04. PROMOTERS.

A promoter is the person who conceives the idea of forming a company and who undertakes, does and goes through all the formalities and incidental preliminaries of incorporating a company. Promoter help to incorporate a company, provide it with a share and loan capital and acquire business or properly which it is to manage. In Whaley Bridge Calico printing company vs. Green and Smith (1850) 5 Q BD 109’s Bowen LS stated a promoter is not a term of law but of business, usually summing up in a single word number of business operations familiar to the commercial world by which a company is generally brought in existence. Lord Blackburn stated that “it is a short and convenience way of designating those who set in motion the machinery by which the act enables them to create an incorporated company”. Justice Cockburn defines a promoter as “one who undertakes to form a company with reference to a given project and to set it going and who undertakes the necessary steps to accomplish that purpose”. Section 45 (5) of the company’s act (cap 486) excludes persons acting on professional capacity from being called promoters. Section 45 (5) (a) provides that promoter means a promoter who has party to the separation of the prospectus; or the portion thereof containing the untrue statement, but does not include any person acting in a professional capacity for persons engaged in the formation of the company. If any such person acts beyond the scope of his professional duty and helps in any way in the formation of a company or in preparations for the management of its affairs, he will become a promoter (great wheal polgooth company Ltd; Re (1883) 53 LS ch. 42). N/B however a registered company may also act as a promoter. Function of the promoters The following are the functions of the promoters: 1. Decide on the company name and ascertain that it is accepted by the registrar. 2. Prepare memorandum and Articles of Association. 3. Nomination of directors, Bankers, auditors and secretary and the registered

office of the company. Page 1 of 25

4. Printing memorandum and articles of association. 5. Registration of the company. 6. Issue of prospectus. Legal status of promoter In Lindley and Wigpool Iron ore vs. Bird (1866) 33, Lindley described the position of a promoter as “although not an agent for the company, nor a trustee for it before its formation, the old familiar principles of the law of agency and its trusteeship have been extended and very popularly extended to meet such cases”. A promoter is thus not an agent nor a trustee of the company but certain fiduciary duties have been imposed on him under the company’s Act.

Fiduciary position of a promoter In Er Langer vs new Sombrero Phosphate company 1878 3A Ac 1218 Lord Cais observed that promoters in equity cannot find the company by any contract with themselves as promoters without fully disclosing to the company all material facts which the company ought to know. Promoters are in a fiduciary position: a) Not to make profit at the expense of the company. Cape Breton company Re.(1885) 29 Ch.D 795 b) To give benefit of negotiation to the company. Thus where the promoter purchases an item he can’t rightfully sell that item at a higher price that he gave in for. (Erlanger vs. new Sombrero phosphate company (1878) AC 1218). The right of rescission is lost if the parties cannot be relegated to their original position this happens: (i) Where the character of the property has been altered. (ii) Where flird parties have acquired valuable rights. Where a promoter sells or wishes to sell his own property to the company he should: (i) See that there is a Board of independent persons appointed as directors of the new company. (ii) Disclose his interest in the property to the intended members or to the public by means of a prospectus. He must also disclose the profit he is making out of the deal.

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c) To make full disclosure of interest of profit. Promoters need to fully disclose his profit and his personal interest in a transaction. A case in support of this is the Liluck vs. Barress AC 240. in this case a syndicate bought property worth $140000 property at $120000, which they later sold to a company which they formed at $180000. A prospectus was issued disclosing a profit of $ 40000. it was held that the $ 20000 was a secret profit and promoters are sound to refund the company. Lady well winning company Ltd B Brookers (1887) 35 ch. D400 in the above case five persons bought a nine for $5000 on 1/2/1873 and sold it to a company on 4/4/1873 for $18000, making a profit of $13000. It was held that the vendors were not promoters when they bought the mine and they were therefore under no fiduciary duty to disclose their interest and account for the profit they had made. d) Not to make unfair use of position. He must avoid seeking. He must guard against taking advantage of position or seek under influence or participate in fraud.

Duty of promoters as regards prospectus Promoters must ensure that a prospectus is issued (public company) and the prospectus. (i) Contains necessary particulars (ii) Does not contain an untrue or misleading statements or does not omit any material facts. Section 39 of the act states that a prospectus shall be dated; and that date unless the contrary is proved be taken as the date of publication of the prospectus. Section 40 provides that a prospectus issued shall state the matters specified in part 1 of the third schedule. Chapter 7 specifies the form and contents of a prospectus. A prospectus must be truthful and promoters can be held responsible (liable) for any misstatement in the prospectus. If a prospectus is found untruthful: a) Allotment of shares may be set a side in the case of fraudulent misrepresentation. b) Promoters may be sued for damages. c) They may be sued for compensation for misrepresentation.

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d) They may be sued for damages by shareholders who have suffered by reason of their non-compliance with the statutory requirements as with the contents of prospectus. e) They may become liable for criminal proceedings. The company’s act provides both criminal and civil liability for both civil and criminal liability for any untrue statement contained in the prospectus. For civil liability 3. 45 (1) provide. Section 45 (1) provides that the following persons shall be liable to pay compensation to all persons who subscribe for any untrue statement included therein. a) Every person who is a director at the time of issue of the prospectus. b) Every person who has agreed to be named as a director in the prospectus or any one who has agreed to be a director immediately or after an interval. c) Every person being a promoter of the company. d) Every person who has authorized issue of the prospectus. However an expert can only be held responsible for an untrue statement made by him. Section 45 (2) provides defences to liabilities under section 45 (1) such persons shall not be liable if he proves. a) He withdrew from being a director before issue of the prospectus and it was issued without his authority or consent. b) Prospectus was issued without his knowledge or a consent and on becoming aware he gave reasonable public notice that it was issued without his knowledge. c) That after the issue of the prospectus and before allotment there under, then on becoming aware of any untrue statement there in withdrew his consent there to and gave reasonable notice of the withdrawal and reason thereto that: (i) Of every untrue statement not made by an expert he had reasonable ground to believe and did up to the time of allotment believe that the statement was true. (ii) That he relieved on an expert and untrue statement is a fair representation of the expert report and he had reasonable ground to believe that the person making the statement was competent to make it. (iii) As regards every untrue statement purporting to be a statement made by an official person or contained in what purports to be a copy of an extract from the document. Section 46 (1) of the Act a prospectus may attract criminal liability. Page 4 of 25

An untrue statement in prospectus may lead to imprisonment for a term not exceeding two years or to a time not exceeding ten thousand shillings or both unless he proves either that the statement was immaterial or that he had reasonable ground to believe and did up to the time of issue, believe that the statement was true. Criminal proceedings are only made where there is willful untrue statement and not otherwise.

Remuneration of promoters A promoter has not right for compensation unless there is a contract. In Clintons claim (1908) 2 ch. 515 promoters were unable to recover fees and stamp duty incidental to formation of the company as there was. A promoter takes remuneration for his services in one of the following ways: a) Selling his own property to the company at a profit provided there in full disclosure. b) He may be given an option to buy shares at par. c) He may take commission on the shares sold. d) He may be paid a Lumpson by the company. Article 80 table A provides that directors can pay all expenses incurred in promoting and registering the company.

Pre-incorporation or preliminary contracts These are contracts entered by promoters to acquire properly or some right for the company. In Kelner vs. Baxter (1866) LR Z. Kelner agreed to sell a hotel to Baxter who was acting agent for a company which was about to be formed. It was held that Baxter was personally liable on the contract as the company was not in existence after its incorporation. The company is not liable for the Act of the promoters done before incorporation. In Newborne vs.Sensolid Ltd 1954 1Q B45 Newborne a director, entered into a contract in the name of a company before its incorporation. He signed his name a contract on behalf of the company. It was held that there was no contract. Position of promoters as regards pre-incorporation contracts

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1.

Company is not bound by pre-incorporation contract even where it takes the

benefit of the contract entered into on its behalf. A case law in this is in English and colonial produce company Ltd Re (1906) 2 ch 435. A solicitor prepared the memorandum and articles of a company and paid necessary taxes and other expenses to obtain the registration of the company. He did this on the instructions of promoters. It was held that the company was not liable to pay the solicitors’ costs although it had taken benefit of his work. 2. The company cannot enforce pre-incorporation contract. A case law in this point is Natal Land and colonization company Ltd vs. Pauline Colliery and development syndicate Ltd Ac 120. a company can’t enforce a contract made before its incorporation. 3. Promoters are personally liable for contracts made on behalf of the company

before the company’s incorporation. Ratification of a pre-incorporation contract. A company cannot ratify a contract entered into by promoters before incorporation. Where contract is entered into by with both parties aware of the non-existence of the company, the contract isa deserved to have been entered into personally and promoters are liable. To validate the pre-incorporation contracts a new contract has to be entered into with the other party (in which case promoters cease to be liable) For promoters acting on behalf of the company about to be formed it is safe (advisable) to provide in the contract that: a) If the company makes a fresh contract in terms of the incorporation contract, the liability of the promoters shall come to an end. b) If the company does not make a fresh contract within a limited time either of the parties may rescind the contract.

05. MEMORANDUM OF ASSOCIATION

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A memorandum of Association sets the fundamental conditions upon which the company is allowed to be incorporated. It defines the relationship of the company and creditors the outside public as well as the shareholders. It also enables creditors and the outside public knows the range of permitted business of the company. In Ashbury Railway Carriage and company vs. Rich it was noted that “the memorandum is as it were, the area beyond which the action of the company cannot go inside that area the shareholders may make such regulations for their own government as they think fit”. Importance of memorandum a) Provides basis of incorporation. b) It determines the areas of operations of the company. c) It defines the relationship of the company with the outsiders. d) It is a charter of the company, which can be altered only under special

circumstances.

Purpose of memorandum There are two purposes of memorandum: a) To enable shareholders know where their funds are to be used and risks they are undertaking in making such investments. b) To enable outsiders of the company know the objectives of the company and whether the contracts they intend to make with the company are within the objects of the company. Preparation of the memorandum

Schedule 1 of the act gives examples of various types of memoranda. Promoters can adopt any of these tables with necessary modifications. These prescribe forms of memoranda are as under: Table B for a company limited by shares, Table C for a company limited by guarantee and not having share capital, Table D for a company limited by guarantee and having share capital, Table E for unlimited company that has share capital. Section 5 provides that memorandum of every company shall be in English and printed. Page 7 of 25

Section 6 states that memorandum shall be signed by each subscriber (with postal address and occupation) in the presence of at least one witness who shall affect the signature and shall likewise add his address and occupation if any.

Contents of memorandum Section 5 of the companies Act stipulated the memorandum should compose the following clauses. Clause 1 The name Promoters must enquire from the register as to whether the proposed name of the company is available for registration and is not considered undesirable; this should be done before filling the memorandum or even before its preparation. Section 19 provides that promoters may reserve a name pending registration of the company for a period of thirty to sixty days. Section 5 (1) requires accompany if limited to use the word “limited” as the word in its name. Section 21 provides that a company may drop the word “limited” if it obtains a licence to do so from the Attorney General. Such licence is given if the Attorney General is satisfied that: (i) The company to be formed is to promote commerce, art science, religion, charity or any useful object. (ii) It intends to apply its profits or other income to promoting its objects. (iii) It prohibits the payment of any dividends to its members. Under section 20 a company can charge its name by special resolution and with the approval of the registrar signified in writing. A special resolution usually requires twentyone days not to the members and three fourths majority of the votes at general meeting. The above section provides that the company may change its name if it is almost like that of an existing company, if the registrar so directs within six months of its registration. The name does not affect any rights or obligations of the company or any legal proceedings by or against it (section 20 (4)).

Clause 2 Registered office Page 8 of 25

Every company must have a registered office from the day on which it begins to carry on business or within fourteen days after incorporation whichever is earliest; to which notices and all communications can be made (section 107) Section 108 states that notice of the address of the registered office, and of any change therein, must be given to the register within 14 days after incorporation or of the change. The registered office is not necessarily the headquarters of the company. Documents that must be kept at the registered office include: (i) Register of members and index of members, unless made up elsewhere or kept by an agent (section 112&113). (ii) Minute books of general meetings section 146. (iii) The register of director’s interests in shares or debentures. (iv) A copy of every instrument creating any charge requiring registration. (v) The company’s register of charges affecting properly of the company.

Clause 3 the objectives of the company Objects clause defines the sphere of the company’s activities, the aims that its formation seeks to achieve and the kind of activities or business that it proposes to conduct. Objects give protection to the shareholders and creditors as they are sure where the funds will be applied. Objects also help outsiders know the powers of the company. Choice of the company’s objects Subscribers to the memorandum may choose any object for the proposed company. When drawing the object the subscribers should note the following: (i) Objects should not include committing an illegality. (ii) The objects should not contradict the Act. (iii) Objects should not be against public policy. Objects clause in the memorandum has to state. (i) The main objects of the company and objects incidental or auxiliary to the attainment of the main objects (ii) Other objects of the company not included in (i) above.

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A c company cannot continue to peruse subsidiary objects after the main object has come to an end. In crown bank Re (1890) 44 ch D634. A company objects clause enabled it to act as a bank and further invest in securities and land and to underwrite issue of securities. Its banking business was abandoned and it confined itself to financial speculation. It was held that the company was not entitled to do so. Incidental acts: A company may do anything which is fairly related to its core business. Anything incidental to the attainment or pursuit of any of the express objects of the company will unless expressly prohibited to be within the implied powers of the company. 1. Evans vs. Brunner, mond and company (1921) 1 ch 359. A company engaged in manufacture of chemicals proposed to devote substantial sum of money to the encouragement of scientific education. It was proved that this will in the end benefit the company, but a shareholder objected that this was beyond the powers of the company. It was held that the proposal was fairly incidental to the company’s objects. 2. Foster vs. London, Chatham and Dover company (1895) 1 QB 711. A company acquired a piece of land for the purpose of its railway. The railway was erected on arches. The company left the arches as workshops e.t.c. The neighbours objected of an account of noise and claimed that the act was ultra vires to the company it was held that letting of the arches was valid. 3. Forrest vs. Manchester etc Rly company (1861) 4 Ltd 666. A railway company had the authority to keep boats to be supplied for a ferry. It employed the boats for excursion trips to the sea when they were not wanted for the ferry. It was held that the use of the boats was incidental to the main purpose and was within the powers of the company. The following activities have also been held incidental to carrying of business: a) Appointing agents and hiring servants. b) Borrowing money and giving security for loans. c) Paying gratuities to employees. d) Paying pensions to former officers and employees or their dependants. In the following cases companies were found to engage in activities beyond their powers. Page 10 of 25

1. London county council vs. Attorney General (1902) AC 165. The council had the power to run tramways. It ran omnibuses to feed the tramways. It was held that this was outside its powers as the omnibuses business was in no way incidental to the business of working tramways. 2. Stephenes vs. Mysore reefs (Kangudry Minin Company Ltd (1902) 1 ch 745. the company object authorized to it acquire gold mines in Mysore and elsewhere and it had other clauses. The company wanted to work in Ghana . It was held that elsewhere could not be taken to mean any other place outside India . Ways a company can engage in a wide variety of business: a) Inflated object clause. Promoters have given a list of several businesses that the company may engage itself. b) Independent object clause Courts usually take the first object in the memorandum as the core business and others subsidiary. To avoid this interpretation experts drafting the objects may specify; ‘Each of the foregoing clause shall in no way unless otherwise provided as forming part of or being dependent upon or shall in no way be severally formed and object clause of an independent company.’ c) Subjective objects clause Here experts can simply say that the company can engage in any business, which in the opinion of the directors, the company can advantageously engage in. Clause IV. Liability clause Promoters must indicate a) Whether the liability of the company is limited or unlimited. b) If limited, is it by shares or guarantee. c) If the company is public promoters have to indicate the liability of directors whether limited or unlimited. Liability clause is entirely omitted from the memorandum in an unlimited company. Clause V The capital clause States the registered share capital divided into shares of a fixed amount. Registered capital is also called nominal or authorized capital. Page 11 of 25

The clause is omitted in the companies with unlimited liability and the companies limited by guarantee having not shown capital.

Clause VI. Association or subscription clause. This is a declaration by subscribers that they desire to form a company and agree to take shares stated against their names. The signature of each subscriber may be any of the subscribers. Each subscriber must indicate his address, description and occupation.

General form of clause. If the several persons whose names and address are subscribed are desirous of being formed into a company in pursuance of the memorandum of association and we respectively agree to take the members of shares in the company set opposite of our respective names. After registration no subscriber to the memorandum can with withdraw his description on any ground. Alteration of the memorandum Section 7 provides that a company cannot alter the conditions contained in the memorandum except in the cases; in the mode and to the extent for which express provision has been made in the companies Act. Section 8 gives seven instances where a company may alter its objects after a special resolution. i) To enable the company carry its business more economically and efficiently. ii) To attain its main purpose by new or more improved means. iii) To enlarge or change the local area of its operation. iv) To carry on some business which may be conveniently combined with its own. v) To restrict or abandon any of its objects. vi) To sell or dispose part of or whole of its business. vii) To amalgamate with another company.

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The proposed alteration become effective unless within thirty days of the resolution, objection is made to the courts in which case the alteration will be effective if the court affirms it. Section 8 (2) provides not such application may be made a) By holders of that less than 15% of the company’s members if the company is not limited by shares. b) By holders of not less that 15% of the company’s debentures entitling the holders to object to the alteration of its objects. Section 8 (7) after a resolution altering the objects, a printed copy of the memorandum must be delivered to the registrar within fourteen days after the expiry of the period allowed for objection. Section 8 (2) the fact that an alteration does not come within on of the seven clauses specified in section 8 does not render the alteration invalid unless objection is submitted within thirty days. No alteration can be made requiring a member to take up further shares or increasing his liability unless he agrees in writing (section 24). The courts cannot allow an alteration, which is incompatible with the original of the objects of the company. A case in this point is in Recyclists Touring Club (1970). A company was registered to promote, assist and protect the use of bicycles, tricycles and similar vehicles on public roads. The company proposed to alter its powers by admitting all tourists and motorists, it was held by the court that the alteration must not be allowed as one of the objects was to protect cyclists against motorists.

DOCTRINE OF ULTRA VIRES Ultra vires is a term given to refer to a situation a company does anything beyond powers given in the memorandum. A company must not engage in activities which are not expressly or impliedly authorized by the memorandum, otherwise any act which exceeds the powers of the company will be ultra vires and void and thus cannot be ratified even by the assent of the whole body of directors. An Act of “Intra vires” the company if it is within the company’s powers, this is the case when;

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(i) The act is within the company’s objects as stated in the memorandum of association of the company. (ii) The act is reasonably incidental to the company’s objects, which are expressly stated in the memorandum of association and is done in order to effectuate or achieve the stated objectives. The doctrine was explained by the House of Lords in the case of Attorney General VGE Rly. The doctrine of ultra vires is illustrated in “Ashbury railway carriage and Iron company vs. Riche” in this case the memorandum give the company powers to make and sell railway carriages. The directors entered in to a contract to lay a railway in Belgium and the company in a general meeting subsequently purported to ratify the act of the directors by passing a special resolution to that effect. The company later dishonoured (repudiated) the contract and the other party sued for breach of contract. House of Lords held that there could be no ratification of a contract made by a company ultra vires even though every single member consented there to. The contract to make a railway in a foreign country was a nature not included in the memorandum. The company was therefore held not liable for the breach of contract. The doctrine of ultra vires approved but qualified in Attorney General vs. Great Eastern Rly company (1880) 5 AC by adding that the doctrine ought to be reasonably understood and applied and whatever may fairly be regarded as incidental to or as consequential upon those things which the legislature has authorized ought not to be held ultra vires to the company. In Re Germany Date coffee company (1882) it was held that where the substratum of the company fails, the heart of the company fails and the body cannot function without the heart. However in a recent case Re Litson R. co. (1946) it was held that the company will not be wound up if the carrying on of the general business is still possible. The main issue in the doctrine of ultra vires is that a company not being a natural person should not be held responsible for its own acts or agents acts that are beyond its powers and privileges. But there is nothing to prevent a company from protecting its property. A case on this point is national Telephone co. vs. St. Peter Port constables (1900) AC 317. A telephone company put wires where it didn’t have powers to put the defendant cut them down. It as held the company could sue for damages for the wires.

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If transaction is beyond powers of directors but within powers of the company, the shareholders can ratify it by a resolution in a general meeting provided they have all facts relating to the transaction to be ratified.

Effects of ultra vires transactions 1. Any member may obtain an injunction of the court to restrain the company from committing an ultra vires act. 2. Directors may be held personally liable for ultra vires payments. But the directors having refunded the money could get indemnity as against the person who received the payment with the knowledge that the payment to him was ultra vires. 3. Directors entering into ultra vires contracts may be liable to the third party for breach of warranty of authority. Directors will be liable to the losses incurred to third parties provided the third party does not know that they have no authority to enter in a particular contract. In weeks vs. property a company invited applications for a loan on debentures but the company had already issued a maximum limit of debentures. Directors were held personally liable to a plaintiff who offered a loan of $500. In order to make directors personally liable it must be established that their act amounts to an implied misrepresentation of facts and not of law. 4. If funds have been spent ultra vires in purchasing some property, its right over the property will be protected. 5. Ultra vires contracts have no legal effect and are void. A company cannot sue or be sued on those contracts because they are void. Every person dealing with the company is expected to know its powers and if he enters into a contract that is inconsistent with them he does so at his own risk. Exceptions where a party can sue on an ultra vires contract. i) If the company takes an ultra loan and uses it to pay off the lawful debts of the company then the second creditor (render) steps to the position of the paid off creditor and to that extent will have the right to recover his loan from the company. But he cannot claim any right to securities held by the original creditor.

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ii) If the property handed over to the company exists in specie or if it can be traced, the party handing it over can reclaim it. iii) If money is lent by a company that does not have the power to lend it, it can be recovered because the debtor will be stopped from taking the plea that the company had no power to lend. 6. A company will be liable for any tort of its employees if: a) The tort is committed in pursuance of its stated objects. b) It is committed by employees within the course of their employment. A company will not be liable for ultra vires torts. 06. ARTICLES OF ASSOCIATION Articles of association are the rules and regulations of a company formed for the purpose of internal management. According to the Lord Justice Bowen “the memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. They are conditions introduced for the benefits of creditors and the outside public. The articles of association are the internal regulations of the company and are for the benefit of shareholders”. Lord Cairns said “the articles play a part subsidiary to the memorandum of association. They accept the memorandum as a charter of incorporation of the company and so accepting the articles proceed to define duties, rights and powers of the governing body as between themselves and the company at large and the mode and form in which business of the company is to be carried on and the mode and form in which changes in the internal regulations of the company may from time to time be made”. Section 2 (1) Articles include the regulations contained in table A schedule 1 to the Act in so far as they apply to the company. Articles were to be framed carefully so that they do not go beyond the powers of the company. They should not violate any provision of the companies Act as these will make them null and void. In Perneril Gold mines Ltd (1898) 1 ch. 122 the articles of a company provided that no petition for a winding up could be presented unless: a) Two directors consented in writing,

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b) The petitioner held is of the issue of the share capital of these conditions were fulfilled. It was held that the restrictions were invalid and a petition could be presented.

Functions of the Articles of Association 1. Define duties, rights and powers of the governing body. 2. Determine the mode and the form in which the business of the company may from time to time be made. Section 9 stipulates that the articles must be registered before incorporation. Section 11 states a company limited by shares may adopt all or any part of the regulations of table A are not excluded or modified, these regulations shall be the regulations of the company so far as they are applicable. Table A in the first schedule to the act is provided as a specimen form of articles of association. Part I may be adopted in whole/part by public companies and part II may be adopted in whole part by private companies where a private company does not adopt part II of task A are registers its own articles they must include the restrictions required by section 30. Section 12 provides that if special articles are registered they must be: a) Printed in English b) Divided into paragraphs c) Dated d) Signed by each subscriber and witnessed.

Contents of Articles of Association.

As an internal constitution promoters and later the members can indicate any rules they may wish to have so long as such rules are permissible. The following are expected to be included in the articles of association. a) Share capital, rights of shareholders, and variation, of the rights payments of commissions share certificates. b) Lien on shares c) Calls on shares. d) Transfer of shares Page 17 of 25

e) Transmission of shares f) Forfeiture of shares g) Conversion of shares into stock h) Share warrants i) j) Alteration of capital General meetings and proceedings there at

k) Voting rights of members voting and poll proxies. l) Directors their appointments remuneration, qualifications, powers and

proceedings of board of directors. m) Manager. n) Secretary. o) Dividends and reserves p) Accounts, audit and borrowing powers q) Capitalization of profits r) Winding up. Alteration of articles of association Section 13of companies act cap 486 provides that a company can alter or add to its articles by passing a special resolution. Any alteration some made in the articles shall; subject to the provisions of the act; be as valid as if originally contained therein.

Limitations to alterations. The following limitations should be observed regarding alteration of articles: a) Such alteration should not be inconsistent to the act. i) Restrict the members right to petition for winding up under section 221. ii) Authorize the company to purchase its own shares. iii) Authorize payment of dividends out of capital. b) It must not contradict the memorandum of association. However articles may be referred to where there is an ambiguity in the memorandum or where the memorandum is silent on an issue. c) Alteration should not sanction anything illegal. d) Alteration must be made bona fide and for the benefit of the company as a whole. In Alten vs. Gold Reefs of west Africa Ltd (1900) ch. 656. it was Page 18 of 25

observed that the power of alteration must be exercised subject to those overall principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. In Shittleworth vs. Cox bros and company (Minden-lead Ltd (1927)) 2 k B g (CA) the articles of a company provided that 5 and four others should be permanent directors to the company. They could be disqualified by any six specific events. S failed to account for the company’s money on twenty-two occasions within twelve months. The articles were accordingly altered and a 7th event disqualified a director added. The event added was that if a director was so requested in wring by all the other directors he should resign. S was so requested to resign, it was held that the alteration was bona fide for the benefit of the company as a whole and was valid. Other rulings in support of this point were made in Greenhalgh vs. Ardene cinemas ltd (1951) ch. 286 and side Bottom vs. Kershaw Lees company Ltd (1920) 1 ch 154 (ca). e) An alteration to increase the members’ liability will only bind those who consent to it. Section 24 provides that no member is bound by an alteration of the memorandum or articles which requires him to increase his holding of shares or increase his liability to pay money to the companies unless: i) Alteration is made before he became a member. ii) He agrees in writing to be bound by such alteration. An alteration of articles subject to restrictions in section 24 may be retrospective in effect, but this will not enable the company to achieve a lien over shares after they have been transferred for value by a debtor.

The relationship between the Articles and memorandum of Association. 1. The articles are subordinate to the memorandum. The memorandum states the objectives of the company while the articles provide the manner in which the internal management of the company is to be carried out. 2. The memorandum must be read in conjunction with articles where it is necessary to; a) Explain any ambiguity in terms of the memorandum.

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b) Supplement the memorandum on matters where it is silent but cannot extend the scope of the memorandum. 3. The terms of the memorandum cannot be modified or controlled by the articles.

Legal effects of memorandum and articles: 1. Section 22 provides that after the articles and memorandum of association have been signed by bind the members as if they have been signed by each individual member of the company. The legal implications of the articles and memorandum may be dissolved in four categories. a) Members to the company. Each member is bound to the company as if each member has actually signed the memorandum and the articles. In Borland Trustee vs. Steel Brus and company Ltd (1901) 1 ch. 279, the articles of a company were altered and provided that the shares of any member who became bankrupt should be sold to certain persons at a fair price. B a shareholder became bankrupt and his trustee in bankruptcy claimed that he was not bound by the altered articles. It was held that the articles were personal contract between B and the rest of the members and B and his trustee was bound. Another case law is that of Hickman vs. Kent or Romney Marsh sheep breeders Assn (1915) 1 ch. 881. b) Company to the member. A company is bound to the members and the company can exercise its rights as against any member only in accordance with the provisions in the memorandum and articles. A member can obtain an injunction restraining the company from doing ultra vires act. In wood vs. Odesa water works company Ltd (1889) 42 ch. D630 the articles of company provided that the directors may with the sanction of the company at general meeting declare a dividend to be paid to the members. A resolution was passed to give the shareholders debenture bonds instead of paying the dividend in cash. It was held that the words “to pay” meant paid in cash; and a shareholder could restrain the company from acting on the resolution on the ground that it contravened the articles.

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A member can also obtain an injunction restraining the company from committing a breach of the memorandum and the articles, which would affect his rights as a member. c) Members to members. The memorandum and articles constitute a contract between the members and each member is bound to as against the other or others. Lord Herschell in Welton vs. Saffery (1897) AC 299 observed “it is quite true that the articles constitute a contract between each member and the company and there is no contract in terms of between the individual members of the company but the articles do not any the less, regulate their rights inter se. such rights can only be enforced by or against a member through the company or through the liquidators; representing the company but no member has between himself and other members any right beyond that which the contract of the company gives”. In Ray field vs. Hands (1960) 1 is a leading case in this point. d) Company to outsiders. The articles do not constitute any binding contract as between a company and an outsider. In general law a stranger to a contract cannot acquire any rights under such a contract. Cases on this points are: i) Brown vs. La Trinidad (1887) 37 ch. D1. The articles of a company contained a clause whereby B was to be a director irremovable for a period of time. He was removed from office before the period, it was held that it could not restrain the company from removing him as there was no contract between him and the company. ii) Elay vs. positive government security life Ass.Co. 1876 1 Ex D 88. The articles of a company provided that it should be the solicitor of the company for life and could be removed from office only for misconduct L took office and became a shareholder, after some time the company dismissed him without alleging misconduct. E sued the company for damages for breach of contact. It was held that the articles did not constitute any contract between the company and outsiders and as such no action could lie. The case in Eley has brought in some problems. The courts have therefore in some cases acted on the footing that a clause in the articles not dealing with the rights of a Page 21 of 25

member as such but apparently intended to operate as a contract with him is to be regarded as the basis of a contract. In Swabey vs. ports Danwin Gold mining company (1889) 1 Meg 385, the articles provided that a director should receive a specified sum per annum by way of remuneration. In July, the company passed a special resolution reducing the sum as from the end of the proceeding year. The plaintiff, who was a director, resigned and sued for the services, it was held that he was entitled to sue for remuneration up for the date of his resignation. Constructive notice of memorandum and articles Each person dealing with the company is assumed to know the contents of the memorandum and articles of association. It is presumed the individuals dealing with the company have read and understood the documents. This is called the doctrine of constructive notice. Memorandum and articles are open and accessible to all special resolution become public documents once registered and an outsider is in notice of their contents in the same way as he is of the articles and memorandum. Lord Hartheley in Mahoney vs East Hollyford mining company (1875) LR7 HL 869 observed. But whether he actually reads them or not it will be presumed that he has read them. Every joint stock company has its memorandum and articles of association open to all who are minded to have any dealings whatever with the company and those who sue deal with them must be affected with notice of all that is contained in these two documents. Anyone dealing with a company is presumed not only to have read the memorandum and articles but have understood them properly (Oak Bank Oil Co. vs. Crum (1882) 8 A. 65). The doctrine also prevents one from alleging that he did not know that the memorandum and articles rendered a particular act ultra vires to the company (Freeman and Lookeyer vs. Buckhusst park properties ltd (1964) 1 ALL ER 630). Doctrine of indoor management. This doctrine imposes a limitation on the doctrine of constructive notice. Persons dealing with the company once they are satisfied that the company has powers to enter Page 22 of 25

the proposed transaction, they are not required enquire into the regularity of any internal proceedings they are entitled to assume that provisions of Articles have been complied with by the company in its internal working. If the proposed contract is within the powers of the company the company will be bound to the outsider and claims of the outsider will not be affected in any way by the internal irregularity of the company. This is the doctrine of indoor management or the rule in royal British Bank v. Turquand. In Royal British Bank vs. Turquand the articles empowered the directors to borrow money provided they were authorized by a resolution passed at a general meeting of the company. The directors borrowed money from T and issued a bond to him without the authority of resolution passed at the general meeting. It was held that the company was liable for the money to T because once the articles authorized directors to borrow subject to a resolution of the general meeting of the company T, was entitled to assume that the directors were borrowing on the authority of the resolution passed at a general meeting of the company, T was not required to enquire into the regularity of the company’s internal proceedings. In Premier industrial Bank Ltd Vs. Calton Manufacturing company, it was stated that “if the directors have power and authority to bind the company, but certain preliminaries are required to be gone through on the part of the company before that power can be duly exercised, then the person contracting with the directors is not bound to the section, that all these preliminaries have been observed he is entitled to presume that the directors are acting lawfully in what they do”. The rule is also held in Fuontain vs. Carmarthen Rly co. (1868) LR5 ESQ 316. The general rule here is that persons dealing with limited liability are not bound to inquire into the regularity of the internal proceedings and will not be affected by irregularities of which they had no notice.

Exceptions to the Doctrine of indoor management. The doctrine of indoor management will not apply in the following instances: i) Where the outsider has notice (actual or constructive) that the prescribed procedure has not been complied with by the company.

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In Howard Patent Ivory Company, the directors were empowered to borrow up to 1000 and such further sums as the company in the general meeting might authorize without such consent they issued to themselves debentures for sums in excess of $1000. it was held they had knowledge of irregularity in the internal proceedings of the company, the company would be liable for $1000 only. Sums borrowed in excess of this were held invalid. ii) A company cannot be held liable for forgeries committed by its officers. In Ruben vs. Great Fingall Ltd, the company secretary issued a share certificate by forging the signatures of the two directors under the seal of the company. The plaintiff contended that it was not his duty to verify the signatures. Whether signatures were genuine or not was part of internal management. It was held that the certificate was not binding on the company as the rule in Turquand’s case does not protect forgery. Lord Loreburn observed in the case “it is quite true that persons dealing with limited liability companies are not bound to inquire into their indoor management and will not be affected by irregularities of which they have no notice. But this doctrine applies only to irregularities that otherwise might affect a genuine transaction, it can apply to forgery”. iii) When the outsider is negligent: any person entering into a contract with the company ought to make proper inquires, and in the absence of this he cannot claim benefit under the Turquard case. In wood vs. bank of Liverpool the sole director paid cheques drawn in the name of the company in his account. It was held that the bank was put upon inquiry before crediting the cheques drawn in favour of the company in the account of the director. The bank was not entitled to rely upon the onstable authority of the director. In Arand Bihari Lal vs. Dinshaw and company, the plaintiff accepted transfer on the company’s property from its accountant. The transfer was held to be void because such a transaction is apparently beyond the scope of the accountant’s powers. It puts the person dealing with the company into inquiry, the plaintiff should have insisted on seeing the power of Attorney executed in favour of the accountant by the company. Even delegation clause is not enough to make the transaction valid unless the accountant is in fact authorized.

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iv) When an outsider does not have any knowledge of the articles. A person who did not consult the company’s memorandum and articles and consequently did not act in reliance on those documents, cannot be protected under the rule in Turquand’s case. v) Where an act is ordinarily beyond the apparent authority. An outsider will not be protected by the rule in Turquard’s case if the act of the agent is one which would not ordinarily be within his powers simply because under the articles the power of making such a contract might have been entrusted to him. The outsider can only hold the company liable if only the power had infact been delegated. The facts of Anard bihari Lal vs. Dinshaw and company illustrate this point. Statutory declaration of compliance. This is a document required by section 17(2) and it contains a declaration made to the registrar of companies telling him that the persons who have formed the company have complied with all the requirements of the companies Act as regards formation of a company. The declaration should be prepared and signed by an advocate of the high court or by a person who was named in the articles as a director or secretary of the company. The declaration must be in the prescribed format usually on form 203 A. The Act requires the promoters to prepare: a) Written consent of every director of public companies stating that each has agreed to act as a director. b) A return of the first directors i.e. particulars of the first directors. c) A statement on the authorized share capital of the company. This is required by the stamp duty act section 39. d) A document indicating notice of the company’s registered office (sec.108).

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