Hamsha Selvanayagam LL.

B
Attorney-at-law

COMPANY LAW

Legal status and Capacity of a company

Section 2(1) - a company incorporated under this act shall, by the name by
which it is registered from time to time, be a body corporate

A company shall have, both within and outside of Sri Lanka-

a) Subject to the provisions of section 13 of this act, the capacity to carry on

or undertake any business or activity , do any act or enter into any
transaction, and
b) subject of the provision of any written law of Sri Lanka or of any other
country , all the rights , powers and privileges necessary for the purposes of
paragraph (a)

Section 4-(1) Subject to the provisions of subsection (2), any person or persons
may apply to incorporate a company, other than a company limited by guarantee,
by making an application for the same to registrar in the prescribed form signed by
each of the initial shareholders, together with the following documents :-

a) A declaration stating that to the best of such person or persons knowledge,

the name of the company is not identical or similar to that of an existing
company;
b) The articles of association of the company, if different from the articles set
out in the First Schedule hereto, and signed by each of the initial
shareholders;
c) Consent from each of the initial directors under section 203, to act as
secretary of the company.

4 (2) A company shall have not less than two shareholders, provided that a
company may have a single shareholder where such single shareholder is
the secretary to the Treasury who is holding shares on behalf of the
Government of Sri Lanka or is an individual or a body corporate.

Pre- incorporation contracts

Pre-incorporation contract is a contract entered into for and on behalf of a

company before it is formally incorporated.

Such contracts may be required,

• Where the promoters have to secure certain rights and obligations on behalf
of the proposed company, as a precondition for proceeding with the
incorporation

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Hamsha Selvanayagam LL.B
Attorney-at-law

• The most frequent example of such contract is agreements to acquire

property
• In common law, no person could contract as an agent of a company before
its incorporation, since the company had no existence and could not
contract as principal. This was the situation before 7 of 2007 companies act.

Attygalle Vs commercial bank of Ceylon

Shiran Thilakawarthana J

“Before a company is incorporated and registered it has no legal existence. If any of

those contracts are concluded before the company comes in to existence, it is
possible that the promoter who negotiated the contract would become personally
liable” (this was the situation before 2007 act)

Pre incorporation contracts (Sec-23)

Pre incorporation contract means,

a. A contract purported to have been entered in to by a company before its

incorporation or
b. A contract entered in to by a person on behalf of a company before and in on
contemplation of its incorporation.

Sec-23(2)
A pre incorporation contracts may be ratified within such period specified in
the contract or
If no such period is specified, within a reasonable time after the
incorporation such company
In the name of which or on behalf of which has been entered into.

Sec-23(3) - Pre incorporation contract- valid

Pre incorporation contract once ratified, it will be effective as of the date on
which the contract was entered into

Sec-23(4)- pre incorporation contract may be ratified

A pre incorporation contract may be ratified by a company- in the same
manner as a contract may be entered into on behalf of a company under sec
19.

Sec-24(1)
Where a person purports to make a pre incorporation contract- for and on
behalf of the company,
He is deemed to give an implied warranty,

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Hamsha Selvanayagam LL.B
Attorney-at-law

1. that the company will be incorporated within the period specified in the
contract,
2. if no such period is specified, within a reasonable time, and that the
company will ratify the contract within such period

Sec-24(2) - damages in case of breach

A breach of such warranty will give rise to damages to the same extent
as-
Would be recoverable from the company for unperformed obligations
under the contract, if it had been ratified by it

Sec-24(3) - liability discharged

Where a company enters in to a contract in the same term as or in
substitution for a pre incorporation contract but not being a contract
ratified by the company under sec23, after its incorporation –

The liability of a person as to the warranty that the company will be

incorporated and ratify the contract within such period, shall be
discharged

Sec-25
Failure to ratify pre incorporation contract after incorporation of the
company-

Where a company has acquired property pursuant to a pre incorporation contract

that has not been ratified by the company after its incorporation, court may on an
application made by a party in that behalf from whom the property was acquired,
court shall make an order

a. Directing the company to return the property acquired under the pre
incorporation contract to that party or
b. Validating the contract in whole or in part or
c. Granting any other relief in favour of the party from whom the property
acquired

Kelner Vs Baxter
Where the promoter in behalf of unformed company accepted an offer of Mr.
Kelner to sell wine, subsequently the company failed to pay Mr. Kelner, and
he brought the action against promoters. Erle CJ found that the principal-
agent relationship cannot be in existence before incorporation, and if the
company was not in existence, the principal of an agent cannot be in
existence. He further explain that the company cannot take the liability of
pre-incorporation contract through adoption or ratification; because a
stranger cannot ratify or adopt the contract and company was a stranger

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Hamsha Selvanayagam LL.B
Attorney-at-law

because it was not in existence at the time of formation of contract. So he

held that the promoters are personally liable for the pre-incorporation
contract because they are the consenting party to the contract.

Held- A Company could not ratify a pre-incorporation contract after its

incorporation due to the non-existence of its principal

Registering a company by a particular name

There are certain rules with regard to registration of company names

Sec-9(1)

Section 9(1) states that a public notice of incorporation must be given by company
within 30 days of their incorporation.

The notice must specify the company name, company number and registered
address

Sec-5(2)

According to section 5(2), when a certificate of incorporation is issued by the

registrar it should specify the company name

Requirements as to company name are set out in section 6

Every company must indicate its legal status in its name in full or in an
abbreviated form

Sec-6(a)

The name of every limited company other than a listed company (Public Limited
Company) must end its name with the words “limited” or by the abbreviation “Ltd”

Sec-6(b)

The name of every private company shall end its name with the words “(Private)
Limited” or by the abbreviation “(PVT) Ltd”

Sc-6(c)

The name of every limited company which is a listed company shall end with the
words “Public Limited Company” or by the abbreviation “PLC”

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Hamsha Selvanayagam LL.B
Attorney-at-law

Prohibitions/Restrictions/Limitations

Restrictions as to registration of company by a particular name may be categorised

as –

-absolute prohibition

- implied prohibition

Section 7(1)(a) impose an absolute prohibition where a company is restricted with

an identical name that already exists

I.e. Name of an already registered company

• Implied prohibition is where it is precluded from registering a company

which is identical to an existing company or similar to another name of and
already registered company

• However the similarity should be deceitful

• The absolute prohibition has been extended by section 4(1)(a) states, it is
required provided a declaration stating that to the best of such person’s
knowledge, the name of the company is not identical or similar to an existing
company along with the application for the incorporation for a company
• a company has a common law right to restrain the use of a name
• Similar to the company’s name by another company, specifically if it is done
with the intention of misleading or deceiving its customers for fraudulent
purpose
• This is challenged by way of passing off action
• The person registering the company takes the burden of choosing a name
which is not similar or identical

In Ouvah Ceylon estates Vs Uva Rubber estate

Held- The sound and spelling is immaterial in deciding whether the name s
identical

Ewing Vs Butter Cup Margarine Co Ltd

The plaintiff sold margarine in retail shops, mainly in Scotland and the north of
England. It had used the name ‘Buttercup Dairy Company’. The defendants

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Hamsha Selvanayagam LL.B
Attorney-at-law

proposed to sell margarine wholesale under the name ‘Buttercup Margarine

Company’

Held: There had been a passing-off

Sec-7(1) (b)

A company shall not be registered by a name which contains the words ‘Chamber
of commerce”

Sec-7(2) imposes limitations as to the registration of a company by a particular

name

No company shall be registered by a name containing the words,

Presidential, President, Municipal, Incorporated, Co-operative, Society, National,

State, Sri Lanka

• Except with the permission of the subject minister

Duties of the Director

The act no 7of 2007 has attempted to codify the existing English common Law
duties of directors and its developments

The fiduciary duties are owed by directors to the company

Sec-529

In terms of section 529, a director includes,

Generally a person occupying the position of director of the company – by whatever

name called

He is authorised to give directions or instructions and authorised to exercise

control or to control the exercise of powers of the company,

To act in good faith and in the best interest of the company could be considered as
a fundamental fiduciary responsibility with respect to duties of a director

Sec-187(1)-refers to basic duties of director,

Act in good faith, and what he believes to be in the best interest of the company

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Hamsha Selvanayagam LL.B
Attorney-at-law

Sec-187(2)

A director of a company which is wholly owned subsidiary of another company-

may act in the interest of the parent company

It should satisfy 2 conditions to be regularity.

The other company has to be the parent company which owns all the shares that
the articles of the subsidiary company should allow the directors to act in the
manner which is in the interest of the parent company.

Regal Ltd Vs Gulliver

Regal negotiated for the purchase of two cinemas in Hastings. There were five
directors on the board, including Mr Gulliver, the chairman. Regal incorporated a
subsidiary, Hastings Amalgamated Cinemas Ltd, with a share capital of £5,000.
There were six directors on its board, who included the five directors of Regal. Regal
was only prepared to subscribe £2,000. It was agreed that each of the directors of
Amalgamated would themselves subscribe for 500 shares each, with the exception
of Mr Gulliver. He said that he would find investors. He did so, and as a result 200
shares in Amalgamated were allotted to a Swiss company called Seguliva; 200 to a
company called South Downs Land Co Ltd and 100 to a Miss Geering. Mr Gulliver
himself held 85 out of 500 shares in Seguliva and 100 out of 1,000 shares in South
Downs Land Co. He was a director of Seguliva and the managing director of South
Downs Land Co, and signed the subscription cheques on their behalf. Miss Geering
was a friend of his. The shares in Amalgamated were subsequently sold at a profit;
and the court was asked whether the directors were liable to account to Regal for
their profit.

Held: Directors are liable to account for activities outside the company if (i) what
the directors did was so related to the affairs of the company that it can properly be
said to have been done in the course of their management and in utilisation of their
opportunities and special knowledge as directors and (ii) what they did resulted in
profit for themselves.

Park Vs Daily News Paper Ltd

The company which had sold its business, through its Board of Directors, had
resolved to pay and pound;1 million to its former workers and the widows of such
former workers. A shareholder sought to prevent this happening on the ground that
such a payment went beyond the articles of association of the company, and such
payment to ex-employees was not reasonably incidental to the carrying on of the
business of the company.
Held: The application succeeded. The making of an ex gratia payment as the
company intended to do, and in the circumstances where that company no longer
operated, was not reasonably incidental to the conduct of its business and was
therefore ultra vires the company’s memorandum and articles. In such

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Hamsha Selvanayagam LL.B
Attorney-at-law

circumstances a shareholder has the right to bring the action which the plaintiff in
Parke’s case did.

Colman Vs Myers

• A company was a family company and some of them were directors and
some were shareholders.
• Non director shareholders were induced by the directors to perform a certain
act.
• Non director shareholders brought an action against the director as they
faced a financial loss
• Held- considering the relationship between the shareholder and director. It
is evident that there is a fiduciary duty.

Sec-188- a director of a company shall not act or agree to the company acting in
the manner that contravenes any provisions of the companies act or any provisions
contained in the articles

• Board of directors take the decisions with regard to the company and they
should comply with the articles (19)

Sec-189-deals with how a director should perform.

A person exercising powers or performing duties of a director,

a. Shall not in a manner which is reckless or grossly negligent and

b. Shall exercise the degree of skill and care that may reasonably be expected
of a person of his knowledge and experience

Sec-190- reliance on use of information and advice

A director may rely on reports, statements, financial data and other

information prepared by –
a. an employee of the company
b. a professional adviser or expert
c. any other director or committee of directors
Only if such director acts in good faith, makes proper inquiry, and has no
knowledge that such reliance is unwarranted, as provided by section
190(2)

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Hamsha Selvanayagam LL.B
Attorney-at-law

Re City Vs Equitable Fire Insurance Co

The duty of reasonable care expected of a company’s directors is generally said to

be that of an ordinary prudent person might be expected to take in the
circumstances on his own behalf, with the knowledge and experience of the director
concerned. The court discussed the duties of a company director. Romer LJ said:
‘In respect of all duties that, having regard to the exigencies of business, and the
articles of association, may properly be left to some other official, a director is, in
the absence of grounds for suspicion, justified in trusting that official to perform
such duties Held: It was no longer good law that directors might leave the conduct
of the company’s honestly.’

Shell Petroleum (Read…)

Sec-191- Meaning of interest

Act considers that a director is interested if he directly involved in the transactions,

internal financial interests, party involved in the transaction.

Sec-192- disclosure of interest

When a director becomes aware that he has an interest in the transaction with the
company, he must forthwith have it entered in the company’s interest’s register

A director does not comply with these requirements does not invalidate the
transaction. However there is a penal sanction of maximum Rs 200000 for non-
compliance with those provisions

Sec-193-Avoidance of transaction

The company shall have any such transactions voided at any time within 6 months
after the transaction and the directors interest in it, has been disclosed to all
shareholders whether through the annual report or otherwise

Sec-197- use of company information

A director may use company information with the authority of the board of
directors. However, company information should be used only for the purpose of
the company and only if t is authorised to do so

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Hamsha Selvanayagam LL.B
Attorney-at-law

Sec- 212- notice of age

A director who is appointed or proposed to be appointed when he has attained the

age of 70 years or such lower age, shall give notice of his age to the company as
may me specified in the company article

Sec-219- duty of directors on insolvency

However this section does not mandatorily impose liability on directors personally
unless they have acted negligently

Where the company is at the brick of insolvency the directors would resolve to
windup the company as they believe that the company is unable to pay its debts as
they fall due

Sec-220- duties of directors on serious loss of capital

If it appears to a director of a company that the net assets of the company are less
that 1/2 of its state capital

The board shall prepare a report within 20 working days

Winding up of the Companies

1. Shareholders Voluntary winding up

2. Creditor’s voluntary winding up
3. winding up by court
4. winding up subject to the supervision of the court

Voluntary winding up procedure are two types

1. Shareholders Voluntary winding up

This is available where the company is solvent, and will proceed on a
certification by the directors that the company is solvent and able to
pay its debts

2. Creditor’s voluntary winding up,

This is available where the company is or will be insolvent and unable
to pay its debts in full

Circumstances in which company may be wound up voluntarily

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Hamsha Selvanayagam LL.B
Attorney-at-law

Shareholders Voluntary Winding up

Sec -319

A voluntary winding up may be commenced,

- If the articles provide for a particular duration, expires or

- If the articles provide that the company is to be dissolved on the occurrence of an

event, and

The company resolves by an ordinary resolution at a general meeting

to do so
• The shareholders also have a general right to windup the
company voluntarily by resolving to do so- by special resolution

Sec-320- notice of resolution to wind up voluntarily

When the company has passed a resolution for voluntary winding up- give notice of
the resolution by publication in the gazette, within 14 days from the date of the
passing of the resolution

Sec- 321- commencement of voluntarily winding up

A voluntary winding up shall be deemed to commence at the time of the passing of

the resolution for voluntary winding up

Sec- 324- Statutory declaration of solvency

The directors must make a statuary declaration of solvency by a majority decision

at a directors meeting

This declaration must state that, they have fully inquired into the company’s affairs
and are of the opinion that it will be able to pay its debts in full within 12 months
from the commencement date of the winding up

Sec-326- appointment of the liquidator

The company at a general meeting shall appoint a liquidator for the purpose of
winding up the affairs and distributing the assets of the company

Sec-327- liquidators vacancy be filled-

Where a vacancy occurs by death, resignation, or otherwise in the office of the

liquidator appointed by the company

The company may fill the vacancy at a general meeting subject to any agreement
with the creditors

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Hamsha Selvanayagam LL.B
Attorney-at-law

Sec-329-

where the liquidators is of opinion, if that company will not be able to pay its dets
in full within the period stated ij the declaration, liquidator shall summon a
meeting of the creditors present a statement of assets and liabilities of the company

Sec-330-general meetings required to be conducted during the process of

liquidation

If a Shareholder winding up continuous for more than 1 year , the liquidator must
summon a general meeting within 3 months of the end of each year or a longer
period- if it is allowed by the registrar

Sec-331- final meeting and dissolution

Once the company’s affairs are fully wound up, the liquidator must prepare an
account of

1. how the winding up was conducted

2. how the company property was disposed of and lay it before the general
meeting
• Notice of meeting- one month prior to publication in the gazette
• within one week after the general meeting-liquidator shall send a copy of the
account to the registrar
• the registrar is required to register the return company will be deemed to be
dissolved at the expiration of 3 months from the date of registration

3. Winding up by court

A company may be wound up by the court, if-

a) the company has by special resolution resolved that the company be wound
up by the court
b) the company does not commence its business within a year from its
incorporation or suspends its business for one year
c) the company has no directors
d) the company is unable to pay its debts
e) the court is of opinion that it is just and equitable that the company should
be wound up

4. Winding up subject to the supervision of the court

Sec -351-

Where a company has passed a resolution for a voluntary winding up-

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Hamsha Selvanayagam LL.B
Attorney-at-law

A petition may be made to court for an order that the winding up be continued as a
voluntary winding up but subject to court supervision

Rights and Remedies of the Shareholders

A share is a division of the capital of a company incorporated under

the company legislation. Those who own shares are share holders

Sec-86- Meaning of Shareholders

1. In this act the term shareholder means

a) a person whose name is entered in the share register as the

holder for the time being of one or more shares in the company
b) a person name as a shareholder in an application for
incorporation of a company at the time of registration of the
company
c) a person whose name is entered in the registered amalgamation
proposal as the shareholder

Rights of Shareholders

1. statutory rights
i. Statutory rights of members individually
A shareholders’ individual right can be enforced by the
particular member himself when his rights infringed
ii. Statutory rights of members collectively
Rights of shareholders collectively may be enforced by one
shareholder on behalf of others
2. Rights derived from the companies constitution
3. Rights accepted by the general law
1. to have the name properly entered in the register of members, to
inspect the register of members, require copies and to have it rectified

2. to obtain copy of the company’s constitution

3. to have copies of resolutions, agreements and balance sheet
4. to inspect the register of charges
5. rights of pre-emption on the issue of further shares
6. to obtain repayment when the shares were allotted illegally

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Hamsha Selvanayagam LL.B
Attorney-at-law

7. to obtain damages for misrepresentation

8. to attend and vote at meetings
9. to demand a poll( shareholders right to vote at meetings )
10. Right to dividend- shareholder has the right to an equal share in
dividends paid by the company.
11. right to redeem redeemable shares
12. minority buy- out rights
Sec-92-of the act sets out the matter for which a special resolution
is needed notwithstanding anything to the contrary in the articles of
the company, when shareholders exercise a power to-
a. alteration of the articles, (b) approving a major transactions (c)
approving an amalgamation, (d) reducing the stated capital,(e)
resolution for a voluntary winding up (f) changing the name (g)
status of the company

93-shareholder may require company to purchase shares.

13. to bring an action against the company for acting in a manner that is
inconsistent with the restriction placed by the articls under sec 17(3)
company has unlimited capacity and can transact anything
irrespective of the fact that that act is not covered under the object s
stated in the articles, a shareholder can make an application to court
under section 233 of the act to obtain a restraining order to restrict
the company from acting in a manner that is inconsistent with the
restriction placed in the article, unless the company has entered into
a contract or other binding obligation to do so

14. derivative action

Sec 234-

This is another important change that the new Act has introduced. Sec 234
of SLCA 2007 provides that a shareholder (or a director) may bring
proceedings in his name and on behalf of the company or any subsidiaries of
that company, or intervene in any proceeding to which the company or
subsidiary company is a party, with leave of the of the court. Such leave will
be granted by court only when the court is satisfied that either the company
or the subsidiary company doesn’t intend to bring or intervene in the

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Hamsha Selvanayagam LL.B
Attorney-at-law

proceeding or it is in the interest of the company or subsidiary company that

the conduct of the proceedings should not be left to the directors or to the
determination of the shareholders as a whole. Derivative action was a
common law action before 2007 Act came into force and in Amarasekera vs
Mitsui Compny Ltd it was accepted by the supreme court of Sri Lanka that
it was maintainable by a shareholder when his rights are infringed.

Derivative action is a well-known common law action that was accepted as

an exception to the proper plaintiff rule laid down in Foss v Harbottle on
the basis that the right to sue derived from that of the company. In this case
an action by two members against the directors of the company, to compel
them to make good losses sustained by the company owing to the directors
buying for the company their own land at a higher value, failed since the sale
was intra vires and there was no allegation of fraud by the majority.

The case established the ‘Proper Plaintiff Rule’ in order to avoid a multiplicity
of suits. However, during the process of development of the law, courts were
not hesitant in accepting certain exceptions to the rule. Derivative action is
considered as one of the exceptions. When the avenues of meeting and
restrictions are closed because a shareholder was a minority, such minority
shareholder should not be left unheard is the reason for allowing a derivative
action.

In Wallersteiner vs Moir it was recognized by the Lord Denning that the

form of a derivative action is always on the basis that it is on behalf of
himself (The minority shareholder) and all the other shareholders of the
company against the wrongdoing directors and the company. It is important
that the petitioner minority shareholder brought the action for the benefit of
the company. This was followed also in Nurcombe vs Nurcombe. Under the
common law, the derivative action was brought in the following instances.

- Where there had been a fraud by the majority on the minority and the
wrongdoers are in control (Cook vs Deeks) The term ‘fraud’ was given a
wider meaning later in Daniels vs Daniels to include ‘some benefits to
directors and majority shareholders’. In Prudential Assurance Company
vs Newman Industries Ltd a derivative action was entertained by the
court when the alleged fraud was committed by directors who were in
control.

15. to file a petition for winding-up

16. Right to pass a resolution
17. to request to convene a meeting and attend meetings
18. to make an application to court for relief by an oppressed member

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