transfer of shares for example one may not transfer his shares except to an existing member or shareholder, and not to an outsider. This is essential and is in any event desirable if such a company is to retain its character of an incorporated private company. 6. BORROWING:
A company can borrow money and provide security in the form of a floating charge. A floating charge is a security created over the assets of the company. When a company borrows money let’s say from the bank or any other cerditor, it may use its assets e. g. cars, bank accounts and other assets as security, the security/ charge will then float over those assets, in case the company defaults on payment, the charge can settle on one or all of those assets and the bank/creditor of the company can sell those assets to recover their money.
It is called a floating charge because it floats like a cloud over the whole assets of the company from time to time, it only settles/crystallizes if the company defaults on payment. So before the charge settles on the assets, the company is free to deal with those assets even to dispose them off in the usual course of business. 6. CAPACITY TO CONTRACT. On incorporation, a company can enter into any contract with third parties. In the case of Lee V Lee & Air Farming Co. Ltd (1961) A. C 12, it was held that a company was it is incorporated it has capacity to employ servants, even the shareholders.
THE ULTRA VIRES DOCTRINE. a) Meaning of ultra vires. The object clause of the memorandum of association of a company contains the object for which the company is formed. An act of a company must not be beyond the object clause otherwise it will be ultra vires. The expression ultra vires means beyond powers, therefore an act or transaction that is beyond the powers of the company as stated in the objects clause of the memorandum is an ultra vires act or transaction, such an act that is ultra vires is void and cannot be ratified by the company.
Sometimes the term ultra vires is also used to describe a situation where the directors of a company have exceeded the powers delegated to them, where a company exceeds the powers conferred upon it by its memorandum of association, it is not bound by it because it lacks the capacity to incur responsibility for that action, but when the directors of a company exceed the powers delegated to them, the company in a general meeting may choose to ratify their act or omission. b) Distinction from illegality.
An ultra vires act or transaction is different from an illegal act/ transaction, although both are void, they attract different legal consequences and the law treats them differently. An act of a company which is beyond its object clause is ultra vires and therefore void even if it is legal. Similarly an illegal act done by a company will be void even if it falls squarely within the objects of the company. c) Importance of the doctrine. The doctrine of ultra vires was developed to protect the investors and creditors of the company.
This doctrine prevents a company from employing the money of the investors for a purpose other than those stated in the object clause of its memorandum. Thus the investors of the company are assured that their money will not be employed for activities which they did not have in contemplation at the time they invested their money into the company. This doctrine also protects the creditors of the company by ensuring that the funds of the company to which they must look to for payment are not dissipated in unauthorized activities. ) Establishment of the doctrine. The doctrine was established firmly in 1875 by the House of Lords in the case of ASHBURY RAILWAY CARRIAGE CO. LTD VS. RICHE (1875). A company which was not authorized by its memorandum of association to lend money or finance any activity made an agreement with the defendant to provide him with finance for the construction of a railway in Beligium, the directors made this ultra vires contract on behalf the company but subsequently the company ratified this contract in a meeting. ater on the company repudiated this agreement and did not actually provide the finances, the defendant sued the company for breach of contract, the company in its defense argued that financing railway construction was not one of the activities it was authorized to do. It was held that indeed such an act was beyond the powers of the company and such an ultra vires contract was void and could not be enforced against the company.
Court also held that an ultra vires contract cannot even be ratified by the company and that the subsequent act of the company purporting to ratify this contract in a meeting was void, court emphasized that an ultra vires contract is void and cannot even be ratified by a unanimous decision of all the members of a company. In that case, the HOL expressed the view that a company incorporated under the Companies Act had power to do only those things which are authorized by its object clause and nything outside that is ultra vires and cannot be ratified by the company. Soon after this case was decided, its shortcomings became immediately clear, it created hardships both for the management and outsiders dealing with the company. The activities of the management of the company were subjected to strict restrictions, at every step of transacting the business of the company; management was required to ascertain whether the acts which were sought to be done were covered by the object clause of its memorandum of association.
The business men thought this unduly restricted the frequency and ease of business, if the act was not covered by the memorandum, it would mean having to alter the object clause to add that activity and alteration of the memorandum required a lengthy procedure. Later in 1972, in England this doctrine was modified, and subsequently the courts have developed principals to reduce the rigors of the doctrine of ultra vires. They include the following. 1. Powers implied by statute.
According to this principal, a company has powers to do an act or exercise a power which has been conferred on it by the companies Act or any other Act of Parliament even if such act is not covered by the object clause in the memorandum of association. 2. The principal of implied and incidental powers. This principal was established in the case of ATTORNEY GENERAL V GREAT EASTERN RAILWAY CO (1880) 5 AC 473, in this case the HOL affirmed the principal laid down in the earlier case of ASHBURY RAILWAY CARRIAGE CO. LTD VS.
RICHE (1875) but made a slight departure and held that the doctrine of ultra vires ought to be reasonably and not unreasonably understood and applied. Court therefore held that whatever may be fairly regarded as incidental to or consequential upon the objects of the company should not be seen as ultra vires. That case therefore led to a clear conclusion that that a company incorporated under the companies act has power to carry out the objects set out in its memorandum and also everything that is reasonably necessary to enable it carry out those objects. ) Ascertainment of the ultravires doctrine. An act is therefore intra vires (within the powers) the company if; * It is stated in the object clause of the memorandum of association of that company. * It is authorized by the Companies Act or by any other Act of parliament. * If it is incidental to the main objects of the company or reasonably necessary to enable it carry out those objects. In the case of ATTORNEY GENERAL V. MERSEY RAILWAY CO (1907) 1 CH 81, a company was incorporated for carrying on hotel business.
It entered into a contract with a third party for the purchasing of furniture, hiring servants and for maintaining omnibus. The purpose or object of the company was only to carry on a hotel business and it was not expressly mentioned in the objects clause in the memorandum of the company that they could purchase furniture or hire servants. The contract was challenged on the ground that this act of the directors was ultra vires. The issue before court was whether the transaction was ultra vires.
Court held that a company incorporated for carrying on a hotel business can purchase furniture or hire servants and maintain an omnibus to attend at the railway station to take or receive the intending guests to the hotel because these objects are reasonably necessary to effectuate the purpose for which the company has been incorporated, and consequently such acts are within the powers of the company, although these may not be expressly mentioned in the objects clause of the memorandum of association of that company.
However not every act that is beneficial to the company is intra vires , it is not enough that the act is beneficial to the company , the act must be reasonably necessary for the company to carry out the activities mentioned in the memorandum. f) Effect of ultra vires transactions. * Ultra vires contracts. These are void and cannot be enforced by or against the company.
In the Case of RE JON BEAUFORE (LONDON) LTD (1953) CH 131, it was held that ultra vires contracts made with the company cannot be enforced against a company. Court also held that the memorandum of association is constructive notice to the public and therefore if an act is ultra vires, it will be void and will not be binding on the company and the outsider dealing with the company cannot take a plea that he had no knowledge of the contents of the memorandum because he is deemed to know them.
In England, the European Communities Act 1972 has lessened the effect of application of the Ultra vires doctrine in this manner. In England, third parties dealing with the company in good faith are protected and can enforce an ultra vires contract against the company if the third party acted in good faith and the ultra vires contract has been decided by the directors of the company.
However in Uganda, the ultra vires doctrine has not been modified by statute or case law and there is therefore no legal provision where third parties dealing with the company in good faith are protected and can enforce an ultra vires contract against the company if the third party acted in good faith Thus in Uganda the doctrine of ultra vires is applied strictly with the effect that where the contract entered into by the third party is found to be ultra vires the company, it will be held void and cannot be ratified by the company and the company cannot enforce it against the third party and neither can a third party enforce it against the company. * Ultra vires borrowing. In Uganda a borrowing that is ultra vires is void and cannot be ratified by the company and the lender is not entitled to sue the company for the return of the loan. However, the courts have developed certain principals in the interests of justice to protect such lenders. The reliefs include; * Injunction.
If the money lent to the company has not been spent, the lender can apply to court for an injunction to prevent the company from spending the money. * Tracing. The lender can recover his money as long as it can still be found in the hands of the company in its original form. * Property acquired under ultra vires transactions. Where the funds of the company are applied in purchasing some property, the company’s right over that property will be protected even though the expenditure on such purchasing has been ultra vires. * Judgments from ultra vires transactions. Because the law considers ultra vires acts void by their very nature, the company and third parties cannot even with consent attempt to validate an ultra vires act.
In RE JON BEAUFORE (LONDON) supra, builders of a factory for purposes which were apparently ultra vires demanded for their money and by consent it was ordered that the company should pay, on winding up, the liquidator refused to pay that debt that was arising out of an ultra vires transaction, the court held that the liquidator was well entitled to reject the claim as a company cannot do what is beyond its legal powers by simply going into court and consenting. LIABILITY OF DIRECTORS ON ULTRA VIRES TRANSACTIONS . 1. Liability towards the company. It is the duty of the directors to ensure that the funds of the company are used only for legitimate purposes of the company. Consequently if the funds of the company are used for a purpose foreign to its memorandum, the directors may be held personally liable to restore to the company the funds used for such purpose. Thus a share holder can sue the directors to restore to the company funds which they employed in transactions which the company is not authorized to engage in. 2.
Liability towards third parties. The directors of a company are treated as agents of the company and therefore have a duty not to go beyond the powers that the company gives them. Where the director represents to a third party that the contract entered into by them on behalf of the company is within the powers of the company while in reality the company does not have such powers under its memorandum, the directors may be held personally liable to the third party for the loss on account of breach of warranty of authority. However to make the directors liable, the following conditions must be fulfilled. i) There must be a representation of authority by the directors.
It should be a representation of fact not law. ii) By such representation, the directors must have induced the third party to make a contract with the company in respect of a matter beyond the powers of the company. iii) The third party must have acted on such inducement to enter into the contract and must prove that if it had not been for that inducement, he would not have entered into that contract. iv) That as a result, the third party suffered loss. EXCEPTIONS TO THE ULTRA VIRES DOCTRINE. 1. Property acquired /investments made by the company using money from ultra vires transactions. 2. Activities which are not expressed by the memorandum but are implied by law. 3.
Activities which are not expressed by the memorandum but are incidental or related to or reasonably necessary for the company to carry out its express objects. 4. Ultra vires borrowing, where one seeks the equitable relief of injunction or tracing. LIFTING THE VEIL OF INCORPORATION A company once incorporated becomes a legal personality separate and distinct from its members and shareholders and capable of having its own rights, duties and obligation and can sue or be sued in its own name. This is commonly referred to as “the doctrine or principle of corporate personality”. No case illustrated the above principles better than the noted House of Lords decision in Salomon v. Salomon.
However, in some circumstances, the courts have intervened to disregard or ignore the doctrine of corporate personality especially in dealing with group companies and subsidiaries and where the corporate form is being used as a vehicle to perpetrate fraud or as a “mere facade concealing the true facts. ” Upholding the abiove principal in such cases would result into and perpetuate injustice. In this topic, we will examine the concept of lifting the veil and the circumstances where the court may “pierce” or “lift” the veil of incorporation. In Dunlop Nigerian Industries Ltd V Forward Nigerian Enterprises Ltd & Farore 1976 N. CL. R 243, the HC of Lagos stated that in particular circumstances, e. where the device of incorporation is used for some illegal or improper purpose, the court may disregard the principle that a company is an independent legal entity and lift the veil of corporate identity so that if it is proved that a person used a company he controls as a cloak for an improper transaction, he may be made personally liable to a third party. The legal technique of lifting the veil is recognized under 2 heads: 1. Statutory lifting of the veil 2. Case law lifting of the veil Statutory lifting of the veil 1. Where the number of members is below legal minimum. Under S. 33 of the Companies Act if a company carries on business for more than 6 months after its membership has fallen below the statutory minimum, (2 for private companies and 7 for public companies), every member during he time the business is carried on after the 6 months and who knows that the company is carrying on business with less than the required minimum membership is individually liable for the company’s debts incurred during that time. In such a case therefore the corporate veil is lifted in order to hold those members personally liable for the company’s debts incurred during that time. 2. Where the- company is not mentioned in the Bill of Exchange. S. 34 of the Companies Act provides that a bill of exchange shall be deemed to have been signed on behalf of a company if made in the name of the company, by or on behalf of the company or on account of the company by any person acting under the company’s authority. S. 09 (4) (b) prohibits any officer of the company from signing or authorizing to be signed a bill of exchange on behalf of the company in which the company’s name is not mentioned in legible characters/ clear letters. Any officer who does this is personally liable on that bill of exchange for the money or goods for that amount unless it is duly paid by the company. Therefore in such case the corporate veil is lifted in order to hold that officer of the company personally liable. 3. Holding and subsidiary companies. Where companies are in a relationship of holding and subsidiary companies, group accounts are usually presented by the holding company in a general meeting.
In this regard, the holding and subsidiary companies are regarded as one for accounting purposes and the separate nature of the subsidiary company is ignored. S. 147 of the Companies Act requires each company to keep proper books of accounts with respect to * Money received by the company and from what source. * Money spent and what it was spent on. * All sales and purchases of goods made by the company. * The assets and liabilities of the company. These accounts are meant to give a true and fair view of the state of the company’s affairs and to explain its transactions. Directors of the company are required at least once a year to lay before the company in a general meeting a profit and loss account (or income & expenditure account for non profit making companies) plus a balance sheet.
Where at the end of each year a company has subsidiaries, then as that parent company presents its accounts, it should also present a group account dealing with the affairs of that parent company and its subsidiaries, the group account consists of a consolidated balance sheet and a consolidated profit and loss account of both the subsidiary and the parent company. 4. Reckless and Fraudulent Trading: Under sect 327, it is provided that if in the course of winding up, it appears that any business has been conducted recklessly or fraudulently, those responsible for such business may be held liable without limitation of liability for any of the company’s debts or liabilities. 5. Taxation
Under the income tax Act, the veil of incorporation may be lifted to ascertain where the control and management of the company is exercised in order to determine whether it is a Ugandan company for income tax purposes. 6. Investigation into related companies Where an inspector has been appointed by the Registrar to investigate the affairs of a company, he may if he thinks it fit also investigate into the affairs of any other related company and also report on the affairs of that other company so long as he feels that the results of his investigation of such related company are relevant to the main investigation. Lifting the Veil under case law . Where the company acts as agent of the share holders. Where the shareholders of the company use the company as an agent, they will be liable for the debts of the company. Agency is a relationship which exists whenever one person authorizes another to act on his or her behalf. The person acting is called the agent, and the one he is acting for is called the principal. Where such a relationship exists, the acts of the agent are taken to be the acts of the principal. Therefore in an agency relationship, the acts of the agent are taken to be the acts of the principal. In case of liability it is the principal who is held liable and not the agent.
This is because of the dictum that he who acts through another acts for himself. Thus where share holders employ or use the company as an agent, then those shareholders will be personally liable for the acts of the company as principals behind the agent. 2. Where there has been fraud or improper conduct. The veil of incorporation may also be lifted where the corporate personality is used as a mask for fraud or illegality. In Gilford Motor Co V. Horne  Ch. 935 Home was the former employee of Gilford Motor Co. He agreed not to solicit its customers when he left employment. He then formed a company which solicited the customers. Both the company and Home were held liable for breach of the covenant not to solicit.
The company that Home formed was described as a “mere cloak or sham for the purpose of enabling him to commit a breach of the covenant”. In Jones V Lipman 1 W. L. R 832 Lipman in order to avoid the completion of a sale of his house to Jones formed a company and transferred the house to the company. Court ordered him and the company to complete payment, even though the ownership of the house was no longer in his names but in that of the formed company. The company was described as a creature of Lipman, a device and a sham, a mask which he held before his face in an attempt to avoid recognition by the eyes of equity. In Re Williams Bros Ltd. (1932) 2ch. 1, a company was insolvent but the Directors continued to carry on its business and purchased its goods on credit. It was held that if a company continues to carry out business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospects of the creditors ever receiving payments of these debts, it is in general a proper inference that the company is carrying on business with intent to defraud. R V Graham (1984) QB. 675 makes it clear that a person is guilty of fraudulent trading if he has no reason to believe that the company will be able to pay is creditors in full by the dates when the respective debts become due or within a short time thereafter. 3. Public interest/policy
Sometimes, courts have disregarded the separate legal personality of the company and investigated the personal qualities of its shareholders or the persons in control because there was an overriding public interest to be served by doing so. In Daimler Co Ltd Vs Continental Tyre And Rubber Co (1916) A. C 307, a Company incorporated in England whose shares except one were held by German nationals resident in Germany brought an action during the First World War. All its directors were also German nationals resident in Germany, which was an enemy country at the time. The Court disregarded the fact that the company had a British nationality by incorporation in England and rather concentrated on the control of the company’s business and where its assets lay, in determining the company’s status. 4. In determining residence of a company for tax purposes.
The court may look behind the veil of the company and its place of registration so as to determine its residence. The test for determining residence is normally the place of its central management and control. Usually, this is the place where the board of directors operate. But it can also be the place of business of the M. D where he holds a controlling interest. MANAGEMENT OF A COMPANY The control and management of a company is distributed among its principal officers and these include the auditors, accountants, Board of Directors, Managing director (if any) and any other officers of a company. There are basically two organs responsible for the management of a company. These are: – 1. The Shareholders through company meetings and 2.
The Board of Directors. The shareholders and Company Meetings The shareholders have an opportunity of influencing the company’s management through the company’s meetings. There are 4 types of meetings through which the shareholders can participate in the affairs of a company. 1. Statutory Meetings: These are provided for under S130 of the Companies Act which requires every public ltd company to hold such type of meeting within 30 days from the date of commencement of business. The meeting is held once in the company’s life and never again. The meeting is a must hold for all public companies, private companies are not required to hold this meeting. 2.
Annual General Meeting (S. 131). Unlike the Statutory Meeting, an AGM is required of all types of companies. It must be convened by notice of not less than 21 days. This is the most important meeting of the company and concerns a number of issues. Although the companies Act does not exactly indicate the nature of the business transacted at such a meeting, the business invariably includes appointment of auditors, fixing their remuneration, declaration of dividends, consideration of the company’s profit and loss accounts and the balance sheet, consideration of the reports of the directors, auditors and election of new directors or auditors if need arises.
The purpose of the annual general meeting is important for the protection of the members because it is the one occasion when they can be sure of having an opportunity of meeting the directors and questioning them on the profit and loss accounts, on their report and on the company’s position and prospects. It is at this meeting that normally a proposition of the directors will retire, come up for re-election:- and it is at this meeting that the members can exercise their only real power over the board i. e. the power of dismissal by voting them out. Most of these things could of course be done at the extraordinary meeting but the members who want to raise these matters may not be able to insist upon the convening of such meeting, the annual general meeting is valuable to them because the directors must hold it whether they like it or not.
If the company fails to convene such a meeting, there are two consequences that occur:- i. The registrar may himself convene that meeting or order that the meeting be convened and in extreme cases he may further order that any one shareholder present in person or by proxy be deemed to constitute the meeting. ii. Every director who is in default of convening that meeting as well as the company itself are liable to a default fine not exceeding shs 200/= and every officer of the company who is in default is liable to a default fine of shs. 40/= (1981) HCB 60). Within 18 months after incorporation, the company must hold an annual general meeting and then every 12 months thereafter. 3. Extra-Ordinary General Meeting (S 132):
This is usually convened by the directors at their discretion ( art 49 table A) to deal with urgent matters which cannot wait till the next annual general meeting. However the directors must hold such meeting irrespective of any contrary provision in the articles if holders of at least 10% of the company’s paid up capital or 10% of the members carrying voting rights ask/ requisition for it. They must state the reason why they want such a meeting. If the directors do not convene the meeting within 21 days of the requisition, then the requisitionists may themselves convene the meeting and recover expenses from the company which may in turn recover the same from the defaulting directors. 4. General meeting convened under court orders (S. 135).
It provides that if for any reason it is impracticable to call a meeting of the company in any manner in which meetings of the company may be called, the court may on application of any director or member of the company who would be entitled to attend and vote at the meeting order a meeting of the company to be called, held and conducted in any manner that the court thinks fit, and court may for that matter direct that only one person present at the meeting shall constitute quorum. PROCEDURE, ATTENDANCE AND QUORUM (17. 3. 05) 1. NOTICE OF MEETINGS. s. 133 provides that any meeting of a company must be called by a notice of a period not shorter than 21 days and any provision in that articles providing for a shorter notice is void and of no effect. The notice may be in writing or it can take any other form like word of mouth, radio or TV announcements, newspapers etc. it must state the exact date time and place where the meeting will take place and what is intended to be discussed at that meeting, if the notice does not indicate the above then it is not a proper notice and if any shareholder is absent from the meeting because his notice had not fully disclosed the agenda, he can seek a court order to declare such a meeting null and void.. However a meeting may be called by a shorter notice than 21 days if all the members entitled to attend and vote at the meeting agree to such a shorter notice. 2. QUORUM. This relates to the minimum number of members that must be present at a meeting of the company for it to be a valid meeting. The company’s articles will normally provide for the required quorum but where they are silent on this, s. 134 (c) of the Act provides for the requisite quorum as 2 members present in case of a private company and in any other case three members personally present.
Quorum need not be maintained throughout the meeting though at the beginning it must be there. 3. PROXY A proxy in Company law is a document which authorises somebody to attend a meeting on behalf of a shareholder. S. 136 provides that any member of a company entitled to attend and vote at a meeting of the company is entitled to appoint another person to attend and vote instead of him of her and any notice calling for a meeting should indicate that that person is entitled to attend by proxy. 4. VOTING. S. 134 provides that every member shall have one vote in respect of each share he has and in case of a company having a share capital and in other cases every member shall have 1 vote.
Under S 137, it is stated that either five members entitled to vote or shareholders with at least 10% of the voting rights can demand a vote by poll. OFFICERS AND MEMBERS OF THE COMPANY 1. Board of Directors There is no definition of a director whether in the Act or by case law. Nevertheless, S2 of the Act states that a director includes any person occupying the position of a director by whatever name called. In most private companies directors are usually share holders and in public companies , there is a requirement that directors must take up qualification shares, which is not the case in private companies unless the articles provide for it. According to S 177, a public company must have at least 2 directors. It’s an offence to have one director.
Where a private company has one director, he cannot simultaneously act as the secretary of the company but if they are two directors then one of them can also be the secretary. Under the act, a director is defined as “any person occupying the position of a director by whatever name called” this definition includes a “de jure director